“Never let the fear of striking out keep you from playing the game.” –Babe Ruth

Who doesn’t love the Babe? George Herman “Babe” Ruth was one of the greatest baseball players of all time, playing for the New York Yankees for 14 years. His quote above, as well as his performance on the field, speaks to that drive to play and participate. One of the sad facts about the investment business is that there are just a tremendous amount of people who are afraid to play the game.

They’re afraid they’re going to strike out, but for the most part, those people are missing out, losing out on opportunities for saving for their future.

People, for the most part, don’t like taking any more risks than we have to. I mean, life is risky enough as it is. You risk danger having a stove, or a fireplace, or going outside, driving to work at 50 miles an hour in a big metal box with other big metal boxes driving faster alongside you, driven by only-God-knows-who. Better to play it safe, right? Better not to play the game.

That’s a big part of why people are afraid of the stock market and markets in general. It’s frequently portrayed by media and journalists, you know the “experts,” as a gambling hall for the ultra-rich, where money is thrown into abstract concepts of ownership of corporations whose interactions intermingle amongst each other.

And yet, in spite of this, the cost of investing has gotten progressively cheaper since the first stock markets opened. You no longer need a broker to handle transactions 24/7, fees are down, transaction costs are down, and buying the Vanguard SPDR S&P 500 ETF Trust, the ETF that tracks the 500 top companies on the market, costs roughly $339. That’s right, having exposure is easier than ever with new devices like ETFs and mutual funds, so the fear of access isn’t really a concern. It’s the fact that those pesky stocks just seem like trying to surf big waves right off the bat. You don’t really know how to do it, you might want to, but who wants to get wiped out over and over?

I certainly don’t, and the good news is that you don’t have to, either. But first, a digression, which will hopefully help illuminate the path to managing those risks of striking out.

The Asset-Liability Mismatch

It’s always interesting to investigate and evaluate the varying issues of scale with regard to how to properly handle and invest money. A recent article from an investment advisor considered what it would be like to invest $10 million dollars and how to live off that money without ever having to touch the principle (meaning the original $10 million). After all, one doesn’t really want to use it all on Disneyland and sportscars!

While the details of the article are not unfamiliar to investment advisors like us at Emergent, there was an interesting point at which the author mentioned that he had conducted a small survey of managers and individual with $10+ million in which he noted that there was a surprising amount of investment in private equity and personal real estate.

The reason was that focusing in on private equity brings the potential for large return while real estate brings cash flow. Renters pay on a monthly basis while preserving (presumably) the value of the investment (the land and house), which will continue to go up in value in the interim.

The cash flow that is generated from those (and other) investments can near-guarantee that someone with over $10 million and no abnormally large liabilities (such as medical bills) can live quite comfortably on their invested $10 million without having to worry about selling if things were to sour, or if the economy should go into a slump.

The good news is that this strategy is not just for the ultra-rich, but rather highlights the positive effects of having a nest egg that can work for you. Investing is not just about chasing down that rocket ship return but also about exchanging capital for cash flow.

That’s one of the secrets to not striking out.

Cash flow is an immediate return that jumps straight into your pocket, putting you in a position to jump back into the game as soon as you find an opportunity. In investing, there really is no striking out unless you lose your whole investment. Instead, there are a lot of opportunities when markets go down, and having that cash flow can put you in a position to take advantage of those opportunities, hence adhering to one of Sun Tzu’s oldest and most profound statements that one should make strengths out of weaknesses. This is such an example.

Trying to time the market and get in when you think the going is good or waiting until you are older to consider saving for retirement just misses out on the powerful time-related element of investing. Waiting to play the game is almost as bad as not playing at all. Research shows that sometimes the biggest days in a stock market come immediately after the worst days, and that if you jumped in at the peak before the crash in 2008 and stayed invested, you’d be making money today. If you had bought the SPY ETF which tracks the S&P 500 index on September 29th, 2007, when the market first crashed, and held it to today, you would have made a 142.7% return.

Not bad for a “strike out.”

But wait, there’s more…

I’m happy to announce to our regular readers that the Emergent Team is going to be part of an online Facebook show and podcast in both English and Spanish on Thursdays weekly! Tune in to the I Love CVille Network weekly to catch us starting at the beginning of the new year!

And some words from Shakespeare to nicely wrap up our theme of taking chances:

“Our doubts are our traitors and oft make us lose what good we may gain by fearing to attempt.”


Nickolas Urpi