Investing Mistakes the RICH Don’t Make

There's a one major difference between those who are successful investors and those who aren't: decision making. It's the most valuable skill anyone can improve. By the end of this video, you'll have a clear understanding of what separates these two groups and how you can improve the ratio of success in your investment decisions. Here are 15 investing mistakes the ultra wealthy don't make.

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Number one: being emotional about money. Emotions trump reason. When emotions aren't kept in check, the ultra wealthy have a secret advantage over everyone else. It's called deal flow. Deal flow relates to the number of opportunities and investments that they have access to. The more deals you make, the better your decision-making mechanism becomes, and the less emotional you'll be about money. One of the biggest mistakes newbie investors make is they don't understand all the terms of the deal. They look only at the surface level and never go deep into the numbers. "Do your own research" is just something newbie investors say but never follow through on. The ultra wealthy actually do the due diligence. The numbers don't lie, and the more you're able to understand what's happening under the hood, the less likely you are to be left holding the bag.

Number two: trying to time the market. The golden rule of investing is do not buy bad assets. If you buy a great asset, it doesn't matter when you buy it as it will continue to generate value for you. Your ability to differentiate between bad and good assets is what will determine your rate of success. Waiting for the right time is, most often than not, taxing on the person waiting because there's always demand for great assets, and thus their value will continue going up through time. The ultra wealthy know that time in the market beats timing the market. You can actually tell how rich someone is based on what time horizons they use when they speak. This is what the S&P 500's performance looks like in the last 12 months: ups, downs, fluctuations— a lack of predictability. Right? But if you start using larger time horizons, that uncertain graph ends up looking more like this: quality investments go up almost linearly through time. When you think in decades instead of months.

Number three: short-term bets, trades, and short-term thinking. The ultra wealthy know quick bets are a fool's errand. Here's something a casino owner once taught us on the difference between the rich and everyone else. When the rich come to a casino, they're there for the experience. They're walking in knowing they will spend money for the thrill, like a ride at a theme park. They assume they're not walking out with the money they came in with as a default. When poor people enter a casino, they're there to earn money. Poor people say they go in to double their money, and we all know the odds are stacked against you, and the house always wins. But for the ultra wealthy, it ends up being a positive experience either way because they got the thrill, they got the thing they came in for, no matter if they win or lose.

Well, for everyone else, it's only positive if they win. This difference is crucial when investing because investing dramatically differs from speculation or gambling, mainly through the time horizon reasons of the outcome. The ultra wealthy actually prefer investments they don't have to touch for years upon years because they know every time they move funds, there will be commissions and taxes attached to those transactions eating away at their profits. But on the flip side, every newbie trader out there is day trading their hearts out while the platforms they trade on are slowly chipping away at their funds.

Number four: being cash poor. Here's how the perspective on money differs from those who are educated versus those who are still learning. The poor buy assets with the hopes they'll be able to sell them later on for more than they paid for them and thus make a profit. The wealthy buy assets with the intention of never selling them. That's the difference between making money and building wealth. Once you understand this golden rule, you'll never think of the investments you make the same way again.

The wealthy treat their investments like their personal piggy bank: you buy and add it to the pile. In time, that pile grows larger and larger. This approach allows you to look at the market differently. If the market price of an investment goes down, the wealthy jump at the opportunity to buy it at a discount. This is why the ultra wealthy always have cash on hand waiting to be deployed. This is why most of their investments are focused on income-generating assets, so they always have more rounds ready if the market fluctuates.

Well, how poor people make one bet and hope for the best. The rich are in a continuous accumulation mode, which is why the rich keep getting richer.

Number five: putting all of your eggs into one basket. The more wealth you accumulate, the more your investment strategy changes. Allocating 100% of your investment to the public markets or a single sector opens you up to complete failure risk. If your industry goes under, your understanding of risk in relation to your ability to alter outcomes also compounds through time, especially as you begin to build wealth.

Now, here's the golden rule of diversification: ninety percent of your investments should be split based on your expertise; the rest is like play money. Now, here's what that means: what do you understand best, and in what ratio? Let's say you run an e-commerce business and also have some investments in real estate, plus stocks. So what percentage of your expertise is in the e-commerce industry? What percentage of your expertise is in real estate? What percentage of your expertise is in stocks?

