The THREE GOLDEN KEYS OF SUCCESSFUL INVESTING What the World’s Best Investors Know and Aren’t Telling
TheTHREE GOLDEN KEYS OF
SUCCESSFULINVESTING
What the World’s Best Investors Know and Aren’t Telling
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 1
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of
Successful Investing What the World’s Best Investors Know and Aren’t
Telling
James Skinner, Roice Krueger, and Mark Victor Hansen
“The Three Golden Keys of Successful Investing”
will tell you what professional investors know and
what amateurs learn the hard way!
___________________________________________
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 2
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
The Authors
JAMES SKINNER is the founder of two global financial
groups that manage billions of dollars of assets. He is
also recognized as one of the world’s foremost business
thinkers and appears regularly on Japanese television.
ROICE KRUEGER co-founded Franklin Covey, the
world’s largest training company, and has supervised
consulting projects for 80 percent of the Fortune 500.
MARK VICTOR HANSEN is the co-creator of the Chicken
Soup for the Soul empire and is the best-selling nonfiction
author of all time. His goal is to make the planet work
for all humanity!
NOTE: Ideas That Can Change Your Life™ is a
collaboration of three of the world’s most amazing
authors, speakers, and thinkers. The first person “I” may
refer to any of the authors.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 3
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
Foreword
There is no foreword to this book.
The markets don’t have time for that! Neither do
we. Let’s get right into it!
James Skinner, Roice Krueger, Mark Victor Hansen
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 4
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
The First Golden Key: Risk
The only thing you ever get paid for in investing is risk.
You are paid to take a risk that somebody else does
not want to take. That is the only game in town.
Risk is merely the possibility of an undesirable event
occurring.
People are willing to pay you to take on the
possibility of an undesirable event happening to you,
rather than holding on to the possibility of that
undesirable event happening to them!
When you put money in the bank, is there a risk?
Yes, there is a risk.
How do you know?
Because they pay you for doing it!
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 5
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
It really is that simple. If you get paid, you are
getting paid because there is a risk.
If there were no risk, you would have to pay them
for safekeeping your money.
So what is the undesirable event that could happen?
The bank could go bankrupt and not be able to pay
you back. A lot of banks could go bankrupt on the same
day, and the government could default on its obligation
to insure your deposits.
Now the likelihood of that happening seems small,
so the return you get on your investment is also small!
Now you know why you don’t get much interest on
your savings account.
If you put your money into a time deposit at the
same bank, is there more risk?
Yes!
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 6
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
How do you know?
Because they pay you more!
It really is that simple.
Bankers are brilliant. After all, they have been doing
this risk thing for thousands of years and have learned a
thing or two about it along the way.
You deposit your money in the bank. The bank then
loans that money to somebody else. They charge that
person one interest rate and give you another. The
difference is theirs to keep.
Savings deposit: Pay 2.5 percent interest
Loan: Charge 7.5 percent interest
Bank’s profit: 5 percent of your money every single
year!
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 7
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
The bank doesn’t want to risk loaning out its own
money, so it pays you to take the risk. It loans out your
money instead!
Now banks are really clever. They get the
government to insure the deposits, which reduces your
risk, and thus reduces the amount of money they have
to pay you for your deposits.
Basically, the taxpayer subsidizes the bank! The
taxpayer pays for most of the risk, so that the bank can
loan out money at a profit.
No wonder banks always have the biggest and best
buildings on all the prime real estate in every city in the
country!
Don’t Minimize Your Risk!
Most investors are taught that when you invest, you
should minimize your risk. This is stupid! If you
minimize your risk, you minimize your return! Get it?
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 8
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
Risk Is Not One Thing
Everybody keeps talking about risk as if it is one thing.
It’s not.
Once again, risk is merely the possibility of
undesirable events occurring.
Since many undesirable events are possible in our
lives, risk is not one thing; it is many things.
In investing, we look at many types of risk, which is
just another way of saying that there are different things
that can go wrong with an investment:
1. Capital risk (risk of losing your money)
2. Volatility risk (risk that the price will go up and
down)
3. Liquidity risk (the risk that you can’t get to your
money when you need it)
4. Credit risk (the risk of a counterparty going
bankrupt)
5. Regulatory risk (the risk that laws, regulations,
and tax rules may change)
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 9
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
6. Currency risk (the risk that the currency that
your investment is in—$, \, €—may change in value)
7. Country risk (the risk that the country you are
invested in may become unstable: war, change of
government, etc.)
