Investing as Capital Allocation
I am bombarded daily with emails promising that if I pay them a monthly fee, I will be able to retire early. Usually, they are offering their unparalleled ability to select stocks. The most common litterers in my inbox are The Motley Fool and, more recently, Investopedia.com.
The most common sales tactic involves a statement like: “This strategy has returned x% over the last y years. Don’t miss out!” Their logic always seems to prey on those who don’t want to fall behind their neighbors. If other people are making this money, I better make it as well. I can’t be left behind.
The reason they do so is they want us to analyze these “investment” opportunities with fear and greed rather than intellect. Fear and greed lead to speculation — the search for short term trading profits. While speculation may work for some, it usually ends with disappointment.
However, if we think of investing as capital allocation instead of as the search for profits, we are far less likely to fall for the speculation-pushers. Investing as capital allocation means that we look for the best long term options for our dollars. It is more akin to acting like the CFO of a corporation, trying to allocate capital to the highest return investments, rather than acting like a gun-slinging Wall-Streeter.
An investor allocating capital looks at the projected returns the company will likely earn on capital and the current valuation. Short-term considerations, such as next quarters earnings or technical indicators are only distractions.
Thinking like a capital allocator, rather than trying to predict future prices has helped me earn great returns for my investors and I hope it will work for you as well.
