High-Return, Low-Risk Investing is the Holy Grail. Meet Fast Follow Investing.

Not only does this Holy Grail exist, but it’s low-cost, easy to manage, and requires no investing expertise. High returns and capped losses align perfectly for early retirees whose money needs to last for 50+ years.

[This is the third of four articles that will show you how to grow your investments and control losses when markets turn south.]

We’re often stuck in the rut of first-level thinking. So many of us aren’t willing to open our minds to new or different ideas. We need to develop our skills in second-level thinking.

In his book, The Most Important Thing, Howard Marks explains.

“Whereas first-level thinking is simplistic and superficial, and everyone can do it, second-level thinking is deep, complex, and convoluted.”

Search YouTube for Howard Marks-Second Level Thinking. It’s a great 2-minute video.

What is Second-Level Thinking?

Second-level thinking means checking much of what you already know about a subject at the door. As Adam Grant recommends in his book Think Again, you must first unlearn and then relearn.

How does this help the individual investor?

Here’s one example:

As a first-level thinking index investor, I once believed as fact that markets are efficient. Entire books are written about it (e.g. A Random Walk Down Wall Street, by Burton Malkiel). 

Second-level thinkers would dive deeper to learn more. Maybe markets are mostly efficient but with periods of extreme volatility due to crazy human behavior. It’s a more complicated and nuanced portrayal of markets.

But we must understand this to become smarter investors.

How? What if you could step aside before the steep decline in 2020 and then reenter the market when it reversed? That would honor the rule of loss asymmetry, putting you in a better starting position.

Second-level thinking is hard. And it takes time. But it makes you better. It gives you an edge.

An Exercise in Second-Level Thinking

Have you ever stumbled onto something that feels magical?

Remember the first time you used Shazam to name a song? Magic. How about seeing Google Streetview? Or better yet, when you went flying on Google Earth? That was crazy to me! 

I read about unveiling the first Polaroid instant photography camera in 1947. People went wild…their minds blown. I’m sure you’ve had similar moments.

Warning! I’m going to stretch your thinking (to second level):

“To retire early and reliably count on my invested savings to fund my living expenses, I need a high-return, low-risk investment process.”

Is it possible?

Well, for one, it goes against everything that we’ve ever learned: high returns demand we take high risk, and low risk offers only low returns…so probably, no?

But what if we could take advantage of the steep (and market-inefficient) drops shown in the chart above?

Could we cut our losses if we bailed out of an investment before the steep drop? Then, if we jumped back into the investment at the right time, could we ride the gains? High returns at low risk. Magic!

Fast Follow Investing is an investing strategy that isn’t well known. It was news to me when I found it in 2021. I have since wondered where it had been all my life.

I’d like to introduce you to it in case it fits your investing goals.

“What is Fast Follow Investing? Start with buy & hold passive indexing. Then, expand beyond stocks and bonds. Finally, bail out before suffering severe losses. You achieve a reliable, stock market-like return at lower risk.”

What is Fast Follow Investing?

The Fast Follow Investor model:

• Tracks market indexes…

…

Continue reading at choosyconsultant.com.

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Brian Herriot has been Fast Follow Investing for three years from his home in Alameda, California, and cabin in Hazelhurst, Wisconsin. He also prepares financial freedom plans for consultants and other mid-career professionals in one-week sprints. Check out his take on a new and different kind of retirement at choosyconsultant.com.