Moat Investor

Five Steps to Setting Investment Goals

I find it very motivating to have specific goals in mind when planning my investments. Lets face it, being a Moat Investor is not easy, although the rewards can be great. As you know, the key to great Moat Investing is to pick a very limited number of companies that you believe in and then invest heavily in them when you believe they are undervalued. This is just the opposite of what you have been trained to do by the mutual fund companies. The mutual fund companies want you to believe that investing is hard and very dangerous. They want you to believe that individual investors cannot succeed in the mysterious world of high-finance. Actually, they want you to be so afraid of losing your shirt that you run out and buy a bunch of mutual funds.

Now, I have nothing against diversification, per se, especially if you do not want to take the time to learn Moat Investing. But just be prepared to watch them gimp along as my 401k did for years with returns in the single digits. Sure, diversification is the right strategy if you want to go on auto-pilot and let someone else determine your fate. But if youre willing to put in the time researching the right companies, you will do much better investing on your own than you will plopping your money into a mutual fund.

You must, I believe, set your own investment goals. You need something to return to when you’re spending extra hours researching stocks and before you’ve made your first exciting gains. Here are some typical goals that many Moat Investors are working toward:

• Retirement
• College savings
• Getting out of debt
• Buying a house or vacation property
• Charity (Buffet has so much money he has to give it away)

Well take a look at retirement as an example, because it is (or should be) common to everyone who isn’t already extremely wealthy.

Step 1: What is the return you are seeking?
Moat Investors should plot out goals for the following returns: 10%, 15%, 20% and 25%. Is this achievable? Thats the subject of another article, but yes, absolutely. My personal bottom line (floor) goal is 15% and I’m tracking for consistent performance toward that goal. But if you want to be more conservative, use 10%. But don’t forget the higher numbers either. There are plenty of wealth managers making much more than that using the same tools and philosophies of Moat Investing not the least of whom is Warren Buffet.

Berkshire Hathaway has returned an annualized 24%. Now, Buffet is a genius and I am not a genius, so I’m aiming for a little more than half of his return. Buffet also has a problem that you and I dont have. Berkshire is huge and moving that amount of money around is difficult. Unless you already have $5m in the bank, you wont have that problem. And if you do have $5m in the bank, what are you doing reading this, go out and spend some more time with your kids.

Step 2: How much time do you have?
This part is straight forward. Using retirement as an example, subtract your current age from your desired retirement age. You will come up with a negative number because we all wish we were already retired, so now, inject some reality into the equation. People often use 60 as the age of retirement, but lets say you’re 35 years old and you want to push it a bit and retire at 55. You have 20 years to achieve your retirement goal.

Step 3: How much do you need?
This part is hard, but here is my method. Think about what you need to live comfortably now and multiply it by 12.5. Why 12.5? Because if you have a pile of dough from all of your active Moat Investing and you don’t want to spend all that time researching stocks anymore, you could just pop it into a corporate bond at 8% or the net equivalent tax-free muni at 5% and live off of that forever. One divided by 8% is 12.5. If you need $100,000 to live comfortably now, you want to amass $1,250,000. But wait, what about CPI? What about the fact that Ill be spending less because I’ll own my house and my kids will be grown? If you really want to be picky, factor those things in. I think they’re pretty much a wash unless you’re 12 years old and then 2% per year inflation could make a difference in the milk money.

Step 4: How much do you need to invest?
You’ll need a good financial calculator for this step, but heres a sample scenario. Lets say you’re 35, you want to retire in 20 years with $1,250,000 in the bank. And you’re starting with no savings today (because you only stumbled upon this site just this instant, for which you will thank Google forever and ever).

• At 10% you will need to invest $1,650 per month
• At 15% you will need to invest $835 per month
• At 20% you will need to invest $401 per month
• At Warren Buffets 24% you will need to invest $218 per month

The moral of the story? Its a lot easier to get to your goal if you’re a genius like Warren Buffet. But, you say, I’m not a genius. Neither am I but I’m trending 15% and I think Im getting better every day I do it. Still, at 15% you will need to find an extra $835 per month which is no easy task. Thats roughly 10,000 more a year. Cut the lattes, get a raise, pick up a part-time or passive income source or find a new job altogether. Its not inconceivable.

But my mutual fund advisor tells me these returns are impossible? They are impossible for mutual funds. But not for the individual Moat Investor. I’ll go into this later in more detail, but mutual funds cannot possibly make the kind of money that you can as an individual. I’ll give you one example. Lets say you run a multi-billion dollar mutual fund and you want to sell $100m worth of a company. You would flood the market with shares and your investment would dwindle even further. So mutual fund managers are stuck through down-turns because they cannot move their money out like you can.

Step 4b: Adjust your time line.
Maybe you’re not willing to get another income source or ask for a raise. You can always stretch your time lines out. Look what happens if our retirement investor, still 35, decides to retire at 65 instead of 55 and picks up the additional 10 years of compound earning:

• At 10% you will need to invest $553 per month
• At 15% you will need to invest $180 per month
  At 20% you will need to invest $54 per month
• At 24% you will need to invest $20 per month

Surely you could find $180 per month, or a mere $2,160 a year to invest. Right? Its about six bucks per day. Could you cut out the lattes, the burgers, the NetFlix? Could you walk to work or get a more fuel efficient car? Come on, you can find six bucks in a day.

Or, better yet, read Moat Investor every week, study up, learn your companies and shoot for the 24% return where you only need $20 per month.

Step 5: Don’t stop with just one.
Don’t stop with a single investment goal. Once you have your retirement locked in, open up a college trading account. Start looking at vacation properties you’ll want to buy when you retire and have all that time and all that money to spend.