I got one of the most valuable pieces of investment advice ever years ago from a billionaire.
Too bad I didn’t take it to heart at the time.
This was back when I was a commercial real estate developer. I’d done business with “Jimmy” a few times already, and we were in talks about a new property he wanted to sell and I wanted to buy.
Billionaires often get a bad rap, and some of them deserve it. But not Jimmy. He was a stand-up gentleman in the business world and elsewhere, and he always genuinely wanted to help people succeed.
Me included.
It was something I recognized and appreciated about him. Though I was young and foolish enough to think I knew better than he did.
This meant that when he told me to “always have a Plan B” in my financial pursuits, I just kept pursuing my Plan A with reckless abandon.
It’s not that I took offense at Jimmy’s advice. Again, he was a great guy and I genuinely enjoyed doing business with him.
But I was making significant profits doing exactly what I was doing – and nothing else. Why should I divert time, money, and effort to other resources when building retail centers for myself and others was so lucrative?
I don’t think I said those exact words to him. I’m sure I was more gracious than that. But I must have voiced some pushback because he added another caution.
“It’s fun getting into these big deals, Brad, but these big deals don’t always work out.”
Those very wise words I didn’t take would come back to haunt me.
The Price I Had to Pay
In theory, I knew there were no guarantees in business. But that’s why I was so careful about selecting my property sites… securing the necessary rights… and working with quality materials and companies.
Plus, this was the 1990s. I was operating in a booming industry that had been booming for a while with every indication of booming further.
The banks were all too happy to work with real estate developers. I can’t quite say they were throwing money at businessmen and women like me.
But it was usually very easy to get financing. Or at least much, much easier than it is today.
All of which to say that I didn’t see any storm clouds on the horizon. And somehow, I interpreted that to mean they’d never come at all.
It seems to foolish to say now – largely because it was. I found that out the hard way only a few years later when my business partner screwed me over.
My regular readers know the story: How he had more money than me, so he got to call the shots, including managing the books. Which meant that when he ran into financial troubles from other properties he owned apart from me, he got to play with our shared assets without me knowing.
Until it was too late.
It took so much work to rebuild my finances and reputation after that. And once I had, the housing market bubble burst and real estate became practically untouchable from an entrepreneurial standpoint.
I was out of business altogether with next to no assets to fall back on.
That’s not a position I would have been in if I’d listened to billionaire Jimmy’s advice.
Diversification Does Wonders
Being a “mere” millionaire at the time, I should have asked myself how Jimmy achieved the billionaire status he had.
Today, I know it was by acknowledging risk. By respecting that there are negative possibilities as well as positive ones.
And by planning accordingly.
Look, I’m a buy-and-hold kind of guy. My research and personal experiences have shown that it pays to invest in well-researched, dividend-paying companies that can grow modest positions into retirement-sustaining wealth over time.
But note the words “companies” – as in more than one – and “modest.”
I usually stress the “well-researched” and “dividend-paying” aspects. That and the expectation of seeing sizable profits well down the road instead of instantaneous riches.
Today, however, I want to highlight the concept of diversification: spreading out your investing money across multiple assets instead of putting all your hopes on a single stock.
Or a single sector.
Or a single anything.
The more your holdings are intelligently differentiated, the less likely a single disaster will wipe you out.
Take the 2020 shutdowns, which I certainly didn’t see coming. I was a real estate investment trust (REIT) man at the time. (Still am, if you haven’t noticed.)
I was constantly preaching about their value as a sector and writing about individual REITs opportunities almost every single workday – which included Saturdays and even some Sundays.
Yet I’d long since accepted Jimmy’s wisdom by then. So I also stressed that REITs were not the end-all, be-all portfolio possibility.
That’s why I didn’t lose everything when their share prices came crashing down in the wake of closed storefronts and social distancing. Nor was I depressed when they stayed down for the rest of the year.
For one thing, as I already mentioned, I make sure to hold high-quality, sustainable companies: the kind that can keep growing their dividends even in downturns. So, while a few of my more noteworthy holdings had to cut theirs, the majority of my portfolio kept paying as promised.
However, there was another safeguard I’d employed. This time, I wasn’t a real estate-only investor.
I’m Properly Prepared for the Good and the Bad Alike
The majority of my portfolio was not in REITs back in 2020.
A good chunk of it was and still is, mind you. But I also held and hold plenty of other dividend-paying assets such as utilities and energy-focused master limited partnerships, or MLPs.
Plan B means not putting all your eggs in one basket.
It means not falling in love with an investment since you know it’s not going to fall back in love with you – which in turn means being willing to sell a stock if its fundamentals turn sour.
And it means being properly prepared for the bad as well as the good.
Speaking of the good, I want to mention two more natural conclusions I’ve taken from Jimmy’s “Plan B” advice:
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I keep a list of companies I’d like to own but don’t own yet. Maybe I already have enough of that kind of investment, or maybe the shares in question aren’t trading at an attractive price quite yet. But I monitor both my current portfolio and my “wish list” to see if anything changes.
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I keep cash on the side. If I do have to sell a stock, obviously, I can put those proceeds into a viable alternative. However, even if that doesn’t happen and one of my wish-list companies goes on sudden sale, I can act on it. Because I’m properly prepared.
That’s really what Jimmy wanted me to understand: that life involves the unexpected. We’re not completely in control, we never will be, and so we should properly prepare for the unforeseen.
That’s simply the reality we live in. So, until reality changes, I’m going to stick with having a Plan B.
I strongly suggest you do the same.
Regards,
Brad Thomas
Editor, Intelligent Income Daily
P.S. Speaking of being prepared for the worst, my friend and CEO of Wide Moat’s parent company, Porter Stansberry, just made a surprising announcement…
Earlier this morning, he held a “State of the Union” and shared his unfiltered view on where the market is heading and why.
Because even as stocks hover near highs, cracks are forming. The “Magnificent 7” have lost their luster. Credit card delinquencies are at Great Recession levels. And American executives are dumping stocks right now.
Porter is already preparing his own “Plan B,” including what he’s doing with his money. If something feels “off,” I think it would be worth your time to hear what Porter has to say.
You can watch his message right here.