Over the last month, I’ve spoken a fair bit about how the purpose of your business is to spin out positive cash for you and to grow in value as an asset. I talked about this when I was promoting my Authority Matrix program (join the waitlist for next time it opens in March 2018) because that’s all about building authority sites as a medium to long-term business asset.
The common theme in all of this in investment.
When you invest, there are two kinds of asset classes that you typically invest in:
1) Stores of Value
2) Speculative Instruments
In simple terms, cash/money, gold, gems, real estate holdings, precious metals and even guaranteed bonds are considered stores of value. Stores of Value assets are generally “low risk”, are often easily liquidated, hold their value and have marginal growth.
As their name implies, they are more geared toward storing value primarily.
Speculative Instruments are more volatile in nature, often less liquid and are used for higher than inflation growth investments. Examples of speculative instruments are shares and in more recent times, cryptocurrencies.
In fact, it was cryptocurrencies that triggered this email.
Unless you’ve been living under a rock, you’ve no doubt seen the hype and mania around Bitcoin and other blockchain-based digital coins. Their valuations have largely skyrocketed over the last year or so and if you spend any time on FB you’ve probably been bombarded with people endlessly talking about their crypto gains.
I’ve kind of stayed out of this entire conversation because I think the vast majority of people are just gambling and calling it investing. I think for many of these folks, it’s the equivalent of treating scratch’n’win tickets as an investment.
This was driven home to me today when I waded into one of these conversations for the first time, based on the fact that Warren Buffet said Bitcoin is probably not going to end well for a lot of people.
Buffet is, without question, the single greatest investor of his generation, if not in the history of financial investments. He has an amazing grasp of risk, the movements of money and how to value assets – he’s worth $87B because of that. Much of his money has come from the insurance industry and how he’s been able to manage the float.
Here’s what “float” is if you’re not familiar.
Insurance companies charge premiums to customers and when customers make claims, they assess them and pay out the liability. The money in insurance isn’t taking in more in premiums than paying out in exposures, it’s in how you manage the money during the in-between time – what’s called “the float”.
Buffet is a master of maximising the float. He figures out how to bundle his potential exposures, re-insure them to lower his premium risk (he buys insurance on the insurance his companies offer) and investing the float into underleveraged assets to grow that money which ends up being 100% net profit for Berkshire Hathaway held insurers.
Again, just looking at what he has done, it’s clear he’s not only an investment genius, he understands risk and exposure at a more fundamental level than the average bear.
So when Buffet has nothing to gain and says that there’s an overexposed risk in something, you’d be a donkey’s hindquarters to ignore him or worse, think he doesn’t understand the market (even when he says he doesn’t) and that you know more about anything finance related than him.
There’s hubris and then there is outright stupidity.
But that’s what people were doing, they had engaged their confirmation bias and were saying that Buffet says he doesn’t understand crypto so his comments are not to be taken as having any merit. Because yeah, the most well-respected investor in the world sits on national TV and says things off the cuff about a financial market that he hasn’t researched.
I decided to ask the question, “What do you think you’re investing in?”
It wasn’t a loaded question, it was straight up. When you invest, you should know exactly what the asset you’re investing in actually is.
I also prefaced the question with the statement that conspiracy theories around central bankers, decentralized currencies or any of that kind of nonsense wasn’t a legitimate reason to invest, so I wanted to understand their investment criteria.
Once we got past the ad hominem attacks on myself and Buffet, one person actually said that they couldn’t intelligently articulate exactly what they were investing in.
Another person said they have recovered their initial capital and were now playing with the house’s money.
I think that’s a great gambling strategy.
And one or two people messaged me privately and said they were investing in the hype and wanted to sell out before the fall – which is essentially a “greater fool” form of investing.
That’s actually a pretty legitimate strategy and how most people make their money in any kind of bubble irrespective of the asset type and class.
Of the responses I got, 50% understood and 50% really had no idea. One person started talking about white male privilege and I discounted their opinion entirely because investing to overcome the yoke of the white man isn’t really a strategy.
So do you see what’s going to happen?
The 50% who know what’s going on will end up with all of the money from the 50% who have no clue. In every bubble or hype cycle, the people who know they’re in a bubble and hype cycle, play to that and strategically work to inflate it before getting out at the height, always end up with all the money.
But this isn’t meant as “Sean thinks cryptocurrencies is like investing in lottery tickets”.
I don’t really have an opinion either way and honestly, don’t care.
For cryptocurrencies to become what I would consider a sensible asset class, they have to shift away from being high speculative instruments with zero regulation to something with more governance and less wild swings in valuations. The liquidity also needs to stabilise and increase over time.
Effectively, they need to go from being speculative instruments to stores of value.
Let’s bring this back around to you building assets in your business. I’m a big fan of people building authority sites because when you do it properly, you’re building a store of value type asset (digital real estate) that spins off cash like an interest-bearing bond.
That’s winning on every level and if you do it right, it’s sustainable. Like any investment, there are externalities that you can’t control, but that’s the risk you take when you invest in anything, that’s why you get a positive return on risk!
The key is learning and understanding what you’re investing in.
You don’t need to be an expert in everything, but you do need to understand the performance characteristics of the asset class and its associated risk profile.
Even with authority sites, you see people “invest” in them without knowing anything about them and many times those people take a hit. They’ve speculated on a store of value asset without understanding the risk profile.
My advice is, take the time to understand where you’re putting your effort and your money so that you can make smarter decisions. If you’re interested in learning how to build authority sites as a business asset, then sign up for the waiting list for Authority Matrix and when we re-open in March 2018, I’ll send you early notice.