Latest / Money Grows on Trees / #341 - How To Make Rational Financial Decisions (3 Step Framework)

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#341 - How To Make Rational Financial Decisions (3 Step Framework) · Money Grows on Trees

• 0:00
  Your emotions are the single biggest threat to your financial future. Most
• 0:03
  people think bad investments are the reason they lose money. But the reality is,
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  people lose money because they make permanent financial decisions based on temporary
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  emotional states, and they optimize for the wrong things. I'm
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  Lloyd J. Ross, seven-figure investor and entrepreneur, and I've helped thousands of everyday Aussies, Americans,
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  and New Zealanders, and Canadians get out of debt and build real wealth. And in this video,
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  I'm gonna give you a simple three-step framework for making rational financial
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  decisions so you can stop losing money and start optimizing for
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  financial Freedom. So let me just take this back for a
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  second. and just explain why I'm doing this particular episode.
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  It's because I feel like after having coached
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  and mentored thousands of people over the years, that
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  the one thing folks get stuck on, no matter how much access
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  they have to information on Google that's been around forever, or how
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  much or how many questions they can ask Claude or ChatDeputy, the reality is
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  most people can't make financial decisions, and not even financial decisions.
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  They struggle to make decisions in general. And here's why. because
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  there is a fear that they will make the wrong financial
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  decision. And in most people's minds, they feel that if they make the
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  wrong financial decision, there's no coming back from it. Now the reality of
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  that is this, there's always room to pivot, okay? So
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  when you make a decision, it's not the end of the world, it's
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  just you made a decision, these are the outcomes, and they're either effective
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  outcomes to the goal or ineffective outcomes to the goal. But either which way,
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  if they're ineffective outcomes, guess what you can do? Stop and pivot and make a different
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  decision. So, I used to, when I was younger, also get paralyzed
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  by making decisions because I always thought the fear of
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  like, what if this is the wrong one? And as I got older with more experience, I
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  realized that there's no such thing. There's just decisions.
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  Now, what I want to make sure of in this episode is I give you this three-step framework so
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  I prevent you having to make the long-term pivot decisions later
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  to save you a ton of time and money because I don't want you to make ineffective
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  decisions I want you to make effective ones. So
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  we want to enhance the effectiveness of your decision making, but most
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  importantly, we want to alleviate the amount of time. that
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  you have been sitting on a decision you haven't made yet, because
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  there's a huge opportunity cost to making no decisions, meaning
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  doing nothing, which is actually a decision in itself, okay? Now, the actual
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  term decision comes from the word decide, and
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  side is Latin for kill, right?
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  So it's to decide, to de-kill. So it's to kill off every
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  other alternative except for the one you're choosing. So part of deciding means
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  to kill off everything else and go down one path, right? And
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  so I can understand why most people get a lot
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  of anxiety around that. You can have as much information
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  as you can find on Google, but for whatever reason, you can't move
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  forward. And it can be very, very taxing on
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  your mind. You can be sat around for months and years at a time, delaying
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  the decision, and that can cost you a lot as well. So there's two types of
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  decisions that happen, two types of acts of
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  decision-making that can happen that will create a result. And Warren
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  Buffett talks about this a fair bit. It's the act of commission, where
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  you literally make a mistake by making
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  a decision itself and committing to a path that's wrong, that
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  turns out to be wrong, based on your goals. and there's an active
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  omission. An active commission is where you take action and
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  it turns out not to be so good. And an active omission is where
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  you don't take any action and it turns out to be not so good. An active omission that
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  turns out not to be good is also costly. Okay, so
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  an example of an active commission would be, okay,
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  I've done my intelligence on this asset I'm gonna buy and
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  I go and buy it and oh, I was wrong and it sucks. Okay, so
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  for example would be, I'm going to go and buy Bitcoin
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  at 110,000 and oh, I'm an idiot, it's now 70,000. Whatever,
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  I don't know. It's probably more likely
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  you're gonna make that decision in a property, for example. You say, okay, it's an active commission.
