Wealth Creation: Understanding the Rules of the Game + Having a Plan + Stock Selection.
The problem is that most investment strategies focus on diversification, a wealth preservation strategy, while most people are not yet wealthy. Our focus should be on wealth creation.
In the complex world of investing, wealth creation is a multifaceted process. It involves understanding the rules of the game, having a well-thought-out plan, and making informed stock selections. On the other hand, wealth preservation focuses on diversification. Let's explore these concepts in depth, considering the categories of zombie companies, dragonflies, rockstars, and Icarus companies.
Rules of the Game
The first step in wealth creation is understanding the rules of the game. Howard Marks, co-founder of Oaktree Capital Management, emphasizes the importance of grasping market cycles, investor psychology, and the macroeconomic environment. These elements aren't rigid rules but essential guidelines that help investors navigate uncertainties and make informed decisions. Marks' memos often highlight how awareness of these factors can significantly impact investment outcomes.
Having a Plan
A solid investment plan is crucial, especially with the end of globalization and the reconfiguration of global supply chains. The investment game has transformed. We’ve moved away from a fully globalized world where U.S. Treasuries were once considered risk-free assets. Today, diversification alone isn't sufficient for risk management, as geopolitical risks can impact multiple markets simultaneously, effectively putting all eggs in one basket. However, geopolitical tensions also foster competition and innovation, creating unique opportunities amidst waves of inflation and deflation. Investors must develop plans that adapt to these changes and leverage the opportunities they present.
Stock Selection
Selecting the right stocks is vital for wealth creation. In high-interest-rate environments, highly indebted zombie companies—those relying heavily on cheap debt—struggle to survive. These companies face two paths: undergo significant transformation to become robust and agile, like dragonflies, or succumb to failure. Only a few companies sustain a competitive advantage and become industry rockstars. However, even rockstars can turn into Icarus-like entities, over-relying on their current success and failing to innovate. CEOs and management teams often focus on short-term gains, neglecting the spirit of long-term reinvention. The challenge lies in identifying companies that not only perform well today but also have the vision and capability to adapt and grow in the future.
Wealth Preservation: Diversification
While wealth creation involves understanding, planning, and stock selection, wealth preservation is all about diversification. Diversification spreads risk across various assets, reducing the impact of poor performance in any single asset. This strategy ensures stability and protects the wealth accumulated through informed investment decisions. The big problem is that most investment strategies focus on diversification while the majority of the population is not wealthy. Our focus should be on wealth creation.
Conclusion
In summary, wealth creation is a dynamic process that requires a deep understanding of the investment landscape, a robust plan that adapts to the end of globalization and the reconfiguration of global supply chains, and careful stock selection. Categories such as zombie companies, dragonflies, rockstars, and Icarus-like entities illustrate the diverse challenges and opportunities within the market. Meanwhile, wealth preservation hinges on diversification, safeguarding against market volatility and ensuring long-term financial stability. By balancing these principles, investors can navigate the complexities of the market and achieve sustainable wealth growth.
Thanks for reading,
Guillermo Valencia A
Co-founder of Macrowise
Bogotá, Colombia, June 7th, 2024.