Diverse versus Highly Focused Investment Strategies

What is diversification? It means to choose more than one thing. In the investment world, it means spreading your investments around various asset classes. 

My name is Kenny Wolfe and I’ve been a real estate syndicator and investor for over eleven years; in this time, I’ve built a successful real estate investment firm, Wolfe Investments. If you’re new to the show, make sure to subscribe so you’re notified when a new episode comes out. 

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Transcript

Diverse versus Highly Focused Investment Strategies

 Welcome to Real Estate Investing with Kenny Wolfe, the show with weekly topics designed to help you learn how to build your ideal life through real estate investing. My name is Kenny Wolfe and I've been a real estate syndicator and investor for almost 12 years now, and in this time, I've built a successful real estate investment firm, Wolfe Investments. If you're new to the show, make sure to subscribe so you're notified when a new episode comes out. 

 What is diversification? It simply means to choose more than one thing in the investing world. It means spreading around your investments around various asset classes. Warren Buffett's got a great quote about diversification. “Diversification may preserve wealth, but concentration builds wealth.” Why would somebody choose why diversification in their investment portfolio, diversification is thought to bring more safety And like Warren Buffett said, it's there to protect your net worth.

 If you think about if you spread out your investments over multiple asset classes, should one be down or one up, it'll even out and bring more safety to your investment portfolio. Good investors pounce on mismark assets whenever they dip, so you may end up diversified over your decades of investing anyways. For example, if oil or gold stocks, real estate, whatever it is, if a crash or there's just a mismark in valuation and you pounce on those at those times, you're going to be diversified anyways as you've built up a large investment portfolio over the decades, hopefully. Another reason to go for diversification is diversification among your passive income streams.  Say you've got 10 of them and one of those shuts off momentarily if that asset is being redone or you're refinancing or something like that. Along those lines, you still have nine coming in every single month or a quarter, however they come in.

 Again, it's a way to take out the risk of putting all your eggs in one basket, especially on passive income. If you can spread that out, it's going to be much safer. Maybe not for growth mode, but it'd be much safer to go about your passive income. Highly focused in investing is just the opposite. That's where you come across an asset or asset class that is undervalued and you invest as much as you can sometimes to a pain point in that one discounted investment that you found. Some of the best investors in the world have highly focused investment portfolios. Another great quote from Warren Buffett is “why diversification is only required when investors do not understand what they are doing.” We'll talk about how you can adjust for risk in an investment through more knowledge or education. We'll talk about that here in a second.

 But I'm personally highly focused on real estate as it's something I know and love and understand. Real estate to me is a very stable investment over the long term for the most part. And I love the four pillars of why we invest in real estate cashflow. Someone else is paying down our principle on our loan, long-term appreciation and an awesome tax shield. So why would you choose a highly focused on investment strategy? It's really all about growing your net worth in a very big way quickly. That's the way to go. If you want to build your nest egg faster, there's going to be inherently more risk at first because you're putting all your eggs in one basket, but hopefully you're starting out young enough where there's bigger risks, real risks early on, or easily recoverable because of your long-term investment runway. You can make up those losses should that investment not pan out or not do as well as you thought, but really, for a highly focus investment strategy, you’ve got to be educated, because what that does is it lowers your risk. If you understand something better than the market, than the general market does, you've got a leg up and what's perceived risk is totally different than what's the actual risk. And so, you want to investigate asset classes that you know or want to learn about. Some good examples are back in 2020, obviously the stock market was in shambles all through Covid. I pounced on one stock in particular, Energy Transfer. This is not a solicitation or a promotion of that stock now, but I did buy it at about four bucks a share when it dipped. I knew because of my background in oil and gas when I first started out, that's the job I was in. I was in accounting and oil and gas. I knew about oil and gas and pipelines.

 What I loved about this particular company is that they were big. They're a pipeline company, so there's less risk there in the oil and gas industry if you're going to invest in it. The other thing too is they moved 33% of America's oil and natural gas, which is huge. I knew that they were heavily discounted, so I bought as much of that stock as possible. It's panned out very, very nicely. It gets off some amazing dividends and continues to grow. Now another example, all through 2020, we are still buying commercial real estate. A lot of our colleagues, a lot of the institutional folks paused. They weren't buying stuff. We kept going here at Wolfe Investments and we landed one of the best, most beautiful assets we have in our portfolio. 400 North Ervay in Dallas, Texas. It's the historic post office building.

 This asset should have gone to an institutional quality investor, and we weren't there yet. I feel like we're there now, but back then we were just breaking into that and by using that dip and a lower attraction by institutional people in assets at that time of commercial real estate, we were able to get our leg up and jump into there. We bought that asset at lower than what the seller was in it for. And on top of that, now we've got an appraisal because we're doing a refi right now where we've already doubled our investors' money on paper since 2020, and that's about, it's less than three years later, which is awesome. When you can use the timing of the market, there's big discounts on assets and jump on them, you are going to be going against the grain. People are going to think you're a little crazy, but if you're able to lean in and know what you're doing, know about those investments and jump on when they're discounted, it can move absolute mountains for you.

 I'm biased, but I prefer the highly focused investment strategy with some caveats. When you've highly focused on an asset that love and enjoy, you've got to leg up on the competition. I've highly focused on commercial real estate because again, this is something that I know love and enjoy, eat, breathe, and sleep it. I do have some other asset classes mixed in and each have a purpose in my portfolio. And yes, you must be that intentional. When you're building your portfolio, you need to know what your investment needs are. If it is liquidity, monthly cashflow to smooth out any kind of bills that are coming in at the house, long-term growth, wealth preservation, et cetera. You do need to mix it up but be very intentional of what assets you put in your investment portfolio to get the returns that you need.

 By focusing on something I know love and enjoy, I have inherently less risk compared to someone who is just now jumping into commercial real estate because I can see what's a deal and not a deal. And really that's because I've got great intel of what rents are, what occupancies are, trends in the marketplace over multiple states and cities in those states that we already own. In. On top of that, we've got 13 years of experience of seeing what works and what doesn't work in commercial real estate. That's definitely helpful. The other thing I like about investing in commercial real estate is that we can force appreciation. I like to focus on that because I know what know levers we can pull to really force that appreciation hub and be the driver of our success on the valuations of our assets. To truly grow your net worth, a highly focused investment portfolio is key to that big growth. As you get up there in years, then it's time to preserve your wealth. Then diversification isn’t a bad thing. Over decades of investing where you've pounced on underpriced assets, you're going to end up diversified anyways. This has been Real Estate Investing with Kenny Wolfe. Thanks so much for listening.