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  where I'm gonna buy this property investment, and I think I know what I'm doing, but
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  oh, I forgot to factor in the operating costs. Oh,
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  I forgot to get a pest inspection, there's white ants in there. Oh, I forgot to
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  get a title search, there's a caveat. Oh, I bought it at
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  the wrong time, or I didn't realize interest was gonna go up. You know, there's all these things that
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  can happen after you make the committed decision to buy a property. On
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  the other side of it, an act of omission is doing nothing. So let's
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  say you didn't buy a property and all of a sudden you've missed out
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  on gains or you've missed opportunity because you
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  omitted the decision to buy. Now I'm not suggesting to buy or
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  not buy based on this example, but I just wanted to explain to you that there's two
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  types of decisions that you can make. or not make that
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  creates problems, okay? So Warren Buffett talks about the fact that
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  they didn't buy Google earlier and it probably cost them billions and
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  billions of dollars. He talks about how he first bought Berkshire Hathaway shares and
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  how that was a really bad decision and it's cost him billions and billions of dollars. Acts
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  of omission. What's interesting about acts of
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  omission is they don't show up on your balance sheet. They're invisible. So
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  for example, had I have left my job, my nine to five
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  earlier, Maybe would be worth
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  millions more. I just don't know because An
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  act of omission is where you don't make a decision and you miss out on the future scaled
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  gains of that decision So they're also decisions
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  are worth considering. Okay, but on this occasion I'm going to talk about acts
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  of commission where you're gonna actually make a decision yourself or you're apprehensive
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  to do it So you haven't done anything? And I
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  notice this a lot when I'm talking to people is that they're just stuck. Like
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  even a young fella yesterday, I was talking to him in DMs on my Instagram, just randomly, and
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  he wants to buy a property or buy a business and he's stuck. There's no which one
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  to take. And the reality is all the data points to the
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  obvious one, but people aren't caught up in just data. We're
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  not robots. We're caught up in the emotions of things. We're caught up in
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  the tribal dance of a rite of passage to do certain things
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  by certain ages to alleviate some sort of tribal pressure on
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  us to be a certain person to our family and friends that we really aren't. So
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  we make these behavioral decisions based on more than just the data. So
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  to give you the three-step framework to help you, let's begin with the most important
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  part of making financial decisions. It's
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  the data, okay? And I know this sounds ridiculous, but
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  you don't, it's quite interesting when people say to me, Lloyd,
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  should I sell my house? I'm
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  like, oh, is that the data? Should
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  I, so the data I have at that point is, you have a home and
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  you're considering selling. That's all the data I have. Yes,
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  no, how can you make a decision? But this is where people
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  get stuck in their own decision-making, because they go, honey,
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  should we sell the house? OK. And
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  off they go. You can't make decisions on
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  should we. That's all emotional. Perhaps
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  you've seen something in the news. You're like, oh, should we sell the house? What
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  do you own? So diving
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  into this deeper, how much is the house worth in the marketplace? How
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  much debt do you have on it? What are
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  the operating costs annually to own that house? What would
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  it cost if you sold it and rented and invested the proceeds of
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  the equity into a different asset class? And do you know how to do that? Would
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  you buy another house instead when you sold it? And are the operating costs less
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  or more than that? And could you qualify for a house now based on your income? What's
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  the, and then what? So when you're trying to make a decision, get
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  the data, but then say, and then what? It's called second order
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  decision-making. It's where you make a decision based on
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  data, and then you go to the second order of, and then what?
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  And this is why I love to play chess, because in chess, you have to think a few moves
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  ahead. That's why it's such a great game to play for strategy. But most
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  people aren't doing that. They're just thinking about, I don't know, what they're gonna eat
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  for lunch. There's no other, like, and then what, right?
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  So the first step to this three-step process is get the data. Get
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  the data on your own stuff. So what do you own? How much debt's
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  on it? What's it worth? What would it cost us to sell it with an agent?
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  What's the agent's fees? What's the capital gains tax afterwards? What
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  are you netting at the end of it? Where are you gonna deploy that money afterwards to
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  do an and then what with it? And is the juice worth
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  the squeeze, which we talk to in a second, okay? But the most
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  important thing to make financial decisions is to get the data.
