Volatility vs. Risk Ep 533

Summary Notes


Alex, the host, delves into the misconceptions employees often have about business revenue and ownership, emphasizing the difference between volatility and risk in business and personal finance. He provides practical advice on wealth accumulation by living below one's means, investing wisely, and understanding the value of sales roles within a company. Alex also discusses the importance of not taking financial advice from those less successful and the potential pitfalls of entrepreneurship versus the perceived security of a salaried position. He advocates for tracking net worth, tackling high-interest debt first, and the benefits of dollar-cost averaging into investments like the S&P 500. Additionally, Alex encourages tying oneself to revenue generation within a company to increase personal value and income potential.

Summary Notes

Misconceptions About Business Ownership

  • Employees often mistakenly believe all revenue goes to the business owner.
  • Business owners and entrepreneurs understand that this perception is far from reality.

"A classic employee mistake is you look at all the revenue and you say, oh, that must be the owner's. That must be Alex's. And every business owner who's watching this is laughing to themselves because they know that is so far from the truth. It is hilarious, but people still make that logical fallacy."

The quote highlights the common misconception among employees that all revenue is profit for the business owner, which is not the case due to business expenses and other financial obligations.

Business as a Game

  • Wealthy individuals often view business as a strategic game.
  • The podcast aims to share lessons learned from building Acquisition.com.
  • The goal is to help others grow their businesses and potentially partner to reach significant financial milestones.

"The wealthiest people in the world see business as a game. This podcast, the game, is my attempt at documenting the lessons I've learned on my way to building acquisition.com into a billion dollar portfolio."

The quote encapsulates the podcast's purpose: to document and share strategic business insights from the host's experience with the intent of helping others grow their businesses.

Volatility vs. Risk

  • The host had an insightful conversation about volatility and risk with a team member.
  • The discussion is relevant for entrepreneurs, sales teams, and employees aiming for wealth.
  • The conversation began with the team member seeking life direction advice.

"So volatility and risk. I had a conversation with somebody on my team, and it was such a good conversation, I wish I had recorded it."

This quote introduces the theme of differentiating between volatility and risk, setting the stage for further discussion on this topic.

Seeking Financial Advice

  • The host advises against taking financial advice from people who are less wealthy.
  • The importance of understanding who to listen to for financial guidance is emphasized.
  • The advice is aimed at people receiving unsolicited advice from less financially successful family or friends.

"Rule number one, do not listen to people poorer than you about advice on money."

The quote conveys the principle that financial advice should be sought from individuals who have achieved greater financial success than oneself.

Understanding Volatility in Business

  • The host explains the difference between volatility and risk, using an insurance company as an example.
  • Volatility does not equate to risk if the business model is sound and profitable over time.
  • The insurance example demonstrates how a business can be volatile yet not risky.

"The reality is that my insurance business is not risky. It is volatile. Those are not the same things."

This quote clarifies the distinction between risk and volatility, suggesting that a business can have predictable downturns without being inherently risky.

The Security of Sales Positions

  • Sales is described as a volatile but low-risk profession.
  • Revenue generators, such as salespeople, are considered secure within a company.
  • The host advises on managing volatility by adjusting personal expenses.

"Sales is an example of a highly volatile profession that still is low risk."

The quote indicates that despite the fluctuations in income, sales positions are secure because they are essential for generating revenue for the company.

Financial Strategy for Sales Professionals

  • The host suggests living on a salary and investing the surplus to build wealth.
  • By saving and investing wisely, even those with modest salaries can achieve financial success.
  • The strategy is to minimize expenses and maximize investment opportunities.

"So his salary, and I said, now your salary is what you need to assume is all you're going to make. Now, I'm not saying live on your salary. I'm saying you should be saving off of your salary."

This quote provides practical financial advice, emphasizing the importance of living within one's means and saving consistently to invest for the future.

Financial Planning and Wealth Accumulation

  • Living below one's means can accelerate wealth accumulation.
  • Planning finances as if the current income is all one will make can be beneficial.
  • Extra income should be viewed as "gravy" and can help in achieving financial goals even in bad months.
  • Wealth is not a number but a ratio of income to expenses.
  • A strong income to expense ratio is crucial for building wealth quickly.
  • Compounding growth can significantly enhance savings over time.
  • It's possible to save towards wealth in a relatively short period with disciplined saving and investment.
  • Lifestyle choices have a significant impact on the ability to save and accumulate wealth.

"Right, but the reality is that this isn't all the person's going to make, but you should plan like it is, because then what happens is all of this becomes gravy."

This quote emphasizes the importance of planning finances based on current income levels and treating any additional income as a bonus, which can contribute to achieving financial goals even during less successful periods.

