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Most people invest based on hype, advice from friends, or the promise of high returns. But without a framework, you can either make emotional decisions that cost you or freeze and miss good opportunities. In this episode, Sharran introduces the Investment X-Ray, a four-part framework he has used for 20 years to evaluate investments and make better financial decisions.
He breaks the framework into four categories and explains how each category can be scored out of 25 to create a simple 100-point investment filter. He then applies it to examples including gold, startups, ETFs, Bitcoin, and real estate.
Drawing from his experience as an investment banker and professional investor, Sharran explains why relying on financial advice from social media can be dangerous. His Investment X-Ray allows investors to analyze and compare opportunities based on factors that actually matter to their goals.
“Rule number one of making an investment is don’t lose money, right? Or if you know what you’re doing, at least you know the risk that’s associated with it.”
~Sharran Srivatsaa
Timestamps:
00:00 – Introduction
01:29 – Capital preservation: understanding your potential downside
02:51 – Tax efficiency: looking beyond investment returns
05:25 – Yield or cash flow: making your money work for you
06:36 – Growth: evaluating an investment’s long-term upside
07:23 – The 100-point Investment X-Ray scoring system
09:26 – Using the framework to evaluate startups
11:46 – Applying the X-Ray to ETFs and the S&P 500
14:38 – Evaluating Bitcoin through the four-part framework
17:25 – Comparing real estate investments using the Investment X-Ray
Resources:
– The Next Billion by Sharran Srivatsaa
– Board Member: ARC Multifamily Real Estate Investing
– Board Member: The Real Brokerage
Connect with Sharran:
– X
– YouTube
– Threads
Transcript:
[00:00:00] Did you know that 43% of Americans actually get their financial advice from social media? And the crazy part is that 80% of that advice is actually wrong. I, I struggled with this myself because I was getting my advice from the internet. And I’ve had a chance to build two billion-dollar companies. I was a banker at Goldman Sachs, at Credit Suisse, and now I’m partners with Alex and Leila Hormozi, and we run acquisition.com.
[00:00:26] And in my entire job, what I do is I’m a professional investor. And with seeing all this tough advice out there, it breaks my heart because no one has been taught a framework for how to actually invest in anything. And so when I was a banker at Goldman Sachs, I didn’t know how to do this either. But one of my clients actually told me how he makes decisions on how he invests.
[00:00:49] This was not even a Goldman Sachs framework. This was from my client, who was a billionaire. And I thought about, “Wow, how can I take this and codify it to help myself and help my life?” And I’ve been using this framework for the last 20 years, and I’d love to teach you this framework today, and this is called the Investment X-ray.
[00:01:05] Now, this Investment X-ray is the exact framework that I’ve taught to several entrepreneurs; I’ve taught to my partners, Alex and Leila Hormozi; I’ve taught to the companies that we invest in, and I use this in my life and in my business every day. So it has four parts, and I wanna break down these parts for you ’cause once you hear this, you will never be able to unsee this, and it will help you make significantly better decisions in your life.
[00:01:26] So here’s the four-part framework. It’s called the Investment X-ray. The first part is capital preservation. What is the entire job… Getting stuck in traffic. What is the entire job of making an investment? Well, the rule number one of making an investment is don’t lose money, right? Or if you know what at least what you’re doing, at least you know the risk that’s associated with it.
[00:01:46] Capital preservation is ensuring that the amount of capital that you deploy, $100, $100,000, a million dollars, is protected in some way. Now, I’m not suggesting that every single investment that you make needs to be 100% protected. Otherwise, if that was the only thing that you did, you would never take any risk, and if you never take any risk, you would never get any growth.
[00:02:05] Meaning, if you took your $100,000 and you put it in a mattress or you put it in a savings account and you got .01%, well, you’re gonna keep your $100,000. That’s what most people do. But understanding how, what the potential for loss is is important, and you may be okay with a 5% potential loss if it gave you a significantly bigger upside.
[00:02:27] For example, if I told you, “Hey, if you made this investment for $100, there’s a chance that you lose $5, but there’s a chance that you make $200,” would you take that investment? Well, you may, and that’s why this is important. So step number one of this framework is capital preservation: understanding what amount of your capital is at stake and what is the risk associated with that.
[00:02:50] All right. Step number two is tax efficiency. What is tax efficiency? The idea that when you make an investment, is there a way that you get some tax advantages associated with it? Most people just think about the ROI on an investment. They’re like, “Man, if I made this investment, what return am I gonna get?”
[00:03:08] Well, that return may be extremely tax inefficient, so you may get a great return, but then you’re gonna be really irritated that you’re paying all these taxes, and then that just messes you up. Is there a way to have some tax efficiency associated with it? Now, let me give you an example. Let’s say you’re investing in your 401.