Let's say it's 75% business, 20% real estate, and 5% stocks. Well, if you're really good at what you do, you should bet the most where you have a real competitive advantage. Invest in things that you have control over in proportion to your ability to deeply understand the market. Now, in this example, the business and real estate are where you understand the market the most, so ninety percent of your investments should go toward what you know. The rest of that ten percent can go to alternative investments that have the potential to outperform the market where maybe you've got an interest, but you don't have 100% expertise to do it full time.

Now, this ten percent is where you can take a little bit of risk because it's not going to affect your long-term strategy. A great example of alternative investment is luxury art. 2022 was the best auction year ever. The big three auction houses sold nearly 18 billion dollars of blue-chip art, especially in times of high inflation or pending recession like the ones we're in right now. Art is outperforming almost all traditional investments. Last time inflation was this high, contemporary art appreciated at an average of 20% per year, according to the MW index. For example, one of our favorite artists, Kaws, well, his pieces have appreciated 40% plus year over year.

Look, we know what you're thinking, but a lux, look how can the average person take advantage of these kinds of returns when there's such a high entry price point barrier, meaning only the already rich can afford them? Well, that's where our friends at Masterworks come into play. They took all of the concepts from stock investments and brought them into the art world. Now you can invest in blue-chip art the same way you would invest in stocks. They buy the paintings, each offering is qualified with the SEC, and is broken into shares. You buy shares for as low as $20 a share, and once that painting is sold, the profit is distributed amongst the shareholders.

All of Masterworks' 13 exits have been profitable to investors, and in all of their exits to date, Masterworks has delivered a positive net return to their investors. This is how in 2022, they paid out over 25 million dollars in total to their investors and why paintings sell in minutes. Normally, these kinds of investment platforms are closed off to retail investors, but since you're part of the Alux community, if you go to alux.com/art right now, you can skip that waiting list. We'll leave the link in the description for you. Masterworks have been a solid supporter of our mission at Alux and were kind enough to sponsor this video.

Number six: spreading yourself too thin. Your success as an investor will boil down to making a couple of right calls with enough upside to move your life forward. This is why the ultra wealthy have just a handful of diversified investments which they stick with. In their hunger for different plays, the newbie investor spreads themselves too thin. Let's say you only have ten thousand dollars to invest, so you handpick and buy 100 different stocks and invest one hundred dollars in each one. If by chance one of them makes some major moves and doubles in value in a short period of time, your best performing play only made you an extra one hundred dollars. That's a mere one percent increase in your portfolio where everything went absolutely right.

Compare that with having picked just 10 stocks at one thousand dollars each, and one of them going through the same situation of doubling in value. Well, it's the same stock, the same event, but it would bring an extra one thousand dollars, and your portfolio would go up by 10 percent. The more you know, the less you need to diversify. You need to pick the ones you understand and with which you're comfortable to go the long run with and then invest most of your funds into a handful of carefully selected picks. Personally, eighty percent of our stock portfolio is just the S&P 500, and the remaining 20% is just there for quick cash liquidity if we need to change positions.

Number seven: investing in something just because X invested in it. This one's a little bit tricky because the rich have a different friend group than you do. They also have a different level of skin in the game and control over the outcome. The ultra wealthy invest in other members of their network's businesses because they know how valuable reputation and relationships are. The founder treasures the investor above everything else, and even in negative scenarios, the investor is usually the one getting paid out before the founder so that the relationship isn't damaged moving forward.

If you're gonna play long-term games with long-term people, you need to be able to trust them. Newbie and retail investors try to piggyback on other people's choices thinking that they'll get a free ride. The difference is you don't have the same agility of play as they do. A good rule in life is if you're walking in the footsteps of someone else, know that they already got the reward before you get there. This is why we don't recommend giving out stock investment advice or crypto advice to your friends and family. You might be really into it 24/7 while they are not.

Let's say you recommend a stock or a token that does really well, and then you exit your position, but because they weren't monitoring the situation as closely, they fail to do the same thing. Due to unforeseen events, the price tanks. Your family and friends are now holding the bag. When you give someone financial advice, you assume an obligation of keeping them posted and making sure they behave the same way you do. When projects fail, you end up resenting the other party, and they'll resent you back because for most people, money is emotional, which is why this next point is very important.