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  Another great example is I'm considering right now buying a company, buying
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  shares in a company. This particular company has returned 400% over
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  the last 11 years. And
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  it's a wonderful company, very high return on equity, very high return
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  on capital. And I'm contemplating in my head whether to buy
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  shares in this company. And I'm accumulating as much data as
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  I can. Yes, I'm listening to YouTube clips, I'm reading their annual
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  report and their 10Ks and I'm reading analysis
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  of it from other people. I'm considering what other big investors are doing
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  with it. I'm really thinking about this deeply. I'm looking at
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  what's happening in the real world with it. I'm just trying to learn as much as I
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  can and take on as much data as I can before making
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  a decision. And it's so important, right? So get the data. Because when
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  you've got data, most of the time, the rational, because
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  this is about making rational decisions. Rational means it's not all
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  emotive. It's not just emotion. That's irrational. And
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  Roger Kipling, I think, said, Kipling has this poem where he said,
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  if you can keep your head when everyone else is losing theirs,
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  you'll win. So the whole idea of getting the data is
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  to rationally make a decision and not lose your head, okay? And
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  I think once you ascertain the data, and one of the best ways to do this is to
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  get a spreadsheet on Excel, even if you can get a, you can write on a pad if you want, and
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  just write every number feasible for that particular asset
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  class. Understand the numbers, right? It's the
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  detail, the devil's in the detail, but The real answer
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  to the questions is pretty much in the mathematics of it. And this is
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  how financial decisions ought to be made. That's the first step.
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  Get as much data as you can and put it and write it
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  and structure it in a way that enables you to
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  see it clearly. Just so you understand what you're dealing with.
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  Now, if you want to go an extra step, you could plug that into Claude
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  or ChatGPT and ask it to summarize it for you and give
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  you the details and ask it what you missed. That's okay too. Say, what did I miss?
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  And it'll tell you, right? So it'll do a lot of the data organization,
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  yeah? Now, the second step is
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  this. Once you've got the data, you
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  then would look at a decision based on, well, here's the data if we stay
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  with this, And here's the data if we don't stay
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  with it. So there's data to support both sides of the decision. So you have
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  to have data on both. So if we keep it, it's this. Or if we do option
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  A, it's this. If we do option B, here's the data. Here's the
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  financials. Here's the numbers. So you have two. And making
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  financial decisions is which one do you want? Do you want option A or do you want option B?
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  Sometimes there might be option C. So just
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  finding and understanding the different scenarios and options with the numbers is
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  critical, okay? Then what you wanna
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  do is you would say, this is a bit about second order consequences,
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  what I was talking about before, is where you say, well, if we do option B,
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  what's the worst that can happen? So this is called downside protection.
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  So it's protecting the downside. And it was, I
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  think it was Templeton, famous investor who
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  said, I position my funds according to
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  not how much money I can make, but how much I can potentially
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  lose. So basically, he says, if you see me place a really big
• 11:42
  position into a stock, it's not because I'm going to make the most, it's because I'm
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  going to lose the least. Does that make sense? Within reason, right? Based
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  on the risk. And you'll notice that when Warren Buffett bought
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  Apple, he put in $50 billion, the biggest position ever, arguably
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  the greatest trade of all time. And he looked at the downside, and as he
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  understood it, Apple was selling for 10 times earnings, with a
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  growth rate of probably over 30%, which is incredible. And
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  it had $200 million in cash. And
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  it was about to execute, in fact it probably announced a 200 billion dollar
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  buyback. So he realised if it fell any further, the
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  fact of the matter is that cash would have been used to buy shares on the way down and
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  it would have actually fortified his position in the company up and the share price, it would have
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  put a flaw in the share price. And so he managed the downside with
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  that. So he's always looking for managing downsides. When he
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  bought Bank of America in the GFC, he put 5 billion
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  into Bank of America, but he said, I'm going to lend you the money. I'm not going to buy shares
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  because they could go to zero. I'm going to lend you the money. You're going to pay me 9% coupon.