[00:03:26] Well, you now have some tax efficiency associated with it, meaning there’s two tax efficien- efficiency methods when it comes to your retirement account or your 401, and that may be what you want. Uh, the first is the amount of money that you put in your 401is instantly tax-deductible from your adjusted gross income, so you get a tax benefit of that money that you’re actually investing in today.
[00:03:46] Second is, inside of your 401plan, it grows tax-free while it’s there. So whatever happens in that plan, if you buy and sell and reinvest, it grows tax-free, which if it was outside the plan, you would actually have to pay taxes on, right? So there is a tax efficiency component there. There’s something called a, in real estate, a 1031 like-kind exchange.
[00:04:08] Well, what does that mean? If you’ve not heard of it, uh, the United States tax code allows you an incentive to not pull your money out of the investments. And to make sure that you don’t pull your money out of the invest- investments, they give you an incentive to keep your money in, because let’s say you invested in a building and you, uh, for h- for a million dollars, and that million dollars grew to 1.3 million.
[00:04:31] Now, if you sold that building, you would pay capital gains taxes on the $300,000 of gain. Well, the US government does not want you to take your money out. They want you to reinvest all of it. So they have this incentive mechanism called the 1031 exchange, which is if you roll all your proceeds into a new investment, then they defer that $300,000 gain into the future for you.
[00:04:55] Now, what you get, there’s two benefits there. Benefit number one, you defer taxes into the future, and in the tax world, deference is the same as avoidance temporarily. But second is you now get the entire $300,000 worth of gain that you could roll into a new property, which otherwise you would not have been able to do.
[00:05:12] You would had to pay taxes on that, and then, um, it would have reduced the amount of principal that you could have put towards your property. So it’s a massive gain there. So there’s a tax efficiency component for that investment. Number one, capital preservation. Number two, tax efficiency. Well, what is number three?
[00:05:26] The third is what I call yield or cash flow. Is there a way in which that when you make an investment, the investment pays you? Uh, the very definition of an asset that I like to use is: is it something that pays you to own it? Meaning, if you invest in this thing, do you actually get some kind of cash flow from it?
[00:05:45] Because at the end of the day, there’s two forms of income. There’s active income, where you trade time for money, and there’s passive income, which is i- which is hard to say passive, but now you’re getting money for money, where you’re making an investment and your money’s working for you and] generating some income for you, right?
[00:06:01] I wanna know if I’m… That, at that time in my life where I want some cash flow associated with it. I’ll give you an example. For my children, I don’t really need any cash flow. Like, they’re… For my daughter, who’s 10 years old, she doesn’t need any cash flow. I, I’m, I’m paying for her Barbie. I’m paying for her iPad.
[00:06:18] I am paying for her to go to school. I’m… She doesn’t need any cash flow. But maybe when she’s, uh, you know, 60 years old, maybe she wants some cash flow. I don’t know. But you also now have the ability to understand, um, do you need the cash flow at this time? So it’s good to analyze the investment using this.
[00:06:33] So number three, cash flow. Number four is growth, and growth is only one part of the component of this. So you say, “If I’m making this investment, will this investment grow?” And I’ll give you an example. If you put, if you put your investment into a, uh, treasury bond, well, you get… Maybe you get a 10-year treasury is now at 4.42%.
[00:06:56] You get a 4.42%, uh, yield every single year, which is great, but your treasury bond’s value does not grow. You just get the same $100,000 you put in, you get it back, and you just get the in- the, the yield from it. So the growth there is zero, right? Is zero. Now, that may be okay with you, but at least you know how to think about and manage the growth.
[00:07:16] So those are the four components: capital preservation, tax efficiency, yield, which is cashflow, and growth. The way I think about it very easily in a day-to-day operating perspective is I th- is I give each of those buckets a simple 25-point score. All… When you add all four of them up, you have 100-point score.
[00:07:36] So when I’m quickly evaluating an investment, I can run it through a filter and give it a score, and then get the total number associated with it. This is especially valuable when you’re trying to compare an investment. So if you’re comparing investment A and investment B, you can at least know very quickly whether the score makes sense.
[00:07:52] So for example, let’s say… Let’s, let’s take a, let’s take a random example. Let’s say you’re investing, thinking about investing in gold. Well, what is the capital preservation associated with gold? It’s pretty good. Like, over the years, the- historically, it’s shown us that gold may move up and down in value, but it’s backed by physical gold in some way, so your capital pres- preservation is decent.