Number eight: investing in things they don't understand. The ultra wealthy stick to the beaten path. It's beaten for a reason because it'll get you to where you need to go. Other people will throw distractions and shiny objects at you all the time, trying to separate you from your hard-earned money. You don't need to be investing in an emerald mine in Zambia. You don't need to put a down payment on an apartment in Dubai for flipping purposes if you've never went there. Be careful of who you choose as your advisors and make sure you do not fail to understand the fundamentals.

If you cannot explain it end to end to someone else, you shouldn't invest. This simple rule alone will keep you out of a lot of trouble.

Number nine: failing to rebalance a personal portfolio. Newbie investors believe in set-and-forget approaches to building wealth the same way they believe in the four-hour workweek or weight loss. It sounds good, doesn't work. Depending on your strategy, the rebalancing intervals vary in length. The super wealthy rebalance every couple of years or once a decade, assuming there are no major financial events.

So what does it mean to rebalance your investments? Let's assume you've got one hundred thousand dollars and want to maintain the following ratio of investment: seventy percent real estate, 25% stocks, and 5% crypto or blue-chip art because you believe this is the right distribution for you. So seventy thousand dollars goes toward real estate, 25,000 stocks, and five thousand to crypto or art. Total: one hundred thousand dollars.

Everything goes well, and after a couple of years, the apartment you purchased is now worth one hundred thousand dollars in itself. The stocks are now worth fifty thousand dollars, and your crypto 10x and now it's worth fifty thousand dollars as well. Your new total is two hundred thousand dollars, so the total value of your portfolio has now jumped from one hundred thousand to two hundred thousand dollars, but the ratio is no longer there, right? Well, the ultra wealthy know the importance of rebalancing portfolios to stick to your investment strategy of seventy, twenty-five, and five.

The new 200,000 split would look more like this: one hundred and forty thousand dollars for real estate, fifty thousand for stocks, and ten thousand for crypto or art. Knowing this, at this point, you should be selling forty thousand dollars worth of crypto or art and making another real estate investment with the proceeds from that sale. This process of rebalancing will keep your wealth safe and growing throughout the years, no matter what the market does.

Number ten: panic selling. Even worse? People selling when the market drops, thinking they'll buy later even cheaper. Yeah, sure you will. For some reason, whenever the media sees red in this chart, it signals the complete collapse, failure, death, end of all of whatever they're discussing, be it stocks, mortgages, crypto, etc. They're always taking a complete failure approach to everything, and this causes uneducated investors to freak out and try to minimize their losses instead of just calming down and assessing the situation for what it is.

Whenever this happens, the ultra wealthy revisit the fundamentals of investment. What has changed since my initial investment outside of price? Is the promise the same? Is the company still around? Is it still profitable? Basically, you revisit number two on this list: if your fundamentals are good, you understand what goes on in this business. If the numbers are still making sense on paper and your long-term vision for the product is still intact, price drops are a completely different signal to the ultra wealthy than to everyone else. That is when they buy more.

Here's a quick story on why Jeff Bezos doesn't get enough credit as a savvy operator. In the year 2000, the stock price for Amazon fell by almost 90%. Every media outlet was calling the end of the internet and the tech bubble. Jeff knew how well the company was performing, though, and he issued the following letter to its shareholders. Feel free to just pause the video and read it as it will forever change the way you look at business.

So in the letter, he goes through bullet points on how much better Amazon was doing than the previous year, despite the massive drop in stock price. The same year, Amazon bought its own shares back at a massive discount, and they went back to work. Once emotions were no longer a variable, people understood just how valuable Amazon was and just how heavier, in the words of Mr. Bezos, the company was becoming.

This particular Amazon story and case study is just one of the examples we use to help the paid subscribers of the Alux app make smarter financial choices among other things. We couldn't be more proud of how valuable the app has become to our most loyal Aluxers and the kind of transformational impact it's had in their daily lives. If you want to give yourself the best shot at winning the game of life, go to alux.com/app and join the tens of thousands of people who already use it daily. They're out there making progress while you're still on the sidelines, not knowing where to start. So allow us to help you fix that.

