- Core Principle 1: Don’t Lose
- Core Principle 2: Asymmetric Risk/Reward
- Core Principle 3: Tax Efficiency
- Core Principle 4: Diversification
- Six Money Mastery Mistakes
- Six Money Mastery Solutions
Tony Robbins has established an extraordinary career for himself. Tony made a study of human achievement and understands what makes people tick. Using masterful communication he motivates people to live up to their full potential.
He is a successful life coach and adviser to the rich and powerful. Tony raised himself up by his bootstraps to a level of extraordinary success. I have learned much from him about human potential, emotional strengths, and ambition.
His books and audio programs have had a positive impact on my life. I don’t always agree with him on everything (e.g. nutrition tips) but he is very persuasive.
In recent years, he has explored the realm of money. In typical Tony Robbins fashion, he didn’t skim the surface. He spent years researching and writing. His interviews include some of the greatest minds in modern investing.
He has established his credibility as an expert in money. His $500M didn’t fall into your lap. He has spent time learning from hedge fund managers and billionaires. Fortunately, he is now sharing some of what he learned with the rest of us.
“The single biggest threat to your financial well-being is your own brain.”
“And what counts is not reality, but rather our belief about it.”
He offers up a set of solutions to help us cut the harm from our primitive brain thinking.
When interviewing the money “heavy-hitters” he received complex and conflicting advice. His goal became to simplify the lessons. His study revealed common themes among their investment methods. He distilled the principles into what he called The Core Four.
The investors he met with were obsessed with avoiding losses. No one enjoys losing money. But these successful investors were always focused on avoiding loss. They realize that recovering from a loss is an uphill battle. They understand math. If there is a 50% decline in value it will take a 100% gain to get back to the starting line. Going into every deal they explored what could go wrong. They thought about how to reduce or mitigate any potential loss.
This is a variation of core principle 1. If there is a potential loss, be sure any upside potential gain is several times larger. Having a limited or negligible downside with an unlimited upside gain is the ideal. Those deals are out there if you look for them. Richard Branson negotiated to return the airplanes if his Virgin Airlines failed. That limited his downside loss but -if successful- preserved an unlimited potential gain.
Taxes can wipe out 30% or more of your profits if you aren’t careful. The most successful investors always consider the tax efficiency of any potential deal. You and I should too. If you are in the highest tax brackets you may lose half of what you earn to taxes. It isn’t the top line earnings that counts it is the cash you get to keep that goes towards building your wealth.
Disregard taxes and you will have far less to invest and compound. Think and plan the location of your holdings. Low-cost stock index funds can be in your taxable account. Your real estate investment trusts (REITs) need to be inside your tax-deferred accounts. Consider master limited partnerships (MLPs) for your taxable dollars.
Don’t put all your eggs in one basket. Not all assets go up or down at the same time. You want to always have some investments that will do well in any economy.
Now you understand the core principles. Let’s move on to common money mistakes and their solutions.
Six Money Mastery Mistakes
1. Seeking Confirmation of Your Beliefs
Too many of us live in an information bubble. If we are conservative, we may watch Fox News or listen to Rush Limbaugh. If you have a more liberal bent, you may enjoy NPR and the NY Times as your primary information sources. Many investors get into trouble this way too. If you hang out only with bullish optimists you may be blindsided by the next market crash.
2. Mistaking Recent Events for Ongoing Trends
This is what psychologists call the “recency bias.” It can appear as the “momentum factor” in investing. After a stock crash, we become terrified of further loss since our brain is flooded by what happened. We can’t put it in a perspective of 100 years of market history.
This is a big one, especially with physicians. We know we are smart and can figure things out. How hard could it be to predict or understand a financial market? We forget that we are outgunned by the brains and technology on the other side of the trade.
4. Greed, Gambling, and the Quest for Home Runs
We all love the big win. We want to be able to brag that we bought Facebook stock in its early days. How wise, prescient, and rich we are! This is also a road to poverty more than a road to extraordinary wealth.
5. Staying Home
The U.S. economy has been dazzling for the last two centuries. We tend to know only about our own country. There is a whole world out there though. Much future growth will come from developing countries. By investing in only your home country you lower your returns and increase your risks.
6. Negativity and Loss Aversion
Behavioral economists proved that we despise loss much more than we cherish gain. We ruminate on minor losses and avoid future risks that could reproduce a painful event. In the process, we prevent gains from embracing risks.
Six Money Mastery Solutions
1. Ask Better Questions. Seek Out Those Who Disagree.
Serious investors like George Soros or Warren Buffett seek out contrary opinions. Could we ask a colleague for his thoughts? One who tends to have opposite views of ours? Could you come up with a strategic plan for scenarios that are the opposite of what you expect?
2. Don’t Sell Out. Rebalance.
If stocks start to decline our animalistic nature starts to panic. We are urged to sell to avoid further losses. This is the opposite of what we should be doing. One way to counteract this urge is to rebalance rather than sell. If you start with a 60:40 mix of stocks to bonds and there is a stock market decline, you may end up with a 55:45 allocation. To get back to 60:40 you will need to sell bonds and buy stocks. It somehow seems less scary to do the right thing in this case if you are are doing some “rebalancing.”
3. Get Real, Get Honest.
Admit that you are not the next Warren Buffett. Instead of trying to reproduce what he did, do what he recommends: Buy broad-based low-cost index funds. You aren’t better than the professional money managers who also can’t beat the index. Get real.
4. It’s a Marathon, Not a Sprint.
Try to avoid the quarterly earnings obsession. Financial markets are erratic in the short term but predictable in the long-term. Invest for the long-term. Make high-yield bets and keep your emotions in check during short-term chaotic episodes.
5. Expand Your Horizons.
Buy some foreign assets. Consider international index funds. Consider overseas REITS. International diversification is now easy and cheap. Often foreign markets zig when the U.S. economy is zagging. Enjoy that diversification.
6. Preparation Is Key.
Have a financial plan and follow it. Know exactly what you will do when the stock market goes into a correction or bear market. Learn from history and know how to apply its lessons. Historical cycles repeat themselves. Those who know what they will do in each scenario are those who profit.
What do you think? Do you agree that our own psychology and behaviors predict our wealth?
Do you think Tony Robbins has something to teach us about mastering our money?