I recently watched a Monday night football game which lived up to the hype and would go down as an instant classic. It was a matchup between two 9-1 teams, both with high power offense. It was a game between the Kansas City Chiefs against the Los Angeles Rams. The quarterback for Kansas City, Patrick Mahomes, was the front runner for the MVP up to that game and was leading all NFL quarterbacks in total passing yards and touchdowns. His counterpart in the LA Rams, Jared Goff, was having an MVP caliber season as well. Both of them are surrounded and complemented by great offensive weapons including great running backs in Kareem Hunt for the Chiefs and Todd Gurley for the Rams. That Monday night, the two teams were trading touch downs, points scored and lead changes. After 4 quarters of an action packed game, the final box score is shown below:
KC vs LA 2018 Box Score
The LA Rams won the game with a final score of 54 to 51. It became one of the highest scoring NFL games on record and the first time two teams scored 50+ in the same game. It was definitely a fun game to watch filled with excitement. As previously mentioned, the two teams have great offensive players. But I’m sure the league’s continued commitment to player safety contributes to greater offensive output for teams across the board. Before the start of the season, the NFL provided both clarity and enforcement on rules over tackling. As a result, a lot of defensive players were called for personal fouls. What was once considered a routine sack of the quarterback became a “roughing the passer” call if the defensive player did not land correctly on the quarterback. This produced more penalty calls on the defense which obviously helped the offense. This probably also instilled a mindset on the defensive players to be more tentative in their tackles and less aggressive in their approach which also benefits the offense. These renewed focus and enforcement of tackles by the league became beneficial for the quarterbacks and offensive units.
Sometimes, the best way to beat a great offensive team, especially in a season when the NFL put defensive players on notice to be less aggressive in the name of player safety, is to have your own high octane offensive unit as well. The Kansas City Chiefs have been on a tear in offense. It would be a tall task for a great defensive oriented team with very limited offense to beat this Chief team, especially in today’s league. The only way the Rams can win is by outscoring the Chiefs by posting touchdowns and field goals of their own.
When it comes to your personal finances, the same rule applies. You should also have an offensive mindset. Being defensive and tentative in your investment approach might not help you win the game. Here are a few things I haven’t done very well that you can keep in mind if you want to generate out size financial returns:
(1) Don’t be too defensive, you might end up losing
Inflation eats away at the real value of money. Inflation has been tamed but, just as the NFL might make it easier for the referees to call personal fouls, the Federal Reserve Bank and federal government’s monetary and fiscal policies might make inflation roar its head again. A 3% 5 year CD might no longer be a good place to put your money if inflation ticks up to 5% in a couple of years. Therefore, if you are not playing offense and become too defensive, the real purchasing power of your money might actually go down over time. You will be losing in terms of what you can buy by holding on to money without properly investing it.
Inflation adjusted return
(2) In order to have an outsize return, you need to assume risk
Investing in stocks (S&P 500) over the past 10 years has returned 238.7%. $10,000 invested in the beginning of 2009 would become $33,874 by the end of 2018. That is where I have put a significant portion of my retirement fund. Now imagine if I didn’t want to take any risk 10 years ago and opted to put my money into a 10 year Treasury at the time instead of putting money into an S&P 500 index fund. That would have resulted in a 21.5% return. That $10,000 invested in the beginning of 2009 would be worth only $12,153 by the end of 2019. That is a difference of over $20,000 on an initial $10,000 investment over 10 years.
S&P 500 vs 10-year Treasury
The 10 year Treasury is the safe route. Now let’s see if I assumed more risk. Instead of putting the money into the S&P 500, imagine if I had put the same $10,000 into a basket of FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks, evenly weighed during this time period (Facebook would be based off of a 5 year history since it wasn’t publicly traded 10 years ago). The return would have been approximately 2,100%. The $10,000 would turn into roughly $220,000 netting a $210,000 profit. The gain would have been almost 10 times investing in the S&P 500 and 100 times that of putting it in the 10 year Treasury.
