From: alexhormozi
The economic landscape underwent a significant shift in 2022, prompting a re-evaluation of investment strategies [00:00:02]. This shift led to changes in asset pricing, inflationary pressures, and downturns in real estate, crypto, and stock markets [00:00:36]. As a result, the speaker, who crossed $100 million in net worth at 33 years old, adapted their approach [00:00:18].
Rethinking Cash Holdings
Historically, many people keep cash in traditional bank accounts. However, this is seen as suboptimal [00:00:47]. When cash is deposited, the bank actually takes it as a loan from the depositor, making the depositor a creditor of the bank [00:01:11]. Banks then loan this money out, either to the government by buying bonds or to individuals for mortgages, earning a higher return than they pay depositors [00:01:23]. For instance, banks might pay depositors 0.1% to 1% annually, while earning 4% from the government, thus making 40 times what they pay out [00:01:41].
A critical factor in lending is the likelihood of getting the money back [00:02:06]. If a bank fails, funds exceeding the FDIC insured amount are at risk, and the FDIC itself is described as being in a precarious financial state [00:02:18].
An Alternative: US Treasuries
To address the limitations of traditional bank accounts, the speaker opted for US Treasuries as a “bank account” [00:02:52]. This approach offers a better alternative due to lower risk and higher returns [00:02:31]. The U.S. government is considered less likely to default than a commercial bank because it can print money to pay back its debt [00:01:31], and it typically offers better returns [00:03:02]. Additionally, one can take loans against Treasuries for up to 80% of their value while still earning interest on the principal [00:03:07].
Evolution of Investment Strategy
The speaker’s investment strategy evolved through several phases:
- Early Life (SME 500): The initial focus was on investing in personal and financial growth. All excess cash was directed towards learning skills, gaining access to influential people, coaching, mentorships, and workshops [00:03:30]. This was considered the highest return investment made to date [00:03:39]. This phase represents longterm investment in personal growth and personal growth and mentorship.
- S&P 500: Once funds exceeded what could be reinvested in personal development, the speaker began investing in the S&P 500, following Warren Buffett’s advice [00:03:43].
- Post-Company Sale: After selling three companies, a “barbell strategy” was adopted, involving investments in stocks, real estate, and private equities of owned companies, with little in between [00:03:52]. However, despite having significant cash, only a small percentage (around 10%) was deployed over two years [00:04:13].
The Revelation: Investing Where Your Knowledge Lies
A pivotal insight came from a video featuring Dave Ramsey analyzing Graham Stefan’s portfolio [00:04:28]. Graham Stefan, with over 80% of his net worth in real estate, questioned if he was “over indexed” [00:04:33]. Dave Ramsey responded by suggesting that an ideal investment distribution should reflect one’s knowledge base [00:04:46]. If 80-85% of one’s knowledge is in real estate, then an 80-85% allocation to real estate is a “perfect distribution” [00:04:50].
Ramsey shared two key lessons learned from numerous billionaires:
- They don’t do many things [00:05:21].
- The things they choose are what they understand, and they do a lot of them [00:05:23].
This implies that the wealthiest individuals focus heavily on one or two areas they know exceptionally well [00:05:39].
Applying the Insight to Personal Strategy
This insight changed the speaker’s perspective, highlighting that his previous “barbell strategy” was a friend’s strategy, not his own [00:06:02]. He realized his expertise lay in service-based businesses [00:06:09].
Quoting Warren Buffett, “It’s only risky if you don’t know what you’re doing” [00:06:31]. The advice to invest in the S&P 500 is often given to those who don’t know what they’re doing, as it provides broad diversification [00:06:36]. However, outsized returns come from playing a “game where you have an unfair advantage,” knowing more than others [00:06:42].
The speaker now feels comfortable making sizable private deals in areas he understands, as he can identify and assess the risks [00:06:50].
A Focused Investment Strategy
The refined investment strategy emphasizes a singular focus, mirroring a successful business approach:
- Invest in yourself [00:07:02].
- Invest excess capital in indexes (like the S&P 500) [00:07:04].
- Once you become highly proficient in your core area of expertise, deploy stockpiled capital into private deals within that area, initiating a compounding machine [00:07:07].
The overall investment strategy now aligns with a business strategy of singular focus: “do the things you know, do more, do it better, and keep doing that for an extended period of time” [00:07:16].