One thing that I came to realize in writing my book Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere is that the best investors treat their trading and investing like a business unto itself. That business has a certain amount of overhead that has to be covered before investing begins to pay off in any meaningful way. For many investors those costs, especially once you take into account opportunity costs, never get covered.
That is why I was so excited to read a post by David Henderson at EconLog that passes along some hard earned knowledge from an experienced tax accountant. What I find interesting is that this advice is both relevant for business owners and investors. You should read the entire post but here are the important lessons that successful people put into practice:
(1) Don’t have a lot of overhead. Don’t commit to a large rent. Don’t have a large mortgage or, if you do, pay it down quickly.
(2) Be “footloose.” That is, be able to adjust quickly when things go bad. So, for example, he told the story of a friend who was doing well but then had his rent on a municipal property jacked up by a local government that saw that he was doing well. His friend didn’t renew the lease but went elsewhere quickly.
(3) Take advantage of–and maximize if at all possible–all of the tax-advantaged ways of saving that you have access to: max your 401(k), max your Roth, etc. He told of a man who worked for a large company and who, over his working life, maxed his 401(k) and now has $1.4 million in that account alone.
The first and third lessons are things that all investors have well within their control. The second one is a little tougher to learn and implement. Changing direction quickly is much harder for individuals to come to terms with. One of the lessons of the lost decade for stocks that we talk about in the penultimate chapter of the book is that we would all do well to make sure we are putting every advantage, no matter how small, in our favor. These three lessons help drive home that point.