فصل 3 بخش 6

CHAPTER 3.6

SPEED IT UP: 4. GET BETTER RETURNS AND SPEED YOUR WAY TO VICTORY

If you’re prepared, and you know what it takes, it’s not a risk. You just have to figure out how to get there. There is always a way to get there.

—MARK CUBAN

How do you get a greater return while still reducing risk? Most people think that in order to get high returns, you have to take huge risks. But the greatest investors know that’s simply not the case. Remember Kyle Bass from chapter 2.8, “You Gotta Take Huge Risks to Get Big Rewards”? He blew the high-risk, high-return myth out of the water with something called asymmetric risk/reward.

That’s a fancy term for a pretty simple concept. How do you explain it? Kyle turned $30 million into $2 billion by finding an investment opportunity where he risked only 3 cents for the opportunity to make $1—more accurately, $3 million for a $100 million upside—and expanded that risk/reward ratio into billions. Remember how he taught his sons to make “riskless” investments with significant upside by buying nickels? The upside (reward) is way bigger than the downside (risk) on this deal, which makes it asymmetric.

One of Paul Tudor Jones’s greatest successes is that he knows he can be wrong and still be successful, because he uses asymmetric risk/reward to guide his investment decisions. He’s always looking for what he calls a 5:1 investment—where if he risks $1, he believes he can make $5.

Jones is willing to risk $1 million when his research shows he’s likely to make $5 million. Of course, he could be wrong. But if he uses the same 5:1 formula on his next investment, and he’s successful, he will have made $5 million, minus the first investment loss of $1 million, for a net investment gain of $4 million.

Using this formula of constantly investing where he has the opportunity for asymmetric rewards for the risk he’s taking, Paul could be wrong four out of five times and break even. If he loses $1 million four times in a row trying to make $5 million, he’ll have lost a total of $4 million. But when the fifth decision is a success, with a single home run he’s earned back his total $5 million investment. The greatest investors in history know how to maximize their returns—they know how to set the game up to win.

You’ll learn more about what Paul teaches in section 6, “Invest Like the .001%: The Billionaire’s Playbook,” and in my interview with him. He is going to share with you his “$100,000 MBA,” or the most important things he’s learned about investing—one of which is how to be wrong and still win!

So asymmetric risk/reward is the first way to get higher returns. The second way? You’ll learn more about this in chapter 4.1 on asset allocation, but for now, just know that if real estate’s mantra is “Location! Location! Location!” then the mantra for getting better returns while reducing risk is “Diversification! Diversification! Diversification!” Effective diversification not only reduces your risk but also offers you the opportunity to maximize your returns.

Asset allocation is the one thing that every investment professional I’ve talked to, the best in the world, has said is the key factor in where you end up financially. It’s the most important skill, and it’s the one most investors know little about. So in chapter 4.1, “The Ultimate Bucket List: Asset Allocation,” you’re going to learn the power of asset allocation and be able to implement its gifts to benefit you and your family for the rest of your life. On top of that, you’re going to see in section 6 the exact asset allocation of some of the most successful investors in the world who have consistently produced the highest returns.

Yes, you read that right: you’ll be able to model the exact strategies of the best investors on the planet. You’ll have Ray Dalio’s asset allocation! Obviously, past performance doesn’t guarantee future performance, but in the case of Ray Dalio, your strategy is coming from one of the greatest investors of all time, and his focus is getting you the greatest return with the least amount of risk. Dalio has been estimating every type of market and finding what the best ratio is through asset allocation for over 20 years. He has more than $160 billion in assets under management and a record of only three losing years out of the last 22. After reading this book, you will learn a strategy that is based on Ray’s groundbreaking approach for the world’s wealthiest individuals, institutions, and governments.

HOW FAST CAN YOU GO?

It’s probably pretty obvious that we’d all like better returns. But what’s less obvious is the massive impact that better returns have on your time horizon for investing. The “rule of 72” says that it takes 72 years to double your money at a 1% compounded rate. So if you’ve got $10,000 to invest at 1% compounded, you may not be around to see that money double. You can cut that timeline in half by doubling your rate to 2%, and in half again by doubling that rate to 4%! So what’s the difference between a 10% return and a 4% return? A 10% return doubles every 7.2 years; a 4% return doubles every 18 years! If you want to radically change your plan and get to financial freedom in seven years versus 18 years, you can. Or 14 years instead of 36! Those are the types of differences that are possible when you learn how to get better returns. And the most important thing is to get these greater returns without taking significantly greater risks wherever possible. You’re looking for that asymmetric risk/reward that all great investors seek. It’s elusive, but it’s out there, and this is just one more way that you can speed up your approach to realizing your dreams. (Take a look at the table on page 284 to see how fast—or slow—your money will double.) Your next question is likely, “Where do I start looking for my own asymmetric risk/reward opportunities?” Sometimes they turn up in the unlikeliest places. For me—maybe because I grew up in Southern California—I’ve always believed in including real estate as a key component of my portfolio. If you ever turn on the news, it’s hard not to notice the demographic shift that’s taking place in this country right now, with 10,000 people turning 65 every day. The boomers are hitting retirement in droves. In the back of my mind, I always knew there had to be a way to provide some of my capital to help expand quality facilities for people entering this stage of life, while providing a profit for me. But it wasn’t until I visited my wife’s grandmother in Vancouver, British Columbia, that I connected the dots for a future investment in retirement communities.