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  So you're going to pay me 9% interest on my 5 billion dollars. And
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  they're going to be convertible into shares once they hit a certain number. So
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  he was the first creditor. So if it had gone bright, he would have been first to take the
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  assets of the company. Great, good downside protection. Plus,
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  you're gonna get paid a nice income on the way through, 9%, which means he
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  would have got his money back in eight years. That's a good
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  downside protection, is getting cashflow back. And then, by the
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  way, I wanna convert them into equity to minimize his active
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  omission, where he should have just bought the shares. But he put in a caveat
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  to prevent that even. Like, it was a most amazing deal. So he's
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  very good at minimizing his downside. So you want to ask yourself the question
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  in this decision, what's the worst that can happen? Just quickly, if you're
• 13:22
  ready to take control of your finances but feel stuck on where to start, I
• 13:25
  have a solution. My book, Money Buys Happiness, simplifies
• 13:29
  investing and wealth building with practical steps to help you achieve financial
• 13:33
  peace. Get your copy via the link in the show notes and let's get your
• 13:36
  money working for you. Now back to the episode. So for example, if
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  you're going to buy a sports car, you're like, you know, what's the worst that could happen? Well, you
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  know, I always sell it. That's true. You could do. Yeah. Like when
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  we bought this Range Rover, we were like, you know what, what's the worst that could happen? Well, it turns out we don't want to do such a good car,
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  or we don't want to, you know, borrow the money to, you know, and we'd always sell it.
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  You know, if we were running a challenge in our business, we'd always sell it. Particularly
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  when you buy it well. Right? If you buy a
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  brand new car, not as effective. But if you buy one that's three or
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  four years old and you don't have it for a year and you sell it, the downside's protected.
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  Not as much depreciation, okay? You can
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  buy certain things that grow in value, then you're protecting your downside because they grow in value over
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  time. There's a lady we're getting, we've invited
• 14:17
  as a partner of one of our businesses and she's leaving
• 14:20
  her job, so it's not an easy thing to do. And she's,
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  you know, there's some apprehension there, a little bit of apprehension. It
• 14:28
  was a bit scary and to herself, she's like, what's the worst that
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  could happen? Not like it, not work out, just go back and get another job. I
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  mean, I made this the same decision-making process when I left my job in 2012 to come
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  back here to Australia. I was like, well, what's the worst that could happen? I could always just call
• 14:42
  my old boss back up and get the same job. He would invite me back in a heartbreak. This is
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  why you don't burn bridges. Figure out
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  step two of the framework. So, step one of the framework is get the data in detail.
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  Step two is what's the downside, yeah? What's the worst
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  that can happen? And figure it out because if you go, yeah, so what's going on? Ah, all good. It
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  helps it. And the third decision is very important because it's
• 15:04
  probably the deciding factor because even if you have the data and
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  even if you understand the absolute worst case scenario is this and
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  it all makes sense to you, you're still stuck. Here's
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  the final part of the three-step framework that makes so much sense What's
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  in your heart? And you might say Lloyd that's
• 15:23
  an emotional decision. It's the last little bit Because
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  you could have all the best data and you could have all this down to
• 15:30
  our protection But there's this niggle in your intuition
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  that says otherwise and it's called your gut So I should just say what's in
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  your gut in your heart same thing. It's kind of connected, right? And
• 15:42
  the best way to do that, I've got this. I should have brought it with me actually. I don't have it. A mentor of mine gave
• 15:45
  me a coin and it's a yes or no coin. I should
• 15:48
  have brought it in. And he gave it
• 15:52
  to me as a gift. And he says, you don't want to make big decisions. I flipped the coin. I'm like, really?
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  He goes, yes, I live my life. I'm like, that's cool. So, you know, I went to buy a boat and he flipped
• 15:58
  it. Oh yeah, buy a boat, not buy a boat. And what's cool about
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  that is when you flip the coin and you put it over and you turn it and
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  you place it on your hand, you'll already
• 16:08
  know in your gut what you're hoping for. So you'll have already made
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  the decision in your head, I hope it's a yes. So
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  you already know that you wanted a yes, because it's in your
• 16:19
  gut, it's in you. So basically it's like what's in your heart, what's
• 16:23
  going to help you sleep better at night, So
• 16:28
  it's not just optimizing for money, it's optimizing for happiness.
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  I think that's a very important thing to consider because wealth
• 16:36
  without happiness is fruitless. It doesn't make any sense. So
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  if you go, okay, well, I'm going to make this really difficult decision. First, following
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  Lloyd's three-step formula. One, get the data. So at least
• 16:46
  I know what I'm working with. Yep. Second, what's the downside with
• 16:49
  the scenarios or the options? Okay, what's the downside with this one? What's the downside with
• 16:52
  that one? Cool. Minimize the downside. Awesome. Makes it
• 16:55
  easier to make the decision. And then finally, well, I have all those things,
• 16:59
  but in my heart, I just can't. Then don't. Then
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  don't. It's okay to delay it further
• 17:06
  if it's not in your heart to do it. You've got to be all in your heart, yeah?
