Wealth conviction is an undying, never surrender belief in a given investment approach, asset class, or style. A belief so strong that it will often come at the cost of other more balanced approaches, but when your song sheet gets played, you can make a pile of money, and it will often come very quickly.
However, what is still more curious, is how such strong wealth convictions and views across individuals can simultaneously oppose each other, yet all deliver incredible results. Let’s review a few of these opposing views today and see if there is anything we can learn and adopt into our personal investment approach.
Warren Buffett – Value Investing
Warren Buffett is the only member of the Forbes World’s Top 100 Billionaires to crack the top 10 through just their investment acumen. The rest do it through owning businesses they create or co-found. This is another way to say, that nobody allocates investment capital better than this man does. On top of this, few have done it longer than he has.
Did you know, for example, that he has owned shares in GEICO, since 1951 and never sold? How old were your parents when he did this first purchase! This is wealth conviction!
His investing approach is based on Benjamin Graham’s Value Investing technique. Warren has adjusted the approach a bit here and there to meet modern demands and opportunities, however the base fundamental approach is still intact. This is to say, buy undervalued companies whose earnings are growing and whose earnings you can confidently predict into the future.
He knows what works and he sticks to his approach:
- Pay fair value for a business you can understand
- Future earnings can be predicted with some degree of certainty
- Pricing power, competitive moat, monopoly like in their space
- Dividend paying companies that increase payouts over time
Buy Strong Future Earnings For a Discount Today
This approach of predicting future earnings of a company and buying them when the market has discounted them versus their fair value has steered him clear of many bubbles and market-mania along the way.
While people were borrowing against their home to buy pets.com in the 90’s, he was picking up shares in boring old Wal-Mart. We all know how this ended. We all know how he won out in the end. It’s this tireless conviction in the face of FOMO that is so incredibly inspirational.
Cathie Wood – Disruptive Technology
Cathie is the founder and CEO of Ark Invest which just started managing money for investors in 2014. She started this firm so she could more fully embrace her thematic investing strategy of disruptive innovation. She derives alpha for her clients by investing in the leaders, enablers and beneficiaries of disruptive technologies while avoiding market indices.
Cathie has staked her fortune and investment approach on companies who are reinventing how things are done. For example, Netflix revolutionized the video rental space, and the cable television industry. Apple has done this with the iPhone, iPod and to some degree with the iPad. These examples highlight how a new product, technology or service can find quick adoption once the audience realizes the tangible benefits. Because the money is already in play, the existing revenue is quickly shifted over from the existing service. You’re already buying 2-3 movie rentals a month, why not divert that to Netflix and watch as many as you want with no late fees?
What Exactly is Disruptive Innovation?
Disruptive technology companies compete directly with the dominate player by reframing customer expectations. They do this through providing a better service or product for less money. To cement the disruption, the differences not only need to be tangible but they need to be measurable. The new technology simply cannot meet or improve upon the old. At a minimum, it needs to strive to be twice as good for half the price; Cathie Wood strives to find a ten fold improvement.
From a Buffett view point, they are attacking and removing the incumbent’s moat or competitive advantage. They are destroying the predicted future cashflows, and taking them away from the incumbent companies. Imagine investing in a taxi cab company thinking it was a terrific value with growing earnings and growing populations only to have Uber enter the market. Your value model is ruined; completely disrupted by technology, and a new way of delivering the same service.
Cathie has wealth conviction because this formula for investing has not always yielded the results she anticipated, but she keeps at it. Her relentless belief in this investment theme has proven very lucrative during the last 5 years.
Here are the industries she believes are innovating and thus present excellent investment opportunities for investors:
While Cathie might not be the richest or most famous investor, I really admire her conviction for investing in disruptive innovation. She is also an outspoken opponent to index investing. Myself being an advocate for this type of investing, I listen to her arguments, but find it difficult to shift my mindset as I’m a staunch believer in wide diversification.
