This blog looks at the career option of being a Financial Investor … earning a living from your own financial portfolio.
The initial question is what do you need to make a living as an investor? Short answer … money. If you don’t have a lot of money it’s going to be very difficult to earn a living from the return on your investments … especially if you try to be somewhat conservative to reduce the risk of loss.
But for the sake of this blog let’s say you do have enough money. What’s the key requirement you need in order to be a successful investor? You need to have a great deal of knowledge about the financial markets, how they work, and the skill to work them effectively and efficiently … as well as patience and discipline. I believe most of us have known some people that we felt were skillful real estate investors over the years. But when things changed significantly starting in 2008 in the real estate market their skill couldn’t help them. Many, if not most, lost big time.
The past few years if you wanted to invest in someone’s traditional small business you weren’t considered an investor, you were actually more of a contributor to a losing cause or maybe just being philanthropic. I don’t mean to be negative here, but since late 2008 through 2012 this category was hit hard and harder. Commercial institutions wouldn’t even participate in this category even though they had plenty of cash on hand.
How about the stock market? People do great there, don’t they? A few do, at least from time to time. But I know more people who have lost than won big, especially in the last decade. It’s almost impossible to have guaranteed returns when you’re not in control. And believe me, as an investor you are not in control … neither is your paid financial adviser. Anything can happen. And it can happen quickly … sometimes overnight.
While I know this is going to make this blog longer than I want, I think it would be wise if I share with you a story to illustrate my point. A good friend of mine was living large. They had sold a company and were working as a highly paid consultant. They received an offer from a large client of about 180,000 shares of stock in the company they were consulting for at the time. It was publicly traded on the NASDAQ and was selling for about $46 a share, which meant their value of the stock was over $8-million. They now had a big income and a great portfolio. Life was going great.
They used part of the stock to secure a loan to build a $1.85-million dream house along with all the accouterments that go along with that type purchase. They didn’t sell off any of the stock and diversity because they knew the company was doing great, was in great shape, had a good product, and a strong sales organization. Then something happened … something that was out of their control. Almost overnight the stock went to $36 a share. Turns out a group of investors targeted the company and shorted the stock. In other words, the lower the stock price went, the more money they would make. They thought this was ridiculous because they knew the company was in good shape … so they bought some more shares at $36, using their existing stock as collateral … sure the price would go back up. It went to $31. They bought more shares. It went to $25.50. All of a sudden my friend started getting margin calls, which means that if they didn’t pay immediately, they were going to start selling their shares to cover their losses … which they didn’t have to send.
Unfortunately, the stock continued to go down … all the way to $9 a share … and my friend’s $8.2-million was gone. Zap! All in about ninety days. As I understand it, the stock did eventually come back and the company was taken private for about $65 a share. But my friend wasn’t able to capitalize on it. They were wiped out financially. Kaput!
Could they have been smarter? Absolutely. Did they make mistakes? You bet. But here’s the lesson: If you’re going to be an investor, you have to accept that things may be taken out of your control from time to time. You have to be disciplined enough to set funds aside plus diversify your investments. The set-aside funds should be separate from investments – non-touchable dollars – that are safe from those in the market. And then when that expensive lesson happens you are ready with a safety net.
Just know that earning a living as your own investor with your money is not a good career choice for most of us. Be very careful, know your limitations, and be in control as much as possible.
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What are your thoughts or comments on making a living as an investor of your own money?
© Phil Hoffman 2013. All rights reserved
I Am Phil Hoffman 