In Chess, the masters are always thinking a few moves ahead of what’s in front of them, and winning often comes down to gaining little advantages throughout the match – advantages that eventually combine to make any advantage that you may have received defenseless. The point is that the competitor who makes big aggressive moves early doesn’t usually win.
Chess is very much like how the wealthy invest. They aren’t looking to make big splashy gains. Instead, their focus is to prevent major losses and to build up small advantages over time.
I’ve written extensively on how the wealthiest invest, and in a recent article, we dove into the asset allocations of one of these prominent groups of wealthy investors: Tiger 21.
Have you ever asked yourself why the wealthy like the members of Tiger 21 allocate a majority of their portfolios to real estate and private equity vs. the average retail investor who allocates a majority of their portfolios to stocks?
It’s because they have different strategies. The retail investor is going for the BIG STRIKE while the wealthy investor is thinking LONG-TERM. They know that the match is long.
The recent men’s final of the French Open is a neat analogy of the contrast between how retail investors invest and how the wealthy invest:
When Stefanos Tsitsipas came roaring out of the gates against the #1 player in the world, 34-year old Novak Djokovic, the 22-year old took the first two sets with some big serves, but the 34-year old veteran and winner of 19 Grand Slams (the record is 20) held steady.
Djokovic’s been around the block, and instead of trying to overpower his opponent, he played smart by cutting back on his unforced errors. It worked on his way to winning the last three sets and, along with them, the championship.
The final stats showed Tsitsipas with an advantage in aces and more double faults along with the aces. Djokovic won the unforced errors matchup, which ultimately made the difference.
Just as in tennis, with investing, winning, in the long run, is less about making those big splashy gains and more about preventing (mitigating) losses and gaining little advantages over time. And like the French Open winner, Novak Djokovic, who knows a thing or two about winning, the wealthy invest with the long game in mind.
What is it about real estate that appeals to wealthy investors? Real estate is ideal for preventing losses and for gaining slight advantages.
When we talk about the wealthy and real estate, we aren’t talking about fixing and flipping. The wealthy invest in real estate passively – deferring to the expertise of others rather than dealing with the headaches themselves.
So, the question to ask is: ”How does passive real estate investing prevent (mitigate) losses?”
- Uncorrelated to Wall Street. Private markets uncorrelated more liquid public markets shield portfolios against wide market volatility. Private markets are insulated from the madness of the crowds because while the herd unloads stocks in a panic, illiquid passive investments in real estate are shielded from wide market downturns.
- Insulated from Inflation. Investments in the right real estate segments with consistent demand – even in a downturn – are ideal for insulating portfolios against inflation. Some segments may even thrive in inflationary times as diminished buying power directs consumers’ demand towards more affordable housing. Rising demand is the perfect counter against rising prices.
- Hard Asset. A tangible asset ensures that your investment will never go to zero.
- Skilled Management. The number one factor that differentiates successful passive investments from those that fail is management. Choosing a private fund manager with experience and expertise is the most important factor in determining the successful outcome of an investment.
Wealthy investors avoid speculation. They’re not looking for huge capital gains retail investors are chasing in the stock and crypto markets. They’re not looking to win the lottery. They’re happy with steady little wins that accumulate over time.
Here are the two major little advantages the wealthy covet when investing in passive real estate:
- Cash Flow. Steady, reliable passive income streams can be reinvested to magnify current income streams or reinvest to create additional income streams. The goal of the wealthy is to garner enough passive income streams to displace their current income. Financial independence is achieved when you no longer have to work. The wealthy know that this can only be accomplished through creating multiple streams of income.
- Appreciation. The natural appreciation of a real asset through its growth in worth over time is another source of wealth-building capital that stocks and crypto lack. The growth of stock prices is typically less related to any underlying economic fundamentals and more related to the day’s flavor favored by the crowds. This type of growth is unreliable.
Winning the wealth game isn’t about those big home run games. It’s about preventing losses like insulating your portfolio against Wall Street volatility, inflation, and inexperienced managers.
That’s why the wealthy love real estate.
It’s the ideal asset for preventing (mitigating) losses.