The best hedge fund managers in the world, and the wealthy people who invest with them, think differently about investing than the rest of us. That’s why their investments perform better. In this you’ll learn five thought strategies that can boost your investment performance.
Welcome to Rich & Thin™ Radio, the only podcast that helps you create wealth by shedding the weight that’s holding you back. Today’s episode is part 3 of our series on how to achieve financial independence. I’m Kelly Hollingsworth, and I’m thrilled you’re here because today we begin talking about investing, which is essentially the process of planting trees that grow money.
Before we dive in today, let’s recap what we’ve learned so far. Step one in achieving financial independence is to decide that you are going to do it. Financial independence is a particular destination. It’s the specific point where your money grows enough money for you to live on, and you don’t have to work anymore. You only work because you want to. And making the decision to get there is critical because we don’t just randomly arrive at our desired destination. We’re not just flotsam floating in the sea. We have to point our boat towards that particular place to get there. That was our discussion from episode 13 in case you missed it and you’d like to go back.
Step two, which we discussed in episode 14, is to gather cash. Cash is key on the journey to financial independence, because when you plant cash properly, it grows money. The low-hanging fruit in growing more money is to stop underearning. Many of us are giving away a significant portion of our upside because the way we currently think about our earning lives causes us to underearn. If you haven’t done thought work on what you are earning, I can almost guarantee that underearning is going on in your life, so please go back and listen to that episode if you haven’t done so already, or maybe even if you have, because ending underearning is the easiest way to immediately begin bringing more cash into your life.
Looking at your thoughts as they relate to underearning is the first step to maximizing your income. What happens once people do thought work on underearning is that they realized that the sentences that are running through their heads have a significant impact on the zeros they see on their bank statements. This is because our thoughts, those sentences running through our heads, drive our emotions which drive our actions which create our results.
And once you learn this in any context, but particularly once you learned it in an underearning context, your brain starts accepting the truth that there is an enormous and profound relationship between what you think and the amount of money that you have in your life. This is not metaphysical woo-woo magical fantastical nonsense. It is very linear and logical. It’s like dominoes knocking each other down, and once your brain sees that connection, you will begin to accept the critically important idea that managing your mind is the most important thing you can do to earn additional money. And that’s when things really get interesting because everything you learn about managing your mind to take your income up to market rate so you’re no longer underearning can also be used to vastly increase your income. You learn to increase the value that you’re delivering to your clients and customers, and your income skyrockets as a result. So stopping underearning is the first step in this journey. The mental skills you learn to stop underearning will also help you grow your business and learn exponentially more beyond that.
Five thoughts that will help you invest like a wealthy person
The skill of managing your mind for better results also leads to highly effective and profitable investing activities, which is what we’re going to begin talking about today. As with earning, the way you think about your investing life is going to affect the outcomes that you achieve, and as someone who has worked among some of the world’s wealthiest people for the last 25 years, I can promise you that what most of us think about investing is killing our wealth creation.
So today I’d like about how wealthy people think about investing. It’s different than how most of us have been trained to think regarding our own investing lives, and the different way of thinking is the dividing line between doing well and suffering losses. So now I’d like to dive into some thoughts that can help you begin thinking like a wealthy person.
Thought #1: Investing is not about taking risk for risk’s sake.
Most of us believe that you have to take risk to make money. We say things like, “If you want to make a cake you have to break some eggs.” My friend the other day said she’d given money to someone in town to manage for her, but then she said that she didn’t really know much about him. She thought about this for a minute, and then she said, “well I guess I want to give him a shot.” And I asked, “Why? Isn’t this your retirement money?” And she said, “Good point. Why would I want to give someone a shot with my retirement money?”
We all have our moments, but wealthy people tend not to have moments like these. They don’t take shots with their money. They like money. They like it a lot. So they make deliberate, thoughtful, educated decisions with money. It’s never about taking a shot, and they look for opportunities to make outsized returns with little or no risk.
Their first goal is always to lose no money. I remember the first time I heard this. I was a little hayseed from Idaho working among hedge fund managers in New York, and one of them said to me, “Rich people are rich because they don’t take risks that everyone else takes.”
This blew my mind, but it also made perfect sense to me. As a kid growing up, I saw what undue risk does to a family and its financial position. In one notable incident, my dad lost our house on the craps table in Las Vegas (not our house directly, of course, but he lost enough money that we had to sell our house).
Big risk is for broke people. The first thing wealthy people do is they look for a guaranteed return.