Number 11: investing based on what's on the news, newsletters, or forums. If you're old, you're probably watching Kramer on CNBC or Fox or whatever you think is the one for you. If you're nerdier, you're probably paying for a couple of newsletters that honestly you almost forgot about until we reminded you just now. If you're young, you're probably here from the Wall Street Bets subreddit or some other meme stock telegram channel. It's all chaos, right? It's all Monday morning quarterbacking. Nobody can make you rich. You have to make yourself rich. You have to be laser focused on something you deeply understand and then assume the risk that you might be wrong. If you aren't, then you get a reward in proportion to the risk you are willing to assume.

These platforms are just entertainment. Treat them as such and you'll be okay.

Number 12: not taking out profits. Here's another staple of the investing world: nobody ever went broke taking profits the same way you should dollar cost average and on the way up the same way you should sell on the way up. This ensures you'll have some healthy profits set aside no matter what. The smartest people in crypto that we know had a simple strategy. They went in massively early on, things started to go up like crazy, and that's when they pulled out their initial investment plus some solid profits and the rest left untouched. This is what the rich call a free roll. Once you take out what you put in, and maybe a little bit on top to make the journey even more pleasant, it doesn't really matter what happens with what you left in.

The price might skyrocket and then you keep on taking profits from it, or it might go to zero, and you're still unaffected because you already cashed in. The reason newbie investors don't do this is because of greed and because some are actually degenerate gamblers pretending to be investors. The problem with betting everything on red every single time is that in order for you to win, you have to be right 100% of the time. It only takes one unforeseen event, and you'll lose everything.

Number 13: constantly checking your investments. Here's a big one: if your investments are keeping you up at night, you are over-invested. It's as simple as that. Sure, there's a frequency of keeping tabs on everything that you've invested in to make sure there are no big changes you should account for, but if you're waking up in the middle of the night to refresh your portfolio, you're doing it wrong, my friend. The continuous need to check, double-check, triple-check, it's just time wasted and anxiety-inducing, especially when there's nothing that you can do to alter the outcome.

Number 14: going YOLO. A basic understanding of math prevents high net worth individuals from betting the house on any speculative investment. This is the concept of low probability, high perceived reward. It almost always backfires in the medium term and always backfires on larger time horizons. Newbie investors usually make the mistake of going for the highest yield option. Usually, a few steps lower than that are the options with high enough yield to make the investment worth it, but with exponentially lower risk.

Number 15: thinking this time is different. Look, numbers don't lie, and people don't change. It pretty much applies to all aspects of life. Once you get burnt, don't put your hand back in the fire. Sometimes taking the L and walking away is a lot more productive than trying to recoup the loss by throwing more money in the fire because usually, the outcome is just a larger fire.

Looking at everything on this list, what mistakes have you made in your investing career, and what did you learn from them? Share with us and the community in the comments.

And as for those of you still around, of course, there's a bonus waiting. Money takes over your life. Building wealth or anything of value in general will require a tremendous amount of effort, dedication, sleepless nights, and you can never really shut it out of your mind. As long as you're in it, it will perpetually haunt you. But you don't have to let it take over. Do not let it take your health away from you. Do not let it keep you away from your family or from what you love about life.

Sooner than you think, a lot of time will have passed. Your children will be grown, your head will be covered in gray and white hair. You will look at yourself in the mirror and ask yourself if it was worth it. Get your money, build your wealth, leave a legacy, but make sure the cost isn't higher than the reward. You don't realize just how important balance is in one's life. Once you do, the way you work changes. You end up enjoying work more.

It took us 10 years to get to the position we find ourselves in today, and we know we could easily go another 10 because we figured out a balance moving forward. The moment you realize work in some shape or form will be a part of your life, you at least get to choose what kind of work you want to do. If you're lucky enough to have found your balance, congratulations, my friend. And if not, do not stop searching for it.

If this idea resonates with you, please write the word balance in the comments. Let's see how many of you made it this far in the video. Thanks for spending some time with us today, Aluxers. We're so glad you did. If you found value in today's video, please give us a like, hit that bell icon to never miss an upload, and hey, don't forget to subscribe. Thank you.