Investing like the rich do

Got a few million dollars to invest?

Neither do I.

Dorsey Farr

Dorsey Farr

Still, on the theory that the rich generally get richer, I thought it would be a good idea to talk with two local advisers who invest money for those with lots of it.

Maybe, Dorsey Farr and Mike Wolf would have a few ideas for us average types. They’re two of the three owners of French Wolf & Farr, which invests $225 million of their clients’ money.

The firm’s minimum for an individual account is currently $3 million — a sum I’m hoping to accumulate in my next life. When it comes to investing, you can never start too early.

Also, when it comes to investing, it’s critical to try to avoid major mistakes. A big one, according to Farr and Wolf, is to pay too much for an asset.

A few years back, they noticed that important investments — stocks, bonds and real estate — were becoming very pricey. So they adopted a more defensive posture, sheltering a larger proportion of money in U.S. Treasuries, money markets and other cash equivalents. Cash, after all, is not trash.

Another key mistake can be thinking you’ve diversified your investments when you haven’t. Some 401(k) programs, for example, have many domestic stock choices. It’s common for employees to split their money among them.

Farr calls that method — “spread it around and hope.”

That’s generally not a wise game plan. It can leave investors with virtually all of their money in domestic stocks and little in other options, such as bonds, international stocks, money-market accounts and the like.

“When you throw a little at everything, you’re not truly diversified,” Farr said.

A third mistake, Wolf said, can be a reluctance to take a loss, sometimes because you’ve become emotionally attached to an investment.

Mike Wolf

Mike Wolf

For their well-heeled clients, a loss can be valuable because it can reduce taxes considerably by offsetting the gains. And for both average and wealthy investors, taking a loss can make sense if the remaining money is then deployed in investments with better prospects.

Where are those investments these days?

With very low interest rates right now and a surging federal deficit, Farr and Wolf believe interest rates are headed north. And they’re not overly impressed with U.S. stocks, because of the relatively meager dividend yields and high price-to-earnings ratio.

So, they suggest U.S. Treasuries that have inflation-protection, called TIPS.

They also like international stocks, particularly from Western Europe and Japan, because they believe those equities are undervalued when compared to U.S. stocks.

And they’re putting money into floating rate notes — bank loans that can be a hedge against inflation because their interest rates fluctuate with market conditions.

While these investments may work in the current climate, Farr said, there’s one other principle to remember — do your homework.

“It’s hard not to mention Bernie Madoff and the number of folks who were fooled,” he said. “There was not enough due diligence.”

If there’s a substitute for that, I don’t know it.

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23 comments Add your comment

TnGelding

February 23rd, 2010
6:44 am

U.S. Treasuries? Haven’t they heard the GOP mantra? We’re broke and in danger of default!

Sound advice for the wealthy, but for the rest of us we need to be in more risky options. I certainly agree about diversification. The key is to be patient and not to get greedy. We have to teach our young folks the importance of planning for retirement when they take their first job. We also have 8 months to plan on paying for the expense of a baby and 18 years to save for a college education. But how many of us actually do it?

hryder

February 23rd, 2010
9:22 am

This is common sense that the majority of people do not follow consistently. If one desires to be wealthly financially or in any other aspect of life logical reasoning, basic statistics, as well as common sense indicate that one conducts oneself as those that have achieved that status. Becoming a rock star, professional athlete, lottery winner, actor, et cetera, is so rare that it is very close to insanity to pursue. There are common general educational, behavioral, and social aspects of life that most all rich people possess. The aspect that sets the wealthy apart is having discipline to continue toward their goal year after year, decade after decade, and even continue beyond its achievement. Yes, beyond, beyond since it has become you, you and the pursuit of achievement have become one. Discipline is required when others party, sleep, arrive late, or deter to peer pressure.

Beam me up Scotty

February 23rd, 2010
9:32 am

It’s so nice to be poor and not have this to worry about!

DW

February 23rd, 2010
9:35 am

These guys are wise. Good article

Glenn Beck

February 23rd, 2010
12:43 pm

Take it from an angry guy with a radio: Buy gold!

Rush Limbaugh

February 23rd, 2010
12:43 pm

Take it from a fat angry guy with a radio: Buy gold!

Neal Boortz

February 23rd, 2010
12:44 pm

Take it from bald angry guy with a radio show: Buy gold!

The Dogfighter Returns

February 23rd, 2010
1:01 pm

U.S. treasuries :) :) . Really. These guys are terrible. do your homework? :) :) Henry are these guys trying to replenish their funds.

They should close their firm immediately. Their best advise is to buy u.s. treasuries.

this is their best advise for the u.s. market. buy treasuries.

In their opinion they can’t find any cheap u.s. stocks. There are plenty. These guys are simply clueless.

losses to offset gains. really

come on henry you can do better. who wants to lose $1.00 to save $0.15. You realize the max rate for long term capital gains is 15%?

Curious

February 23rd, 2010
1:11 pm

I agree with most of what is said here but there no mention of emerging or frontier markets? Yes they are volatile but it seems hard to ignore the places that have GDP growing at 6%/yr+ (Brazil, India, China, Egypt, Vietnam, Indonesia, Turkey, Eastern Europe, etc.) when the US and Western Europe are so heavily burdened with debt and are already well developed. Besides Western Europe and Japan, what other international markets do the contributors like?

Another thing I think a lot of people need to understand and work on, not only to get rich but also to live more comfortably, is to get out of debt and be more frugal. The money that is spent on interest payments, late payments, etc. on credit cards is like throwing money away. Car and home loans, along with student loans can make sense but credit cards in particular have terms that overwhelmingly favor the issuer and it is NOT a wise way to finance a purchase.

