Trend Versus Exception Investing: Don’t Waste Your Free Time on the Exception

investment trneds

Key Takeaway: Spending time looking for one-off exceptions to invest in sounds fun and exciting. Yet confusion arises over what is investing in normal trends versus truly one-off ideas. Most of us can hit our goals and have more free time if we don’t spend the time trying to find the exception in investing.

It has become popular over the last few years for people to buy homes as rental properties. Coming out of 2008–2009, real estate got so depressed that buyers dried up and renters were numerous. So to buy a home that you could rent out with some ease has seemed like a good idea. But before getting excited about this trend, consider the exception.

Trend Versus Exception

Investing at its best is your money working harder than you. After all, you have a limited number of hours in the day, so to make more money, you must give up something else (usually free time). Be careful not to get lured into ideas that purport to be investing when they might just take up more of your leisure time.

Investing in the stock and bond markets (ignore the concept of a diversified portfolio for a minute) is generally an exercise of investing in trends. The general trend is that over long periods of time, stock markets rise, usually more than bond markets.

The reality for most of us is that we should have most of our money invested in stocks and bonds. Play the trend, and don’t think about it day to day.

Yet some people invest in exceptions. Venture capitalists are an example. They tend to get pitched on hundreds or thousands of ideas. If you look at the ones they fund, they are the ideas that were the exception. In the case of venture capital, exceptions have higher payoffs when they work out (but you can also lose all your investment on the other end).

Don’t Confuse the Two

Confusion arises for many investors when they believe the trend is the exception. The reality is that there are very few exceptions to invest in. When exceptions do arise, they usually are small twists on current thinking with exceptional people behind the scenes. I would also add that true exceptions should be expected to show higher returns (than investing in something like the stock and bond markets).

Consider my example above of investing in rental homes. Investing in a single-family home that you could rent out means that you will have the home 100% rented or 100% empty. There will probably be a few months out of every two years that you don’t have a renter. Besides the idea of these vacancies lowering your overall return, if you depend on the home for cash flow, those months without a renter could hurt. Yet, if you like the idea of being a landlord, twist the idea a little to find the exception.

In this case, the exception could be buying a multi-unit apartment building. Most likely, you would never be 100% empty. Even if you were 70% full, you probably could make it work.

Note here that I am not suggesting you invest in real estate, but instead I am advocating that you constantly ask yourself what the exception of any investment might be. The reality is that very few exceptions exist for most of us to invest in. That alone should give you pause when you hear of someone touting something “too good to be true.”

Doing Nothing Is OK

Many of us will go through life never seeing a true investment that is an exception, and we can still achieve our goals if we follow the trend by investing in the stock and bond markets. And that brings me to my main point: If it is not your job to look for exceptions (as venture capitalists do), then it might be better to draw a line in the sand and not even listen to those saying they have an exception for you to invest in. It certainly frees you up to think about other things to do with that free time.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.