Investing Habits of the Super Rich
The old aphorism “money begets money” holds more than a grain of truth when it comes to describing how the super-rich put their idle cash to use. As a collective group, the moneyed tend to display an instinctive flair for making more astute investment decisions that only serve to grow the size of their already burgeoning wealth pies over time. Here's a brief exploration of some of the discerning investment behaviours that set the super-rich apart from the rest of us.
They don’t over-diversify
Much has been spoken about the benefits of diversification when it comes to investing. Without doubt, a measured approach to diversification goes a long way when it comes to controlling portfolio risk. However, the super-rich seem to instinctively understand that when diversification crosses over into the realm of ‘over-diversification’, it virtually eliminates all possibilities of achieving supernormal gains. In a manner of speaking, the wealthy subscribe to the prosperous Scotsman Andrew Carnegie’s view that “the way to become rich is to put all your eggs in one basket - and then watch that basket”. Although Carnegie’s statement may be construed as a rather extreme interpretation of this philosophy, it’s worth noting that the super-rich tend to concentrate their investments into assets that they understand well, rather than spreading themselves too thin in the name of diversifying risk.
They are self-aware
Whether by dint of their naturally superior judgment, or through the harshly acquired lessons of experience, it appears that the super-rich have learned over time that they are in fact their own worst enemies when it comes to investing. Most affluent investors have perfected the art of stepping outside of their own emotional shells and rationally evaluating their decisions to either purchase or liquidate an asset. By keeping aside their behavioural biases, the super-rich are generally able to ride through tempestuous and torrid markets with élan. They are a lot less inclined to succumbing to all too common fallacies such as over-optimism, procrastination, ‘temporary paralysis’, groupthink, anchoring or loss aversion. Thus, they are more likely to discover and unlock value while novice investors either sit on the side-lines indefinitely or jump in and out of investments as if prancing on hot coals.
They understand risk
Generally, the super-rich do not hold polarized views about risk; they neither embrace nor reject it. Rather, they understand risk and how it can affect future investment returns at a given point of time. “Risk comes from not knowing what you are doing”, Warren Buffett had once explained. As if in sync with this famed Buffett Principle, affluent investors display a knack for coldly evaluating facts and opinions, even when they are conflicting in nature and flowing in from multiple sources. They tend to be extremely detail oriented, spending unnervingly long periods of time in the process of evaluating potential investment decisions. They make efforts to read the fine print and use their intellect to filter the noise from the facts. The super-rich will rarely, if ever, jump into an investment that they do not fully understand.
They are relatively passive
If you envisioned the super-rich as a swashbuckling group, constantly on the lookout for the next big thing to deploy their ‘hot’ money into, you couldn’t be farther from the truth. Quite on the contrary, they usually tend to err on the side of being overtly passive than being overtly active. Having dedicated significant amounts of time and energy into the evaluation phase of an investment, wealthy investors tend to display an above-average tendency to allow their investments to run their course and for their dynamics to fully play out. They also tend to be more hard-nosed about their investment decisions, generally staying unaffected by the ebbs and tides of short term market movements. By rigorously staying on top of news and events, the super-rich are able to rationally assess whether economic shifts are appreciable enough to warrant a revalidation of a prior investment decision. If not, they are happier staying put.
They have fun, too!
All the above might have led you to believe that the super-rich are a stodgy bunch of money hoarders, content with the humdrum of rational decision making and passive investing. However, that wouldn’t be a strictly accurate conclusion. Almost as a rule, affluent investors tend to have a measured allocation towards speculative investments that might not appeal to reason in the strictest sense, but that appeal to their ‘gut feel’ instead. Making leveraged investments into derivatives, providing seed capital to start-ups, short term trades in equities, buy-today-sell-tomorrow stocks; the super-rich do it all. The key difference is that they have very clear lines demarcating risk capital from their long-term investments, and ‘never does the twain meet’. Unlike lay investors who often speculate with more than what their financial position would warrant, wealthy investors speculate with moneys that they can afford to lose in entirety without feeling a pinch. If it sinks, they can shrug their shoulders and walk away without regret. If it pays off – well, a shiny new Mercedes-Benz never did hurt anyone, did it?
