Love, along with life, death, and money, is one of the most talked-about concepts in history and one of the most powerful forces that drive human behavior, for good and for bad. And who can forget the title and lyrics of this Beatles song – All You Need Is Love.
Most people confine the discussion of love in the realm of personal relationships (romance, family, and friends). We will also find its presence in hobbies (art, music, sports) and politics (patriotism, political candidates). However, very few people talk about love in the area of personal finance, especially investing. People think investment should be all about cold, hard numbers. With the prevalence of quantitative investing, passive investing, target-date funds, and even robo investing with AI, the talks of love and emotions regarding money are seen as unsophisticated.
That’s why you have “money experts” continuously beat you over the head with their math and financial figures. They are the ones who yell at you to “sell now, a crash is coming,” or “you should diversify and rebalance all the time,” or “invest in only index funds because you can’t beat the market.” The worst one: “you should let me handle your money because you know nothing, and I’m the expert.”
Let me tell you a secret: they are all wrong. What if I tell you, love, if harnessed radically and correctly, can be a superpower to guide you toward amazing investment returns and wealth generation? Yes, your love, that feeling that’s in your heart and unique only to you, is a secret weapon that these “money experts” overlook and dismiss. You can use love to trounce most, if not all their expert talking.
I am not talking about the love of money itself and the desire for more. I am talking about your passion for the products and services that are the most intertwined with your daily lives. Whether it’s the convenience, the feeling of luxury and exclusivity, the mental enrichment, or just the comfort, you just love them. Maybe it’s an online store with millions of selections and sends you the things you want in two days after a click of a button. Perhaps it’s the coffee chain that you stop by every day because you can’t be happy without first tasting the coffee. Or maybe it’s the dependable video conference software that enables you to work remote or attend to church during a deadly global pandemic.
If you have those products and services in your life, you should 100% invest your money in a portfolio of companies that make and provide them. And over the long-term, they will give you amazing returns.
5 X 5 LOVE EXERCISE
Don’t believe me? Do this simple love exercise with me. This is called a 5 x 5 Love Exercise:
1. List the top five companies that you can’t live without. If suddenly they all disappear in one day, you won’t be able to find a comparable replacement that you love and trust on the same emotional level. (If you are not a normal consumer, and you are like, “I don’t love anything and I only live a minimalistic life in a trailer,” then this blog might not be for you, although I will ask you to exam how much you love your trailer first).
2. Find out if those companies are publicly traded on the stock market. If they aren’t, keep finding another company to add to the list, until you get to five publicly traded companies.
3. Use Google Finance to find out how much their stocks were worth five years ago, and how much they are worth today. Calculate that if you invested $2,000 in each of these five stocks (totaling $10,000) five years ago, how much will your total portfolio be worth today?
4. Find out the number for S&P 500 index (the most commonly recognized index that represents “the market”) five years ago and today. Calculate if you invest $10,000 in the S&P 500 index fund over the same period, how much will your portfolio be worth today.
5. Calculate the difference between these two portfolios. Feel free to send me the results by reply to this email, or tweet it to me @jiajiang.
I bet for the vast majority of you, there will be a positive difference. If your portfolio happens to lose, I will ask you to expand this list to 10 (I personally have 30). If you are still losing,… I don’t know how to put this, but you might be a weirdo, and this investment philosophy isn’t for you.
Just for example, here are my top five loves out of my 30. And I will explain why I love them in a later post):
In this case, the S&P 500 index was at 1,917.78 five years ago (2/19/2016), and 3,932.59 (2/16/2021) today. If I invested $10,000 in an S&P 500 index fund, it would be worth $20,506 (+105.1%). That’s an annualized return of 15.4%. Amazing! We have been in a bull market and everyone should be happy about this.
However, if I invested in my 5 x 5 Love Portfolio, I would have had $38,056 (+280.6%) today. That’s an annualized return of 30.6%!!! If you were a Wall Street hedge fund manager, and you tell your client you averaged 30% for the last five years, they would call you a genius and give you a lot more money to invest.
That difference, if compounded over time, will be the difference a decent life and financial freedom, if not wealthy at retirement.
