The Game with Alex Hormozi - When Is It Time To Actively Invest? | Ep 523

Episode Date: April 13, 2023

It’s all about the timing. Today, Alex (@AlexHormozi) talks about the thought process of investing and some frameworks he used to help you know and decide when it’s the right time to invest.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:(1:45) - Think through opportunity costs(4:34) - Save 6mo-2yrs living expenses, take loan against assets(5:20) - Invest time in growing income(7:58) - Invest in gaining skills, find ways to generate revenueFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition(This episode is a re-run. Original airdate was June 22, 2021)

I'm a big believer and continuing to take dividends out of a business as it continues to grow. And that's because you want to decrease your downside risk. Welcome to the game where we talk about how to get more customers, how to make more per customer, and how to keep them longer and the many failures and lessons we have learned along the way. I hope you enjoy and subscribe. If I'm an entrepreneur and I'm growing my business month over a month over month, when should I start taking money out? And two, when should I start actively investing?

These are some of the questions they get most frequently with the entrepreneurs that I speak with, who, you know, depending on where they're at, they might have, you know, 500,000, a million, two million dollars in the bank, and they're like, I'm not really sure what I should do. And so what I wanted to do is walk you through the thought process that I have or had around investing to give you a little bit of some frameworks to think through that help me make the decision, make your process a lot easier. So first off, I'm a big believer in continuing to take dividends out of a business as it continues to grow.

And that's because you want to decrease your downside risk, right? Because for some reason, and the statistics are very likely that the business will not, succeed in the long term, right? You know, 90, whatever it is, 90% or 95% of businesses fail within five years. And so it's much better, in my opinion, to consistently take money out of the business as you're growing it because there's a very high likelihood that it will not stick around. A, and B, many entrepreneurs have this idea that they're going to sell their business for some magical number sometime in the future when in reality only 1% of businesses ever sell. And so if that is the case, again, well, I would rather not stack the chips on a 91 to 1 bet.

It does happen, but the likelihood is low. And so I would like to take chips off the table on a regular basis. So that is the first part, which is making sure that we're taking money out. The second question is, okay, well, now that I have this money, this $500, this million, this whatever, what should I do with it? Right. And so one of the big things is I just like to think about this through the lens of opportunity cost, which is if I'm currently making, let's say, $500,000 a year, right, from my business in net-free cash flow, that's owner earnings. I get to take out of the business after reinvesting in the growth and competitive advantage that we need to continue to maintain to grow, right?

So if I have $500,000 of neferrous cash flow that's coming to me, and let's say I've got, I don't know, a million dollars saved up, if I were to passively invest that, I should get about 10%ish a year, right? That's just going to be investing through indexes like the S&P 500, et cetera, right? If I'm doing that, then the advantage of actively investing might be the marginal difference, but it might be an extra 5% or 10%. So that'd be a 50 to 100% increase,

10 to 15% is a 50% increase, right? But if I look at it in terms of real terms, just purely on how much my net worth is going to increase, which is the lens that we have to look at this through, which is the opportunity cost, if I were to spend half of my time thinking about actively investing because it will take up half your mind space, I promise you, because I've done this mistake before, I made this mistake before, then what happens is your active income will fall at a disproportionate rate compared to what your money is making you. So, let me, I'll walk you through a numbers example. So let's say you've got that million dollars and you can get 10% a year, which is 100 grand, 100% passable, right? But the additional 50% or $100,000 a year, 50 to $100,000 year, which would be 5% to 10% of that million, right?

You could get through actively investing. Well, if you're currently making $500,000 year from your business, do we think it would be reasonable to take half or 25% of your time to go chase that when you could probably get your income from $500 to $750,000 in the next year, $500,000? to a million. And so for me, that was always the opportunity cost of actively investing, which until my wealth became so large that I felt like it was the opportunity cost of the money that I should be making by paying more attention to my money was going to, was going to outpace my income, which is still almost not there. And so for me, that is why, as for entrepreneurs, it's my belief that, A, you should be ripping out cash on a regular basis because that's downside risk protection. It's not your upside. It is downside protection. It's the fact that what if my business

does not succeed. And you have to think, like, as much as I'm a big believer in being optimistic, you also have to face reality and confront facts, which is the likelihood that this particular business that you're on, I've had 13 businesses that I've started up to this point, and now I would eight more, right? So, like, the likelihood that the business that you start is going to be the one that you finish with is extremely, extremely, extremely low, right? Extremely low. And the likelihood that you're going to sell that business for a big number is extremely, extremely, extremely low. And so you take this money out and you put it into the S&P or you put it into an index because it is passive and you can put it there and the ideas that you never have to

think about it again. Now, the amount of money that you should keep in cash in my belief is it should have about six months, two years worth of normal living that's saved up in cash. And that's just so that you can sleep well at night and that's it. Right. And so the other thing is that when you invest that into indexes and whatnot, you can always take a loan against those assets if you wanted to start something big. So it's not like it's illiquid when it's there. You can take loans against those assets at 60 or 70% loan to value, meaning if you have a million dollars in assets in the S&P, most banks will give you 60, 70% of that, or at least 50, right, depending on the stocks and in your history with them, et cetera, that they'll give you basically for free, right?

