Where to Search for Investment Ideas – The 5 Magic Categories
In the 80/20 way of investing, we want to make use of the 80/20 principle to our utmost advantage. One way to utilize the principle is to make use of what I like to call the FIVE magic investment categories.
Out of the five magic categories, the first and by far the most important is, your own “cash engines.” YOU are the most valuable asset on your personal balance sheet (at least in most cases). The one asset that continuously produces cash on a monthly basis until the day you die. Anybody can earn money, and if you end up spending less than you make, you have a positive cash flow.
This cash inflow accumulates with each month and builds the basis of your personal wealth and future investments. But there is more to it. With each future investment you make, you should be able to increase your free cash flow through investment income and capital gains, reinforcing the positive cycle of income growth and wealth accumulation.
Quite logically, it is in any investor’s self-interest to make sure that this primary cash engine runs smoothly for an extended period, which includes living a healthy and balanced life. As corny as it may sound, your first investment should be in yourself. Remember, it all starts with your primary cash engine.
Aside from investing in yourself, there are four more categories that offer universal opportunities for any 80/20 Investor, regardless of their specific work background or expertise. These are areas that put maximum emphasis on the price that you have to pay to get value, with less reliance on expert knowledge and confidence about the inherent growth potential of a specific business opportunity.
As referred to in my book The 80/20 Investor, the underlying principle behind these categories is to observe the seasons, as Mr. Womack so masterfully expressed. To see it from a different perspective, you let the market bring ideas to you rather than go chasing after hot investment tips.
The following idea categories represent the 80/20 way of investing because they help you to focus on the decision that will have the largest impact on your portfolio’s performance. They will reduce your workload and simplify your decision-making while ensuring enormous performance results for your portfolio without the need for advanced technical or accounting knowledge. Mr. Womack, the pig farmer, most certainly didn’t have an MBA or an advanced accounting degree. He didn’t need to!
5 Magic Investment Categories:
1) Your personal Circle of Competence
2) Global market crises
3) Single country crises
4) Individual industry crises or single asset class
depression
5) Single business/company crises
The four additional categories offer an endless stream of new investment ideas as described in my recent book “Modern Investing: Gambling in Disguise” and illustrated in real time through my 80/20 Model Portfolio. But even though they offer great starting points for no-brainer ideas, they still require you to do your own analysis and homework, with the top one requiring the least and the bottom one requiring the most.
Especially the fifth category requires more specific business understanding and financial education. If you would like to know more about all FIVE magic categories and see some interesting examples and case studies, I recommend you to read Chapter 11 of The 80/20 Investor. Purchase HERE