"Wealth is a ratio. It's a ratio between how much you spend versus how much you make."

This quote defines wealth as the relationship between income and expenses, suggesting that managing this ratio effectively is more important than the absolute amount of money earned.

"His wealth is going to build very, very quickly, right? And with that, that extra money will more than cover his $25,000 a year, right?"

This quote illustrates the concept that by maintaining a favorable income to expense ratio, one's wealth can grow rapidly, allowing savings to exceed annual expenses by a significant margin.

"Now, would I want to retire in $230,000? No. But if he worked for a decade, by the end of that period of time, he'd have two point something, right?"

This quote demonstrates the power of compounding growth over time, showing that even if initial savings don't seem sufficient for retirement, they can grow to a substantial amount over a longer period.

Debt Management and Investment Strategy

  • Prioritizing high-interest debt repayment is crucial.
  • Credit card debt, due to its high interest, should be paid off before low-interest student loans.
  • Student loans often have lower interest rates and can be managed differently.
  • The ethical implications of student loans are questioned, especially their impact on financial freedom.
  • Personal preference plays a role in the decision to pay off low-interest debt like student loans.
  • Investing in the S&P 500 is recommended, following Warren Buffett's advice.

"So the way to guarantee a 16% compounding rate of return is to take away the drags that are at negative 16%, all right?"

This quote suggests that paying off high-interest debt is equivalent to earning a high rate of return on investments because it eliminates the negative compounding effect of debt.

"I think it's horribly unethical that they do student loans. I think I'm so wildly against student loans in general."

This quote expresses a strong opinion against the practice of issuing student loans to young individuals without considering their ability to repay, highlighting the potential lifelong financial burden imposed by such debts.

"The reason I say that is because Warren Buffett, the advice that he's given the people who are managing his will is that he just wants everything put in the s and P 500."

This quote references Warren Buffett's investment strategy as a rationale for advising others to invest in the S&P 500, suggesting that following the practices of successful investors can be a wise decision.

Social Engagement and Networking

  • The hosts express a desire to connect with their audience on LinkedIn.
  • Listeners are encouraged to send connection requests and interact with the hosts.
  • Networking is promoted as a way to build relationships with the podcast community.

"So send me a connection request, a note letting me know that you listen to the show, and I will accept it."

This quote is an invitation for listeners to connect with the hosts on LinkedIn, emphasizing the importance of audience engagement and the hosts' willingness to build a community.

"There's anyone you think that we should be connected with, tag them in one of my or Layla's posts, and I will give them a connection request."

This quote encourages listeners to facilitate connections between the hosts and other individuals they believe would be valuable to the network, highlighting the collaborative nature of networking.

Dollar Cost Averaging

  • Dollar cost averaging is a strategy where you invest a fixed amount of money at regular intervals, regardless of market price.
  • This method helps in participating in the market at all times, both when the market is overpriced and underpriced.
  • It reduces anxiety around timing the market and trying to get a good deal.

And you do this every month. It's called dollar cost averaging, so that even when it goes down and goes up, you're going to participate at all times.

The quote explains the concept of dollar cost averaging and its benefit of consistent market participation without the need to time the market.

Increasing Value to a Company

  • Tying oneself closely to an acquisition channel increases one's value to a company by driving revenue.
  • Employees should explore and master new client acquisition channels in their off time.
  • Successful mastery and implementation of new channels can lead to increased income through leading a team and getting a cut of their sales.

The closer you can tie yourself to an acquisition channel, the more valuable you are to the company because you're driving revenue.

This quote emphasizes the importance of being integral to revenue generation within a company by mastering acquisition channels.

Pick a channel that we're not currently using, and in your off time, try and figure that channel out.

Alex advises on proactively learning new channels for client acquisition to provide more value to the company.

I want to build a team, and I think that I can show five other guys how to do this and generate revenue.

Alex discusses a strategy for an employee to increase their income by leading a team and sharing in their sales revenue.

Entrepreneurship vs Employment

  • Alex's perspective as a business owner has shifted towards encouraging employees to pursue their dreams, even if it means leaving the company.
  • Understanding the risks associated with entrepreneurship is crucial.
  • Salespeople in Alex's company can earn more than the average small business owner without the associated risks and responsibilities.
  • A high-earning salesperson effectively owns a business in terms of net income without the complexities of running a full business.

My incentive is I want to be the best human I possibly can be.

Alex expresses his evolved incentive as a business owner, focusing on personal growth and supporting his employees' aspirations.

Many, many of my salespeople make more than many entrepreneurs do.

This quote highlights that employees, especially salespeople in Alex's company, can have higher earnings than the average entrepreneur.

