From: alexhormozi
The economic landscape shifted significantly in 2022, prompting a change in investment strategies for many individuals. It is crucial to adapt one’s approach to how money is deployed, as the economy has changed [00:00:12]. For individuals with substantial assets, understanding where to position wealth is key to navigating periods of inflationary pressures, and market downturns in areas like real estate, crypto, and stocks [00:00:39].
Understanding Cash and Banks
Many wealthy individuals like Warren Buffett are said to have “cash equivalents,” which doesn’t mean literal cash sitting in a bank account [00:00:52]. When you deposit cash into a bank, you are essentially lending the bank money, making you a creditor [00:01:11] [00:01:17]. Banks then loan this money out, either to the government by purchasing bonds or to individuals for mortgages and other loans [00:01:23] [00:01:37].
Banks generate significant profits by paying depositors a low annual interest rate (e.g., 0.1% to 1%) while earning much higher returns (e.g., 4% from government bonds), effectively making 40 times what they pay out [00:01:41] [00:01:51]. Key factors in lending are the interest rate and the likelihood of repayment [00:02:00]. A major risk with bank deposits is that if a bank fails, you could lose money beyond the FDIC-insured amount, especially considering the FDIC is currently described as “bankrupt” [00:02:18] [00:02:24].
The Alternative: U.S. Treasuries
A superior alternative to holding cash in banks, offering lower risk and higher returns, is to purchase U.S. Treasuries [00:02:31] [00:02:33]. Treasuries are seen not just as an investment vehicle but as a safer “bank account” [00:02:52]. The U.S. government is considered less likely to default than a commercial bank because it can print money to repay debts [00:02:54] [00:03:11]. Furthermore, you can typically take loans against Treasuries for up to 80% of their value while still earning interest on the principal [00:03:07]. Banks typically do not highlight this option because it reduces their ability to profit from your deposits [00:03:19].
Evolution of Investment Strategy
The speaker’s investment structure has evolved over time:
- Early Phase: The first significant investment was in oneself, focusing on learning skills, gaining access to people, coaching, mentorships, and workshops. This was considered the highest return investment [00:03:30]. This aligns with investing in personal growth.
- Mid-Phase: Once excess capital exceeded what could be reinvested in personal development, money was applied to the S&P 500, following the advice of investors like Warren Buffett [00:03:43].
- Post-Sale Phase: After selling multiple companies, a “barbell strategy” was considered, balancing investments in stocks and real estate with private equity in owned companies [00:03:52] [00:04:00]. However, this strategy, proposed by a friend, led to a period of limited investment activity, as it wasn’t aligned with the speaker’s core expertise [00:04:13] [00:06:02].
Investing in Your Sphere of Knowledge
A pivotal insight came from an analysis by Dave Ramsey of Graham Stefan’s investment portfolio. When Stefan’s portfolio was heavily weighted in real estate (80%+), Ramsey posed a question: “What percentage of your knowledge is real estate versus stocks and bonds and other stuff?” [00:04:29] [00:04:46]. When Stefan admitted 80-85% of his knowledge was in real estate, Ramsey concluded that it was a perfect distribution for him, as it reflected his expertise [00:04:55] [00:05:02].
This anecdote highlighted a crucial principle of building wealth:
- Invest where you have knowledge: Where you invest should align with what you know [00:05:13].
- Billionaire’s approach: Billionaires tend to do few things, but those things are what they understand, and they do a lot of them [00:05:17]. They pick one or two games they know well and focus heavily on them [00:05:39].
The speaker realized his core expertise was in service-based businesses [00:06:09]. This shift in perspective led to a willingness to make substantial investments in areas directly within that expertise, even if they were larger than previous real estate considerations [00:06:16].
A key quote from Warren Buffett, “It’s only risky if you don’t know what you’re doing,” reinforces this idea [00:06:31]. Buffett’s advice to invest in the S&P 500 is often given because many people lack specific investment knowledge [00:06:36]. However, outsized returns come from playing in a game where you have an unfair advantage and know more than others [00:06:42]. Understanding the risks within your sphere of knowledge allows for more confident and appropriate investment [00:06:54].
A Phased Approach to Investment
The recommended phased approach to building and maintaining wealth is:
- Invest in yourself: Prioritize personal growth through skills, education, and mentorship [00:07:02]. This represents longterm investment in personal growth.
- Invest in indexes: Once personal investment capacity is met, deploy excess capital into broad market indexes like the S&P 500 [00:07:04].
- Deploy into private deals: When you become proficient in your main field, use accumulated capital to invest in private deals within your area of expertise. This deployment initiates the compounding process [00:07:07] [00:07:10].
Conclusion: Singular Focus for Wealth Growth
The ultimate investment strategy reverts to a core business strategy: singular focus [00:07:15]. To achieve significant wealth growth, one should:
- Do the things you know [00:07:18].
- Do them more [00:07:20].
- Do them better [00:07:20].
- Keep doing that for an extended period [00:07:23].
This focused approach, based on understanding and expertise, makes sustained success highly probable [00:07:24].