The Barbell Strategy – Limit Risk While Taking Advantage of Upside

Limit Risk

What’s the big fear of a lot of people about becoming an entrepreneur or investing?

Risk of course.

On the flip side what drives us to take this risk?

Upside.

What is upside?

Upside is the potential of something better happening.

Entrepreneurs are often perceived as risk takers but really the best entrepreneurs aren’t big risk takers.

The same is true of others who do well who are seen as not being risk takers they find ways to capitalize on upside.

If you want consistent success the objective is to simultaneous protect your downside while at the same time taking advantage of upside.

This won’t mean you always win as much as you could but it will mean over time your consistent wins will work out very well in your favor.

The strategy is what we call The Barbell Strategy courtesy of Nassim Taleb for the name.


What’s the Worst That Could Happen?

This is an important question to ask not just because it could be crippling but because the downside can pull you back a lot of years.

So the best entrepreneurs identify what could go wrong and find ways to limit those risks.

Having a low risk or risk mitigation strategy is the first half of the Barbell Strategy.

In other words if things don’t work out you’re still not that bad off.

A great example of this is investing in cashflowing real estate.

If you buy solid cashflowing real estate then usually the worst that will happen is you end up with the cashflow.

The cashflow isn’t especially high it’s not going to make you rich on its own but it’s also not horrible. You might consider it similar to what you’d earn by having your money in a bond or the dividends from a stock.

Likewise, you could look at earning a salary at a job.

Whether the company does well or poorly for the most part this salary should remain consistent and you’re fairly protected.

Of course, you could lose the job and could plan for this but even if you lose the job you don’t lose the salary you made along the way.

This is a notable difference between having a job and having a business. In a job you shouldn’t go negative. In a business you can actually go into the hole not only not earning but also losing money you’re putting out for expenses.

You’ve got the two types of risk to consider. Loss of actual value (relationships, money, assets, reputation, credit, etc.) and loss of time.

In other words, you want to be getting ahead regardless and you want to protect yourself against losing what you’ve already got.

What does this mean?

When you’re considering opportunities you want to find at least some protection within your strategy.

There are plenty of examples of people who don’t do this, make lots of money then lose it all and what good is that?


What’s the Best That Could Happen?

People don’t get rich off protecting downside they get rich off upside.

One of the main reasons so few people become rich is because they never pursue strategies with much upside.

The best that could happen isn’t very good.

Look to become rich you’re going to need to earn multiples (typically around 10x) the average annual income or better.

Even with saving and investing and the compounding you get you won’t be able to add up to much without a project yielding you a lot of upside. (Check out The Golden Path to explore how to do this predictably).

The problem is you simply won’t have enough to invest to get you there and especially not within any reasonable period of time.

So, you need an opportunity where the best that could happen (meaning if things go well) the rewards are really great.

If you study billionaires you see this in their thinking.

Steve Jobs famously said, “I like to be involved in projects that affect a lot of people”, hence iPhone, iTunes, etc. this is upside.

Elon Musk said he thought, “what are the biggest threats to humanity?” If you’re talking about a big threat you’re also talking about big rewards, this is upside.

In both cases especially Musk’s case there was lots of downside risk as well but the point is it was the upside not simply avoiding the downside that’s turned him into one of the richest people on the planet.

Having an opportunity with a lot of upside is the second part of the Barbell Strategy.

Note, there’s no guarantee this upside will actually happen, it might well not in fact most of the time it won’t, which is why the downside protection is so important.

Examples of upside strategy would include:

  • Ownership of shares or options
  • Profit sharing
  • Ability to scale a strategy that works
  • Etc.

If everything goes well those shares, options, profit sharing, etc. could be worth far more than your salary but there’s no guarantee they’ll pay off they are simply ways to participate in possible upside.


Putting the Barbell Strategy Together

The Barbell Strategy helps you not only figure out what opportunities to pursue (in many cases a blend of opportunities) but also how to structure them.

For example, should you take all stocks and profits or salary plus shares?

Should you go into a new business with both feet or should you maintain a side income while building the business until the business can replace your side income?

The Barbell Strategy should encompass both a downside “what if the worst happens?” strategy, which isn’t exciting but keeps you safe while at the same time also encompassing an upside “what’s the best that could happen?” strategy, which is exciting and could make you rich.

Here’s the beauty.

The probability of any given upside strategy paying off is usually fairly low otherwise everyone would do it.

The failure rate of businesses not counting MLMs and a lot of the work from home opportunities is around 70% in the first 10 years…those are actual failures they don’t count ones just getting by without exciting results and when you include MLM and work from home opportunities the numbers tend to balloon well over 90%.

Worse, the percentage of those actually achieving the success they dreamed of when they got into it are much lower typically at less than 5%.

