Your Net Worth And Why It’s So Important To You- Investing To Win The Long Game Feat. John Raymond

You put a small amount of money into an idea, you defied the odds and built something successful that's worth many, many times what you originally put into it. The cash on cash returns are probably into the triple digits. This is an example of a power loss success. Remember that car wash slide? You know the fact that I never get my car washed, which is about $20 a pop. I figure I saved about $1,000 in car washes for a year. Investing that into a startup. In October of 2016, it was worth a million dollars in April of this year. That's the power of looking at your net worth. As business leaders, even with our survivorship bias in place, we know it is still really hard. And most attempts at starting something new don't turn out well. Sometimes we'll be lucky enough to get some money back. And the only good news is that failure usually comes brutally quick. This is why you need to think about using your extra compounding dollars to literally play in this space.

There are hundreds of financial decisions you have to make before this year ends. These financial decisions will never stop you until you're dead. However, there's one financial decision you should immediately make because it's that important to you and it is so doable. The financial decision is to focus on your net worth and not your cash flow. Cash flow is defined as your budget, what money you have coming in and what you spend that money on. This is true for both your business and in your personal life. Net worth is simply your total assets based on the fair market value minus your liabilities. These liabilities include your loans and your mortgages, your taxes, your mortgages, your taxes, etc. This financial net worth focus can be the foundation for you to become a successful investor a of your family's wealth. A focus on your net worth as opposed to your cash flow will also help you thrive in difficult times like recessions, depressions or Covid. That's why I've asked John Raymonds to share this idea with you. John inherited a family plastics manufacturing business that had a huge financial challenge and a zero net worth. Yet just 14 years later, John sold that plastics manufacturing business for 500 million. Yes, half a billion dollars. That sale was in 2008. Since then, John has been a full time investor in many businesses. Some of those businesses are part of Genius Network. One of the others is a producer of Hollywood movies such as the Joker, which has become the largest grossing R rated film ever, bringing in over a billion dollars. Giving talks like this is not part of John's world yet he's willing to step out of his comfort zone to help you financially. John has made a lot of money. John is continuing to make a lot of money. And in the future, John plans to make even more money, all because of one financial decision he made years ago. Focusing on net worth, not on cash flow. So the title is you net worth and why it's so important investing to win the long game. Please help me welcome John Ramons.

Well, Joe, thank you so much for that introduction. It's great to be at this annual event, even though it's a zoom session as opposed to in a wonderful hall somewhere. And imagine me doing a 10 minute talk that's mind boggling in itself. Well, anyway, as you told the group, our title today is your net worth and why it's so important to you. So let me see how I can share my screen and start. I like network better than cash net worth. Okay.

Yep, I can see it.