(3) Utilize greater leverage
When markets run up, being too conservative will leave money on the table. Back in 2009 and over the next 10 years, I purchased a number of real estate investment properties. I was very conservative in my approach having lived through the Great Recession and saw real estate prices whipsawed from all-time highs to a fraction of the peak price. It was a scary time to live through and witness. People’s lives were ruined. This has impacted my level of aggressiveness and I became more conservation in my real estate purchases. Instead of utilizing heavy leverage, especially given the low interest rate environment, I opted to put more money down on a number of the purchases to lower the loan-to-value (LTV) ratio. In one instance, I made an all cash purchase. I stilled obtained mortgages to purchase a number of my properties but the total mortgage amount was very low relative to the total value of the properties. My LTV, which is the total amount of the outstanding mortgage balance to the total market value of my investment properties, was less than 50% at the peak. The LTV currently stands at 20% on my portfolio of investment properties. You can see I am not that lever on my properties. Because of my conservative nature, I lost out on a lot of upside given the run up in real estate prices.
The below is an example of one of my first investment properties. The current price is an offer I received on the property in 2018. As you can tell, my return on my initial capital would have doubled if I put down 25% instead of 50% on the property.
25 vs 50 percent down return portfolio
(4) Start your own business
I have pretty much played it safe in my career. When I graduated from college with a finance and accounting degree, I went to work for a Big 4 Accounting firm. It was a stable job. Accountants are always needed to keep track of how well a company is doing in good times or how poorly a company is doing in bad times. I eventually left my Big 4 job after over half a decade to work in the private sector in an asset management firm. While the company was a lot smaller, it was still viewed as stable. There is a monthly paycheck that is being deposited on the last of the month directly into my bank account. Come year-end, I can expect to receive a bonus from the company. While the bonus is discretionary in nature, the amount has only gone up over the past 10 years. The corporate career has provided me with a great financial foundation. However, would I have been better off starting my own business? I see personal bloggers out there who are able to make 6 or even 7 figures all while having time flexibility and location independence. Additionally, there is no office politics and can result in having equity in a business which can be sold to create a big financial event (3x multiple on $1 million of free cash flow will be a $3 million sale price). If I started this blog 10 years ago, who knows where this blog can be. I hope to generate at least $100,000 from this blog in order to quit my job at Corporate Co. and still be able to maintain my living standards while providing me with time and location flexibility which I value greatly at this point of my life.
(5) Bubble surf but don’t wipeout on the way down
You can try to bubble sure and ride the wave. The key here is to know when to get out before you get crashed on the way down. Riding a bubble wave on an asset moving up because of speculation momentum can result in sizable gains over a short period of time. Take crytocurrency for instance. If I had invested in Bitcoin back in January 1, 2016 and got out two years later on December 2017, a $10,000 investment would turn into $330,000. That is a tremendous gain in only 2 years. One can put in $30,000 to generate $1 million of profit. There is little downside risk in terms of absolute dollar amount versus the upside reward for riding this speculative bubble. Try to identify waves forming in the sea of investments and ride it quick and fast up and get out before the wave comes crashing down on you for a potentially sizable gain in a short period of time.
(6) Utilize Levered Investments such as Options
Apple stock is currently trading at a price of $155. A two year call option on Apple at a strike price of $155 can be purchased for a price of $25. If Apple ends the two year period at a price of $205, the return on the option would be 100% but the return on holding the stock only would be 32%. For the same dollar invested, the option would generate 3 times the profit than the stock. The flip side of that is if the Apple stock price doesn’t move up but hovers around $155 or goes down over the 2 year period, your investment in the call option would be wiped out while there is still value in holding the stock.
Of course, you need to understand the risks with being more aggressive and being more offensive. The potential upside never comes without increased risks. Going back to that Monday night game, while the Kansas City Chiefs ended up scoring 51 points, Patrick Mahomes ended the night throwing an interception during the final drive of the game to seal the win for the Los Angeles Rams. The Chiefs went for the win but fell short. The LA Rams ended up scoring a touchdown on the offensive series before and locked up the win by playing good defense to create the game winning interception. The goal is be offensive minded without throwing an interception to lose the game at the end.
To the audience: Have you been aggressive with your personal finance? How did that play out? Is there an instance when you wish you would have been more aggressive and be more offensive minded?
Many people work hard to better their physical and mental health. What about their financial health?
I started this blog back in 2019 to help people better their financial health as well.
My financial journey began with tens of thousands in student loan debt. Over the span of 20 years, I am close to achieving financial independence.
I truly believe anyone can get to strong financial health. Hopefully, this blog can help you on your financial journey to greater wealth and financial independence.
You can read more about me here.
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You should be posting more stuff.
Thank you. My goal is to publish a new post about once a week. Be sure to check back soon for additional posts.