[00:08:11] So I’ll probably give it a 20 out of a 25, right? Uh, because when you pull it out, it may be a little different. The second is tax efficiency. Well, gold has no tax efficiency. Maybe if you have some esoteric structures that you build with it, it may have some. But, uh- Just because you invest in gold, you don’t get any tax efficiency associated with it.
[00:08:30] So, uh, it gives me a zero for that 25. The third is cash flow or yield. Well, uh, unless you do something creative from a structure perspective, you’re not getting a dividend yield interest on owning gold, so that’s another zero. And then growth. Well, growth is interesting from a gold perspective because gold is generally, uh, inversely related to the performance of the general e- economic environment.
[00:08:55] So gold is what they consider a flight to safety. When the rest of the world is not doing well, gold does better. So sure, maybe I get some growth associated with it, but the growth is probably, I don’t know, if I give it a score out of 25, I maybe give it a 5. So in this, I’ve only given… I’ve got 5 points for growth, and I’ve got 20 points for capital preservation.
[00:09:15] On a scale of 100, I got a 25 out of 100 for gold. I’m not suggesting that is the be-all, end-all of the answer, but at least it allows you to quickly evaluate this inves- investment. Imagine your friend, um, wants you to invest in a startup. By the way, I… This is the… As you get more and more successful, you’re going to get the peer pressure of your friends wanting to have you invest in their companies.
[00:09:39] The… My recommendation to you is I try ex- as hard as possible to invest in my friends’ businesses if and only if I understand it. All right? Um, otherwise, I’ll tell you what I do in a second. If you have a friend who’s building a, uh, a company that is an, I don’t know, a startup, and it’s a startup in biotech, and you know nothing about it.
[00:09:59] Well, it’s a startup, so what is the capital preservation associated with that? I mean, not much. I’m gonna say zero. What is the tax efficiency associated with that? Not much. Zero. What is the yield or cash flow associated with that? Not much. Zero. What is the growth associated with that? A lot, maybe. So I’m gonna give it a full 25.
[00:10:16] Assume your friend is a rock star. Give it a full 25. So on that scale, I’ve got a zero, zero, zero on 25. That’s 25 out of 100. I got 25 points. So it allows me to at least say, “Huh.” I, I… Gives me a chance to evaluate whether this investment is the right investment, whether the investment… I, I have some framework for doing it.
[00:10:34] Now, here’s the one thing that I will recommend. If You have a friend that is making a startup, that is starting a business, that is, uh, building a community. Uh, what you should do is you should do everything possible to support them with that business. So if they have an events company, you hire the events company because you need it anyway.
[00:10:54] If they have a pizza store, you order from the pizza store. If they make, you know, fluffy, uh kids products, you buy all their kids products. You do whatever it takes to support them. You don’t need to feel the need to invest in things that you don’t understand. But supporting our friends, paying full price, not asking for discounts, is a very important thing to do because that is how you support them.
[00:11:15] You don’t have to write them a check to invest in their business. But as a good friend, you should support them with their business and then give them feedback on what they’re doing is right, but publicly endorse them, write the Google review, etc. Like, that’s good. Tangent. That’s okay. Now, you may say, “Well, Sharran, all right, I get this tax…
[00:11:31] I get this capital preservation, I get this tax efficiency, I get this yield, this growth. Tell me how… H-have you actually used this in your life?” Well, it’s to the point where I was, I was talking to, uh, our team about it, that I use it every single day, that it’s become a second, become second nature for me.
[00:11:46] I’ll give you a very simple example. Let’s just say many of you probably, you’ve probably heard about this idea of, hey, you know, you should go invest in a, uh, ETF. Buy the S&P 500. Buy the, buy an index and just invest in the market. Well, you’re probably investing in some, the S&P 500 with a ETF like SPY or VOO, uh, from Vanguard, that invest in the broad-based equity market.
[00:12:09] Well, let’s put that through this filter. I don’t know the exact details of this fund because it’s not in front of me, but, uh, we can make some assumptions. If you take VOO as the broad market ETF index, it is capital preservation. Well, over time, we’ve had decent capital preservation based on, uh, based on the, the S&P 500.
[00:12:29] So I’m just gonna give it twenty out of twenty-five because it’s, it’s done decently well, as long as you are able to time when you take it out. Tax efficiency. Well, I don’t think there’s any tax efficiency associated with this. I’m just gonna give it zero because as the stock grows, it grows. Now if it l- if it loses some money, you get some losses I guess, but we really don’t wanna lose money, so I’m gonna give it a zero.
[00:12:48] Yield. I, I’m unsure of the exact yield or the cash flow that you get from the ETF. Let’s say it’s small, but it’s not gonna be significant. And the last part is growth. Well, definitely the, the growth component is the S&P 500 has generally grown 7 to 10% on average a year for the last 30 years. Okay. Well, let’s take that as the, the growth component and give it a 20 out of a 25.