Now, here I want to be careful, to clarify what I’m saying, because with some financial products such as certain annuities that no one should ever buy, the label of guaranteed return is slapped on to a horrible product that will siphon gargantuan fees away from you, and give you inferior returns and undermine your wealth rather than help it along. That is not what I’m talking about. If anyone uses the term “guaranteed return” with you, when they’re selling you an investment product, or even if they imply that a return is guaranteed, you probably should turn and run in the other direction. Because with traditional financial instruments: stocks, bonds, annuities, hedge funds, all of that type of thing that we tend to think of when we think of investing, there is no guaranteed return. There is always a risk of loss—it’s much smaller in some scenarios than others–but it’s there. I was on the phone with a broker the other day, he called me because I haven’t been trading in my account recently, and he suggested that I invest in some bonds because bonds are safe. And I said, “well, they are safe unless the issuer defaults, right?” And he said, “Oh, no. We only recommend really high-grade bonds.” As if those can never lose money.
This kind of false assurance in the investing world happens all the time. Salespeople believe in the thing they sell, or maybe they don’t believe in it but they just want to make the sale, so they minimize the risk or tell you that it isn’t there, but either way, whatever the cause, and I want you to know that there is always risk. We’re going to talk about protecting your assets in Part 4 of this series. That’s the next episode.
The point for today is that there are some things we do that generate a guaranteed return, or darn close to it, and those are the top priorities for where wealthy people put their money.
If you can put money in your 401k and get a match from your employer, that’s an example of a guaranteed return. Wealthy people take free money every chance they get. I heard a business owner on a podcast recently talk about an employee meeting where he took a bag of money and dumped it on the table and told his employees that the pile of money represented the amount that they had forgone when they didn’t avail themselves of the match in their 401(k)s. The next year most of them were taking advantage of the matching.
Another type of guaranteed return is when we stop underearning. We talked about this in the last episode, episode 14. If you are leaving money on the table because you are not managing your mind, you want people to like you, you’d prefer that they like you versus pay you, or maybe you think there’s something inferior about you that warrants a discount from what your client or employer would have to pay to someone else doing exactly the same work that you’re doing, if you have this kind of thing going on, every additional cent you make once you learn not to underearn is a guaranteed return. That is a deal you should take every time.
Once you have taken advantage of all your guaranteed upside, the next thing you do is you start ranking your opportunities in order of risk. Wealthy people always go for the most bang for their buck. What presents the least amount of risk and the highest potential return?
If you start instructing your brain to look for this kind of thing, you’ll begin seeing it, and this is a skill you get better at as you go along. My husband, for example, comes from a long line of auctioneers. Buy low and sell high is in that family’s, and they live and breathe it from the moment they’re born, so he tends to create a risk-free return in almost everything he buys, even consumer products, because he never overpays for anything. Our boat, for example, we could sell at a profit even now, after a few years’ use, because he created a guaranteed return in that boat by fishing out the best possible deal on the buy.
So it is possible to make money while you minimize, mitigate, and even eliminate your risk. Look for that wherever you can, and you will start to see it.
Thought #2: Investing is Optional.
This thought flies in the face of everything we hear. I listen to a lot of investment and business podcasts. I read a ton of books on investing. Invariably what I hear and read it is that everyone must invest. Lately I’m hearing, “just put your money in something. It doesn’t matter what it is,” is something I’ve heard on more than one investing podcast lately.
This is a thought. It is just a thought, and there’s a flipside thought that is at least equally true: The best way to double your money is often to fold it over and put it in your pocket.
Many wealthy people believe that the only “investment” we need to make is in ourselves and our own earning capacity. This is where we have the most control, and it’s often the biggest rate of return we’re ever going to see. If all you ever do is continually invest in creating a higher earning potential for yourself, you might never need or want to invest anywhere else. If you earn a $50,000 salary but you invest in yourself and your own earning potential to achieve a 10% increase in your income every year for 20 years, you will earn an additional $2.1 million over that time. This is very do-able, by the way. If you get a 20% increase in your income over each of those 20 years, also very do-able, that’s an additional $10.2 million over the 20 years.
Why am I telling you this? Not because I never want you to ever invest in anything but yourself. I work in the hedge fund industry. I love investments, and I believe that money, properly planted, grows more money. So either way works: You can turn yourself and your own earning capacity into a fountain of money. And you can also make a lot of outside investments that grow money for you. The point is not to say that one is better than the other. It’s simply to suggest that there’s more than one road to wealth, when we’re talking about investments, and no one makes good decisions with a gun to their head.
If you hear yourself saying something like, “I know, but what choice to do I have?” that’s almost always code for “I am about to do something stupid and harmful to my wealth,” because when your brain doesn’t see a choice, it’s blocking you from accessing your own wisdom. So I want every listener to know that there’s always a choice. There’s always another way. You never have a gun to your head, and it’s critical to know this because that’s generally when we make our worst decisions: when we think there is no choice.