Astute cryptocurrency investors will notice I put “Bitcoin” as his approach, and not crypto, or cryptocurrencies. Michael has made it clear he is only interested in Bitcoin – full stop. He’s sees Bitcoin as the pristine store of wealth and the best way to transfer monetary energy through time and space. As many will know, Michael Saylor is the current EO of MicroStrategy who has decided to begin acquiring Bitcoin as a reserve asset instead of holding the US dollar.
Here are his comments from the most recent earnings call for MicroStrategy
“Our view is that Bitcoin is an institutional-grade treasury reserve asset. It’s 95% dominant as a proof of work crypto asset network. That makes it the crypto asset winner if the use case is money or long-term store of value, i.e., digital gold. So what we wanted with our treasury was, in essence, digital gold from the dominant monetary network in the world.”
Saylor said that other cryptocurrencies did not align fully with that strategy – describing them as “investment theses” instead. “They are more like venture capital investments,” he said, “and they have a different risk-reward profile. We don’t have a portion of our treasury allocated to venture capital, so it wouldn’t be appropriate for us.”
Just Bitcoin Please
So we learn from this that he is just buying Bitcoin. Now, I understand his idea of holding Bitcoin as a reserve asset and alternative to holding USD, but they have begun borrowing heavily to buy more and add to their balance sheet. This means they are raising capital for the sole purpose of just holding a reserve asset and this seems a bit off when you’re really an operating corporate entity. Time will tell, and I see he is able to attract hedge fund capital through not being an ETF, but it all seems a bit off.
While this recent obsession with acquiring Bitcoin has bordered on lunacy, his wealth conviction in how important it is to acquire this asset is inspiring. The company has gone to the debt market on a few occasions to borrow money and purchase additional Bitcoin when the price has dipped. He is literally going all in on Bitcoin and has pitted the fate of MSTR to the future price performance of Bitcoin.
So far, his bet is working out, as their current holdings are valued at $3,571M with a cost basis of $2,251M. If you’re curious which other companies have Bitcoin on their balance sheets you can visit the Bitcoin Treasury website.
Image Caption: MicroStrategy Bitcoin purchase history since August 2020. Purchases total $2,251M USD for a total of 92,079 Bitcoin. Does not include the recent June debt agreement for another 500M. Credit to InvestAnswers for this great chart.
Why Wealth Conviction is Important
I’m a firm believer that to get wealthy, very wealthy, you will need 20-30 years to obtain it. You can obtain millionaire status in 10-15, but to get into the multi-millions you will need more time. I believe most readers don’t want to hear this, that they want it faster, but in reality its just the way the numbers work out. Even through leverage and business creation you will need some time to cement your fortune.
Now, in order to last 20-30 years you will absolutely need to endure numerous bear markets and some crashes. In the end, your conviction and commitment to your investment strategy is what will get you through. Bonus, if your conviction is so strong you decide to further capitalize on the opportunity and buy more.
What Will Happen If You Lack Conviction?
If you lack conviction and confidence in your wealth building endeavors you will ultimately fail. Why? Because you will be tossed and turned, wandering from one winning strategy to the next and wondering why you are always buying at the tops. The truth of the matter is that every asset class, strategy, and approach has their day in the sun. This is why all three of these admirable investors can be worth billions: they see through it thick and thin and hold to their wealth conviction.
Even just look at last year alone. During the COVID-19 crash, government bonds proved resilient and rose to premium levels that forced real yields to go negative. Then stocks and equities took off anticipating a strong V shape rebound. Finally, crypto stood up and redefined high performance asset returns as the year ended. If you had run from one to the other you’d be caught holding the bags three times instead of just holding to your guns with conviction. Sure, you would have likely missed on one or two of these moves, but you would enjoyed at least one.
Wealth conviction is critical for long-term investors
Final Words & Wrap
We started the article discussing 3 titans of the investment industry who have opposing views. While they cannot each be right at the same time, they can each be right over longer periods of time, and each can amass tremendous fortunes over periods of 20 to 30 years.
Much to learn here: hold to your wealth building convictions and you will find success over the longer term. Hold the line, don’t continually vacillate and switch from one hot stock to another. Survive and endure the dips and bear markets and you will win out in the end.
Conviction… conviction in sound money and sound investments will always win out in the long term.
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