We're getting there. All right, so imagine it's the beginning of 1994. Your father just passed away unexpectedly. The family business he was leading is headed for bankruptcy and owes the bank $20 million. Your well diversified portfolio looks like this on your net worth. Scale is a valueless business and everything else weighs into around $300,000. Since your father just passed away, the bank financing the family business asks you to sign the $800,000 personal guarantee that used to be in his name. What would you do? Walk away or sign it? This is what it looks like after you sign it. There's now an $800,000 balloon lifting everything in your entire life off the scale. You know that phrase burn your boats? Well, effectively that's what I did when I signed that guarantee. With the help of a turnaround COO for 18 months and making a long term hire afterward, the business slowly started to turn the corner. When the current bank got the great news, we were putting their business out to bid. One of the checkboxes on the short list of competition was if they needed a personal guarantee or not. Selecting one that didn't got rid of that balloon. However, there was another bad financial decision hiding in the business too. A single bank was holding the business loan and the mortgages on the properties that were separately owned by the family. You don't want to do that either. The key to getting them to appear on the scale was finding separate banks to refinance the mortgages. Paying higher rates made the loans non recourse as well as to a cash flow thinker. This is terrible since there'd be less available to me as the owner, however, I was focused on net worth, building a platform for both growth and diversification. The COO I hired to grow the business gave me one of the simplest and most important points of wisdom in what would be my future success. It was somewhere around 2004, the year we partnered with private equity, that in another much smaller family business, they were redoing their tool shop floors with this amazing epoxy stuff that was super tough and non slip. Think your typical Home Depot mix on steroids. When I asked them for a quote to do the garage floor of a home we just moved into, I was greeted with the surprise of them saying since I own the business, they would do it for free. Now what would you do given this opportunity? Cash flow wise, it was obviously a pretty awesome deal. But what if you're focused on building net worth? For some reason, I paused on this and went to my COO in the business. I would sell in just four short years for $500 million and described what they had offered. Without hesitation, he said, pay for it. You never want to owe anyone any favors in business. From banking relationships to accountants, legal and everything material we purchased, this simple philosophy gave us unbelievable freedom to always get the best deals for wherever we were in our path of growth. Remember, a dollar saved in business goes right to the bottom line. This mindset flows over into your personal life as well, but in ways that are not entirely obvious. If you are focusing on cash flow, you might be looking for the best interest or dividend rates for an account thinking of the growth it will bring. When you focus on net worth, you will understand that assuming a 30% tax rate, a 5% cash back, you know, like you get on credit cards or other form of discount, is a risk free 12 month return of 7.14%. If you're focused on cash flow, you might see you might have enough to purchase that Ferrari. Yes, I always wanted that Ferrari. Never got it. Also managed to figure out it was far more fun to want it than to buy it. And that was before spending any money. When you focus on net worth, you will understand that if you bought the Ferrari, you would need to make 143% return on that lost cash just to replace it. This is true for small things too. I don't go off roading, but my car does sometimes look like that. My family makes fun of me for never getting it washed, as in literally never. But you're probably thinking I have it all wrong. It's the cash flow from the business or the cash flow from your investments and that pay for all this stuff. Expenses don't compound. Yes, that's the cash flow mindset at work. Warren Buffett is known to be legendarily frugal. I bet this is not true for the reason a cash flow mentality would think the less you spend is obviously the more you have in your bank account. No, for Warren, if I'm reading his mind correctly, the less he spends, the more opportunity he can take advantage of. He doesn't see the cost of a $300,000 Ferrari today. He sees the $4 million of equity that could turn into 10 years from now if it's applied to the right deal. The net worth mindset thinks like this instead of just consuming it, finds ways to get the best pricing on needs, and moves the savings into new buckets. The net worth mindset also takes the dollars you would have spent on things you don't need and starts putting them into new buckets as well. These buckets are the ABCs of investing. Always be compounding. Some of the buckets you can start filling to add to your net worth are things you already know about. They are your list of usual suspects. Some of these things even generate income, which you might keep in the bucket it came from or choose to use it somewhere else. These are your nest egg. Keep them and keep them growing. The risk of losing everything in any one of these buckets should be extremely small and the return should compound well over all the years to come in your journey through life. Since there's an abundant amount of expertise available for each of those buckets, and since this is not a 10 day talk, I'm not going to attempt any deep dives there. However, all of us in this room, well, Zoom Session did not make the majority of our net worth that way. And for those who have been in genius, you might recognize this gaping void. Image explaining life as an entrepreneur. You put a small amount of money into an idea, you defied the odds and built something successful that's worth many, many times what you originally put into it. The cash on cash returns are probably into the triple digits. This is an example of a power loss success. Remember that car wash slide? You know the fact that I never get my car washed, which is about $20 a pop? I figure I saved about $1,000 in car washes for a year. Investing that into a startup in October of 2016. It was worth a million dollars in April of this year. That's the power of looking at your net worth as business leaders. Even with our survivorship bias in place, we know it is still really hard, and most attempts at starting something new don't turn out well. Sometimes we'll be lucky enough to get some money back and the only good news is that failure usually comes brutally quick. This is why you need to think about using your extra compounding dollars to literally play in this space. The great thing about truly understanding your net worth is you can get a feel for how much of your total net worth you might want to put in these power law buckets. And the math of power law returns only works if you make enough bets to play long enough to find the big returns. In other words, if you assume you'll lose everything you put in, you will always sleep well at night looking for the big win. Wow. Imagine a cash flow mindset trying to wrap their brain around that proposition. Speaking of how much? When there is an opportunity in front of me and someone else who does not understand their net worth is looking at it too, I almost always hear the question how much money do you think I should put into it? Well, that question is impossible for me to answer for you, but you should know the answer by heart. It's based upon how much of your net worth you want to have in these kind of buckets and how many buckets you want to spread that risk over. The call to action is to figure out your net worth and in doing so, understand your net worth. Understand where you can take risk that doesn't change your life if it goes the wrong way, but can manifest an entirely different future if it hits big. If you do that, this talk could be the most meaningful financial message you have ever heard. Because that's how I got to where I am. When I sold my business, I stopped getting a W2 and have not had one since. Talk about the cash flow mindset getting brain freeze. I put my liquidated net worth into my nest egg bucket and gave constant grief to Goldman Sachs who always asks, don't you want to take more risk? I take my risk outside of that bucket. And to date, assuming Covid doesn't have further plans to change the world, being invested in Brawn, which is in the business of producing films like the Joker alone, might double that nest egg. Add other startup investments like levl, good money, proteome energy, bulletproof capital, logics, pharmapacks, and so on, it could be much, much more than that. And there's no such thing as a single point of failure anymore. Success might be hard to achieve, but as successful entrepreneurs, we've all learned at least some of what it takes. Adding that knowledge to the dollars you choose to invest in startups may not take all of the risk away, but it can give an unfair advantage to the people running them. That's where the real magic happens. Let your net worth drive your budget instead of cash flow budgeting your net worth. When you focus on net worth, you will see how well you are diversified and where risk is. And when you focus on net worth, you see where opportunity is. And when you focus on net worth, you get freedom. Let me say that again. When you focus on net worth, you get freedom.

