The Hedge Fund Advantage: Growing Your Wealth With This Time-Tested Strategy
Today I want to talk to you about one of the most powerful wealth builders in the world…
And thanks to the power of a free economy and free market — this wealth tool is available to all of us!
When I started my career at a $130 million dollar hedge fund in Atlanta, I noticed that most of our wealth clients had become rich because of a business.
Either they started their own business, or they were a part owner in a business that was very successful. And that business left them with an immense amount of wealth — that WE got to invest at the hedge fund.
You know, that approach to building wealth through a successful business is available to ALL of us, because of the vibrant stock market here in the U.S.
Owning Your Share of the American Dream
Yesterday, we talked about two different approaches to building your wealth with income from the market. And today I want to dig a little deeper into the INVESTMENT side of that discussion.
When you INVEST in a company, you’re making a commitment to becoming a part owner in that company by buying shares. When you buy a share of stock, you legally OWN a small part of the business.
This is important because as an owner, you’re entitled to your portion of the company’s profits. And for most large established companies, those profits are paid out through dividends.
I love owning dividend companies because you have TWO ways to grow your wealth. One is through the regular cash payments that are sent to you. And the second is when the price of your shares moves higher.
In a perfect world, both of those wealth generators would continue to move in the right direction. As a company’s profits grow, your dividend checks would get bigger over time. And as the company’s value increases the stock price should naturally move higher.
But the real world throws us some curveballs from time to time. And that’s when we as investors have to make some tough choices…
Buy, Sell or Hold… Making Smart Investment Decisions
When the market trades lower like it has done during the coronavirus crisis, even the best dividend stocks can lose some value.
Sometimes this is because the companies themselves are actually worth less than they were before.
For instance, a cruise line company may truly be less valuable today than at the start of the year. This is because the business hasn’t been able to collect enough revenue to stay current on its loan payments. The industry is changing and will require higher costs to maintain new health standards. And prospective customers may be less likely to purchase a cruise for years to come!
Those are all things that affect a dividend stock’s underlying business — and they’re not just a temporary blip on the radar. So it makes sense that the stock value for this company may be lower. And investors can likely expect lower dividend payments in the future.
On the other hand, let’s consider a different dividend stock with a business that is less affected by the coronavirus crisis. I’ve often mentioned Procter & Gamble (PG) as an example of a great long-term investment with a stable business that pays investors plenty of cash.
When the coronavirus bear market hit, shares of PG quickly traded from a high near $127 to a low below $95. That’s a 25% drop in just a few weeks!
Should you sell an investment position that loses so much value in such a short time?
As an income investor, this would be a terrible decision to make!
After all, PG’s underlying business is still very stable. In fact, the company might actually be better off as individuals and businesses scramble to accumulate many of the consumer staples products that PG produces.
In the long-run, PG’s business will continue to be very stable. And your dividends from this great company will continue to grow.
But over a period of a few weeks, the stock price dropped simply because other investors decided to sell their shares because they were afraid.
Here’s an important question… Do you really want to base your financial decisions on what other people do in a time of crisis?
Protecting Your Wealth Through Vigilance and Diversification
When I enter an investment position in a stock that I would like to hold for a long period of time, I base my decision on the underlying company and how reliably it can generate profit.
Of course there are a lot of things to research.
I look at a company’s balance sheet to see if there is too much debt. I look at their overall business plan to make sure they will generate profits year in and year out. I even consider the company’s management team, the strength of the customer base, new opportunities for growth, and other economic factors.
But once I invest in a company that I believe in, my plan is to hold those shares for a long period of time.
(Please note, this is different from trading positions which we’ll talk about in an upcoming alert)
I don’t sell simply because other people are panicking and selling their shares. If anything, I’ll buy more when the price drops. After all, if I’m buying the same dividend payments and getting a chance to own a bigger piece of the company for a low price, that’s a great deal!
So if we don’t sell an investment simply because the market drops, how do we protect our wealth from a challenging period like the coronavirus crisis?
The key here is to be vigilant about each company’s underlying business, and to be diversified into many different areas of the economy.
Vigilance is important because things can change with an investment you hold.
A good example of this is General Electric (GE). Over the past several years, the company was managed poorly, the amount of debt was allowed to rise to a dangerous level, and investors lost a lot of value.
Fortunately, our vigilance at Lifetime Income Report allowed us to see these challenges and get out of the position before too much damage was done. And that’s the power of doing your research and understanding if things change with your investment.
If the company changes and you would no longer choose to buy that company, then you should get out. Regardless of what the price is doing.
On the other hand, if the price is falling and the company is still generating profits and paying its investors, this may be a great time to buy at a discount!
The other thing to remember is to be diversified into several different stocks. And those stocks should represent several different industries.
That way, if something goes wrong in one area, you still have plenty of wealth and income in another area.
For example, many oil companies are in deep financial trouble now that Saudi Arabia and Russia have pushed oil prices sharply lower.
That’s frustrating for owners of U.S. energy companies which are being hurt through no fault of their own.
But if you own some energy stocks, and many other stocks in different industries, your wealth won’t be nearly as vulnerable.
And that’s exactly the type of approach that helped our hedge fund clients weather storms like we’re seeing right now with the coronavirus crisis.
Markets move up and down. Stock prices fluctuate — and sometimes those fluctuations are extreme!
But if you focus on the companies you’re invested in… on the profits these companies are generating… on the dividends that they pay to us as investors…
You’ll be able to weather this storm just like my hedge fund clients. And come out with more wealth when the dust settles.
A Perfect Investment For Today’s Environment
Tomorrow, we’ve got a special opportunity to put this investment concept to work!
I’ve asked our Head of Research Jonathan Rodriguez to share one of our favorite investment opportunities with you.
This is a great play that will allow you to capture income from the market, while also participating in one of the strongest growth areas in our economy.
So be on the lookout for this special The Daily Edge alert tomorrow!
Here’s to growing and protecting your wealth!