By Kyle J Christensen, Founder, Principles-Based Planner, Unique Advantage

Unique Advantage Monthly Client Email – March 2024

When I was a little kid, I had a lucky rabbit’s foot.  Pretty gross, I know!  I would have had that for the image on this article, but, I thought people might call the animal abuse hotline on me or something!  Thus, the four-leaf clover.  

A lot of people believe that luck or bad luck determines many of the things that happens to them in their lifetimes.  People might carry around a lucky rabbit’s foot (which obviously wasn’t very lucky for the rabbit), try to find a four-lead clover, wear their baseball hats inside out (“rally cap”), cross their fingers and possibly their toes (if they have that strange ability), never walk under a ladder or past a black cat, whistle through a graveyard, and actors want to be wished “Break a leg” instead of “good luck!”  People have all kinds of superstitions about what influences various outcomes in their lives.  

To a certain extent, it is true that everything that happens to us isn’t necessarily caused by our own personal choices.  However this idea, if taken too far, can cause people to disregard the importance of their own decisions and can lead them to avoid taking responsibility for the outcomes of their decisions.  Overemphasizing luck or bad luck may lead people to inadvertently or even intentionally to give up control and influence over their destiny.  They may develop a “Why try?” attitude and “I should just accept things the way they are and learn to live with it.”

I’ve read many amazing biographies and autobiographies of highly successful people lately, including Walt Disney, Warren Buffet, John Wooden, Dave Green (Hobby Lobby), Jon Huntsman, Sr (Huntsman Chemical and Huntsman Cancer Institute), Andrew Carnegie, and Thomas Edison.  It is really incredible how consistent the principles of success are among them.  Do you know what none of them relied on to achieve and maintain the success in their lives and professions?  Luck.  Yes, they almost all give some credit to being in the right place at the right time.  For example, Andrew Carnegie says that when he was about 15 years old, a friend of his Uncle Hogan asked if his uncle knew of any good young man that could act as a messenger in the telegraph office where he worked.  Andrew was the young man that was given that opportunity, which led to the next opportunity and the next after that (eventually in the railroad industry and then in the iron and steel industries).  In Mr. Carnegie’s own words [with my words in brackets]:

“Upon such trifles [seemingly small and coincidental things] do the most momentous consequences hang.  A word, a look, an accent, may affect the destiny not only of individuals, but of nations.” (The Classic Autobiography: Andrew Carnegie with The Gospel of Wealth, p37)

Luck wasn’t what caused their success.  Luck wasn’t what continued their success.  In every case hard work was a key ingredient.  In every case, major investments of time and effort were involved.  In every case, learning (especially from failure) was a key ingredient.  

In every case, they followed the Three Rules for Investing:
1) Invest in what you know.
2) Invest in what you can control.
3) Don’t chase returns.

They didn’t invest their money into something and just hope and pray it worked out.  They put the work in.  They learned everything they could about their profession.  They DID put all of their eggs in one basket.  Andrew Carnegie summed up his investment attitude with this:

“…made up my mind to go entirely contrary to the adage not to put all one’s eggs in one basket.  I determined that the proper policy was ‘to put all good eggs in one basket and then watch that basket.'” (The Classic Autobiography: Andrew Carnegie with The Gospel of Wealth, p153)

Some of you may have heard a similar phrase from Warren Buffett.  Andrew Carnegie said it long before Warren Buffett.  In fact, I would bet Warren Buffett got the phrase from Andrew Carnegie.

Carnegie goes on to say:
“I believe the true road to preeminent success in any line [profession or area of investment] is to make yourself master in that line.  I have no faith in the policy of scattering one’s resources, and in my experience I have rarely if ever met a man who achieved preeminence in money-making, certainly never in manufacturing [which was Carnegie’s industry] who was interested in many concerns.
…
My advice to young men would be not only to concentrate their whole time and attention on the one business in life in which they engage, but to put every dollar of their capital into it.” (The Classic Autobiography: Andrew Carnegie with The Gospel of Wealth, p155)

Is this attitude unique to Andrew Carnegie?  Not even close.  In fact, I too have never known or read about anyone that has become a great success in anything without that thing becoming their major (if not sole) focus, of their time and their money.  No one gets rich and maintains it by being ignorant.  Nor do people get rich by diversifying.  It simply does not happen.  

Yes, once people become “rich” they oftentimes diversify their assets (we’re talking true diversification of true assets, not diversification the way stock market proponents preach).  But the purpose of diversification is not to gain, but is to protect against loss.  Most people are following bad advice to “diversify” in order to retire or to become financially free.  Again, this is a false hope.  Riches are obtained from niches.  They are obtained from becoming an expert.  All people are paid for what they know.

Justin Donald, author of The Lifestyle Investor, gives us some important insight into the mindset of people who achieve high levels of success investing:

“Many people make investments in businesses, effectively financing a zero-interest loan for an unknown timeframe [this is what buying publicly traded stocks is] for someone else.  In doing so, they buy equity in exchange for believing that someday they’re going to get their money back.  That approach to investing is more of a gamble.  It’s not investing unless they have superior knowledge to understand and negotiate a wise deal.  Otherwise, they’re rolling the dice and hoping to they the right number.” (The Lifestyle Investor, p11)

Why do people tend to rely so much on luck?  Because people are constantly looking for the easy path.  If someone gives you the choice between becoming rich by blood, sweat, and tears, versus becoming rich by simply sending money automatically and systematically to a “professional money manager”, which requires no additional knowledge or effort on your part, which one sounds more appealing?  Unfortunately, most people choose the latter because of their false hope that it will actually turn out to be equally true.  