Thought #3: Be your own fiduciary. No one knows what’s better for you than you.
Recently I spoke with a woman who was going to retire in a few years with a seven-figure nest egg. But she was in a panic. She was saying, “I just want someone to just give me a number. I want them to just tell me how much I need, and what I need to do to get there. I know I’ve been screwing up, and all the brokers are telling me that I just have to get started or I’m in big trouble.”
Two things to notice here: the first thing is that most of the folks we tend to view as financial services experts are really just financial services salespeople. They don’t know any more about this stuff than we do. Often they know far less, and the particular salespeople this woman was dealing with were pressuring, a woman who has no need to rush into anything, to rush into all kinds of things. Second, she was ascribing certain magical powers to these brokers that they can’t possibly possess, such as the ability to determine how much she needs to live the life she wants.
My thoughts? When we think that someone else can tell us how much money we’re going to need, when we allow them to decide our objectives right down to the very number that’s appropriate for us to retire on, and put the plan to get there wholly in their hands, that’s a sign that we’ve stepped out of our brains. Another way of saying that is that we are out of our minds. Not a good place to be when we’re talking about money and the quality of the rest of your life. We’re basically checking our thinking capacity at the door and abdicating the responsibility for our financial security to someone else, in many unfortunate cases we’re abdicating that responsibility to a salesman who’s main interest is in the size of his next commission check and not the size of our portfolio or the quality of our lives.
Why do we do this? We do this when we’ve bought into the lie that we can’t understand this stuff. It’s all too complicated.
If you hand your power over to someone else, what do you become? By definition, you become powerless. You’re powerless to protect yourself. Powerless to think about what’s happening and to determine if it makes sense. Powerless to detect if something seems amiss.
So if you follow investing very much, you may have heard that the Department of Labor has been trying to put a new law into place that would have more financial services professionals labeled as “fiduciaries” so that they are obligated to act in your best interests. I started out as a financial services regulator and I’m a financial services attorney, but here’s one thing I can promise you: There’s no law that anyone can write that will have any other person caring as much about your money as you do. So what I would advise, what I would encourage everyone to do, is to stop worrying about the fiduciary rule. Stop worrying about what the regulations say that your financial services professional, sales person, the investment advisor you hire, stop worrying that the rules say they’re supposed to be looking out for you and acting in your own best interests and conducting themselves as your fiduciary. We can never regulate someone into caring about you as much as you care about yourself. Be your own fiduciary. Your role with your money is to be the supervisor to what every one of your advisors is doing. Never check your brain at the door.
Thought #4: If you think investing is risky, take a closer look at spending.
In my mind, there are only 2 things you can do with money: spend it or invest it. Some would say you can also save it, but I think of savings as an investment because it earns a little interest and more to the point because it’s an investment in future possibility. My husband and I like to do an investment strategy that we call “blood in the streets,” where you hold a pile of cash off to the side and you invest it when the market has plummeted and everyone else is running for the hills. This could be the stock market, it could be real estate, any kind of market that you’re looking at. If you have cash when no one else does and prices have fallen like a rock, that could easily be a life-changing investment. You might never need to make another one.
So I don’t think of savings as a third option. Money is either invested, or it is spent. The point I want to make here is that often get confused between the two. For example, people will say that they’re investing in a new kitchen or some other type of remodeling so they can make more on the sale of their house. But experts generally report that you don’t recoup the costs of renovation when you sell your house. According to Bankrate.com, the top six renovations that yield the highest return in the sales price of your home range from a new garage door, at 98.3% recouped, to a siding replacement, which gets you only 76% of the cost of the siding back when you sell the house. A kitchen remodel only gets you 81% back when you sell.
So let’s not get confused about spending. We can call spending an investment, and often we do, but if at the outset the expected result is less money coming back to you, if you know that before you even deploy the cash that it’s not all coming back, it’s not an investment. It’s not an investment no matter what you call it. An investment is where you expect to get your cash back and then some.
So here’s the crazy thing about investing versus spending. Generally, if we talk about making any kind of investment, whether it’s the stock market or a hedge fund or rental real estate or something for our business, maybe it’s going into business at all, we often hear, others will say, “I won’t do that. It’s too risky.” They’ll even tell us that we shouldn’t do it. We could lose money, even in cases where there’s a good chance that some or all of that money, and more, will come back to us. If we’re investing prudently, there’s a very good chance of that. Yet this kind of thing is risky in most people’s minds.
Yet when we’re talking about spending, no one ever says, “boy, that seems risky.” Spending seems safe, which I find so strange, because money is walking out the door with no hope of making its way back to us. It’s like water through our fingers, yet none of us have a problem with that. I think of this every time my friends who refuse to make investments head down to the casino. They have no problem with this idea. None of us typically do–except for the wealthy among us. Wealthy people have a problem with that.
