On this episode of Investing with Purpose, Kyle discusses the differences between the rich and the poor when it comes to investment styles. Kyle explains how even high-income earners can invest like they are broke, and talks about where rich people invested their money in 2020.
“I don’t really think there is a huge difference between investing in the stock market and investing in the lottery.”
0:00 – Intro
0:31 – Money works for rich people, while poor people work for their money
1:03 – Even high-income earners can be investing like they are broke
1:33 – Kyle shares his opinion on investing in the stock market
2:55 – Kyle speaks about common habits of a broke person – they spend too much on discretionary purchases, don’t plan for emergency’s, lack a financial plan, are not setting financial goals, and spend money as soon as they get it
5:59 – Investing in the stock market is for people who don’t have long-term plans or goals
8:14 – Kyle talks about how to invest like a rich person and the importance of understanding the investment habits of the rich
9:29 – Kyle speaks about the habits of wealthy people – they believe in the law of income, that you can control your income and grow it through your own decisions, they focus on opportunities, they associate with positive and successful people, and they grow bigger than their problems
12:28 – Wealthy people don’t take enormous risks
14:57 – Kyle compares two wealthy people with different spending habits
18:40 – Being generous isn’t always about what we give or how much we give, it’s more about our heart and making sure we’re not being controlled by greed
19:04 – Kyle discusses specific asset classes that the rich are investing in
Welcome back to our podcast. I really appreciate you taking the time to listen and would appreciate even more if you take the time to share it, subscribe, and just give us a review in this new season.
Today, we’re going to be talking about some differences between the rich and the poor and how they view money, how they treat their money. And so I’ve titled this podcast, I’ve titled this episode, Don’t Invest Like You’re Broke.
You know, the rich and the poor treat money very differently. I think that’s pretty obvious. So for example, like the rich, money works for them and for the poor they’re working for their money and this attitude spills over into pretty much everything in part of their life. But obviously including investing, which is what we’re talking about. And so just a couple of quick questions. I mean, are you investing like you’re broke?
And when we ask that you might be saying to yourself, well, how can you invest if you’re broke? And I think that, you know, we’ve got to set some more context here because I didn’t even think high-income earners can be investing like a broke person without even really realizing it. And one of the ways that I think a true broke person might invest is by investing in money to go buy a lottery ticket, for example. But you know, if you are a high-income earner and you have some little bit liquidity, a little bit extra spending money each month, you know, if you’re just dumping it into the stock market, I think you’re essentially playing the lottery too, you know, I don’t really think there’s a huge difference between investing in the stock market and playing the lottery. I mean, if you think about it, they’re both very easy to do.
There’s a very low barrier of entry and they’re both gambling to many people, especially when you look at the latest stock to pick. I mean, if you’re not doing your own homework and if you’re just taking somebody else’s advice, even a trained professional, even a financial advisor, somebody like that, and you’re not doing your own homework, to me that is true gambling. You know, there’s certain things that I’ll do with other parts of my life when it comes to, you know, trusting people and kind of taking their word for it, if they bet at something, you know, I think especially the example is like when we’re looking at buying a new product, you know, a new vacuum or something silly like that, you know, something that we’re going to go out and get the data for the best reviews to be able to take somebody else’s word for it. And obviously the more reviews and the higher the stars, obviously you can trust that that’s probably a better product, you know, and if there’s not many reviews or there are a lot of views and there’s not as many stars, then you know, that’s going to sway your decision there.
So a lot of people treat stocks just the same. And so, you know, I put a couple of thoughts on some common habits of a broke person as well. So the first one is they spend too much on discretionary purchases. They don’t plan for emergencies, they lack a clear financial plan. You know, they’re not setting financial goals and they spend the money as soon as they get it, which is how a lot of people who earn a high income can really get into financial trouble. And truly we broke at the end of the day.
All that being said, I think one of the things that this really boils down to for money habits is broke people don’t think long-term, they’re very shortsighted and this carries over into their investment habits. And, you know, they invest in the stock market, like they’re planning at a blackjack table or they’re at some other casino game. They’re jumping in and out of stocks, just like they’re jumping from one table the next, just playing each game. And they’re just looking to hit it big, hit that next home run. So one of the unfortunate things about all this is I think being broke is actually somewhat hereditary. Typically we repeat our family’s patterns and even our peer groups, you know, the people we hang around and this spills over into money matters and investing in general. And even though most broke people usually raise broke kids. Obviously, we can break that cycle. We can break that generational curse. You know, even in my experience with raising capital and talking to a number of high-income earners, like doctors, lawyers, and CEOs, they can even still invest like they’re broke. They don’t have the financial wherewithal, or they just, at the end of the day, they really haven’t done the homework. They haven’t studied. They haven’t educated themselves on how they should be thinking about money.