8. Reputation risk (the risk that your reputation will
be ruined by associating yourself with a
particular investment
9. Event risk (the risk of unpredictable events,
from terrorist attacks to natural disasters)
10. Market risk (the risk of price changes in the
market, caused by such things as shifts in supply
and demand)
What Risk Should You Take?
The secret to successful investing is that some risks are
easier for you to take than others.
Let’s go back to the bank example for a moment.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 10
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
If you put your money in a time deposit, what is the
new risk you are taking that causes them to pay you
more?
The risk is called “liquidity risk.” It means you might
need your money before the term of the deposit is
completed and either not be able to get it or have to pay
a penalty for early withdrawal.
Now my question is simply this:
Do you care?
I mean, really, if I can double your return and all you
have to do is guarantee that you don’t need to touch the
money for six months, is that a good deal for you?
For most individual investors, especially young
people, the answer is a resounding “I don’t care. Just
give me the return!”
In that case you should be taking liquidity risk all day
long.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 11
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
What about “volatility risk?”
If I can double your return, but it means that on
some days we are going to be way down and other days
way up, do you care?
Once again, most individual investors do not care
very much about volatility. So long as they don’t have to
take a long-term risk of capital loss, they would be
perfectly happy for the price to fluctuate on a daily basis
if it means a better return for them over the long term.
In that case, you should be taking liquidity risk and
volatility risk all day long. This is risk is emotionally
inexpensive for you to take.
There are investors that can’t do this.
Think of a publicly traded company.
If they make a large investment and the price is
down on the day they close their books (end of their
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 12
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
fiscal year), they have to report the loss to their
shareholders.
Everyone involved then loses their jobs!
To them, volatility risk is unacceptable.
Thus, individual investors tend to enjoy a
competitive advantage in taking liquidity risk when
compared with institutional or corporate investors.
The First Golden Key to Successful Investing is to
find a risk where you enjoy a competitive advantage
and to take as much of that risk as possible!
You will not find this in any other book.
Everyone keeps talking about risk as if it were one
thing!
“This investment is too risky!”
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 13
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
Everyone keeps talking about risk as if it affected
everyone the same.
“The risk-return profile of this is favorable to investors.”
It’s not. And it doesn’t.
Risk is many things, and it affects everyone
differently!
The real problem is that financial institutions and
large institutional investors are ruining the game for
everyone.
They tell hedge funds to develop products with daily
liquidity and low volatility!
I guarantee there is no way to generate a return.
If you want daily liquidity and low volatility, get a
bank account.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 14
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
With monthly liquidity (you can only redeem at the
end of the month) on a well-managed portfolio of hedge
funds, you might get 8 percent to 12 percent per year.
With semiannual liquidity (you can only redeem
every six months), your returns would be more like 15
percent to 20 percent per year.
If you don’t care about liquidity risk, then this is a
great deal for you!
It is useful to point out that different risks are
rewarded differently in the market at different times.
At the time I am writing, the market is rewarding
liquidity risk very highly.
The reason is all the big investors can’t take this risk.
This is a golden opportunity for small private
investors.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 15
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
After all, private equity (new companies that are not
traded on any public exchange), large construction
projects, certain hedge-fund investment strategies, real
estate, etc., all require a certain amount of time for
completion or for resale of the assets. Somebody has to
take the risk, and the market is willing to pay a premium
to those who do!
Never make an investment without knowing the risk
you are being asked to take.
If someone tells you there is no risk, they are either
ignorant or fraudulent. Either they don’t know what
they are talking about or they are lying through their
teeth!
Run away as fast as possible.
You get paid to take risk.
Find out what you are getting paid for.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 16
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
You Are Basically in the Insurance Business
Since the only thing you can get paid for in the
investment game is taking risk, you are basically now in
the insurance business.
Here are some questions you should ask yourself in
making any investment:
Question: What is the risk (undesirable event) that I
am being asked to insure?
Question: Do I have a competitive advantage in
taking that risk?
Question: Is there an inexpensive way to reduce
that risk?
Every insurance company specializes in taking
certain types of risk.
If they have to insure a type of risk where they do
not enjoy a competitive advantage, they reinsure that
risk with another insurance company!
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 17
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
You can do the same thing.
Look at the investment.
What are the risks? What undesirable events could
occur?
Which of those do you want to get paid for
insuring?
Which of them do you want to pay someone else to
take over for you?
For example, suppose you have purchased a piece of
investment real estate.
What are the risks?
1. The housing market could dry up, and the price
of the property could fall (market risk)
2. The house could burn down (event risk)
3. The furnishings could be stolen (event risk)
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 18
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
4. The neighbor’s child could fall in the pool, and
you could be sued for everything that you own
(event/regulatory risk)
Which of these risks do you want to take?
