The Game with Alex Hormozi - This Is How My Mentor Set Up My Wealth | Ep 674

Episode Date: April 3, 2024

“It's always never lose money.” Today, Alex (@AlexHormozi) shares effective wealth management strategies for entrepreneurs, focusing on long-term growth and capital preservation. He discusses key lessons from building a billion-dollar portfolio, emphasizing strategies like yield, equity growth, tax advantages, and risk reduction through diversified investments.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(0:49) - The fundamentals of investment(2:41) - Understanding investment yield and appreciation(3:23) - The importance of tax advantages and capital preservation(4:47) - Breaking down the wealth allocation strategy(5:33) - The three main investment buckets explained(9:18) - Leveraging indexes for low-risk, high-return investments(10:35) - The entrepreneurial approach to wealth managementFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition(This episode is a re-run. Original airdate was on January 11, 2022)

I think the economy is going to go up over the long term. And so I want to just preserve my capital and not have to think about it. So I can immediately allocate the cash. And this is something that people don't talk about. The wealthiest people in the world see business as a game. This podcast, The Game, is my attempt at documenting the lessons I've learned on my way to building acquisition.com into a billion dollar portfolio. My hope is that you use the lessons to grow your business and maybe someday soon partner with us to get to $100 million and beyond. I hope you share and enjoy.

My mentor sold his company for $3 billion and I asked him, how should I set up my wealth? And this one I'll talk to you about it is one of the many components that he broke down for me in terms of how I should set up my wealth and my investment as an entrepreneur. All right. And so everything I'm going to break down is based on what that conversation was and what he explained to me. All right. So right off the top, he was like, listen, there's only two things that you can do with your money. You can either buy stuff with it or you can lend it to people and get interest on it. That's it.

All right? And so once you understand that those are the only two things you can do, then you can start analyzing your decisions appropriately. it's like from a risk perspective, all right? These are the ways that we decrease risk for the investments, especially if you're lending. The first is that we make sure that you are the top of the cap stack. Cap stack just means the stack of capital. So if you have multiple people who are lending or own something, who gets preferential treatment, all right? So a preferred creditor or somebody has preferred stock means that if something goes bad, that person gets paid out first, right? You can even have liquidation preferences. I won't even get into that stuff. But if you're top of the cap stack,

So, for example, if you lose your job and you can't pay your mortgage anymore, the bank is the one who gets your house because they are the preferred creditor. So you don't get your house. Your bank gets your house. Even though you put money into it, the bank put money into it too, and they are the preferred creditor. So they get your house even though you lost the money, right? And so that is the first element of risk. The second one is like you want to be able to see at all times what's going on. And so that's called transparency.

All right. So that's what kind of reporting do you have? What kind of relationship do you have? How clearly, you know, how do you have access to the books? This is why publicly traded companies, for example, you have lots of transparency. transparency, right? So the second way you decrease risk is through transparency. The third is through liquidity, all right? So this is speed to money, all right? Money transferring from money to money, right? Is liquidity. And that means that you can get in and out of position very easily or very

quickly or you can translate one asset into money and back into it very quickly. And that also is an element that decreased risk. If you have to hold on to something and you want to get rid of it and you can't, that means it's not that liquid, which means you're at higher risk, right? And so he's like, So this is what I'm thinking about when we're lending money. Now, the second thing is what are we going to look at for the investment, right? There's four pieces to what you need to look at for all your investments. The first is what is the yield, right? Is this thing going to pay me month over month and month?

So, for example, if I bought crypto, that's not going to pay me anything, right? What that's going to do is increase in value or our hope is that it's going to increase in value. That is one of those, the greater full theory, which is you buy and then you, you hope that there's somebody else in the future who's going to buy it for more money, right? And that's appreciation. So you have equity growth. The next is the yield, which I mentioned earlier, which is do I get cash flow? So if I had a real estate property that would give me cash flow, or if I'm buying an asset and hoping it appreciates like crypto or like gold or whatever, those would be things that we're hoping that increase in value. The next is, is it tax advantaged,

all right? And what I mean by that is if you have two different investments in one of them has a better tax structure based on laws, then that would be a better investment. So this is why it's variable because if you can have two things and one of them has this characteristic, then it would make it a better investment, right? And is there ways that we can structure our investments so that we get a better tax treatment? And the answer is yes, right? And then finally, is a preservation of capital, right? Which is how likely am I to lose my money, right? And what I was, what I can tell you is of all the guys that I know who are worth half a billion, a billion, this individual who sold his for three billion or more, is that they're far more, far more. And they just repeat it over and over and

