How To Invest When There’s Blood In The Streets — A Letter To My Younger Self

$100 bills

Dear Tom,

What you’re seeing in the stock market right now is opportunity. I know you know this, but I want you to listen to me. You’re eager to get your money in, hoping to find the ten-baggers and home runs. You’re browsing through forums and reading analysis eager as a tied hunting dog, but I’m telling you, pause.

You need to rethink your approach. Stop chasing unicorns and grab some proven race horses being left in the stables as they run away from the track. Your initiative is good, but your approach is wrong. What you’ll come to learn is that you’re a terrible stock picker when you try to be smart, and a wonderful stock picker when you don’t.

Another thing you fail to realize right now is that cash is king. Sure, you’ve heard this expression before, but you do not yet understand what it means.

I’ll tell you.

First, the expression should be cashflow is king. Why? Because with your current approach, after your money is spent you’ll be left to wait and hope that your stock rise to have a paper profit. And even if you succeed with that, what will you do with this paper profit? Buy something? Well, you can’t do that without selling, and when is the right time to sell a winner? You don’t know.

What you’ll learn eventually is that stocks running good have a tendency to keep doing that, and since you’re a shitty stock-picker, it wouldn’t be smart to sell a winner to buy a potential loser. And what if the market stays flat in the years to come?

This is where the cash flow part comes in. You need to invest in stocks that pay dividends regularly. You need to generate cash you can both reinvest in your winners and take a few small speculative bets with. This is good money management. It took me way too long to understand this, and I’m hoping you will take my advice. Don’t think speculative fads, think Coca Cola, McDonalds and such. These aren’t companies that will 10x in a year like the stocks you fantasize about, but your chance of finding those are slim anyway. A better question is; do you think they will be worth more in ten years? And, since they’ve been steadily paying and increasing dividends for the last 25 years, is it reasonable to assume they’ll continue? Go for companies that are a yes on both accounts so you get both the cashflow and the appreciation. This is what you need.

Use this market to get quality, dividend paying stock and secure yourself some cashflow. You know that when there is major drawdown in the markets, fear pulls the quality stocks down as well, even when the underlying fundamentals are good long term. Don’t try to guess what will happen to some random speculative stocks if X, Y and Z happens. The world is too complex to know with any certainty anyway. Keep it simple. Will people still be eating burgers and drinking coke in ten years? That kind of simple. Cash is truly king, Paper gains, not so much.

The blood is in the streets. It may get worse. Keep cool, keep it simple. Cash for cashflow

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Tom C Aune

Tom C Aune

Free Thoughts, Free Weights and Free Cash Flow