Strategic investors. Dr. Stephan Goetz, Warren Buffett (on video link) and Baronin Ariane de Rothschild at the Munich Film Festival,2012 (Source: Wikimedia Commons)
Ideas for Leaders #361

Investors’ Strategies for Wealth Creation

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Key Concept

Strategy, whether for business, military or political ends, involves the optimal use and deployment of resources in order to achieve an objective. In this Idea, using strategy for wealth creation is explored, in the context of individual investors.

Idea Summary

According to an article published in IESE Insight, the conventional approach of investing in stocks and bonds may help to preserve capital, but is not suitable for wealth creation; investment expenses, taxes and inflation all have a real impact, and a different and more innovative approach is necessary.

Researchers from institutions including IESE Business School and the University of St. Gallen suggest that a strategic approach to investment is the better approach. Based on their book, The Empowered Investor: 7 Principles for Strategic Wealth Creation in a New Financial World, they propose a framework of seven interconnected principles to help individual investors take control of their investment decisions:

  • Build on core strengths: identify fields in which you already have strengths that can be built upon, so that you can deploy resources in ways that capitalize on these strengths.
  • Exploit opportunities: identify the strategic investment opportunities you want to exploit and concentrate on them. Be on the lookout for favourable economic, technological, social and market trends that could be exploited using your strengths.
  • Cultivate quality networks: networks play an important role in successful strategies, and social media have made the cultivation of networks even easier and more efficient.
  • Differentiate your investment: try to ensure your investment strategy differs from the mainstream. Apply an indirect approach and always be innovative.
  • Protect yourself against threats and risks: losses at some stage must be expected. Build a ‘security portfolio’ for survival in a worst case scenario. Another option is to invest in many and, if possible, uncorrelated assets (i.e. diversify).
  • Study the time dimension: correct timing is important. Think in cycles and look at the bigger picture.
  • Execute with efficiency: this involves more than just reducing fees; be efficient and mindful of costs throughout the strategic investment process.

According to the authors, the true value of this framework becomes evident when you combine all the elements into an overall process, with careful monitoring along the way.

Business Application

An overreliance on mathematical formulas when it comes to investment decisions is a common yet flawed approach; instead, investors should take control of their investment decisions by focusing on the principles of strategic management. Along with the framework above, a number of questions are also presented in this article that investors should ask themselves. Some of these include the following:

  • For what do I have a passion? What excites me, and where could I develop such a passion?
  • How can I build a network adequate to my particular focus and needs?
  • Where is there a low level of competition?
  • What real threats and risks am I, as an investor, likely to be confronted with in the coming years?
  • What are the time-related factors that might affect my investment decisions over its life-cycle?

As future events can unfold unexpectedly, questions like these must be asked and answered on an ongoing basis before deciding on any actions to take regarding your investments; only then will you be on the road towards successful wealth creation.

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Authors

Institutions

Source

Idea conceived

  • September 2013

Idea posted

  • April 2014

DOI number

10.13007/361

Subject

Real Time Analytics