I recently heard about a hedge fund manager who didn’t like to spend five dollars on a cup of coffee because it’s money out the door. He knows that five dollars invested in his fund can easily become $500, maybe even more than that, so he doesn’t think of that cup of coffee as a five-dollar expense. He thinks of it as a $500 expense, and it’s just not worth it. That’s way too much to spend on coffee.
So what I’d like to suggest here is that the real risk is not in making well-considered investments. The real risk is the one we blindly take on throughout our lives without ever thinking about it, and that is in our spending. It’s in money that flows through our fingers; that walks out the door with no hope of ever returning. And what I’d like to offer here is to flip this on its head. Spending is where the real risk is. All spending is pure risk. And this isn’t to say you should never do it. Sometimes it’s fun to have something new, or to do something a little frivolous with money. But it’s also fun to have investments that pay you. Who wouldn’t think that a money tree growing outside is fun? I certainly do.
Thought #5: The stock market isn’t the only game in town.
Right now, the stock market is flying high and everyone who’s invested in it is feeling like a rock star. And even when it’s down, we’re told that it will always come back up. So the advice is to just buy. Just buy, and buy, and buy some more, blindly hang on to your stock market investment because even if it goes down, it’s always going to come back up. And what I think about that is maybe the stock market will always go back up over the long term. Probably it will. It’s always happened before. But I don’t take that as a certainty, because nothing is 100% certain. Disruptions happen all the time, and things change in ways that we never expected.
For example, many of us used to think that our kids, every successive generation of human beings, would always live longer than the previous generation, because we are continually making improvements in medicine that should extend life spans. But for the first time in the history of the world, our kids’ life expectancies are shorter than our own. Similarly, for a long time, for the history of the world, we thought that the population would always grow, and it still does in some parts of the world. But in certain developed countries, governments are paying women to have babies, and this could spread everywhere as more women across the globe gain more access to choices about the size of their families.
So the point here is that disruptions happen. Things change, often in ways we can’t predict, and at some point what we thought was inevitably going to happen suddenly ceases to occur.
This brings me to the stock market. One theory is that stock market growth is driven by population growth. As there are more people, the stock market rises. If this theory holds true in practice, slower or stalled population growth could also stall the stock market’s growth. And if that happens, buy-and-hold wouldn’t make sense anymore.
Another theory is that millennials aren’t going to invest in the businesses that make up the stock market (the S&P 500, or any other stock index, for that matter), because they’re going to invest in themselves. They think that’s their best chance for success, and I don’t disagree with them. In many cases, entrepreneurship, not employment, is now the best chance to achieve a high income and a secure future. So if the Boomers start selling stocks when they hit retirement (and the Wall St. Journal recently reported that 70% of them are going to retire between, I think, 2022 and 2027). If that happens, but the millennials don’t start buying stocks, what’s happens in the stock market? A whole lot of selling and few of them buying doesn’t bode well for a rising market, and who knows when that will turn around, if it happens?
Here I want to make clear that I’m not a doomsayer or a conspiracy theorist. I believe in America and our financial prospects, and I tend to believe that the stock market is going to continue to rise over time. But don’t pretend to know that is going to happen. I definitely don’t know where it’s going, and neither does anyone else. If I were just starting out as an investor, some of my money would be earmarked to a buy-and-hold strategy. As Dave Ramsey and many other stock-market cheerleaders suggest, you just put some money in the market and you leave it there and you keep adding money month after month after month. It’s not a horrible idea. But I don’t think you should do this with all of your money, and this is in keeping with how wealthy investors generally think. They invest in hedge funds and other alternative strategies, strategies that will perform even if the stock market doesn’t, because they know that these strategies can make money in rising and falling markets. This isn’t to say they always do make money, but it is to say that it’s nice to have something in your portfolio that won’t necessarily tank if the continued rise of the stock market ceases to be a certainty at some point in the future for whatever reason.
How smaller investors can access these types of alternative strategies that aren’t tied to the stock market is something I’ll cover in upcoming episodes, but for now I’d like to say that the first step to achieving the portfolio of a wealthy person is to open your mind to lots of possibilities that you probably haven’t heard before and begin thinking like a wealthy person. I hope the five ideas we’ve covered today will help you in that regard. And I hope you’ll join me for the next episode, where we’re going to talk about how to protect your assets. There’s no point getting rich if you’re not going to stay rich, so that’s what we’ll begin to cover next time. And with that, I want to thank you for joining me today. I sincerely appreciate having you as a listener, it’s been my pleasure to talk to you today, and I’m looking forward to connecting with you next time.