Most decisions will not impact your life at all. This is difficult to put into perspective since we’re forced to make multiple small decisions every single day. But. If any of our readers think back to the last five years they unlikely find more than one or two “life changing decisions”. It’s quite odd since the average american always seems to be stressed out about getting from A to B despite the event being un-impactful to their life. This has caused us to come up with a rough decision tree to help people get rich.
First Compounding Decisions: The first item is a caveat. Deciding to eat healthy, exercise consistently and invest your savings on a monthly basis is technically a “daily decision”. This is 100% a fair criticism of our earlier paragraph so we’re including it here before moving on. We assume that any successful person already does these items on “auto pilot”. Working out, eating healthy (90-95% of the time), stretching, brushing your teeth etc. should all be assumed. If someone can’t even do this part of their life we think they’ve already lost the game. That’s a rough statement. And. We think it is true. There is no point in being rich if your health is a wreck, your quality of life is falling off and you have medical bills. In short, we assume you automatically eat healthy, work out and invest small amounts of money on a monthly basis.
Quitting Makes Life Easier: Quitting gets a bad reputation despite the importance of quitting. To us, quitting is when you realize that you just don’t have the ability to do something. The obvious example is a 5’ 6” guy giving up his dream to be an olympic volleyball player (yes we’re sure there is 1 out of a billion that breaks this rule as well. And. The point stands). Quitting to us is when you realize you can’t get to the top 1% without dedicating 16+ hours a day to improve. This is called a lack of talent.
Remember, quitting is only acceptable when someone is certain they have something else to move towards. Lets say you start an online business and seem to stall at $100K per year. Not bad at all. That said, your only real competitive advantage is sales. This is a significant realization. You have figured out exactly why you’re profitable and why you’re struggling to make the next jump. If this is the case, then it makes sense to go ahead and quit and jump into enterprise sales instead. You’re leveraging your talents to do something new (which you realized because of moderate success in online business).
There is actually a lot of information packed into the prior paragraph. In order to realize you’ve peaked you have to knowwhat you lack and what made you successful. If you can’t answer either of those questions, quitting is not an option. Once you have pinpointed exactly what you’re good at and exactly what you’re bad at, you can make a smart decision that can change your life forever. That sounds like an exaggeration but it isn’t. Knowing exactly what is going right and wrong means you can self-evaluate (something regular people lack as they believe they are good at everything) and push you into a new direction. Again. The prior paragraph is simply an example and if you had a lack of sales skills but still made $100K, maybe the answer is to hire a trained sales profession for your company! So on and so forth.
Funny enough, we think quitting is probably the most overlooked skill that people need to acquire. It actually comes in *first* on our list. Everyone else is focused on “grinding it out” despite not having the skills to proceed past a specific level. As soon as you realize your abilities do not function in a specific position, it’s time to quit. Not later, not in a few weeks, but that exact day.
The Probabilities Framework: If you’re extremely new to generating value and making money, it is time to get used to the probabilities game. This means you should look at every industry you’re going to take a “stab at” and see if the effort is even worth it. The numbers don’t lie and opinions never change reality.
Take for example a person who is amazing with languages. Will this person make a lot of money by being a language translator? Unlikely. Maybe there are a handful of positions where you can make a high income (say translating for international business) but the number of positions is quite small. Even the top 5% of language specialists don’t make that much cash. Also. One has to recognize that this position will lose value over time. We have technology that is able to translate paragraphs from english to any other language. In the future, this technology will become incredibly accurate devaluing the need for humans in the first place (more room for error).
Before moving on we can use a second example, software engineering. Here is a position that has so much demand that they cannot fill the open positions. Yes it is competitive. No not everyone can succeed and make $400K+ a year. But. The median software developer (50th percentile) is certainly making more money than the median teacher/language specialist etc. So if you believe you can become a mediocre software developer and you could also become a mediocre language specialist… go and become a mediocre software developer. For now.
Follow the Money: Without money in the industry, there is no reason to bother. This is a big decision. Many people will enter an industry thinking that they can easily “switch” later. This is incredibly incorrect. 30-40 years ago it was a lot easier to switch industries. You had people with minimal amounts of education simply climbing corporate ladders. In 2018, careers/businesses are incredibly specialized and if you move into one direction it is difficult to make a switch 90% of the time.
Things that are making money today might not make money in 5 years, 10 years or 20 years etc. The best way to approach this is to figure out your own timeframe. If you’re looking to get to $500K and that’s enough for you, a lot of careers are viable. You could even go into capital raising for investment banking if your hurdle is low. If you’re looking for something long-term and sustainable? Hundreds of industries will evaporate. Having a reasonable time horizon is becoming more important as technology accelerates, displacing (and creating!) jobs/careers/industries.
A good rule of thumb is the “fifteen year rule”. If an industry is making a lot of money today, then it likely lasts between 10-20 years of “peak earnings”. If an industry is seeing earnings growth, it usually means that we haven’t reached the peak (of course!). This is not a science and you should do your research. But. Keep this in the back of your mind. If the money is good calculate your expected earnings assuming either declines or slight increases before an expected deceleration.
