Dare you be a win/ win wealth builder?
IS there a better way to live and interact with our fellow human beings than by constantly attempting oneupmanship? When I teach methods of wealth accumulation in my financial planning workshops, I reference a hierarchical model I developed that’s based on four levels of risk:
Saving lies at its floor providing stability and safety in exchange for low returns; above our savings base comes investing, and then speculating, and finally we have gambling teetering at the top.
Note: I do NOT advocate gambling. Personally, I think gambling is a stupid activity on the part of the gambler, although it is hyper-profitable, first, for gambling companies preying on the frailties of some people, and, second, for the perpetually revenue-strapped governments of the world that heftily (and justifiably) tax gaming companies. Gambling — particularly when breadwinners jeopardise their family finances — creates a risk where there was none to begin with!
Investing, on the other hand, has the potential to bring multiple benefits to all parties involved.
There’s a fascinating reason investing is potentially beneficial to everyone involved in it. Those familiar with Stephen Covey’s book The 7 Habits of Highly Effective People may remember his fourth habit because it has the potential to revolutionise the way we act at home, in the office, and in our wealth building activities.
Sadly, though, Covey’s Habit 4: Think Win/Win is tough for people with a scarcity mentality to embrace. In contrast, it’s easier for those with an abundance mentality to incorporate it into their worldview by adopting healthy paradigms or mental models.
Covey writes: “Win/Win is based on the paradigm that there is plenty for everybody, that one person’s success is not achieved at the expense or exclusion of the success of others.”
A person with a well-nurtured mental model of abundance as opposed to one of scarcity will be a better adjusted, happier individual. But can such a "marshmallowy-lovey-dovey-Covey" approach to life make us consistently richer? Surprisingly, yes.
Paradigms of human interaction
In his book Covey teaches us six different paradigms of human interaction, most of which mirror binary logic circuits with two options: On or Off. The six paradigms are: Win/Win, Win/ Lose, Lose/Win, Lose/Lose, Win, and Win/Win or No Deal. I’ll leave you to research the differences between them by buying Covey’s book or going online.
In my opinion, Donald Trump, for instance, seems fixated, at best, on paradigm five, Win, and, at worst, on paradigm two, Win/Lose. In contrast to his divisive, destructive policies, the two healthiest paradigms are Win/Win and the more courageous Win/Win or No Deal. Businesses and portfolios built on those two healthy paradigms as opposed to the other four tend to succeed better over long periods.
Let me illustrate that with the zero-sum Win/Lose example of poker: At the end of a game no wealth has been created. All that has happened is a transfer of money from the losers to the winners. The goal of each player is to win at the expense of the losers.
In contrast, investing, especially in equities and investment real estate can result in a commendable Win/Win paradigm being played out. You see, in business, being willing to walk away if a true Win/Win deal can’t be ironed out sometimes results in short-term business losses that yield long-term profitable business relationships.
Consider the example of a hypothetical stock that traded at, say, RM5 five years ago and is now trading at RM10 a share. A person who bought it at RM6 four years ago from someone else who paid the IPO price of RM5 would only have done so if he believed the price could rise further or if its dividend yield was healthy; while the one who sold it may have done so because she needed the money and was happy with her 20 per cent price appreciation over one year.
The new buyer might then hold the stock through good times and bad to finally sell it to you or me for RM10 a share tomorrow. As long as we do our homework and feel the current price, double the IPO price half a decade ago, makes economic sense, we might be happy to hold the stock for a few years.
Winning deals
Alternatively, think of a real estate buyer who makes an offer to you for the home you’ve lived in for, say, 10 years. He might want your fine home for his young family, while you may choose to sell because your house has appreciated and you’re looking to downsize to a condo that’s easier to clean.
In both scenarios, as described, all the buyers and sellers accurately believe they secured winning deals. Of course both stock and real estate prices can fall. But if our savings buffers are large enough, those vital cash cushions reduce the likelihood we’ll need to sell at a loss, especially if we always focus on purchasing high quality investments.
So, scrutinise your current portfolio. See if what you own today allows you to position yourself for true Win/Win investing tomorrow. Furthermore, in all your future career and business dealings, try as much as you can to NOT emulate a volatile president; instead, why not adopt the healthiest of all paradigms:
Win/Win or No Deal.
Warning: It requires courage.