Hey, I hope you're enjoying this video. And I want to let you know that I have a new book that's come out, and if you'd like to get it absolutely free, there's a link below in the description. Or you can wait till the end of this video, or you can Simply go to joe'sfreebook.com and you can get a copy there. How would you define freedom, John?

Freedom, you know, I think it's the ability to do what you want to do without being constrained by things that are somewhat out of your control. Yeah, yeah.

You know, the whole single. No single point of failure anymore. When you inherited really a lot of debt and a problem and a complexity and you had to navigate yourself through it. How did you. How did you mentally prepare yourself? What did you. How did you get through that and be resourceful and smart and build it up? I mean, where did this come from?

You're assuming I did mentally prepare myself for that. Yeah.

No, I know you. I'm trying to figure out how to ask the question. Like, I think, you know, when there's so much complexity with something, people start crashing and they don't make good decisions. And I mean, I see that with people with addictions and whatnot. All the ways that people, when there's a lot of pain in someone's life, they either, you know, have maladaptive ways of dealing with it, or they do things to figure it out. So what did you. What did you do that worked, and what were you doing that that wasn't working?

Well, I think there are probably two key aspects to that. One, you sort of had to see that there was a light available to you. And in our specific family business, it was in a consolidating industry, Meaning you were either going to sell or you're going to buy. And for us, if we were going to, we had to be in a position to grow the business. And if we. If we were successful growing the business, you know, we. There would be an opportunity for us to create value. But I think that the biggest issue is it comes down to that leadership. If you know you're going in the wrong direction. Wrong direction was going towards bankruptcy. Right. Trying anything else was better than that. Yeah. So I wasn't 100% sure that I would succeed, but I knew if I didn't do anything, I knew exactly where I was going to end up.