If you're a salesperson and you're making 200,000 a year, it's the same as you owning a million dollar business.

Alex draws a comparison between the income of a successful salesperson and the net income of a small business owner, emphasizing the benefits of high-earning employment.

Tracking Net Worth

  • Tracking net worth regularly is one of the easiest ways to increase it.
  • Alex receives a weekly email summarizing his assets, bank accounts, and portfolios, which helps him monitor his financial progress.
  • Frequency of tracking can vary based on personal preference, but regular monitoring is key to financial progress.

Easy to remember. And so easiest things that you can do to increase your net worth is start by tracking it.

Alex suggests that regularly tracking net worth is a simple yet effective method to improve one's financial situation.

I know every week how I'm doing and whether I'm going up and up.

This quote reveals Alex's personal habit of weekly net worth tracking and his focus on consistent financial growth.

Financial Tracking and Net Worth

  • Regular tracking of bank accounts and net worth is highly beneficial.
  • Utilizing bank dashboards helps consolidate financial information.
  • Daily updates on an excel sheet of assets and investments can show growth over time.
  • Tracking finances daily helps in understanding the flow of money and identifying unnecessary expenses.
  • Regular financial reviews lead to plugging money leaks by canceling unused services or subscriptions.

"Tracking every day, the cumulative amount of your bank accounts is one of the single greatest things that I ever did, ever, like, ever."

This quote emphasizes the speaker's personal experience and the significant impact that daily tracking of financial accounts had on their financial awareness and growth.

"And so as soon as you start doing this, you'll start decreasing. You'll plug the holes, you'll decrease the outflows of money in your life because you're tracking and not slacking."

The speaker suggests that the act of tracking finances leads to a natural reduction in wasteful spending, as it brings attention to where money is being lost.

Debt Management

  • Incorporating debt into net worth calculations is crucial.
  • Paying down debt, especially high-interest debt, increases net worth.
  • The speaker advises prioritizing the repayment of high-interest credit cards and loans.

"Now, your debt should also be on there. So if he's paying down debt, his net worth will go up, because right now, he's got $20,000 in debt. So his net worth is negative 20,000 compared to his cash."

This quote highlights the importance of accounting for debt when calculating net worth and how reducing debt can positively affect one's financial status.

Investment Strategy

  • Dollar-cost averaging into the S&P is suggested, though not as formal investment advice.
  • Decreasing expenses and investing surplus income is recommended.
  • Legal disclaimers about investment risks and no guaranteed returns are mentioned.

"Dollar cost, average all of the money that you make in excess of your expenses into the SP mind you, this is not investment advice."

The speaker advises on a potential investment strategy but clarifies that it is not formal advice and that investments come with risks.

Lifestyle and Spending

  • Experiences with luxury items and lifestyles may not equate to happiness.
  • The speaker shares personal preferences for simpler, less expensive things.
  • Emphasis on the lack of correlation between material possessions and happiness.
  • Reducing expenses is encouraged, regardless of income level.

"I can tell you firsthand they're not what they're cracked up to be."

The speaker shares personal experiences to illustrate that expensive items and lifestyles may not provide the expected level of satisfaction.

Income Growth and Business Strategy

  • Tying oneself to an acquisition channel can increase income.
  • Learning new customer acquisition methods not currently used in one's business is advantageous.
  • Building a team to execute newly learned strategies can lead to becoming a "rainmaker" in the business.
  • Rainmakers, those who generate significant business, are typically compensated well.

"Tie yourself to an acquisition channel. Try and find a new way of acquiring customers that the business that you're currently in is not doing."

This quote suggests seeking out innovative methods for customer acquisition as a means to grow business and income.

Entrepreneurship vs. Employment

  • Entrepreneurs must be mindful of risk, not just business growth.
  • Working hard in a business can increase wealth, but there are risks involved.
  • The speaker contrasts the potential outcomes of hard work for entrepreneurs versus employees.

"And that's the difference between being an entrepreneur and employee, is that a lot of people don't adequately monitor the risk, all right?"

The speaker points out that many entrepreneurs may overlook the risks associated with business ownership, which is a key difference from being an employee.

Understanding Volatility and Risk

  • Volatility in investments does not necessarily mean high risk.
  • The importance of understanding and defining financial terms accurately is stressed.
  • Making informed decisions requires a solid grasp of financial concepts.

"Something that goes up and down a lot is not necessarily risky. It's just volatile."

This quote clarifies the distinction between volatility and risk, indicating that fluctuations in value are not always indicative of danger.

"If you can understand that words matter and how you describe things matter and understand. Think the definition of words."

The speaker emphasizes the significance of precise language and definitions in financial decision-making.

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