Are You Investing or Speculating?

In markets that have experienced a prolonged bull run, as we have seen since the 2008 financial crisis, nearly all asset classes have appreciated significantly. This rise in asset prices has created a sense of exuberance or mania, leading many to believe that they can pay any price for an asset and still make a profit. This is what we call the “greater fool theory” – the idea that there will always be someone willing to pay a higher price.

What Makes You an Investor

Real investors focus on fundamentals and intrinsic value. They assess the value of a business or asset and consider the regular, predictable cash flow it can generate. Whether it's a business, stock, real estate, or syndication, the potential for a back-end profit should be secondary to the asset's intrinsic value and its ability to produce income.

If your investment strategy relies solely on the asset's appreciation, you are speculating, not investing. This distinction will define the success of wealth preservation and growth as we navigate through economic cycles and market corrections.

The Looming Market Correction

Many investors will face frustration and disillusionment over the next decade due to the unsustainable monetary and fiscal policies currently in place. The Federal Reserve and Congress have been stimulating the economy through excessive spending, increasing inflation, and pushing markets to unprecedented heights. However, this cannot continue indefinitely. A significant market correction is inevitable.

Assuming that markets will continue this bull run forever is wishful thinking. I call this “linear extrapolation – belief that the trends of the recent past will continue indefinitely into the future.

History has shown that market corrections are a natural part of all economic cycles. Financial markets, being highly efficient, tend to correct swiftly and severely. Tangible assets, like real estate, also experience corrections, though at a slower pace. This is an advantage in the real estate markets because it gives you, the investor, time to reposition and pivot strategies.

Strategic Adjustments for Investors

Before continuing your current investment strategy, consider that you might be investing at the market's peak, exposing yourself to asymmetric risk. It would be prudent to reassess your position and shift your capital towards higher ground or safer options like cash, cash equivalents, or treasury bills. 

Alternatively, you could explore the private credit markets. In real estate investing, one can balance between equities and private credit. While equities focus on growth and tax benefits, private credit involves loaning money, secured by real, tangible assets, similar to a bank. 

The benefits of being a private lender include receiving payment before any other equity investor and the dependability of the contractually agreed-upon interest being paid to you at the frequency determined at the beginning.

As the equity markets face potential downturns, diversifying into private credit is a safer route to invest as we wait for the opportunities on the other side.

Avoid Financial Abdication

These will be important decisions that will have a significant impact on your financial autonomy in the future. One of the worst mistakes you can make is abdicating your financial future to a third party, such as a money manager or financial advisor. Seeking advice is necessary, but you must take ultimate responsibility if you wish to have any control of your own financial destiny.

No one will care about your financial future as much as you do. By taking a more active role in where and how you invest, you can make informed decisions that align and accelerate you to your goals.

You must decide whether you are an investor or a speculator. Focus on building your investment knowledge and surrounding yourself with the right mentors and guides, avoiding the pitfalls of financial abdication. By doing so, you can secure your financial future.