So if this is repetitive, then take it in because I've been dealing with it, you know, on their side too, is that it's way more about return of capital than return on capital. They're far more concerned with making sure that they keep their money than that they grow the money. And I think that having this defensive first strategy has been something that I've seen over and over and over and over again. And you listen to Charlie Munger and you listen to Warren Buffett, it's always never lose money, right? It's always never lose money. And that's always the first and second thing that they're thinking about. because any number, no matter how big it is, multiplied by zero, is still zero. So you can erase an entire lifetime of excellent decisions by one very poor decision,

which is why mitigating downside is so important. And this preservation of capital kind of relates to these three things that I mentioned earlier. All right. So now that he laid this as the foundation, he's like, you're an entrepreneur. And so you're going to have buckets of wealth. And this is how we're going to set it up for you. All right. So the first is I have acquisition.com, all right, which is our portfolio.

company, that's where all of our companies sit in, all right? And what happens is that cash, then cash flow is generated, right? Every day, every week, there's positive cash that's being generated from these businesses because those are the types of businesses that we like to work with. So we're not, there are businesses that generate, you know, losses for long periods of time, and then they try and sell later, like software companies tend to be in that. We own one software company, but the vast majority of our portfolios is asset-light, high cash flow generating businesses. Now, there are three buckets that this cash goes into. All right. The first and simplest bucket is indexes. All right. And the reason we do this for us specifically is that they are

passive, all right? And they are truly passive. All right. I don't have to worry about Coca-Cola and how it's going to run. I don't think about it. I'm not on their board meetings. I'm not giving them insight, right? I let I let Uncle Warren do that for me. But indexes are the first probably first and 50% bucket for us. in terms of where all wealth is. And there's some advantages to indexes that I'm going to share in a second that you get that most people don't know about, all right? Especially people who don't have as much money yet, all right? And that's what we're trying to solve with this channel.

All right? So indexes, and the reason we do this is because A, it's super passive and B, it's because I'm bullish on the long run that I think the economy is going to go up over the long term. And so I want to just preserve my capital and not have to think about it so I can immediately allocate the cash. And this is something that people don't talk about. So if I can allocate all my money, almost immediately every single month, then I get so much more growth over my portfolio

over my entire career because if every, let's say I only did real estate, for example, well, there's a time delay to allocate cash flow in real estate. You have to go find deals, you have to review the deals, and then you have to, you know, make your offers, secure the deal, negotiate, and then you have to fund the deal, and then there's a whole escrow period. There's all this, there's time delay, right? And so during that period of time is when that money could have been growing, but it's not, right? And so just from a, from a context of a perspective, for you, like the speed of allocating capital also can increase the returns. Now, I'm not saying do things in a rush because one of our money rules is mistakes love a rush

decision. All right. So we don't want to do that. But it's just that, but there is a mathematical component to allocating capital quickly. All right. Real quick, guys, if you can think about how you found this podcast, somebody probably tweeted it, told you about it, shared it on Instagram or something like that. The only way this grows is through word of mouth. And so I don't run ads. I don't do sponsorships. I don't sell anything. My only ask is that you continue you to pay it forward to whoever showed you or however you found out about this podcast that you do the exact same thing. So if it was a review, if it was a post, if you do that, it would mean the world to me and you'll throw some good karma out there for another entrepreneur. So indexes

is our first big bucket. The second big bucket is multifamily real estate. All right. And the reason we do this multi specifically, people are like, why don't you do single family home? Because I have to buy like two houses a day if I was going to do single family homes, like just from the amount of cash flow that we generate. And I'm not saying that to posture, I'm just saying realistically, like it would become an entire business. Now we could do that, but then it would become a business, but that's not my main business. This is my main business or you're running our portfolio company. So that's what I need to spending my time doing, not trying to buy, you know, homes and bird dogging and things like that. That's just not my thing. So I'd rather buy 300 units

at a time and allocate our capital in that way. Now, here's the specific reason for us why we use multi is that if you can design yourself as a real estate professional, which is 750 hours or more per year, then you're able to take your depreciation of your assets, like buying a big, you know, real estate thing and depreciating it's your regular income. So let's say I buy a building for $10 million, all right? And let's say I make $10 million this year. I'm just using simple math numbers, okay? Now, I might be able to take an accelerated depreciation of about 40% on this against my income. So this, now I only get taxed on $6 million. All right? Here's why this is cool. Because the $4 million, right, that I'm saving is probably going to save me about $1.4 million.

