From: alexhormozi
The economic landscape underwent a “massive shift” in 2022, prompting a change in traditional investment strategies [00:00:04]. With inflationary pressures, a struggling real estate market, and crashes in crypto and stocks, it became crucial to reassess how capital is managed [00:00:39].
Reassessing Cash Holdings: Banks vs. US Treasuries
Traditionally, cash is held in bank accounts, but this approach offers low returns and carries risks.
The Problem with Banks
When money is deposited in a bank, the depositor is essentially loaning the bank money, becoming a creditor [00:01:11]. Banks then loan this money out, either to the government by buying bonds or to individuals for mortgages [00:01:23]. Banks profit significantly from this arrangement, paying depositors as little as 0.1% to 1% annually, while earning around 4% from the government on the same funds [00:01:41]. Furthermore, there’s a risk of losing funds beyond the FDIC-insured amount if a bank fails [00:02:18].
The Alternative: US Treasuries
A more advantageous alternative for holding cash is investing in US Treasuries [00:02:46].
- Lower Risk: The US government is less likely to go bankrupt than a bank, as it can print money to repay its debts [00:01:31].
- Higher Returns: US Treasuries typically offer higher returns than traditional bank accounts [00:03:04].
- Liquidity: Loans can be taken against Treasuries for up to 80% of their value, allowing investors to access capital while still earning interest [00:03:07].
Evolution of Investment Philosophy
The speaker outlines a personal journey of evolving investment strategies:
- Self-Investment (Initial Phase): The highest-return investment initially was in self-improvement, including learning skills, gaining access to mentors, coaching, and workshops [00:03:32].
- S&P 500 (Second Phase): Once personal reinvestment opportunities diminished, excess capital was allocated to the S&P 500, following the advice of prominent investors [00:03:43].
- Barbell Strategy (Post-Sale): After selling three companies, a “barbell strategy” was adopted, focusing on stocks and real estate, with very little in between, complemented by private equity in owned companies [00:04:00]. However, this strategy led to infrequent investments [00:04:13].
The Importance of Investing in Your Knowledge Base
A pivotal shift in the speaker’s investment philosophy came from insights derived from Dave Ramsey’s analysis of Graham Stephan’s portfolio.
“If we were going to put a portfolio together of your knowledge base it would be 80% real estate 20% stocks maybe so where you invest is what you know…” [00:05:07]
This highlighted a crucial principle: successful investors, particularly billionaires, tend to focus on a few areas they deeply understand [00:05:21]. Their portfolios reflect their knowledge base [00:05:04]. This concept aligns with the idea of investing based on personal knowledge rather than broad diversification into unfamiliar areas.
Revised Investment Strategy: Singular Focus
The realization was that the previous “barbell strategy” was someone else’s, not aligned with the speaker’s core expertise [00:06:02]. The speaker’s strength lies in service-based businesses [00:06:09].
“It’s only risky if you don’t know what you’re doing.” [00:06:31]
This quote from Warren Buffett underscores the importance of expertise. For those who lack specific investment knowledge, the advice is to invest in broad indexes like the S&P 500 [00:06:36]. However, outsized returns come from playing in a “game where you have an unfair advantage” – where you possess more knowledge than others [00:06:42].
The revised investment strategy has reverted to a singular focus:
- Invest in yourself: Acquire skills and knowledge [00:07:02].
- Invest excess in indexes: For general exposure when specific expertise isn’t applicable [00:07:04].
- Deploy stockpiled capital into your main game: Once confident in your expertise, invest heavily in private deals within your area of knowledge [00:07:07].
This approach emphasizes doing what you know well, doing it better, and consistently applying that focus over time to achieve significant success [00:07:16].