What is your minimum return rate?
Every investment decision I make has 2 key factors:
(i) What return can I expect?
(ii) How locked up is my capital?
For a long time, I was completely focused on the return. The higher, the better, right?
The truth is much more complicated than that.
First of all, we’ve all taken a deal that promised X% returns and turned out to be a black hole where our hard earned money simply vanishes.
Second, when does your return show up? For example, most commercial real estate deals provide a return of 20%+, but only if you keep your money in it 5-7 years.
The latter is highlighted in the extreme by a recent viral post showing FTX “as-if” $114 billion portfolio, had they not been forced to liquidate, including a 165x return on their Anthropic investment.
The reality is that I invest in Bitcoin, knowing I have a horizon of 4+ years before it performs “as expected”. My 4 year hurdle rate is therefore 30%+ year-over year.
So every investment decision has to have a clear return and time expectation. I call this the hurdle rate at each time horizon.
A foundational system
In a previous post, I shared my velocity income stacking system. This system is what defines my short term hurdle rate for any investment. The reason is that, when well managed, the stack is incredibly predictable.
Anything that is less predictable needs to generate more upside.
The entire thing builds off of a life insurance policy as a recurring source of capital. The reason for that is that every dollar in there can be used twice. Once as cash value that grows at an estimated1 tax-free rate of 5-6% per year. And another as investment dollars.
These are deployed in an “as-if” amortized loan that pays 10% interest over 36 months. Yes, an amortized loan that's also liquid. Counterintuitive, I know. Next week's post breaks down how
The velocity impact pushes my return above 14-15%. And since I am using Digital Credit (see here for definition), those returns are also tax-free.
As I rinse and repeat, this system gives me a 20%+ yearly return on completely liquid investments that have very predictable patterns. That is my hurdle rate.
1 The return on a well designed life insurance policy with a mutual insurance company can vary between 4.5% and 6.5%, both depending on your specific circumstances and the company.
Long-term hurdle rate
Now, while that is an awesome return, there are opportunities to go beyond that. And now the question becomes, how much am I willing to tolerate to earn more?
I start with bitcoin - $BTC ( ▲ 0.44% ). On average over the last 10 years, bitcoin has returned over 30% per year. After studying the instrument for nearly a decade, I know that I have to think of it as “illiquid” over a 4 year period at least.
This is where most speculative investors go wrong. They see a massive market movement and jump in, capturing 5-10% upside, then sideways movement and potentially some losses before rotating back out. Generally in 90 days or less.
In my case, I buy it every day and forget it. After 4 years, inevitably, whatever I bought is worth 3-4 times what I paid.
This is my long-term hurdle rate.
Seeking risk (and higher returns)
The above considerations provide a floor on all my investment decisions.
Warren Buffett famously postulated two rules for investing.
Rule #1: Never lose money.
Rule #2: Never forget rule #1.
Why is this critical? The most powerful force in finance is compounding. Even modest sums compounded over a very long time can grow to enormous amounts. The oracle of Omaha himself had “a mere” $25m at age 39. But nearly 60 years of “not losing money” left him with a fortune that puts most to shame.
He did that by investing very carefully and not losing money. If you dissect his portfolio over the last 6 decades, his patience and balanced approach are what drives results, not massive wins.
If you look at 20% as your minimum rate that is safe, 20 years compounds into a 38x return. Most of us are not patient enough and will put that money into riskier endeavors to get there faster.
My approach to this, after losing money and learning the lesson the hard way:
Build a system that compounds uninterrupted
Skim some extra off the top to take big swings
If you want to learn how to do #1, subscribe!
In next week’s post, I’ll share how I build the “as-if” amortized loan that is fully liquid. That’s where Digital Credit supercharges and amplifies it to power this system.
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Disclaimer: All material is provided for educational purposes only and does not guarantee any financial results. This is not financial, legal, or tax advice. I am not a financial professional. Results vary and are dependent on individual effort, timing and circumstances. There is no solicitation to invest.