On the flip side, I have friends who come from very low-income families, but they’re actually thriving. They are now high-income earners. And so now they’re looking at how they can build wealth and how they can get their money to truly work for them. I often get asked about my own investments and why I’m not saving it all or why I’m not investing in the stocks. And I usually just kind of have some fun with it and I’ll respond with a question of my own. And I ask them, what are you saving for? Or why do you invest in stocks? And just that simple question, you know, the typical reply is, well, that’s what I’m supposed to do. Or, you know, I’m just trying to hit my max on my 401k. There’s really not a good reason on the other side of it, when they ask me for what I’m doing and deep down, I know there’s a lot of intention, but like I said, I tend to have fun with it, but this is kind of my point, you know, doing what you’re supposed to do or doing what you’re taught or doing what everyone else is doing is essentially investing like a broke person, because you’re kind of going with the herd mentality. They’re not thinking long-term.
I would argue for most people investing in the stock market is essentially for people with not a whole lot of long-term plan or goals. You know, I don’t blame a lot of these people because they don’t really know any different, but at some point, the responsibility has to be taken to seek other options, especially if we want to retire at an earlier age, which I think we all would love to do. As humans, as people on this earth, we’re hardwired to think that investing in the stock market is the only way to invest, but it’s not, but it is all we hear, see, read about, and it takes so much energy to go against the flow. It really does.
And a lot of times, if we aren’t really educated enough, it feels like it’s a little bit reckless, whether we are investing in the stock market, or we’re not, if we don’t know what we’re really standing for, then we’re kind of lost.
I read an article about just psychology in general, on some human behavior and in psychology, these types of human behavior have names for kind of what we’re talking about. So they have one of them is the inconsistency avoidance tendency. And the other one is the availability bias, which is basically kind of an anti-change bias. So I’m not a psychologist, but essentially what that comes down to is we don’t like change. And the availability bias is basically just lazy bias. The whole notion of being comfortable, we get so trapped by being comfortable. And when we get trapped, we tend to just believe what’s ever in front of us. You know, what’s on our screens, what’s on our phones. What kind of news is hitting our Facebook feed or what’s on the airwaves? You know, the radio, whatever we’re listened to, we’re too lazy to do our own research. Even though we may not have all the riches just yet, it’s something that we can model. If we’re striving for it, there’s still something to be said about modeling our investing habits and our behaviors after a rich person, you know, true wealthy person.
In order to essentially invest like, like we’re rich, we need to understand the habits of rich people to do that. And so I’ve actually studied this quite a bit. And one of the biggest groups that I tend to study is a group called tiger 21. And I’ve actually referenced them a few times. I write a lot about them in the newsletter, but essentially for those that don’t know, tiger 21 has over 700 members. It’s basically, this really large mastermind, but there’s some criteria that you have to hit. One of them is, first, you’ve got to be invited by an existing member. So it’s got some exclusivity, but you also have to pay an annual fee of about $30,000. And you also have to have about 10 million. No, it’s not about, you have to have 10 million in liquid assets.
So if you think about that type of profile, these people are obviously very wealthy, and they have the liquidity to prove it. So if we just take a look at some of the habits that I’ve come to understand from studying these types of groups and just other families and other books and other sources, you know, obviously this isn’t the end all be all, but this is just kind of my own thoughts that I’ve put together. So the first one that I put together, the rich believe in the law of income cash flow, they also believe that you can control your income and grow it through your own decisions and by getting educated. They also focus on opportunities, not necessarily obstacles, you know, they don’t accept what’s average.
They associate with positive successful people. You know, you can’t necessarily control the families you come from, but what you can control is who you choose to surround yourself with. And the rich surround themselves with winners and they learn from them. And they’re always talking about new ideas. And through that comes new investment strategies of course. The rich also grow bigger than their problems. This is huge. You know, they find solutions, whereas the poor give up. So when they grow bigger than their problems, they’re truly taken education head-on. They’re growing themselves. We talked about pressure a couple of episodes ago and how we handle pressure. The rich handle pressure by being educated, which is one of the correlations that I made in that episode.
