Welcome to the 125th episode of the Alternative Investing Podcast!
In this episode, I will share the fundamental philosophy and principles I believe smart investors should adhere to.
If you're an investor who wants to learn important lessons that can help guide your wealth-building journey, then make sure to listen to this episode!
From a case study point of view, I will share the fundamental philosophy and principles to which I believe astute investors should adhere.
I want to tell you about a client who started working with me a few months ago.
This client is someone who has taken bold and massive action to change his financial future.
Most people fear change and resist bold action, but this is the story of someone who did the opposite.
This particular person put everything on the line because he wanted to design the life he wanted.
My Mentor's Metaphor on Wealth-Building
Years ago, a great mentor I deeply respected was trying to help me through my difficult wealth-building situation.
I felt that where I wanted to go was completely in a different direction.
I had responsibilities around the business. I had stressful work. I had a lot of things that made me feel stuck.
The metaphor that my mentor shared with me was that we need to think about our wealth building a little bit, like turning a ship.
We're not trying to turn things around, obviously.
But it happens incredibly slowly if you watch a large ship in the ocean trying to change direction.
You've got the resistance of large waves and water, and you can't put down an anchor.
You’re slowly turning the ship in the opposite direction, and I think wealth-building is the same.
Many people are expressing their frustrations about how slow wealth-building is, that it isn’t a nice, smooth, straight line, that it’s challenging to set aside capital, and that it’s hard to find great investments that take you in the direction that you want.
All of these are challenges we need to overcome. But if you can embrace the metaphor of the turning ship, you’ll understand that worthwhile things take time.
If I convert that back to the topic for today about bold actions and outcomes, I think the problem that many investors have is that, yes, they do all the right things.
But they find themselves in a situation where they depend heavily on their active income.
They have assets and investments that have given them stellar capital growth.
But they continue to be heavily dependent on that active income, and they don't have enough passive income from those investments.
That leaves them in a position where they don't have the freedom to design their own lives.
Leading on from that, many investors talk about capital tied up in what I call big, fat, lazy pandas.
These assets consume a lot of resources, time, and energy. They've got the capital in them, but they aren't giving us what we want.
I think the banks are becoming more hostile and less accommodating towards supporting investors wanting to grow their wealth through property investing or growing their portfolios.
That's tough for people, especially in the earliest stages of investing.
It's game over for you if you can't get financing to grow your property portfolio, and I know that's a deep frustration.
There are a lot of people out there who want to grow their net worth.
But they find that many investment options are too speculative about future growth.
I've spoken to many very intelligent people over the last 12 months with the means and the borrowing capacity, but they say no to the asset class around property.
I find it curious because, for decades now, people have been successful at growing wealth through real estate.
But there's a gnawing feeling that the market is bloated and that they are now speculating on future growth to make more money.
That’s why I want to set that as the tone for the background of this story.
Case Study #1
Now, let's get to the case study.
I will call this guy Frank because I don’t want to reveal his real name.
Frank has a young family, and he had his family slightly later in life. He's got that maturity around him, looking for more balance.
He recognises time is something he cannot grow and get back.
He tolerates his work, but he's not passionate about it.
If I look over his journey from his description, he has hustled to build a robust property portfolio.
He squirrelled, saved, and shopped around to get the best loans. He has done his research and due diligence on where he should invest and what he should buy.
Then Frank saw the writing on the wall a year ago when he realised that although he had a reasonably good property portfolio, he was still decades away from the financial freedom he needed to let go of his active income.
What he wanted more than anything else was that exact thing.
He wanted the freedom to step away from work and just be with his family.
That was the point in time when he took very bold action a year ago.
He decided to sell up a good percentage of his assets and free up the capital to explore other opportunities.
For the sake of making this case study relevant, let's call it a million dollars.
He freed up about a million dollars in cash and then put the whole lot on red.
That's a metaphor for putting it all in one basket, but he quickly achieved his goal.
When we met, he was heavily invested in one lucrative strategy that was a short-lived deal but delivered epic cash flow.
When I looked at the impact on the overall risk of his portfolio, it massively skewed it.
As much as I am a huge fan of alternative, I’m also a huge fan of managing risk.
From my point of view, it doesn't matter how lucrative an opportunity is.
Experience has taught me that you should never go all in on a single opportunity.
An example that you would be familiar with is the idea of investing in mining towns.
If you look at the history of real estate in mining towns, you can see that prices go up when new mines open.
This happens because more people move to the town and want to buy property.
We've had markets here in Australia where property prices have been 7x over relatively short periods.
If the mines go bust or if there is a blip in or disruption to the price of resources or commodities, you end up with a property worth very little and cannot even get a tenant.
That might have looked like a very sexy strategy for many people at one point in time. But it pained me that they went all in on just that strategy.
In the case of Frank, he was achieving the outcome he wanted. He had put his money into an investment delivering very lucrative cash flow, but he knew the risk was completely out of whack.
So Frank and I got together for our blueprint day.
By the way, blueprint days are when I have people come in to spend a day with me in my office, and we go super deep on everything they are doing financially.
