My personal holdings company is growing. I’m continuing to add more revenue streams and expanding my network of assets.
I’ve been thinking a lot about my first principles. Meaning, what are the principles and non negotiable conditions that must be met in order for me to consider investing in an opportunity?
I’ve created a list of 10 laws. I hope these laws can be a guiding force in helping you build your own portfolio of investments.
Let’s get started.
1. Replace Yourself Always
Business owners work in the business. Entrepreneurs work on the business.
This is the most important law, because if you don’t know how to build a system that works without you, you will always be handcuffed by the day to day of inventory, accounting, customer service, and management.
Many of you have read “The E-Myth Revisited.” If not, I suggest watching this short video.
Imagine you have two companies. Both companies generate $5,000,000 a year in revenue. However, company A is entirely built around the owner. Without the owner, the business can’t function. Company B is entirely built around a system that doesn’t require the owner being involved in any capacity.
Which business is worth more?
From an enterprise value standpoint, company B is probably worth 2X to 3X more than company A. As such, your mission as an entrepreneur is to replace yourself always.
First, you need to find THE NEXT MOST IMPORTANT problem to solve. What is the improvement you can make that will generate the most results in exchange for the least amount of resources?
Second, you create a system to solve the problem, write documentation to define the systems and procedures to easy replicate the ability to solve the problem, and implement the system into your workforce.
Third, you hire someone to run the new department. This way, the problem is solved forever.
The biggest cash suck for new entrepreneurs is wasted time. Every second you spend solving problems is a second that you are not growing or improving.
You think you have to do everything yourself because “no one cares as much as you do.” This is not true and is a decision based on ego. When you say things like this, it means your ego is in charge.
2. Sales Cure All
Why do companies go out of business?
- bad management?
- bad company culture?
- the company couldn’t find product / market fit? (whatever that means)
Nope. Companies go bankrupt because they run out of money.
That’s the only reason. And companies run out of money because they don’t generate enough sales. Pro investors and entrepreneurs understand this. They know that sales come first.
Any time I am looking at a new business to bring into my portfolio, the vast majority of my attention is focused on sales. It may be recent sales, potential sales, the future of the marketplace, or even the quality of the sales team.
Many of you fail because you focus your attention on the wrong thing. Selling is uncomfortable, so most of you avoid selling and focus on “marketing” instead.
You create content and you convince yourself that you are “building your brand.”
Or you obsess over your website or maybe you send another email to check in with your customers because “you really care.”
This is fear. You are avoiding what scares you.
If you’re unwilling to generate sales, that means you’re unwilling to build your business. Without sales, you don’t have a business. Rather, you have a very expensive and stressful hobby.
Focus on sales first. Get cash money flowing through the business.
This way, you have to ability to improve and iterate over time.
Without sales, everything dies.
3. The Goal Is To Keep Playing
If not, you should.
The book argues that business is a game that never ends. There is no finish. The entire purpose of the game is to keep playing.
When you look at investing from this perspective, it makes it much easier to approach building your portfolio as a process. You never have to see it as wins and losses because you never actually win or lose. You simply keep going.
This is a mental framework that helps me stay out of my own head and allows me to see the bigger picture and make better decisions. It allows me to extend the timeline, because there is no clock.
4. Always Invest In Cash Flow
I’ve written about Warren Buffet many times.
What makes Buffet different from “traders” is that he doesn’t invest in companies with the intention of selling his stake in the future. He buys companies and holds onto them forever. His goal is to generate cash flow that is extended out indefinably into the future.
What if I told you that I would give you 10 cents every day for the next 30 years if you gave me $100 right now. Would you take that deal?
I hope so.
This is the principle Warren Buffet uses. He lets time do the hard work for him.
This is the simplest path to wealth. You are buying cash flow. You are spending money now and trading that money for a steady stream of cash into the future.
Then, you use that cash to buy more cash flow.
Once you see investing from this frame of reference, it’s a total game changer.
5. Find Asymmetric Advantages
How is your company special?
What can your company do that gives it an advantage over everyone else?
There needs to be an X factor. There needs to be potential for the business to 10X or even 100X. If not, then you are making an investment in a market that is racing to the bottom, because all the advantages are already taken.
This has been a helpful “if this, then that” algorithm for me.
IF the opportunity has an asymmetric advantage, THEN I will look deeper and decide whether to invest or not.
Without a asymmetric advantage, the likelihood of future cash flow plummets, because it means you’re investing in a company that is easily replicated. If it can be easily replicated, then the advantage will funnel to the company who can produce the product for the cheapest. At this point, everyone is trying to be cheaper than each other.
Like I said, a race to the bottom.
6. Avoid Being Stupid
Charlie Munger is Warren Buffet’s partner and Vice Chairman of Berkshire Hathaway.