Another one is the rich think both while the poor think either or, an example of this in layman’s terms is if given $5 and a choice to buy two things that cost $5, the poor might think either or, you know, they can only buy one of the two items. While the rich essentially take that $5 and make $10 out of it in order to buy both. The rich are constantly learning and growing. They’re never really satisfied. They’re always open to new ideas, new suggestions, they’re always learning. They also don’t mind taking the hard road. They have the patience and endurance to see the plan through, this is where the long-term focus comes in.
They also focus on net worth, not necessarily working income. You know, they get their money to work for them. Instead of the other way around. The rich don’t go with the crowds and they’re willing to learn and accept alternative paths. And they’re not content. They want to trade time for money. They think long-term and invest to buy their time back. And at the same time, they know what they’re good at and they know what they don’t understand. It’s awareness that leads to a path of growth. They’re not going to risk anything that they don’t know. They’re not going to put money out there, if they don’t understand an investment opportunity, they understand their limits.
I listened to an episode of Lewis house podcast a while back from earlier this year and Kevin O’Leary was on it. You know, the old Mr. Wonderful from shark tank. One of the things that he confirmed for me on this episode is that wealthy people actually don’t take an enormous risk. He said the majority of wealthy people don’t need to beat the market. They’re more focused on preserving their capital. And this is where investing in something that has a tax strategy behind it, like real estate, where you can get depreciation and things like that come into play. So even Mr. Wonderful confirmed that the rich are thinking long-term, they don’t speculate. They don’t take speculative positions and they’re not investing in speculative investments. They’re using play money with that type of investment, if they are investing in something like that, that is very highly speculative or highly vulnerable. They’re not using their hard-earned cash and dedicating a large majority of their portfolio to a speculative opportunity.
There’s another characteristic that I’ve seen from wealthy people that I think we can all adopt right away. And I would encourage you to really take a good look at this. I know I am always trying to look for opportunities in regard to what we’re about to discuss, but wealthy people are very motivated to be philanthropic. They give money to something that truly matters to them and being generous with their finances is the big one. It actually can kind of protect them if you think about it, you know, being generous, protects them from money, having complete control over their lives. I can’t really recall any wealthy people that I’ve come across in my life that are also consumed with greed I think we just, as a side, he sort of default that, Hey, any rich person is actually greedy. And I think that is just a true poor man’s way to think about money.
Essentially, what I’m saying is true wealthy people are not greedy. I think they’re focused. I think they have very specific goals, and I think that’s how they’ve been able to make their money. But it’s the high-income earners that buy a bunch of stuff. And these grownup toys that I think are selfish and greedy.
I actually have a couple of stories to help with this point. And they actually also involve a boat, both of them do, but as I was kind of thinking of a story to tell these both came to mind. So the first example happened a few years ago. We were out on a boat with some friends, with both of our families you know, my family and my other friend’s family. And he had an extremely nice boat and somehow it got brought up that he spent about a 100K on this boat. And I don’t really remember how, but he probably just volunteered that information, cause I don’t remember asking for it. But anyway, what really stuck with me was that while we were all wakeboarding and wake surfing and we were all having fun, taking turns to being off the back of the boat all day, he didn’t do it. He didn’t partake in the activities and come to find out that his wife actually made a joke about it. But what was made known was that he didn’t want anyone to drive his boat. He didn’t trust anyone else.
I didn’t grow up owning a boat. My family didn’t own a boat. My dad didn’t have a boat, but I did learn how to drive a boat at a very young age when I was in high school because I drive my buddy’s dad’s boat all the time. And I told him this, cause I was trying to encourage him to go have fun. But he didn’t want to, you know, I told him, I know how to operate a boat, but this guy was so concerned that something might happen to it or we might wreck it, or I might break it that he didn’t even let his wife drive the boat. On the flip side, the second story is that my wife has a pretty wealthy uncle who also has a boat and a lake house and some jet-skis and some other cool toys. He’s made quite a bit of money and they actually still live in the same house they lived in prior to their wealth. They’ve done a ton of renovations, but it’s still probably only about 2,500, 2,600 square feet. But like I said, he also has a boat, and we went out to their lake house without him, mind you, he wasn’t even there. And we stayed the night with some friends who also had some kids and hung out for the weekend.
