The Holy Grail of Investing

Any stage of life can and should apply in their quest for financial freedom. Their generosity of time and principles helped me form a trio of financial playbooks, and I really encourage you to read the others if you haven't done that already. Now, I began my deep dive into money mastery after the 2008 financial crisis, when the world's economy was on the brink of collapse due to the reckless behavior and greed of a relative few. Nobody escaped the economic pain, myself included. My phone was ringing off the hook as I tried to coach friends and family through job losses, home losses, obliterated retirement plans. And all my clients were affected, from the barbers to the billionaires. The storm tore through everyone's life with varying degrees of devastation. Never one to be a victim of circumstance, I thought I needed to do something. I decided to take immediate action to become part of the solution in some way. So I started out with a healthy dose of cynicism, and I set out to answer what I think is one of the most important questions facing a financially illiterate society. Is the game still winnable? In the post-financial crisis world, could the typical investor win the game of investing? Could the average person become financially free, even if they never sell a business or inherit a nest egg or scratch a winning lottery ticket? Well, I have to tell you, after interviewing over 50 of the world's most brilliant financial minds and boiling down hundreds of hours of interview recordings, the answer to this question was a resounding yes. Although the titans I interviewed shared very different approaches to investing, they all agreed on certain immutable laws and steps that investors need to take and avoid to win the game. Although there are many, the four of the most common principles among these greats were as follows. One, first, don't lose money. Well, that seems obvious, doesn't it? As Warren Buffett succinctly says, rule number one to investing is don't lose money. Rule number two is see rule number one. You see, most people don't realize if you lose 50% on a bad investment, you need to make 100% return just to get back even. One thing that almost all successful investors have in common is they know they're going to indeed lose at times. They're going to be wrong. Yes, even Buffett. To mitigate this, they never get too far out over their skis and risk too much on any one investment, which is what leads to the second critical principle. Number two, the core principle of asset allocation, i.e. spreading your assets among different types of investments with varying risk-reward ratios. I remember when I sat down with the late David Swenson, the man who took over Yale's 100-year-old endowment. It took 100 years for them to grow their endowment to a billion dollars, and David grew it to 31 billion in three decades. He explained to me that your asset allocation accounts for 90% of your investment success returns. As you'll learn, the ultra-high net worth and the biggest institutional investors have a drastically different approach to asset allocation than the typical investor, and that's one of the great benefits you're going to get from this book, as I'll show you exactly what they do. Third, wherever possible, you have to look for opportunities for what's called asymmetric risk-reward. Big word. Simply put, these investors look for investments where the potential reward far exceeds the downside risk. For example, my good friend, one of the greatest investors of all time, Paul Tudor Jones, tries to only place trades when he believes he has a risk-reward ratio of five to one. What does that mean? He'll risk a dollar if he believes he can make five off of it. This way, he can be wrong more times than right and still succeed. Principle four, fourth and final is the principle of diversification. That's certainly not new, but you want to own a wide variety of investment types, from stocks to bonds to real estate to private equity, private credit, et cetera, across various asset classes, across different geographies, across different timeframes. My guess is, if you're listening to this book, you're not the average investor. You or your clients have likely accumulated enough of a financial foundation to move beyond these core tenets and add some additional fuel to your investing fire. As you'll hear in the hours ahead, alternative investments have generated outsized returns for the world's most astute investors. Let me give you an example. Between 1986 and 2022, private equity as a whole outperformed the S&P 500 by over five percentage points annually. In other words, the S&P is the 9.2% during that time, and private equity is 14.28% a year. That's a 50% greater return every year compounded. Private credit and alternative bonds has generated two to three times the income yield of traditional bonds. It is undeniable that the smart money uses high quality...