GREED or AMBITION? When is a "Strong" ROI Strong "Enough"? | Episode 198 - a podcast by Bryan Ellis - SelfDirected.org

Is it greed, or is it ambition?  The difference is huge, but subtle.  One leads to excellence, the other to ruin… yet, they can feel very similar.   Here’s how to make the distinction, and avoid the devastation to your portfolio that awaits the greedy.  I’m Bryan Ellis.  This is Episode #198.

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Hello, SDI Nation!  Welcome to the podcast of record for savvy self-directed investors like you, where we have one and only one goal:  To help you make GREAT investments that are simple, safe and strong.

One thing I’ve learned in working with you fine folks is this:  There’s some subjectivity to the words “simple, safe and strong”… and that’s really as it should be.  While there’s a baseline for those things –  sending money to a Nigerian prince, for example, is always foolish and never safe – what is true is that what you define as simple or safe or strong may be different than how I define it, and that’s ok.

Defining what those terms mean for you is really very important, and the answers simply aren’t the same for everyone.

But there’s a line in the sand that mustn’t be crossed on one of those factors:  Strength.  Strength refers to the results of your investment, such as whether it garners the ROI that you need, and whether it’s sufficiently stable for you to avoid the kind of stress that hurts your body and mind more than it helps your pocketbook.

On one side of the “strength” line is ambition.  Ambition is a good thing.  Ambition is the thing that drives us to be more, do more, and achieve more.  Ambition is what drives us to demand the best of ourselves, and that is why it’s good.  Pure ambition is an inherently good thing, because pure ambition is correctly aligned with the purpose of your life… it’s what drives you to be what you were put here to be.

So, curiously, having clarity about your life purpose is a key part of being a successful investor… if you’re doing it the SDI way.

Now On the other side of that line in the sand is something that feels a lot like ambition, but is wholly different:  Greed.  Greed is all about wanting more without being more or doing more.  Greed is not about fulfilling your life’s purpose… it’s about achieving a standard to which you falsely believe you’re entitled.

Greed and ambition are separated by a line in the sand, and that line is called wisdom.  A better word for it might be “perspective”.  Perspective is the difference between extraordinary investors like Peter Lynch and Sir John Templeton versus criminals like Bernie Madoff   The former experienced tremendous wealth because they earned it.  The latter stole billions because he believed he was entitled to it, but absolutely did nothing to earn it.

And that’s what greed is:  A sense of entitlement to something you do not deserve and have not earned.

So let’s connect this back to helping you to make great investments that are simple, safe and, particularly in today’s context, strong.  There are two points of evaluation you must consider where strength is concerned and they are:

First:  What is the cash-on-cash return?  In other words, how much money do you expect to pull out versus the amount of money you put in?

Second:  What is the stress-adjusted return?  In other words, how does the volatility of the investment make the investment more or less attractive for you?

That second part… the stress-adjusted return… is a factor that far too many investors fail to consider prior to taking an investment.  You might look at the cash on cash return, and be blinded by the financial potential, without ever considering that a 15% return that causes you overwhelming stress is far less desirable than a 7% return that’s perfectly reliable and predictable.  This is a critical consideration, my friends, and it can easily be reduced to a formula.

Let’s use an example, shall we?

Imagine that you’ve got an investment opportunity that you’ve been told will yield 15%.  Now we all know that 15% is an exceedingly attractive cash-on-cash return and makes for an excellent “headline”.  Anybody who gets that kind of return on a consistent basis is a superstar, and we all know that.

But think about that for just a moment.  Which is better:  An investment that yields 15% and is fundamentally predictable and reliable, or an investment that yields 15% in the end but is so volatile that, on any given day, it looks like you might actually LOSE your investment rather than make a huge rate of return.

The answer is clear… an investment that’s highly predictable and reliable is far better than one that’s volatile, even if the rate of return in the end is the same.

So what we’ll do is to assign a “SDI Strength” factor to each investment with 10 being perfectly peaceful and reliable and 1 being just shy of suicidally volatile.

The investment which yields 15% and is highly predictable and reliable gets an SDI Strength factor rating of 9.  The investment that yields 15% but is highly volatile gets an SDI Strength Factor rating of 5.

It’s pretty easy to compare the two investments then… just make percentages of those numbers – 9 becomes 90%, 5 becomes 50%, etc… and multiple that percentage by the rate of return.  So the highly predictable investment has a stress-adjusted ROI of 13.5%, whereas the much more volatile investment has a stress-adjusted ROI of 7.5%.

The difference is far more clear this way, isn’t it?  But that’s only an approximation.  The real difference is far more distinct, and it’s based on some mathematical relationships that will only excite the engineers and math geeks among us, of which I’m certainly one.

So let’s do this:  Rather than talking about the math, I’m going to make a little spreadsheet you can download to do it for you.  What I’ll do is make a nice little page of tools for you to use, and it will be available at sdi360.com/tools.

But give me a couple days on that, please.  Right now, my dear wife Carole is having some serious health problems, and has lost a substantial amount of hearing in both ears.  I’m desperately concerned about her and will be taking her for another round of doctor visits today and tomorrow, so please bear with me and I’ll get that posted for you within a couple of days.  And, if you’d be so kind… say a prayer for her, ok?  Thanks.

But what about the whole ambition versus greed discussion?  How does this calculation help us to clarify this issue?

The truth is that there’s no way to precisely quantify the difference between greed and ambition.  But here’s a pretty good standard:  Would you be happy if your investment yielded only the stress-adjusted return rather than the more attractive headline return?  If you’d only be happy with the “headline” return – the big number in bright lights – rather than the stress-adjusted return… well, then… you’re making an emotional decision rather than a rational… and that emotion may be greed rather than ambition.

The answer is simple, but maybe not easy:  Be patient.  Find another investment where the numbers – including the SDI Strength Factor – actually line up to achieve the goals you seek.  Because it’s not greedy to demand strong performance for your capital.  But it’s the very essence of greed to demand that your investments achieve more than they can truly be expected to achieve.

My friends… invest wisely today, and live well forever!

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