When everyone is playing checkers, its time to play chess

I recently came across a great chat with an investment manager who manages $75bn in investments on behalf of the Alaskan State Government. The fund aims to make 7% per year, which is actually difficult when you have such a large portfolio to deploy. The 7% return goes back to the state of Alaska and is then used to help pay for everyday civil spending.

Pretty cool to hear how successful investment decisions can help fund social infrastructure, a universal safety net and reduced state government taxes for everyday workers.

The thing that stood out to me most is how these big investment managers think so differently to ordinary, everyday investors managing their own money. Large investors have clear targets they need to meet each and every year, regardless of what happens in the market.

Most individual investors get into the market and have no short, medium or long term targets. If I was to ask 100 individual investors what their annual return target is for real estate, stocks or crypto, I doubt very much that any of them have actually thought about this properly.

The trap is short term thinking. We live in a society functioning on instant gratification. Nobody wants to wait anymore. A 7% return doesn’t sound sexy, but when compounded over 10 years, the portfolio doubles. A 10% annual return gives you roughly 260% return over the same period.

Marathon vs sprint

Investing is a marathon, not a sprint. I’m by no means a marathon runner but what I’ve learnt from friends or athletes is they train in small incremental blocks. When you train for 10km runs, your body adjusts for 12km runs.

Starting off with a 5 or 7% annual target will help you over time achieve 10-15% annual investing targets. The worst way to train for a marathon is to start with a low base and aim to run an unrealistic distance. It’s the same with investing.

When you start small and aim for unrealistic returns, you’re almost certain to blow up. We are now in a market where many are taking crazy risks, trading like there is no risk, making statements and investments with little or no regard for downside.

The stock, real estate and crypto markets are playing checkers while I’m playing chess.

It’s easy to get a 7% return in one year, its a lot harder to get 7% per annum consistently over 30 or 40 years. That’s exactly how I’m starting to think and reposition my portfolio.

Every investment I make is now viewed in the context of 30-40 years. I only want to buy assets that I can hold over that period of time. I could be wrong along the way and happy to sell when the fundamentals change. But if my thesis is correct, I want things I can hold onto for a long time.

Lessons from Alaska

To get consistent returns, large investors always allocate their portfolio across various asset classes - domestic stocks, international stocks, infrastructure, real estate, commodities, fixed income (debt), private investments and venture capital. If the stock market falls, life goes on. If it goes up, they make gains. It’s a very solid way to think about your investments.

In the past few months I’ve started diversifying my asset exposure while remaining focused on real estate, which is the asset I love most and understand best. I’ve started adding gold, silver and international stocks to my portfolio, some of which I have spoken about in recent weeks (like Peloton and Ford).

Around 70% of my portfolio is passive investments (real estate generating rent, ETFs, gold and silver) which 30% is active (picking stocks, finding new real estate).

Roblox & the next generation

One of the stocks I’ve recently added is Roblox which came from a conversation with my three children. I overheard my 8 year old son tell his sisters to join him on a private server to play Piggy. I took an interest and asked what was going on. I soon discovered the power of Roblox and just how powerful this network and business has become.

Roblox as a gaming platform has 8 million developers who have created 20 million experiences (games etc). Kids like mine have contributed to around 31 billion hours spent on the platform in aggregate since it launched in 2008. Roblox reported a 140% increase in quarterly revenue totalling $387m for the first three months of this year. THREE MONTHS, $387m in revenue.

Hours spent on the platform increased to 10bn in the first three months, up 98% on the same period last year. Something huge is going on and today’s generation of children are going to grow up interacting on Roblox a lot more and sooner than my generation adopted Facebook, Instagram and WhatsApp.

This is a juggernaut. The stock is currently valued at around US$54bn, which I actually think is cheap given the extent of revenue generation to date and the massive impact of the network, which is growing exponentially month to month.

Roblox also has its own digital currency which kids purchase (with their parents money) and use to buy games, trade avatars and all kids of other stuff which I’m yet to understand.