My wife, my Bonnie Pearl—my “Sage”—is the love of my life. Her family is my family. Her grandma Hilda was my grandma. I loved her dearly. After being married for 58 years, her husband died, and we all watched as she suffered. For ten years, Hilda cried herself to sleep at night. She was living on her own, proud and independent, but heart-achingly lonely, missing her life partner. We didn’t have the heart to put her in a home, yet with Hilda’s dementia worsening, Bonnie Pearl’s mom, Sharon, was determined to find her a home with the best possible care.

We had heard that some retirement communities were pretty spectacular, and after weeks of looking, Sharon finally found a community that gave the Four Seasons a run for its money—this place is amazing. I always said I’d stay there, and I don’t say that about many places.

So guess what happened to Grandmom after moving into her new digs? Forget that she traded up to a beautiful new apartment with modern amenities and 24-hour care. That was just the tip of the iceberg. More amazing than that, she began a second life! At 88 years old, she transformed into a new woman and fell in love again. A 92-year-old Italian captured her heart. (“I don’t let him under my shirt yet, but he tries all the time,” she said with a grin.) They had four beautiful years together before he passed away, and I kid you not, at his funeral, she met her next beau. Her last decade was filled with a quality of life she never could have envisioned. She found happiness, joy, love, and friendship again. It was an unexpected last chapter of her life and a reminder that love is the ultimate wealth. It can show up unexpected anytime, anywhere—and it is never too late.

Grandmom’s story opened up the realization that there was a real need for retirement communities that were effectively staffed and beautiful just like hers. How could I find a way to invest in an opportunity like that? Obviously just walking into a home and asking to invest is probably not the most effective strategy. So I went to my personal advisor, Ajay Gupta at Stronghold, and told him what I believed in and what I was looking for. He found an opportunity where my investment not only stood to make a great return but also aligned with my values and beliefs and with a broader trend in the market. Many experts look at this category as a “demographic inevitability” because the 75-year-old age segment will grow by 84% between 2010 and 2030. Demand will be greater than supply!

Ajay found an investment company run by an amazing entrepreneur who builds, invests, and manages high-end senior living facilities. He started with nothing and has built it into a $3 billion enterprise. He finds the sites, puts up as much as half the money himself, and then rounds up a small group of investors to put up the rest. Here’s what I get in exchange: I get a preferred return on my money (which are income payments each month) based on the profitability of the facility. This can range 6% to 8% per year, and because it’s real estate, I also get the tax benefit of depreciation, which means I don’t have to pay income tax on the entire income payment. Plus, I own a piece of the real estate, which, over the long term, I believe will increase in value. I get to participate in the exit strategy when the investor group eventually sells the facility. To be clear, this specific investment is limited to investors who are accredited11 and meet certain net worth/income requirements. But don’t fret! For those who are nonaccredited, there are publicly traded REITs (real estate investment trusts) that focus solely on owning a basket of properties around the country. These can be purchased for as little as $25 a share at the time of this writing and offer dividend (income) payments each quarter. Do your homework and/or have a fiduciary advisor help you find the best available.

If senior housing seems out of reach, another strategy in real estate is lending your money with a first trust deed as security. In the chapter on asset allocation, I’ll describe to you an example of how investors who need money will take short-term loans at high rates—for example, a one-year loan for 8% or 10%, and you get the first trust deed as collateral. When done effectively, you can loan, say, $50,000 on a $100,000 home, or $500,000 on a $1 million home, and the property could drop 50%, and you’d still be in good shape. While others are collecting 3% and 4% returns, you’re getting 8% to 10%.

Once you start focusing passionately on ways to save more, earn more, reduce fees and taxes, and find better returns with even less risk, you’ll be amazed at how many new opportunities you’ll discover. Again, a great fiduciary advisor won’t just guide you; he or she can also help you to find investment opportunities with that magical asymmetric risk/reward that all successful investors seek.

Okay, we’re coming to the home stretch of this section. This final step can massively increase the speed at which you achieve your most important financial goals. Plus, it’s fun to dream and explore. You’re going to love the journey of this next chapter. Let’s discover . . .