You know, I luckily got to see some of your talk when you were first creating this and between where that was with all the great potential information and the way you put it together, I got to tell you, was incredible. So one of the better 10 minute talks I've ever heard. For, you know, someone who doesn't normally speak and do these kinds of things, I think you set the bar very high for everyone. So congratulations on that. I also love the net worth versus cash flow because, you know, as in what we do, we run into this a lot where entrepreneurs have this passive income cash flow kind of idea and often they look at things through that lens and don't see the bigger picture of growing your net worth and creating financial freedom that way. How would you speak to a risk budget? Because one thing we like to do is give a risk budget to entrepreneurs, to our clients, because what they'll often do is they have the risk in their business, which is usually most of their net worth, and then outside their business, they invest in other startups and other things like cryptocurrency, because that's exciting to them and yet they don't build a fundamental kind of safety net of more conservative investments. So how do you manage, how would you recommend people manage a risk budget and decide how much outside their business to put in kind of boring, predictable things and how much to put in these types of high flyers that you also have been a part of?

The answer changes, of course, you know, with a person's age and so on. And I think you need to have some traditional wisdom there as well. But again, I do believe that a lot of people get trapped in the, whether you call it the cash flow mindset or the liquid asset mindset, and you know, if your business is worth $20 million and you're beating yourself on the head about a $50,000 decision as to whether you should invest it somewhere, that's ridiculous. But that $50,000 may actually be a large portion of your available cash. But the other thing you have to do is you have to be brutally honest. Is that business really worth $20 million? What's the tax liability? What's the issue, Is it a personal brand? If you walk away from that business, what is the value if you walk away, get the check, pay the government, how much is left in that bank account? And that's not an easy question to answer.

Thanks, John.

Sorry, I was muted. Who has the next question for John?

Hey, John, this week you and I had a nice, long conversation, and you said something to me that literally made me do a spit take where I literally spit coffee out of my mouth. Could you tell people what you said? Just because I think that this might be an interesting audience to.

Hear that. Does this relate anything to what I talked about?

It actually does, doesn't it?

Which one is this? Because sometimes I say things that are shocking, and I don't even think they're shocking in my own head. You told.

Sorry, I'm in the actual room and I was hearing some feedback. You told me that you believed that in order to heal the pain that the company is feeling and to really get things rolling again, you had a surprising choice for who you thought the next president might or should be. And I thought you were kidding, but you insist that you were not. And so I just thought it might be interesting for you to share.

Well, I told you that Kanye west would be the person that could possibly heal the country right now. If you look at it, we're in a no win scenario. No matter who wins this presidency, the country's in conflict and it's evolving, and that could be a good thing. But I think the thing that's lacking from either side because of the politics is hard. We need, whether it's Kanye or someone else, we need someone with heart and create Kanye, Kanye's heart. And I don't really know who Kanye is. I really don't. I'm not a Kanye fan, so. But he's a creator. He's a creative artist, and that's where his heart comes from.

Hey, John. Go ahead, Joe. Yeah, buddy. You know, as we build companies, and I know your heart, you know, I've.

Seen a lot of messages about how kind and gentle you are, and I can do nothing but echo that. You know, so when I try to build a company, I try to reward other people with equity and ownership and everything else. What's your philosophy on that? How have you done that, or should you do that? In the early days, when we had the family business, the plastic packaging business, it wasn't a case where we even knew exactly what the endpoint was, even though it was a consolidating industry. And I guess if you really went ahead and intellectually went out there. You would think that the endpoint would be selling the business. But from the family perspective, that was so inconceivable that the idea of giving out real equity to other employees was not necessarily something that was on the radar. But with that said, you still needed the three kind of components of compensation. You needed salary, that was the short term compensation. You had to be fair there. You needed a midterm reward, which were annual goals that you had to go ahead and mutually agree on and have some kind of formulaic reward to those annual goals based on business metrics. That was another important part of the compensation. But the other thing that we were able to come up with since we began to understand what the value of the business was so intimately, what the literal metrics were for the size of our business, for the amount of debt we had for the cash flow, and how others viewed our business in relation to a possible acquisition target. What we were able to do was actually create a formula for the the enterprise value and instead of giving our employees stock, we gave them phantom stock. So it was an accounting marker. When the business grew in value, they were rewarded. That was on a three year rolling basis. It gets complicated. But yes, bottom line is you need to share equity. And I'm going to go way off topic here. I say off topic. Sometimes you may not have the greatest scalable business. I'm going to give the example of one of the best IP shops in Silicon Valley. IP meaning intellectual property lawyer. There's only so big his business is going to get, but he was sort of able to do it the opposite of what you're saying. He was able to provide so much value to these startup businesses that he was able to get equity in those startup businesses for the value he was bringing them that they couldn't afford to pay for in those early days. Right.

