From: alexhormozi
Understanding risk in investments is crucial for wealth growth and financial stability [00:00:04]. The approach to risk often differs significantly between those with little money and those with substantial wealth, revealing a paradox in financial behavior [00:10:10].
Skills as a Foundation Against Risk
One of the most valuable assets an individual can possess is a strong skill set [00:00:30]. Unlike physical assets or accumulated wealth, skills cannot be seized by governments, individuals in a divorce, or lost during financial crises or revolutions [00:00:33]. When entrepreneurs face financial ruin and hit “zero,” their skills enable them to bounce back [00:09:13]. For instance, after losing everything, one individual generated $110,000 in cash collected within 30 days, demonstrating the power of inherent skills [00:00:20]. This highlights a fundamental philosophy on debt and financial risk management which emphasizes that skills act as an ultimate safety net against financial catastrophe [00:09:01].
Investment Opportunities: House vs. Business Acquisition
When considering investment and wealth management opportunities, two scenarios for a $50,000 capital can be contrasted [00:01:27]:
- Buying a House: Investing 500,000 house would typically involve a 10% down payment and incur monthly mortgage liabilities [00:01:33]. This path usually involves years of saving while earning a typical salary, such as $60,000 annually [00:01:58].
- Acquiring a Business: Alternatively, the same $50,000 could be used to acquire a business that generates significant profit [00:02:23]. The key is to seek out opportunities from brokers (to understand the market) or directly from motivated sellers [00:02:35]. When acquiring a business, it’s beneficial to look for those where one has specialized knowledge or interest [00:02:57].
A negotiation tactic involves agreeing on price first, then on terms [00:03:49]. For example, a business profiting 625,000 (2.5 times earnings) [00:03:04]. Instead of a full upfront payment, terms can be negotiated to include seller financing for a substantial portion (e.g., three-quarters of the deal, or 50,000 serving as a down payment for that loan [00:04:47]. This strategy allows the buyer to significantly increase their income (from 250,000) within 24 months, with minimal upfront risks and rewards of investing in businesses [00:05:37].
Case Study: Acquiring a Business with Zero Out-of-Pocket Cost
An example demonstrates the effectiveness of this strategy: Having previously invested 250,000 in a second (which yielded no more profit than the first), a more experienced individual acquired a fifth gym location for no money out of pocket [00:06:32]. The previous owner was motivated to sell due to personal circumstances [00:07:20]. The price was agreed upon at 50,000, with terms allowing payment over 12 months [00:07:36]. This arrangement meant the new owner acquired a cash-flowing asset without any initial capital investment [00:08:03]. Within the first 30 days, the gym generated $51,000 in sales, effectively paying for itself [00:08:13]. This asset was later sold for 1.5 times the purchase price, further illustrating the potential for impact of longterm investment and profit with minimal risk [00:08:36].
The Paradox of Wealth and Risk Aversion
Observations suggest that wealthy individuals tend to be more risk-averse, as the downside risk of losing everything increases significantly with greater assets [00:09:36]. A single bad investment can undo decades of good decisions, akin to multiplying any number by zero, rendering it worthless [00:09:46]. Their philosophy on debt and financial risk management leads them to prefer guaranteed small returns with no risk over the potential for huge returns with guaranteed risk [00:10:58].
In contrast, people with less money often engage in high-risk, low-reward activities, such as buying lottery tickets, which are considered one of the worst possible investments with a high risk of going to zero [00:10:15]. Wealthy individuals, instead, seek assets that could “never go to zero” and acquire them for minimal or zero cost, such as through private equity investment or strategic negotiations [00:10:30].
Key Takeaways for Managing Risk
- Prioritize Skills: Develop and rely on your skills, as they are an unassailable asset [00:09:01].
- Negotiate Terms: When making an investment, especially in businesses, always agree on the price, then negotiate the terms, focusing on seller financing to reduce upfront capital [00:11:44].
- Seek Motivated Sellers: Look for businesses with motivated sellers who may be willing to part with their enterprise for very little or even nothing upfront, as there are many owners tired of their businesses [00:11:53]. These opportunities are often not formally listed [00:12:47].
- Patience: Success requires patience. Taking six months to find an excellent deal is preferable to rushing into a bad one [00:12:02].
- Embrace Risk Aversion: Adopt the mindset of the wealthy, prioritizing lower-risk, guaranteed returns over speculative, high-upside ventures that carry substantial downside risk [00:11:31].