7 Principles for Strategic Wealth Creation

New Book by Prof. Liechtenstein

June 27, 2014

Banks and brokers, stocks and bonds. These are the ingredients of traditional investing — but currently, they tend to preserve rather than create wealth. This is because no matter how well thought-out your portfolio, investment expenses, taxes and inflation will ultimately impact your attempts at wealth creation.

Yet wealth creation is very much within reach, say IESE Prof. Heinrich Liechtenstein and co-authors Cuno Puempin, Fariba Hashemi and Brian Hashemi, in their new book The Empowered Investor: 7 Principles for Strategic Wealth Creation in a New Financial World. But it requires deviating away from the standard normal distribution investment paradigm and entering into the realm of strategy.

Changing Investors’ Paradigm

Investors who wish to create rather than preserve wealth should aim toward annual returns of 10 percent or higher. Investors cannot achieve this by following traditional stock/bond recipes or listening to their bankers or financial advisers, who tend to create generic investment recommendations based on analyzing opportunities quantitatively.

What should be at the heart of any successful investment endeavor are the immense value of clients’ personal knowledge, skills and resources. Investors should build strengths and core competencies that enable them to invest successfully. They should develop their own strategy based on seven highly interconnected principles:

  1. Build on core strengths and competencies. This is the essence, the raw material needed to help investors succeed.
  2. Exploit opportunities. Build on your knowledge of a specific field. Scan the environment and be sure to take a long-range view.
  3. Make use of networks. Keep core competencies at the heart of the network. Do not overlook the importance of weak ties.
  4. Apply an investment approach that differentiates you from others. Decide where you want to differentiate: A niche asset class, industry or geography? Build core competencies that differentiate you and apply an indirect approach.
  5. Prevent threats and understand how to handle risks reasonably. Threats and risk may inevitably lead to losses. Manage them through rigorous analysis and careful selection of core competencies that need to be developed.
  6. Fit the time dimension by observing trends and cycles. Timing is crucial. Be sure to think in cycles. Apply the big picture, and clarify your investment horizon. Also, ensure strategic flexibility. Be creative and courageous, but also patient.
  7. Execute with efficiency. Avoid or reduce fees and implement your strategy at a low cost. Watch out for opportunity costs.

Turning Theory into Action

With these principles in mind, investors should distribute their investment over four sub-portfolios, according to their age, aspiration and level of risk aversion.

Successful investors are those who have marched to the beat of their own strengths and competencies to create wealth, thus, having brought wealth creation from the realm of the elusive to that of the tenable. The Empowered Investor illustrates this concept with real-world case studies and interviews with highly successful strategic investors.

For more information, see IESE Insight

Buy The Empowered Investor  here.