We all know, internally, that NOTHING is free.  At least, nothing that is valuable and enduring.  Booker T. Washington said that, “Nothing ever comes to one that is worth having, except as a result of hard work.”  

What are some signs that you’re relying on luck in your investments?

• You couldn’t argue the points of your investment.  Who’s managing your money (the person actually making the specific investment decisions)?  What qualifies that person to manage your money?  What’s that person’s background and experience?  Why is it going to work?  What exactly has to happen in order for it to “work”?  What are the risks of the particular investment?  What has been done to mitigate those risks?  
• You invest automatically.  Automatic means without thinking, without careful evaluation.  Yes, some things in life should be automatic (or habitual), but investing is not one of them.  
• You put money into it because someone told you you would get a high rate of return and you know very little else about it.  We call this “chasing returns”.  They say ignorance is bliss.  With money, ignorance increases risk of loss.  Knowing a projected rate of return is not a basis for investing into anything.  
• You have no control or influence over the outcome.  No investment can give you 100% control over the outcome.  However, that doesn’t mean you should purposely invest or cause your entire financial future to be based on things that you have practically no control of.  Being able to choose which mutual fund or stock you put your money into does not equate to “control” any more than choosing which number you’re hoping the ball falls into on the roulette table.
• You chose the investment because it was easy and convenient.  The best investments are neither easy or convenient.  The definition of the word invest means to earn a return.  Earn means “to receive as return for effort and especially for work done or services rendered.”  Convenience always comes with a price.  When it comes to investing, convenience is a recipe for loss.
• Everyone else is doing it.  That should be your first red flag for not doing something financially (unless it’s something that is required by law, like filing tax returns or buying auto insurance).  For the most part, “everyone” is going to fail financially (or at least, not become financially free or even come close to it).  So, “everyone” is not a good measure for most financial decisions, and it is especially dangerous when it comes to investing.  
• I get a free match.  Another red flag should pop up in your mind.  The flag that pops up says “Nothing is free.”  It’s the same red flag that pops up when someone stops you on the street offering you a “free bracelet” or “free flower”.  You know what comes next!  It’s not free!  I could write (and have written) an entire article about the “free match” and how it’s not free.  I’ll summarize by saying that the free match requires this of you:  1) Your money, that you worked hard for.  2) You give up control and use of your money for long periods of time (possibly decades).  3) You have to put your money into something where you have no control or influence over the outcome.  4) You put your money into something that is designed, purposely, not to produce income to you.  5) You put your money into something that you are likely not an expert in.  “TANSTAAFL – There ain’t no such thing as a free lunch.”  
• You have no strategy.  If you are relying on hope or the benevolence of financial institutions and their surrogates, you are relying on luck.  The financial institutions, by the way, do not rely on luck in order to get paid.  They get paid whether your account value increases or decreases.  In fact, they oftentimes make more when the market goes down.  They sometimes even bet against their own customers (see Inside Job – documentary by Charles Ferguson).  So, do you have a strategy?  What criteria do you have for what qualifies as being the right investment for you?  Do you know the industry where the money is being invested?  What are the risks?  What causes the risks?  What are you doing to mitigate those risks?  Do you know when you are going to get in and when you are going to get out (something that has nothing to do with your age or Social Security’s Normal Retirement Age)?  How are you going to get in and how are you going to get out?  What will the tax consequences be?  What are the rules associated with the investment you are getting into?  How much time will you need to invest?  How will you continue to improve your knowledge in the arena in which you are investing?  Who needs to be involved in order to ensure your outcome as much as possible (your team)?  What strengths do they bring to the table to make up for your areas of weakness?
• You are relying on appreciation and not cash flow.  Capital appreciation is the least certain aspect of a return on any investment.  Notice that Wall Street firms don’t get paid based on appreciation.  They get paid based on the certainty of fees being charged to the accounts they are managing.  No brokerage firm actually gets paid “only if you win.”  That’s a bold-faced lie.  When expert real estate investors invest, for example, they have already calculated the cash-on-cash return they are going to get starting the day they close on the deal.  The appreciation of the property is simply a cherry on the top.  However, even that is generally pretty certain, because a successful real estate investor buys property at “a good deal” (meaning, they get it with a gain already built in).  Financial institutions, who are the best in the world at investing, rely on cash flow, not capital appreciation, to grow and succeed.  As Robert Kiyosaki says, it really doesn’t take a lot of intelligence to find investments that lose money.  It does, however, take a lot of wisdom and intelligence to find investment assets that produce cash flow.  An investor has much more control of cash flow than they do appreciation.  Relying solely on appreciation is relying mostly on things that are out of your control, which means that you’re relying on luck.  

You do not have to rely on luck to accomplish your financial objectives.  In fact, luck will almost certainly not get you there.  Relying on luck is appealing to people because it allows people to push responsibility onto someone or something else.  Relying on luck is appealing because it doesn’t require effort or knowledge.  

Principles of hard work and knowledge are key ingredients to success in every area of life, including investing.  Learning from failure is a key ingredient to success in investing.  Responsibility and accountability are key ingredients to success in investing.  Avoiding these principles is avoiding what is required in order to achieve success. 

I love the book, The Obstacle is the Way, by Ryan Holiday.  The overriding point of the book (not to spoil it) is that all to often, the right way to do something is not the easiest.  It is often what appears to be the hardest way.  And attempts to circumvent what appears to be hard, usually leads to failure. You have the power within you to do hard things, to learn, and invest the right way, the way that will lead to financial freedom.  It’s a choice you can make and then live by.  I encourage you to do so. 

“I have tried always to hold fast to this important fact.  It has been with me a cardinal doctrine that I could manage my own capital better than any other person, much better than any board of directors.” (The Classic Autobiography: Andrew Carnegie with The Gospel of Wealth, p155)

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