Asymmetric Results: The best bet to make is an asymmetric bet. This means that the downside is zero but the upside is say 10-20 fold. Why? It is the best way to see a step function in your net worth without setting you back in time. At the end of the day, investing in asymmetric results should be an annual phenomena. A few will hit. This will accelerate your net worth and a few will fall flat on their faces leaving no impact (you don’t need to put in much money to see the upside).
Clear examples are: 1) venture capital, 2) any low cost business start up, 3) biotechnology investments and 4) volatile technology stocks – typically small capitalization.
The funny thing about asymmetric investments is that you realize how much you overspend in a month. We’d guess that anyone with a good career could clamp down and come up with $3-5 thousands dollars in a few months. If that results in a 30-50K return you’ve essentially gotten it all for free by clamping down for a short period of time. This phenomenon of being able to invest in asymmetric ideas only gets better over time. Eventually throwing $25K becomes viable and the return is significant. This is exactly why angel investors exist. They clamp down on their higher end life styles to get some cash and simply place it into some risky bets once and a while. Naturally? These guys end up getting richer and richer.
Practical Applications: In a change of pace, we’re going to try a “‘practical application” section to a few posts. This will force each post to be actionable versus purely informational where one is forced to read between the lines.
10% Rule: A good way to think about each decision is the long-term ramifications of it (in terms of net worth). If you decide to take a specific risk and it would result in a net worth reduction of about 10%, this is unlikely a major decision. Why? Well a smart person will get anywhere between 6% and 12% in investment returns. Yes we know the long-term average is 7%, so feel free to use that as well. This means a 10% reduction would not break the bank because you would be back to roughly the same level in just over a year.
Time Commitment – 1 Year Rule: Any decision that requires 1 year of your commitment is a serious decision. This is surprising since many people think that a 10% net worth hit is worse than the time commitment. Unsurprisingly, most people don’t value their time. If you lose a full year of your time it should be a *certain* decision. These certain decisions include: 1) college, 2) your first job/career, 3) your first major investment that represents over 20% of your net worth and 4) personal relationships. Generally, people spend many hours of their time hanging out with people at bars (people that will never add any value to their life) and think this is a “casual decision”. These decisions add up to major life changing amounts of damage. Unless it is kept under control “casual hangouts” should be avoided more often than not.
Practical Examples: The following items will make major impacts to your life: 1) not knowing your talents, 2) not knowing the growth or decline of a market, 3) spending time with unsuccessful people because “you’ve known them a long time” and 4) investing large amounts of money into risky ventures where you cannot recuperate the costs. In bullets we can use the following:
- College: You only choose schools or majors based entirely off the of the return profile. The people who say college is a fun 4 year or 2 year party (MBA) are simply lucky or reckless. The vast majority of the successful people will choose something that results in a high income. They find their rough talents and go where the probabilities are in their favor.
- Career: Before choosing a career one should at least know their “niche” skill. Sales is the best example. If you’re better at advertisements vs. direct sales, you should get into affiliate marketing immediately. If you’re not good with ads but are good at long-term sales management, you should go into enterprise sales. These skills are not equal. Broadly speaking, advertisements impact the lower IQ piece of the populations while enterprise sales is used for higher IQ individuals. People will complain about that basic split but it’s broadly correct as rich people are typically smarter than the average person.
- Relationships: This is an often ignored part of life. We’ve seen hundreds of talented people waste their time with go-no-where situations. This could be a girlfriend they will never have kids with, a best friend who still lives at home or a bar/club they go to every single weekend. It’s odd to see this behavior but it is engrained in human behavior. Similar to how students typically take the exact same seat in a lecture hall every day. This type of programming needs to be fixed before it leads to long-term pain.
- Asymmetric Risks: If you think an investment has a chance of returning 20x… this does *not* mean you invest. That is right. You should not invest just because something has the potential to go up 20x. Instead you should ask if the chances of the 20x is higher than 5%. The best example is bio-technology stocks. If you know that a specific drug has a 40% chance of approval and is not priced into the security you should buy a certain amount of it. Asymmetric risks that are *missed* can wreck your life time net worth. If you ask a rich person how they made their money they always seem to have at least one small event in their life (a big sale of a company, a large return on an investment etc.)
- Leverage: Using other people’s money can be life changing for the better or worse. The answer is in your ability to “force” appreciate the returns. This is typically specific to real estate. If you’re unable to offset the debt payments with your own effort it is best to avoid. If you can easily offset it, then t
- he time to buy is now.
When we look at these five practical examples, it unsurprisingly shows us that doing the opposite pays off. Look at the constant decisions made on a daily basis (health, fitness, who you spend time with) and that is a life changing adjustment. Most people view it as a part of their daily life. The second item is the amount of risk one takes on. By calculating the actual risk and return you won’t miss out on asymmetric upside and you also won’t kill your net worth by 50% leveraging up into an asset you cannot afford.
That wraps it up for today and our next Q&A will be held on Tuesday July 10. We’ll leave it open for roughly the day as it should be slow. Have a wonderful weekend!