Cool. Got good. Joe, I'm going to read Mike Middleton's question where he said or a comment. John's thinking is great. The other trap to avoid is allowing money and cash flow to become your abiding thought. I've had so many clients for whom focus on the cash flow becomes the main focus in their lives. My experience this leads to misery and often leads to people losing purpose in their lives. Focus on net worth allows you to focus on growing and developing. I guess the reason that struck me is that I know a lot of very wealthy people who are miserable and whose lives are out of control and who spend more time worrying about money and stressed out about money. Than many people I know that don't have anywhere near that level of things. So, I mean, do you have any thoughts or any other elaboration you'd like to make on that suggestion which was such a big part of your talk?

Maybe, if you can rephrase that, Joe.

Well, so the focus. So focus on. There's so many people that say, focus on cash flow. Okay. And here you're saying, focus on net worth. What does that really mean?

Well, it makes a focus on net worth. Like when again, family business going back to that early day when the business didn't have much cash flow. And the idea, the only endpoint was building value. So to me, the easiest decision I ever made in my entire life was taking the W2 I was getting from that business and change it to. I don't know what it was, Whether it was 50 or $100,000 a year, it doesn't really matter. I changed it to $1,000 a year. And the only reason why I kept on payroll was to keep my health benefits. Yeah. You know, I wanted no dollars coming to me. I wanted the dollars going into building value.

The other way that I think about this, is this applied in this way is Gary Halbert said this thing to me many years ago that some games in life, the only way you win is you don't play. And this is one of these things where I'd say a lot of people are playing the game in a way that they never really win it, not just financially, but psychologically. Right. And one of the reasons of my wanting to take a sabbatical at this time in my life and also come back and hopefully, you know, have a lot of useful lessons on work and in life that to bring along with it and hopefully be useful is that there's a lot of games that I play that work, and there's a lot of games that I play that don't work. And no matter how skilled or how much I try, how much strategy I bring to it, how much perseverance, it just doesn't work. And so the game of, like the, you know, the Warren Buffett line is, you know, don't lose money. You know, here you have the ability to play around with some different games. Like, what are your. What are your thoughts on gambling as it relates to investing? Because ultimately, the reason I wanted you to talk is I look at everything as an investment. You know, everything. Every team member, everything that I put money on, everyone that's spending money on Genius Network, it's money. Right. And it's an Investment and sometimes there are bad investments and sometimes there are good investments. But a lot of the investment has a lot to do with the person and what their goals and what their objectives and what their focus is. So when it comes to not losing money, where are you willing to gamble if you want. If. I don't know if you would ever use that term. Do you gamble in real life? Do you ever gamble?

No. When you say gambling, I am assuming you mean literally gamble.

Exactly like Vegas gambling.

Yeah. The issue with gambling is the only reason why it works is because there's a casino business. The only reason why the casino business exists is because the odds are in the favor of the house. You could be the outlier and be getting your money from the other people that are at the casino. But that's not a game of abundance, if you will. Right. And you know, you can go ahead and call startup investing, you know, for example, gambling because it's super high risk but you can go ahead and get. If you make enough in, you have to have the right deal flow. But if you make enough investments and work with the right people, 30% IRR over extended period of time is very reasonable. But you're going to get that because of the outliers. You're going to get that because there will be unfair returns. When you put, what do you want to call it, a chip on double zero on roulette. And you don't get a 36 times return, you get a 3,000 times return. The house doesn't win with a 3,000 times return on roulette.

Okay. I hope you found that video awesome and useful. So if you want to get a free copy of my book, I want you to click here. And if you want to watch some more videos that will be useful and awesome, click here. Go ahead. They're over here. Do it now.

Come on.

Thank you. Watch them.