[Note: The 5 x 5 Love Exercise a simple exercise and demonstration. It shows if your taste and lifestyle are suitable for Love Investing. I’m not asking you to invest in only five stocks, which is way too risky. I will teach you an active-passive strategy to build a diversified portfolio in later articles.]
This is the power and essence of love investing: you put your money where your love is. If you are a normal consumer, your portfolio will more than likely kick S&P 500’s butt. And here is the beauty, this makes total sense. You love these companies, because they provide amazing products and services that delight you, convenience you, empower you, and entertain you. If you love them, the odds are, millions of other people also love them. And having products and services that people love are the clearest signs they are great businesses whose stocks will outperform over the long term. It sounds overly simplistic, but it’s the truth.
Now, let’s be my own devil’s advocate and ask some questions:
Q: Using your example: you have five stocks, why don’t you invest all your money in the best performer: Amazon? You would end up with $61,113 instead of $38,056.
A: That’s like saying, why don’t you go to the casino and bet on red if you know red will turn out to be the result? The truth is: no one knows Amazon would perform the best out of these five loves, and no one knows which one of these will be the top performer five years from now. You can guess, but you could easily be wrong. However, using a diversified Love Portfolio, you can build a portfolio of companies to increase your odds that your overall performance will vastly outperform the market.
Q: Maybe you are just lucky that these five stocks have great returns. What if the companies I like are not great businesses with market-beating returns: like JCPenny (-98.7%), Bed Bath & Beyond (-40.2%), GE (-59%). If I had invested in them, wouldn’t my portfolio be a disaster?
A: Yes that portfolio will be a disaster, but so is your taste in life. That’s the point. Do you really love these companies? If you like JCPenny and Bed Bath and Beyond more than Amazon and Wayfair, and you are addicted to GE lightbulbs, you are an outlier and this blog isn’t for you. You should just invest in an index fund. No worries, I don’t take rejection personally.
Q: What about companies like Palantir? It has return 202.6% since it’s IPO in 2020. I am a regular consumer who doesn’t use their services, so there is no way to love them. Wouldn’t I have missed on this great investment?
A: Again, if we all know the future, there is no need for investment strategy. Love investing is about using your love for companies as insights to achieve high returns. Since no one knows about the future, your love, if spread over many companies, can serve as an amazing predictor on how well a company does. Let’s say you got lucky and bought on Palantir, do you know how much longer to hold? Do you have any idea what it does? Do you know if their business model is sustainable? Do you know their leadership? Do you love them? Without your relationship with their products and services, you simply have no idea.
Q: This worked because we were in a bull market for the past 12 years for that matter). This strategy might not have worked if we were in a bear market.
A: Stock market will always have bull markets and bear markets. No one knows the next year or two if the market will go up and down. As the legendary investor Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Over the long-term the S&P 500 has returned over 10% per year over its history. If you zoom out over time, the entire American stock market history can be considered a bull market.
Love Investing is a long-term (there are conditions, which I will explain in later articles) investing strategy. If you adhere to it over the long-term, the odds are you will beat the market and keep generating great returns.
Q: This sounds way too simplistic. A great and less risky investment strategy should be more sophisticated than this.
A: Most truths in life are simple: if you work harder than others, you are usually more successful; if spend more and don’t save/invest, you usually end up poor; if you eat healthy and exercise, you are likely to live longer. Just like these simple truths, if you invest in companies you truly love, they usually bring you better returns than the random stock market. There are outlier events like in any situation, but follow the simple truth is the best way to make the right choices.
In fact, many money managers have very complex methodologies and understanding of the market. But 90% of them underperform the market. You can beat most of them plus the general market if you just follow your simple love.
A: I don’t believe you. Maybe you just cherry-picked five stocks to prove your point. What’s your real return with this strategy?
Q: My entire portfolio is indeed different from the five stocks I showed you. Those five were just the top loves. For my Love portfolio, I have 25 more stocks for a total of 30. Below are their performance compared to the S&P 500.
Please know, these are my loves. I am not recommending any of these stocks to you. Your portfolio might end up looking entirely different than mine, because your life experience, your preference and your loves will for sure be different.Share
Love is life