Don’t say, “None of them!”
You will never get paid.
Say, for example, that you have thoroughly studied
the housing market. You like the demographics.
Population and income are increasing. There are plans
to build a new factory in the area, creating more jobs.
You like the market risk.
Still you don’t want to put 100 percent of your
capital at risk.
What do you do?
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 19
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
You take out a non-recourse loan with the bank for
80 percent of the value of the property.
Now, the event risk you don’t like at all.
Why?
You don’t know anything about it. You don’t know
what the odds are on this particular gamble, and if
something goes wrong, you face catastrophic losses.
What do you do?
You take out fire and theft insurance, and wrap the
property in a corporate structure that protects the rest of
your assets should any of these unforeseen events take
place.
That is called being a professional investor.
There are many ways you can reinsure your
investments:
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 20
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
1. Fire, theft, and liability insurance
2. Key man insurance
3. Use of corporate vehicles to isolate risk to a
single investment
4. Use of non-recourse loans
5. Title insurance
6. Options
7. CPPI and other capital guarantee structures on
investment funds
8. Stop losses on stock trading transactions
The more of these tools that you understand and
know how to use, the better an investor you become!
Once again, in every investment, think of yourself as
an insurance company.
What are the undesirable events that you are being
asked to insure against?
Do you have a competitive advantage in insuring
those events?
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 21
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
Which risks would you like to reinsure, and how can
you do that in a cost-efficient manner?
The Second Golden Key: Returns
Once again, in investing you are paid to take risk.
In the investing world, the payment you receive for
taking risk is called the return.
Return is simply the possibility of good things
happening to you.
In other words:
The return that you get for accepting the possibility
that bad things may happen to you is the possibility
that good things may happen to you as well.
These returns come in three different forms.
1. Fixed returns (returns that are guaranteed in a
fixed amount)
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 22
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
2. Variable returns (returns that change depending
on circumstances and performance)
3. Opportunity returns (returns that depend on
certain events or conditions)
Question: What return am I being offered in
exchange for the risk that I have to take?
Question: Are those returns fixed, variable, or
opportunity returns?
Question: Does the value of those returns outweigh
the risks that I am unable to reinsure?
Question: How can I increase those returns by
taking more risk in those areas of risk where I feel most
comfortable?
Now what you have to do is actually write the
insurance policy!
Sit down and spell out clearly the undesirable results
you are being asked to insure, which of those results you
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 23
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
can effectively reinsure and how you will do that, and
the reward or return that you are being offered or
believe that you can receive in exchange for taking that
risk.
This is a very simple process, but how many
investors do it?
How many discipline themselves to do this one
simple thing?
This would save more money on Wall Street than all
of the stock advice and newsletters that have ever been
written.
The Second Golden Key to Successful Investing is
to write the policy! What are the undesirable events
that I am taking responsibility for? Which of those
can I reinsure, and how will I do that? What return
am I being promised or anticipating in exchange
for taking that risk?
What is the policy you are being asked to write?
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 24
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
Write the policy!
Increasing Returns Through Leverage
Leverage simply means borrowing money to invest with.
Leverage is one way to increase the risk of an
investment, and thus accelerate the return you can get
on an investment.
Let’s walk through an example.
Say you are going to purchase a stock.
The stock now trades at $50 per share, and you have
$5,000 to invest.
You can purchase 100 shares.
If the value increases to $60 per share in one month,
you will make $10 per share, or $1,000.
What happens if you use leverage?
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 25
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
You get your broker to loan you $2,500. Now you
have $7,500 to invest.
You can purchase 150 shares.
If the value increases to $60 in one month, you sell
your 150 shares for $9,000. You pay back the $2,500 you
borrowed, leaving you with $6,500. Instead of $1,000,
you have made $1,500 minus the interest your broker
charges you for using the money.
The most effective use of leverage is to increase the
volatility of a nonvolatile asset or to decrease the
volatility of a volatile asset.
If you want to make an asset more volatile so that it
produces returns faster, then you can borrow money to
increase the size of your investment.
If you want to make an asset less volatile so that you
control risk more effectively, then you de-leverage. What
this means is you put a portion of your money into cash,
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 26
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
government bonds, or other low-volatility investments
to lower the volatility of your overall position.
Billionaires actually pay banks to do this for them.
They choose an investment and tell the bank exactly
what volatility they wish to hold that asset at. The bank
then leverages or de-leverages the investment every
month to keep the volatility at the pre-agreed level.
That is some very sophisticated investing, but the
concept is simple.