The main goal is to identify where they are financially and assess how effectively they have been building wealth to date and how effectively they have been converting premium income into wealth.
We identify opportunities to improve what they already have in place and optimise them.
Then we also identify the infrastructure or architecture required to bridge the gap between where you are now and where you want to be.
I'm a huge advocate of not rocking the boat too much on what you already have in play, so when Frank came in to do his blueprint day with me a few months ago, we went through everything he had with a fine tooth comb.
I suggested he didn't need to take such big risks with his capital to get the outcome he needed.
We identified the real goals that mattered to him and crystallised those in very concrete language and with very tangible metrics so that he could put a stake in the sand and say, “When those goals are achieved, then I will have achieved the financial freedom that I'm after.”
We worked out all of the areas where maybe money wasn't flowing effectively.
We also look at the areas where he might have a poor structure or be paying too much tax.
We looked at his financial milestones over the next three to five years and considered other family members, including his parents.
We also talked in depth about how many risks he wanted to carry. Then we honed in on a series of strategies, specifically in alternative investments backed by real property.
Alternative investments can help him get the outcomes he wants and give him a more stable and predictable cash flow, unlike high-octane investments that deliver extraordinary results over short timeframes but could potentially jeopardise the capital.
We're now executing a plan to diversify the same capital into a series of deals in different geographies with different strategies, time horizons, and deal makers.
The returns are significantly more modest than what he's getting now, but he can bank on them in the medium term.
Frank wasn't chasing returns when he could least afford it.
As the runway to retirement becomes very short, many people take these completely left fields high-risk opportunities to bridge the gap.
If he'd lost all of the capital he'd put into that environment, he had time to recover because he was still young enough, but it would hurt.
On one hand, I want to acknowledge and commend Frank because he had the guts to do something that I think very few people dare to do.
He's taken incredibly bold action and is striving for a very bold outcome.
He's lucky because I think he will get through the series of high investments, hopefully unscathed, and gradually move into opportunities that are much more realistic and sustainable.
Case Study #2
I'm going to contrast him with another person I know.
He is a good friend, and I will call him Jerry.
Jerry is the polar opposite of Frank. He still has the investments he put money away a long time ago.
He has created a relatively modest capital base by the sheer time in the game.
He is completely miserable with his current financial outcomes, and there is no way he would ever take bold action.
He understands the opportunities in the market, but he is paralysed by fear.
He operates from a paradigm of “I don't have enough. I don't know enough. It's not the right time.”
He feels completely stuck and isn't prepared to take action.
He talks about feeling regularly overwhelmed by what is happening in the financial world.
He's happy to leave his capital in underperforming assets just because it feels safer.
So when we catch up, the thought that often comes to my mind is that it’s insane to feel miserable with your financial outcomes but don’t want to do anything about it.
For me, Jerry represents the majority of people. But, of course, I’m saying these things in extremes.
There's someone who's taken massive, optimistic action to achieve the outcome, and then the other extreme of the character is someone miserable with where they are but won't take any action.
Lessons From the Case Studies
So what we want to do is see the lessons in both of these case studies.
The first thing I would say is that bold action is commendable.
But bold action without a reference to a plan and without thinking about risk and downside protection is crazy.
The second lesson is that you must also recognise a feeling of powerlessness in a state of inertia.
Ask yourself, “Is it true? Are you actually powerless? Or is it that there's just resistance to taking action?”
Sticking your head in the sand and hoping for the best, believing that the government will take care of us, and believing that financial planners have our best interests at heart is becoming increasingly naive.
When you talk or listen to people on top of their game, like the world's greatest hedge funds, they also reflect a sense of ridiculousness on that wealth model that most people subscribe to.
The third lesson is to think about what you want.
I've talked about goal setting and creating compasses in past episodes. But I want you to think about what you want concretely.
Don't be wishy-washy.
If you have obligations to take care of your parents, put a number on it.
If you have aspirations for the financial support you want to give your children, put a number on it.
Cost this stuff out. We don't live in a vacuum. We have people and causes that we care about.
If you intend to contribute a certain amount of money each year to charitable pursuits, put a number on it.
Too many people are wishy-washy about it. They describe financial freedom based on how they would spend their time.
That's nice, and there's nothing wrong with that.
But to some degree, there's an element of daydreaming on that side of things.
What I'm talking about is being concrete. You want to set a stake in the sand. Then, you want to think about the timeframe in which you want to achieve it.
Then you want to lay the foundations for sustainable passive income through multiple diversified opportunities.
That's where I want to leave today,
These two characters illustrate the extremes in the current world as to what's available to them.
I commend the bold action, but I think it's important to do it within the framework of something that makes sense.
If you're someone who wants to understand what is possible for you or if you have built net worth but the missing piece for you is still passive income, then feel free to reach out to me.
If you are serious about wanting to take some bold action and turn your ship in a different direction, I'd love to see if I can help.
Send me an email at firstname.lastname@example.org and let me know where you are, what you want to achieve, and how you see bold actions fitting into your life over the next few years.