Munger makes the argument that being smart is overrated, and that you increase your likelihood of success by avoiding being stupid.
Financial growth is actually pretty simple. Mathematically, it’s almost guaranteed (NOT INVESTMENT ADVICE OBVIOUSLY) to make an average of 7% return on your money by investing into the S&P500 every month. You don’t have to be smart to do this. All you need is time.
Most people can’t handle that, because they need to be making moves. They need to feel like they are in on the action.
But the more risks you take the higher your probability of being wrong. And success is lopsided in that it usually takes years to generate wealth, but seconds to lose it all.
Success comes drop by drop, but failure is a crashing wave.
Avoid being stupid and you’ll be just fine.
7. Focus On What You Know
As your start to build your portfolio, you will inevitably get the itch for variety.
We are human beings, and for whatever reason, we like to keep life interesting by finding new toys to play with.
In investing, this is a huge mistake.
Avoid investing in markets you don’t understand. Everyone is an expert at something, and you will most likely get wealthy by doubling down on your core competency.
Naturally, it will take time to develop this core competency and of course you will find opportunities in other spaces. In those moments, it’s up to you to make the right call.
But, IF YOUR GOAL IS TO BE WEALTHY, then you will have a much higher probability of generating massive wealth by sticking to what it is you know.
8. Embrace Boring
Money > status.
For me, this has been easy. I was never the cool kid in high school and I’m comfortable with being on the outside looking in.
This is an advantage in investing, because it allows me to stay focused on what my main objective is.
What is the main objective?
To build a portfolio of cash flowing businesses.
People do strange things. People base most of their decision making against how they perceive their status in the tribe. Human beings are tribal creatures, and for hundreds of thousands of years, status was a much more important indicator of survival than wealth was.
In fact, for most of humanity, wealth wasn’t even a thing.
You are hard wired to collect status. It’s baked into your brain stem. The urge for status is extremally powerful.
Now that you recognize how powerful status games are, you can more logically look at a potential opportunity and view it from the landscape of revenues and profits as opposed to status.
You ever notice how we praise entrepreneurs who raise big rounds of money?
Why? Nothing happened. No one built an actual business yet. In almost every case, raising money is an indicator that the business is NOT profitable. However, the size of the investment from outside investors sends a signal. That’s why entrepreneurs write grandiose press releases about rounds of capital being raised.
It lets the tribe know that these people (investors), are elevating the status of this other group of people (the entrepreneurs), through means of resource allocation.
That’s a bad game to play if you’re building a personal holdings company. In fact, the likelihood of building a huge company on the back of investment capital is very low. Almost all of these businesses go bankrupt. (But no one writes press releases about their failures, do they?)
Sexy businesses are a trap.
People flock towards status.
Gravitate towards boring businesses that generate cash flow. That’s the game you want to win. You shouldn’t care about press releases. You should care about putting cash money in your bank account.
9. Golden BBs Instead Of Silver Bullets
Alex Hormozi taught me this philosophy and it instantly transformed my business.
When you see a problem in your business (or in your life), what do you do? You want to take action and get ahead of the problem, right?
You want to fix it! You want to take action!
This is a mistake.
You’re much better off solving problems by making small improvements every day, as opposed to giant leaps forward.
There are no silver bullets in business. There are no easy solutions. Overhauls rarely work and oftentimes, they create more problems in the future.
10. Never Lose Money
This is another Warren Buffet philosophy.
I know what you’re thinking. “Never lose money” is a stupid idea, because it’s too simplistic, trite, and easy. Let me paint you a picture to articulate the point.
Below, is the mathematical formula for compounding.
Compounding is how you get wealthy, because your money starts to make money. In turn that money you made also starts to make money, and your wealth grows exponentially.
So when you lose money, you don’t just lose the money you have, but you also miss out on the money that your money would have created in the future.
Compounding wealth looks like this …
So, how do you apply this principle to your investing?
By investing in businesses that are already cash flowing and profitable. Or by creating businesses with low expenses and high cash flow.
You see why cash flow is so important? As long as cash keeps coming in, then that cash generates more cash which generates more cash.
I’m not going to pretend like I have a perfect track record. Far from it. My biggest loss was when I invested $100,000 into a business I was CERTAIN would be successful and I lost it all. So I have my battle scars.
But that loss taught me a valuable lesson. And that lesson is to avoid angel investing or investing in a potential “big pay day” in the future. If the investment doesn’t cash flow, then I don’t do it. Because losing the money is much worse than simply losing the money.
Notice A Pattern?
That’s the name of the game and the underlying philosophy behind my personal holdings company. My priority is to create a system that slowly trickles cash back into the business and then that cash gets redeployed to do the same thing.
Low risk. High reward. Low stress. High fun.
This is how I want to live.