And you know what he did? We never talked about me driving a boat. We didn’t talk about my experience. All he did, he gave us step-by-step instructions that he wanted us to follow to take the boat cover off. And you know how to use the launch pad off the dock in his dock at the lake house. Really the only thing he wanted us to do was follow the instructions. And all he said was, you all have fun. Just follow the instructions to get the boat out of the water and you all have fun. He never questioned my experience with driving a boat and it never come up in any conversation that we’ve had like holidays and get together and stuff like that. So what he didn’t know was that, if I ended up breaking his boat or, you know, something happened to his boat, he could obviously get it fixed or, you know, worst-case scenario he could just buy a new one.
You see, like, I’m trying to draw this example. My friend, who’s just high-income earner who spends all of his money on toys and things like that, knew that if I broke his boat, it would actually be a pretty big loss. Whereas my wife’s uncle just gave us a list of directions to follow. And he knew that if I broke his boat, it wasn’t going to hurt him. You know, in this case, I would say that my friend was actually controlled by greed while my wife’s uncle knew that money didn’t control him.
On a granular level, we can implement generosity in our everyday life. If you know of a greedy person, a greedy, wealthy person that is, I would say, just wait 10 years and see how they make out. Because even if they don’t lose all their fortune, I guarantee you just based on what I’ve seen, that they are not living a fulfilled life. They’re very empty. Being generous isn’t always about what we give or how much we give, it’s more about our heart and making sure that we aren’t controlled by things or money in general. Being generous is a big one. It’s huge in terms of how wealthy people handle their money versus broke people.
To wrap this up and get a little a bit more tactical. I wanted to take a look at some specific asset classes where the rich are investing in and to do this, we can look at the annual asset allocation chart that tiger 21 makes public, this is public information. And so what this is, you know, we mentioned tire 21 earlier. They’d take a poll of all their members investment portfolios and come up with a general summarized asset allocation chart to highlight the categories from essentially where the members invest.
So there’s subcategories for each one as well, which we’re really not going to dig into that. So we’re going to just say at the high level, but this is from the most recent asset allocation chart in 2020. So it just came out early 2021, but essentially it was kind of a snapshot of looking and where they allocated in 2020. So for number one, I think this is, so number one shouldn’t come as any surprise to anybody, especially because of if you know what I do, but real estate is at 26% of their portfolio, which is not surprising because generally real estate is mainly a long-term play.
Number two is private equity at 25%. So what this is referring to is mainly small businesses or really large businesses, but just something that’s not made public.
Number three, here is the public equities at 22%. So yes, they’re still investing in some stocks, but it’s not their primary horse. And if you do take a look at the subcategories on this one, they’re investing in stocks like Amazon, apple, and Microsoft.
So even though they’re invested in stocks, they’re stocks with low volatility, and these three companies are here to stay and have been for obviously quite some time.
Number four is not really surprising if you just kind of think about it, but cash, cash was actually 12% of their portfolio. Obviously, this is a main reflection of 2020 because in 2019 cash was closer to about 5%. But what we’re seeing is a potential event where high net worth folks like the folks in the tiger 21 have increased their cash position so they can move quickly when opportunities come up, opportunities in real estate and private equity that is. They’re ready to pounce. So they’ve increased their cash position so that they can add more back into buckets number one for real estate and number two for private equity. Number five was fixed income at 9%. Number six was hedge funds at 5%. Number seven was just a miscellaneous category.
But I think number eight is really telling, especially in today’s day and age, it’s listed on the chart, but it’s actually at 0%, which I thought was interesting. And what it is coming in at number eight is, is actually currencies. Currencies at 0%, what this is saying is not a single member of tiger 21 had any amount of their portfolio in Bitcoin or any other cryptocurrencies, which makes complete sense because of the speckle of nature. I’ve got to admit, I wish I would have invested in Bitcoin a couple years ago when it was really low, but it was so speculative that I was speculative, my Spidey sense went off the whole time. But you know, it’s a missed opportunity. Yes. But at the same time, there’s no logic to it right now, whatsoever.
This is why the rich have their portfolios heavily skewed in the direction of real estate and private equity. These assets cashflow, and they grow over time and they’re way more in line with their habits and their long-term thinking.
So, as I mentioned earlier, we may not have the ability to invest massive amounts of capital just yet. But what we can do is really start changing our habits to mimic the way the true wealthy people think about money, the way they manage their money. And essentially that’s the whole point of this episode. It’s to get us to start taking notice to what the wealthy people are actually doing as far as their strategy and intention around how they use money as a resource. So I hope this helped, and I hope this caused you to think a little bit differently and truly invest with a purpose.