There is no reliable way to invest in an environment of easy money.  I’ve worked in a wide number of environments and studied many approaches that I don’t use, and I can tell you one thing: there is no approach that will give you easy money.

The easy money promoters make money off of subscription revenue.  They are not investing alongside you, as I do with my clients.  What I own, they own.  80%+ of my liquid assets are invested in my strategies, and most of the rest is in cash.  Our interests are aligned.  This is like not true of those that suggest easy money strategies.

When you see books suggesting that you can flip houses, avoid them.  Few make money off that regularly.  If that were true, someone would form a REIT to do it, and do it far better than you could.

The same applies to books offering a simple trading strategy.  If that worked, there would be a lot of stupid people losing money.  Wait, there are a lot of stupid people losing money, at least on a relative basis.  But that doesn’t mean that particular simple trading strategy works.

Wherever it appears the lure of “easy money” brings out the worst in people economically.  The love of money is a root of all kinds of evil. (1Tim 6:10a)    Organically, value grows bit-by-bit, but often prices move in a more volatile fashion.  Try to win by buying stocks that grow value.  Winning from speculation is a crapshoot.  Avoid it, the odds are against you.

Imagine for a moment that we did not have financial markets.  Who would do the best?  Those that compounded their economic activities the best — those who were the most productive.  The same is true for us today. Focus on companies that are productive, growing organically.  That is almost always a good road to profits.

There’s a puzzle of sorts in asset allocation, and it falls under the rubric of uncorrelated returns.  When a new asset class arrives, and it is small and few invest in it — lo, it is uncorrelated!

But then the word spreads, and more investors begin investing in the alternative asset class.  This has two effects:

  1. It drives up the price of the alternative assets, temporarily boosting performance, and
  2. It makes the asset class returns more sensitive to the actions of large institutional investors, such that the correlations rise with stocks and other risk assets.

How an asset is funded matters a great deal as to future price performance.  I often talk about strong hands and weak hands in investing, but I can make it simple:

  • Strong Hands — Well capitalized, little debt, and what debt there is, is long-dated.  Such people can buy assets and ride out storms, not worrying about mark-to-market losses.
  • Weak Hands — Poorly capitalized, much debt, and what debt there is is short-dated.  A storm will capsize them, making them forced sellers of the assets they acquired with debt.

Buffett understands this.  His insurance companies have relatively low underwriting leverage, but they benefit from high allocations to stocks.  He can own stocks because there is a core amount of liabilities that will fund the stocks that he owns.

Think of housing for a moment.  Asset prices were highest when the ability to use short-term low-cost financing was abundant.   Eventually, there was no demand for housing when prices would lock in losses for buyers who would rent the property out.

If an asset is owned by entities that have weak financing, there is a real risk of loss if the financing can’t be maintained.  You become subject to the credit cycle, which governs much of investing.  Invest when credit spreads are wide; don’t invest when they are narrow.

I know that advice is vague, but that’s a part of the game.  You have to adjust the riskiness of your portfolio to overall conditions, and resist trends, if you want to make money over the long run.

How people and other entities fund the assets that they own has an effect on the future price performance, because it affects how they might buy or sell.