For over a decade, I’ve pondered an analogy for investing and building wealth. Until recently, I envisioned it as a simple metaphor: a floor in an empty room. The basket of investments you own is the floor, which ideally rises over time, lifting you along with it. Even if the floor is indestructible, there’s always downside risk—but now that risk is limited to falling onto a higher surface.
Now imagine 100 elevators scattered across a field. Your ultimate net worth depends on choosing one elevator and seeing how high it ascends over 30 years. But success isn’t about beating everyone else; it’s about meeting your personal objectives. These elevators vary widely in speed, reliability, and price, with incomplete information about each.
If you want complete safety with little chance of wealth creation, there’s an elevator for you: the GIC (Guaranteed Investment Certificate). It offers almost no downside, predictable outcomes, but minimal upside beyond inflation.
Other elevators present combinations of speed, track record, and cost. The dream scenario is selecting the elevator that rockets to the moon (a rare, high-growth company). The nightmare? The floor collapses (a value trap), taking your financial future with it.
Standing firmly on the elevator floor represents paying fair value—intuitively, gains or losses depend on how far the elevator moves up or down. Paying above fair value is like floating in mid-air over the elevator floor. This can work if the elevator rises faster than expected, preventing a hard fall and continuing its ascent.
Value investors aim to start below the elevator’s floor, hanging from stretched rubber bands. They can win in two ways:
- Being slingshotted up to the floor (mean reversion or multiple expansion), which doesn’t require the elevator to rise at all.
- Staying on as the elevator ascends, driven by earnings growth.
Ways to Win
- Pick the right elevator:
- Don’t overpay, or if you do, ensure it rises fast enough to justify the price.
- Better yet, underpay for it, positioning yourself for both a “catch-up” to fair value and future growth.
- Stay on for the ride:
- Hold indefinitely if it’s truly “the one,” or long enough to benefit unless a clearly superior option emerges.
Ways to Lose
- Choosing a faulty elevator: One with structural problems or no future growth.
- Overpaying: Starting too high only to get smashed back to the floor because it didn’t rise fast enough.
- Mistiming exits: Stepping off during uncertainty, thinking you can re-enter, only to watch it take off without you.
- Switching poorly: Selling a strong elevator and moving into a faulty one.
In investing, as in life, selecting the right elevator requires a mix of strategy, patience, and courage. Just as we wouldn’t step into a random elevator without checking its condition and destination, we shouldn’t approach investments without thoughtful evaluation and long-term vision. The key to success is understanding your objectives, assessing risk, and making informed choices — all while resisting the urge to jump in and out at every bump or lull. Like the best elevator ride, wealth-building is about choosing wisely, staying the course, and enjoying the rise.