They'll give you at 1% or 2% money that you can go and reinvest to starting another business or buy a piece of real estate or whatever, right? And so for entrepreneurs, it is my I believe that you should be investing most of your time and energy or almost 100% of your time in energy and growing your income, growing the main vehicle you have, but extracting the money and putting it into a low brain vehicle that's not active, that's passive, that's truly passive, not real estate flipping, that's not passive, right? Truly passive. If you're in crypto, right, or you have some speculative stuff that you want to get into, it's probably taking up way more of your attention than it should be, and it's actually going to make your

main income suffer, which means your net worth will grow more slowly than it otherwise would. So it's all about the opportunity cost of your attention. Mosy Nation, real quick, if you are a business owner that has a big old business and wants to get to a much bigger business, going to $50, $100 million plus. We would love to talk to you. And if you like that, we'd like to hear more about it, go to acquisition.com. You can apply anywhere on the page and talk to one of our team and see if we can help you get there. Now, I'm going to put this special note out here for employees. If the primary objective of the employee, in my opinion, is to increase how much your income is.

And so all of yours, and this goes for entrepreneurs too, the initial parts of your investment should be growing to increase your skills because that increases your basis. That increases your basic income that you can continue to yield from the marketplace based on your skill set. And so this is where I think people step, you know, they step over dollars to pick up pennies. If you're if you were saving, you know, $500 a month, there's nothing wrong with that. But I would be actively investing that $500 or the thousand or $2,000 a month in the beginning into making my skills more valuable. because I know that if I do that in two years, I might quadruble my income. Because that's the thing is that your ability to earn is one of the greatest investments. That's not just a billionaire saying.

It really is. Like, if you develop the skill of selling, which might take you two years, you can go from making $60,000 a year to $250,000 a year or $500,000 a year, which puts you in the top 1% just by earning that one skill. And so if you can develop that skill, it is worth the investment in most investments in self-improvement are so disproportionately low that is worth the investment. Even if there are courses that you only get a handful of things from, you are still as yourself an asset more valuable.

And so you, I mean, at the end of the day, you are the source. You're the source of where all the money comes from. So it's like when people don't invest in themselves, it makes no sense to me. I've spent every dollar I possibly could gaining access, getting mentorship, getting coaching, getting programs, buying courses, buying books, and doing that stuff because I'm the source, right?

And if I can improve me as a business, the machine that generates all the flow of income, then the rest of the stuff becomes easy, right? And so first and foremost, you have to invest in that. After you have an excess of that, then start pulling the dividends out of the business that you have and investing those things that are passive, not active. And then at the point where your net worth from your investable assets, what 10% of that net worth growth would be is in excess of what you make per year, then at that point it makes sense to start shifting your perspective towards managing wealth and growing wealth rather than growing income. Now, like I said, two employees.

Number one is increase your skill basis, meaning continue to invest in gaining skills so that you can become more valuable with the company. The way you do that is by tying yourself to revenue streams. That means you find ways to generate the company more money, period. And that can be through a variety of ways. If you're in your customer success or customer service fulfillment, then it's going to be, how can I ascend as many customers as possible? How can I retain these customers? How can I track these metrics and show to the people who are deciding my compensation, how I'm directly making a company more money, right? And how losing me would cost a company a lot more than,

what it would cost them to keep, right? If I'm on the front end side, so it's gonna be sales, it's gonna be marketing, it's be acquisition based, how can I show them how I can become more valuable, how can I close twice as many deals, how can I close at a higher percentage, how can I get more lead flow by working my pipeline better? How can I generate leads on my own independent

from the leaves that they're generating for me, right? All of those things are things that you can do to increase how much you make, right? Now, like I said, if you're an employee, there's going to be a certain cap most of the time on what you're earning. And if that is the case, and you're rubbing against that cap,

You should keep your basis for living as low as humanly possible and plow as much of that money as possible into a highly liquid asset. Again, if you're in the situation where your wealth, the net worth that you have, is 10% of that amount is still less than you make, then all of your attention should still be going to your primary net worth increaseer,

which will be your income. And so if I can consolidate this video into a single statement, you should, It's my opinion, spend the majority of your time on the vehicle that will increase your net worth the fastest. And for most people, it is going to be increasing their income until the point where they have saved sufficient amount of assets that they've put in passive, highly liquid things like S&P's and indexes, et cetera.

And at that point, when the potential to earn and increase your net worth is faster or greater Through the assets that you have, at that point, it makes sense to switch your attention towards growing those assets, because now the opportunity cost is shifted away from where your income is generated versus where your wealth is growing. And so that is my, at what point should you start investing?

That is how I break it down. First, invest in you, increase your skill basis so that you can generate more income. It is the highest return, genuinely, I'm not saying that for jargon, it is the highest return that you can get. Second is that you continue to put things into passive, truly passive, not what people claim is passive that are really side hustles, but truly passive business so that you can continue to focus on your

main income generation. And then when 10% of your net worth growth exceeds your income capacity currently, at that point, it makes sense for you to shift your perspective into growing your wealth and rather than your income. So I hope you found this video valuable. Click subscribe and I'll see in the next video. Bye.