If you want to accelerate returns, leverage up.
If you want to reduce risk, leverage down.
Now there is just one more concept you need to
understand to fully master the concepts of investing and
risk.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 27
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
The Third Golden Key: Arbitrage
Ultimately all investments are based on the idea of
“arbitrage.”
Arbitrage is what happens when two people or
markets value the same thing differently at the same
time.
Say that crude oil is selling for $58 per barrel in New
York, and at the same time it is selling for $60 in
London.
This is a golden opportunity for arbitrage.
You buy the oil in New York at the same time you
sell it in London.
This has traditionally been the area where hedge
funds have made the most money.
People value different things in different ways at
different times.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 28
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
This is actually the foundation of all economic
transactions.
The seller of goods values the cash more than the
goods and the buyer of goods values the goods more
than the cash. We can do business!
Arbitrage opportunities may occur due to
differences in time, place, regulation, liquidity, crises,
panicked markets, situations where the market is valuing
companies based on their revenue rather than on their
underlying assets, differences in regulation, or many
other factors.
Fundamentally, the less efficient a market is, the
more opportunities there will be for arbitrage.
Consider the situation of a distressed real estate sale.
The owner of a building worth $2 million finds his
business in trouble and needs $1 million in cash within
24 hours to save his company.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 29
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
There are very few places that can get you that kind
of cash on that schedule, and most of them will take
your kneecaps and your children as collateral.
Real estate markets are pretty inefficient and illiquid
as markets go.
You say to the owner of the real estate, “Sure, I can
get you your $1 million; I just want the building.”
He replies, “But the building is worth $2 million.”
You simply say, “Six months from now it is worth
$2 million; today it is worth $1 million.”
Arbitrage!
There is a difference in perception of values caused
by the liquidity crises in his business.
Now, every investment transaction you ever enter
into will be a case of arbitrage.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 30
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
If two people do not value the transaction
differently, it cannot take place.
The questions you need to ask yourself are these:
Question: Do I have a valid reason for believing the
value to be different than the price I am being asked to
pay?
Question: Do I have a valid reason for believing the
value will change in the future?
Question: Is there something unique about me or
my situation that allows me to value this opportunity or
risk differently?
Arbitrage comes in two forms: Risk arbitrage and
price arbitrage.
1. You believe either that the investment is
fundamentally worth more than the price you
must pay or that the value will increase in the
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Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
future due to factors that the seller is not
properly valuing.
2. You believe that the risk you are being asked to
take on is being valued incorrectly or that you
enjoy a unique competitive advantage in taking
on this form of risk.
One of my favorite arbitrage stories involves a
company CEO who realized one day that his company
was going to go bankrupt.
They were almost out of money, and in seven days
they would fail to meet their payroll obligations.
The CEO took all of the company’s money out of
the bank and went to Las Vegas.
He sat down in front of the roulette wheel and put
all the money on red.
Now when you bet in roulette, what is the risk that
you take?
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 32
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
If the ball lands on another color, you lose all your
money.
The return that you get is the opportunity that if it
comes up red, you will double your money.
This CEO understood investing very well. He had a
unique competitive advantage in taking loss of capital
risk.
After all, in one week he had a 100 percent chance
of losing all his capital anyway!
Brilliant arbitrage!
Three rolls of the roulette wheel later, he saved his
company.
The Third Golden Key to Successful Investing is to
use the principle of arbitrage. If you are able to
value the price or the risk of an investment
differently and more accurately than others, you will
make money in investing.
© 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 33
Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
Summary
The Three Golden Keys to Successful Investing
1. Find a risk where you enjoy a competitive
advantage and take as much of that risk as
possible.
2. Actually write the insurance policy before
investing.
3. Make effective use of arbitrage. Know the value
of things.
The Seven Steps of the Investment Process
1. Understand the risk you are being asked to
underwrite.
2. Identify those risk areas where you enjoy a
competitive advantage.
3. Take as much of that risk as possible.
4. Reinsure everything else.
5. Look for arbitrage opportunities where pricing
in the market is inefficient (inefficient markets),
or where you have a good reason to believe
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Ideas That Can Change Your Life™ in Wealth
The Three Golden Keys of Successful Investing
values will change in the future (uninformed
markets).
6. Become an expert in identifying what things are
worth.
7. Use leverage as a tool to control volatility (the
speed at which your investments produce an
economically meaningful return).
We wish you all the best in your investing
endeavors. May the market winds blow in your favor,
and may all your losses be the ones you reinsured.
James Skinner, Roice Krueger, Mark Victor Hansen
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