• 17:11
  And you also know sometimes when it is in your heart, you've got to get uncomfortable, in
• 17:14
  which case you've got to step into the fear and you've got to do it, because it's in your heart, right? Before
• 17:18
  I left my job in 2012, it was in my heart that
• 17:21
  I needed to get out of this 9 to 5 stuff. It just wasn't, it
• 17:24
  was misaligned. So there's some fears around getting rid of a paycheck or a
• 17:27
  wage, for sure. But in my heart, I couldn't have gone through life
• 17:32
  with my heart whispering to me every single day, you're better than this, you need to do more
• 17:35
  than this, this is not you. And you have to listen to it. And
• 17:38
  eventually you got to follow it. So don't delay. It even happened to me when I was trying
• 17:41
  to make a decision to leave the CFA charter program, which I've spent five years at. But
• 17:45
  my heart said, hey, this network marketing business is a better opportunity to live a juicier life.
• 17:48
  And it was. And we've made millions in profits because
• 17:51
  of that. And we've made the most, it was
• 17:55
  the best decision ever. And part of that was, well, I had
• 17:58
  the data. The downside was, well, other
• 18:02
  bad could happen really, but it was in my heart to just leave that, you know, and it was a
• 18:05
  really tough decision. So, I hope this three-step framework
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  gives you some sort of formula to follow
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  to make that decision. And if you can go, okay, I've got the data, I know what I'm working with, I
• 18:16
  know the downside, there's not too much there, great, and in my heart it says this,
• 18:21
  you've got your decision, right? You got your decision, so
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  make it. And if it turns out
• 18:29
  later down the track, that it was an ineffective decision, then
• 18:32
  at least you can say, well, you know what, at the time when I made it, it was
• 18:36
  very rational for what I wanted and what I was optimizing for, so I don't regret
• 18:39
  it. And that's the beauty of making rational decisions,
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  is you can't go back, you can't ever regret, because you're like, at
• 18:46
  the time, it made sense for these reasons and I made it. And
• 18:49
  if it didn't work out later, it's not because you didn't make a rational decision, it's because the world changed around
• 18:53
  you and that's going to happen. So, the worst thing you
• 18:56
  can do is just be paralyzed for your entire life
• 19:00
  and not make decisions because then you're not forcefully moving
• 19:04
  through life and you're letting the world come at you. And a business coach
• 19:07
  once said to me, Lloyd, there's two types of people in the world. One, where the world comes
• 19:10
  at them. the victims, and two, the
• 19:14
  one where they got the world. And if you want to be someone who goes with the world, you
• 19:17
  have to be able to make decisions and back yourself and go
• 19:21
  to them, despite what might happen in the future. Because it
• 19:24
  means you're forcefully building your life how you want it. And
• 19:27
  if you can't make decisions because you don't have this framework, then you're
• 19:30
  actually letting the world go at you. And sooner or
• 19:34
  later, the market will force you into making that decision and
• 19:37
  it's going to be worse. So have the courage. Fortune
• 19:41
  favors the bold. Apply this three-step framework to all your decisions, and
• 19:45
  you will alleviate all the anxiety you have around not making any. And I know
• 19:48
  you're going to live a better life by making the decisions because you're in control. And that's
• 19:51
  where you want to be. So I hope that makes sense. If you've enjoyed this episode, share it with a
• 19:54
  friend. Share it with someone who's stuck in their financial decision making. Go, hey, We
• 19:58
  need to listen to this. We need to listen to Lloyd with his three-step framework. Let's apply it. Send
• 20:01
  it to a friend. Hit the subscribe button if you enjoyed this episode. And of course, come
• 20:05
  and leave me a question in the comments on YouTube. And thanks for those listening on Spotify and
• 20:08
  other channels. Appreciate you and I'll see you in the next episode of the Money Grows on Trees podcast. Thanks
• 20:12
  for listening to Money Grows on Trees. If you enjoyed the episode, leave a
• 20:15
  five-star review on Apple Podcasts and Spotify and subscribe
• 20:19
  to us on YouTube so you never miss an episode. And if you're serious about
• 20:23
  building wealth, make sure to check out the links in the show notes and follow me
• 20:26
  on all social media platforms at LloydJamesRoss for