$1.8 million in taxes, and that goes straight to my net worth. There's $1.8 million that I can now put into indexes or I can put into bill, you know, whatever it is, right? And so because of that, I actually am able to grow my wealth at even faster rate because this is tax advantage, if you remember this guy, right? And so that is why we like multifamily. Now, here's something cool that you may or may not have known about, but when you're looking at indexes, for example, one of the things that's awesome about indexes is that you can actually loan money or get loans on your indexes at about one and a half percent, all right? That's crazy low interest rates. And the reason is because it's a secured loan. And typically you can take about 50 to 60 percent

of your indexes. So let's say I had $10 million here. I'm just using simple math. All right. Then it means that I would be able to take $5 to $6 million of this and only pay one and a half percent on that. And I could buy real estate. I could buy whatever I felt like doing using that money and basically paying nothing on it. And so for context, you know, one percent of $5 million is 50 grand. All right. So you have $5 million. If I can't make $50,000 a year or $75,000 a year, if it's 1.5% on that money in a year, then I probably suck it investing and that's okay. But like, you get the idea here. Right. Like if I can make even 10% right on my $5 million, then I would make $500,000 and it would cost me $50 to $75,000 per year to carry that money, right?

It's a great deal for me. And that is why I like indexes a lot too is because it actually allows us to still reinvest in the other things with super, super low cost, low risk money. All right? Now, the third bucket is cash slash spec, all right? And technically cash and spec are different things, but I'm just going to put it for sake of explanation. And the reason he's only going to put this here, he's like, there's always going to be things. He's like, you're entrepreneurial, right?

He's like, you're always going to have little deals that come up and you want to have some dry powder, which is the term they use, on the sideline so that you can deploy that opportunistically, right? And like, for example, I think I recently told you guys about two and a half million dollar debt note that we wrote that will probably make three or four hundred thousand dollars on in about 90 days right so I'm going to give two and a half million dollars and then they're going to hold it for 90 days and then I'm going to get three or four hundred thousand dollars back plus my original money and it only that I only get those types of deals because I always have cash on me and so people

know that I always have decent amounts of cash and so they will hit me up and be like hey can you fund this deal can you can you can you know underwrite this this note or whatever it is and because they know that I have a lot of capital in hand I have these opportunities that come towards me right And so with that, I can generate, you know, pretty good returns on having this stuff. And I just like having me personally for my peace of mind having a certain amount of cash on the sidelines, right? And so this was the investment strategy that he outlined for us. This is kind of our wealth strategy in terms of big picture of how we allocate our money. So the money gets generated.

Boom. We basically split it between indexes and multifamily. We can always use our indexes to generate more. We can usually take loans against that. want to, if we want to deploy stuff and get even better returns or whatever. And then finally, we have our cash and speculative stuff. And I tend to have a little bit more cash because I am an entrepreneur. And because I'm an entrepreneur, I like to have that liquidity available to me at all times. All right. And you'll notice that this is not a very high risk portfolio. And the reason

for that is because all my net worth is being generated in this bucket. Right. This is where the vast majority of my net worth has been created in that. And that is where all my risk lies. Now, you can make the argument, and this is what he made to me, he's like, it's not that high risk because you know what you're doing, right? He's like, and that's the easiest way to decrease your risk is to know, is like diversification is a hedge against ignorance, as Uncle Warren says. And so he's like, you know what you're doing here. And so it's not actually low risk, but it's still the vast majority of your net worth, which is why we can, quote, beat the market by a big, by a big amount because we're actively involved in each of these companies. We have niche expertise in these

industries and we know how to grow them at a much, much, much faster rate than what the market does. But this is much more a preservation of wealth strategy than a, especially these three buckets, than a true, true growth strategy. But this is how we set it up for me because I'm an entrepreneur and this is kind of how my risk, you know, looks in my life.