As for being frugal, it is a habit that pays for itself immediately. Sure we all have to buy things but there is nothing wrong with and no shame in finding the best deals and not being wasteful.

messin with sasquatch

February 23rd, 2010
3:08 pm

no mention of global bond funds?

John

February 23rd, 2010
3:08 pm

Every money manager walking the planet has a differing opinion depending on what hour of the day it is. Just watch CNBC or FOX Business channel and you’ll see a number of “experts” debating which way the market is going to turn, and when. There are so many disagreements among the “pros” it’s like watching children fight in a sand box – and they all believe they’re right. The dirty little secret is no matter what the so-called money gurus want you to believe, no one knows what the market is going to do. Sure there is theory and historical analysis, but what is it we are taught about chasing performance: past performance is not indicative of future returns. I’m sure these gents are fine number crunchers, understand market theory and have the necessary academic credentials. One group of money men tells us we should head for fixed income because of events X, Y, and Z are about to happen. But then another group of money managers tell us we have to stay in stocks because of the the same X, Y, and Z events. When market gyrations were “normal,” one could reasonably follow investment theory and diversify his assets accordingly. However, the implosion of the financial markets from late 2007 to early 2009 allowed us to see just how bad theory and professional advice can go wrong. During this time span, every asset class save Treasuries went straight into the abyss. Here’s a piece of advice: when your money manager says you should be invested in whatever asset class, ask him how he’s investing his money. If he he won’t tell you (and if he does but he’s doing something different than what he’s advising you to do) it’s time to find yourself a new money man.

TnGelding

February 23rd, 2010
3:10 pm

Curious

February 23rd, 2010
1:11 pm

Frugality rules! Live within your means to become rich, then invest like the rich!

I’d be interested to know where these fine gentlemen have their personal fortunes invested. A little quick math: They have less than a hundred clients. 1% of $225 million is $2.25 million. Not a bad rake.

John

February 23rd, 2010
3:26 pm

Investing is not rocket science. But Wall Street wants to make you believe that it is and therefore, you need a seasoned veteran or some Ivy League MBA type to manage your money. Aside from professional athletes, the Hollywood crowd, and Fortune 500 executives, a majority of millionaires in this country are small business owners who know how to make money. I suspect they’re smart enough to manage it, too. And when I define millionaire status, I’m talking about liquid cash, not some phony net worth figure.

6Digitballin

February 23rd, 2010
3:33 pm

I know nothing about investing. I do know how to spend my money at the Tantra.

DW

February 23rd, 2010
3:46 pm

@DOGFIGHTER.. The guys were suggesting TIPS (inflation protected treasurys) These are basically the opposite of regular treasury bills, notes, and bonds. TIPS are a bet on inflation, Regular treasurys are a bet on lower inflation / deflation. For smaller retail investors you are better off going with I-bonds or series E savings bonds (you can purchase up to $10k of each per year)

Kevin

February 23rd, 2010
4:00 pm

Buy Ford, I did. I bought it at $2.50/share and now its close to $12. Buy undervalued U.S. Stocks, the U.S. economy will rebound and you will be sorry you didn’t take advantage of the low prices out there.

DW

February 23rd, 2010
4:03 pm

@Kevin.. be careful not to confuse brains with a bull market. The s&p is up what, 60% since ford was 2.50?

Emma

February 23rd, 2010
4:04 pm

I am very interested in investing, but I don’t know where to begin. Does anyone have any suggestions? Should I read something and where do I go? I would greatly appreciated it. Not trying to strike it rich, but to have a little in a nest egg would be great.

John

February 23rd, 2010
5:20 pm

Emma, there are hundreds of book offerings to choose from. Go to a Barnes and Noble and check out the Personal Finance section. But stay away from anything with “The Only …. You’ll Ever Need” in the book title. One of the best books I’ve read on the subject is “Common Sense on Mutual Funds” by John Bogle. A majority of Americans invest in mutual funds within their 401(k) and IRA plans. Others have small online brokerage accounts. The “rich” tend to favor what is called managed money and use brokerage firms or other private money managers. But for beginners, mutual funds are your best option. You can check out a number of websites from fund companies such as Fidelity, Vanguard, and T. Rowe Price. Pick up a copy of Money magazine of Kiplinger’s Personal Finance magazine (and checkout their web sites their websites) . This whole investing game can appear to be overwhelming. But it shouldn’t be. It is essential you understand the different asset classes and characteristics of each. The best advice is to read – a lot – before investing. Hit the web and the bookstore. Don’t go for the real technical stuff; you’re just starting out and you need to understand the basics first. But like everything else in the investing world, everyone has an opinion and they’ll be glad to share it with you. That’s why it’s important to read a variety of books on the subject matter. Get grounded before you invest. You’ll be glad you did. A word of caution: do not use a full service brokerage firm. Contrary to what many believe, brokers are really salesmen and you don’t want to go down that road early in your investment career. If you’re interested in reading about the concepts of personal financial planning without all the technical jargon, pick up a copy of “The Richest Man in Babylon” by George Clason. Finally, understand the difference between being a “trader” and an “investor.” These are two different animals.

Emma

February 23rd, 2010
5:34 pm

John: Thaanks so much for the response and enlightening me on the matter. I just printed your response so to help me guide my way. I have always wanted to invest but found it intimiating. Although I have a degree I don’t know everything and I appreciate the information. Thanks soooo much again.

TnGelding

February 23rd, 2010
6:36 pm

TnGelding

February 23rd, 2010
6:49 pm

There are more than enough jobs in this country, still. But the wrong people are filling them. We need to concentrate on having at least one member of each household gainfully employed.

We certainly aren’t wealthy, but we live comfortably. I recently botched an opportunity to make $2 million on my wife’s “company” stock, altho she never worked for it. No guts, no glory.

French Wolf & Farr

May 25th, 2010
5:06 pm