From a purely statistical basis this means to succeed at a high level you’re probably going to have to be willing to try 20 or so opportunities (with great training, education, networks, etc. you can improve these numbers of course, hence Richucation).

Well guess what?

Because the Barbell Strategy protects your downside you’re more able to pursue one opportunity after another because you don’t have time spent recovering from big losses.

What are some great examples of the Barbell Strategy at work?

We discuss how investing in properly purchased cashflowing real estate with a reasonable amount of leverage achieves this brilliantly. See How to Buy a House Like a Millionaire.

This is because the cashflow provides the downside protection while the leverage with appreciation provide the upside, which is why so many people have done well in real estate.

Dividend stocks can provide a similar benefit (estimates range from around 40%-70% of returns coming from dividends). This could in theory be enhanced by investing with margin where the dividends pay the cost of the borrowing but this introduces new downside risk due to the high volatility of stocks.

Note commodities, currencies, etc. don’t offer this same benefit because they are non-productive assets, which is one of several reasons our philosophy is to invest almost exclusively in productive assets.

Some strategies with bonds offer this to a lesser extent because the upside isn’t as great as say real estate or stocks but the volatility is also a lot lower than stocks so the downside isn’t as bad.

What about in income building vs investing?

A great example is mastering marketing.

In most careers you’ve got a low income cap. Trades, engineering, nursing, accounting, IT, etc. usually you’re capped around $100k-$200k/yr. depending where you are in the world.

These are great because they protect the downside but horrible because they don’t offer the upside.
On the flip side you’ve got entrepreneurs, deal makers, traders, etc. who have upside but also could make nothing or in some cases lose a lot.

Marketing is one of the rare fields with both.

It’s very easy to earn a regular wage say $5000/mo. depending where you are in the world as an example.

On the flip side if you master marketing because it’s a field that scales you could earn $2 million or more per year.

This is one of the many reasons Richucation puts so much effort into helping clients develop mastery of marketing since it is the #1 game changing skill in financial success if you’re willing to put the time effort into mastering it and what you learn in colleges or universities simply doesn’t give you these results since it’s designed to have you work in a big company where you don’t have the upside you get through learning independent, entrepreneurial, or small business marketing.

There are some other skills with high upside as well such as Leadership/Management but the problem is in most organizations these aren’t careers so you have to start somewhere else then move into this position.


The Key to Upside is Scale

Why do some things have upside and others don’t?

The answer is scale can you put in the same amount of time and energy while producing dramatically greater results?

In fact, is there a decoupling between how much time and energy you put in and what those results are?

The extent to which you can do this determines the scale.

Scale will make you rich.

McDonald’s isn’t the most profitable burger company because they make the most per burger or the best burger but because they sell the most burgers.

Coca Cola is the most profitable and valuable beverage company not because they make the best beverages or sell them for the most but because they sell the most of them.

This is one of the key insights of The Formula – The Essentials of Becoming Rich.

How much can you scale something that works?

Some things are easier to scale than others but there’s also strategy and skill to scaling and especially scaling fast once you’ve got something that works.


Conclusion

Find ways to protect your downside not only your risk of loss but also ensuring you’re getting ahead as much as possible so you’re not losing time.

Make sure you’re pursuing something with upside or leading to something with upside.

There’s one final lesson.

Sometimes people have a low risk strategy to go along with their upside strategy but the upside strategy has big DOWNSIDE and the downside can wipe out everything they’ve got in the low risk strategy.

This can be a big problem.

For example, you might have a job along side a real estate development project you’re running. The real estate development might involve borrowing a lot of money and maybe you’ve got a personal guarantee.

If the development goes bad it could ripple over and result in losing everything you own even if it’s solid in its own right.

This is where asset protection strategies come in and you can address these through proper structuring as well as proper relationships.

Last but not least the Barbell Strategy doesn’t apply just to money and time it also applies to relationships, reputation and assets.

Some relationships have great upside but also huge downside. You’ve got opportunities for lots of attention, which could build great reputation but also go the opposite way. And so on.

Make sure you apply the same principle limiting your risk to relationships and reputation while pursuing high upside.

The wisdom of this strategy doesn’t usually show up in the short term but over time especially as you go through a cycle or two it becomes very apparent and HUGELY beneficial.

What seems slower is often faster in the long run but what’s slower is sometimes just slower. Make sure in pursuing success in particular financial success you have upside in your low risk strategy.

Likewise, what seems faster is sometimes slower in the long run because it will all come crashing down as time passes. The wise thing is to avoid strategies where you can end up with catastrophic loss even if the chances are low because the more time passes the more those chances compound.

To improve your odds of success:

Or contact us for specific questions.

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