[00:13:09] Well, now you have 20 for capital preservation, zero for tax efficiencies, m- I’d say five for yield, that’s 25, and say all 25 for growth. Well, 25 and 25, that’s 50 out of 100. Now it allows me to evaluate this. You may say, “Well, Sharran, that’s interesting, but is there something better?” Well, now the thing that is better that I was thinking about is what other box can I activate here?
[00:13:32] I’ve activated the cap- capital preservation box. I have no tax efficiency. I’ve activate- I have no y- yield or cash flow. I’ve activated growth. Can I add one more? So how I thought about it was, can I get the same general performance of the S&P 500, um, let’s say, say for my children, but can I get some cash flow?
[00:13:50] Which is why I… One of the ETFs that I personally am invested in, by the way, this is mine, and if you are interested, you should check it out, talk to your advisor, make sure it’s the right fit for you, is SCHD. SCHD is, uh, a dividend-paying ETF of some of the high- highest dividend momentum-based companies on the S&P 500.
[00:14:13] Now, I still get growth coming from it. I also get cash flow and a dividend based on that. So now I’m able to actually e- enhance my equity market return by still getting capital preservation, by still not having a lot of tax efficiency, by still getting cash flow, and still getting growth. So you can actually take a simple idea that you already have and then ask a question, “Hey, how can I activate something else in this that could be helpful?”
[00:14:36] I’ll give you another crazy example. If you like crypto, you may like this. I put the same filter on to handle crypto. Capital preservation. Well, I don’t know. If you take Bitcoin, I don’t really know if I’m gonna get p- preserve any capital. There’s a good chance it could go to zero. Um, tax efficiency. By the way, on tax efficiency, there is not built-in tax efficiency.
[00:14:57] However, uh, if you did not know this, I, I’ll give you a tip here. If you own Bitcoin, this is for now, you should check with your advisor, but for now, uh, it is still treated like a security, and it is not subject to wash sale rules. Meaning, if you buy Bitcoin for $100,000 of Bitcoin, and you’re in- and you in- you intend on holding that Bitcoin And say the Bitcoin drops from $100,000 to $70,000 and you have a $30,000 loss, but you intend on holding that Bitcoin anyway.
[00:15:26] Well, you could instantly sell the Bitcoin, capture the $30,000 loss, harvest it, meaning you bank that loss, and you can use it against your other investment gains, and then you can rebuy Bitcoin for the same thir- 70,000 again. So net-net, you bought it at 100,000, you have one Bitcoin. It dropped in value to 70,000, so you have a $30,000 loss.
[00:15:47] You sold it, so you got the $30,000 loss, and you rebought it right away in the next 30 seconds, and you still have your one Bitcoin. So the nice part is you started with one Bitcoin and you ended with one Bitcoin 10 seconds later, and you now have a $30,000 loss. That’s cool That’s cool, right? Now, at some point with all this crypto legislation, I’m sure that change is coming.
[00:16:09] I don’t know. But whenever I see crypto go down, I sell it, and I capture the loss, and I rebuy back the exact same time. But so let’s say I still give it a 20 out of 25 for the, for the tax efficiency, if you know this idea. Cash flow, not really unless you stake the Bitcoin. Growth, I’ll give it a 20 out of 25.
[00:16:28] I don’t know. Maybe it’ll grow or not. So now I have a 40 out of 100, um, rating on the security. Well, I- I’m unsure. I- I don’t know much about Bitcoin. Now, I’m not saying that Bitcoin is bad. I’m just saying I don’t know much about it, and it’s really hard for me to invest in something that I don’t know a lot about, especially when it gets volatile and things get tough.
[00:16:48] I don’t know how to react. I don’t know how to manage my emotions, and so I try to invest in things that I actually know a lot about. But I’m also probably like you. I get FOMO. Man, if Bitcoin had a massive run and I didn’t invest in it, no [00:17:00] matter what, it would make– it would be hard for me. So what I did was I bought one Bitcoin for my son and one Bitcoin for my daughter, and I put it aside.
[00:17:08] And every time it falls in price, I just capture the loss. I just put it right back in. I always own one Bitcoin for my son and one Bitcoin for my daughter. Now, if it goes bonkers, my son and my daughter win. If it doesn’t go anywhere, that was a flyer that I took overall. Last but not least, I’ll give you one more example, which I think will be helpful to you.
[00:17:24] Uh, I read this book, which you probably read, called Rich Dad Poor Dad, and one of the key parts of the book that Robert Kiyosaki said was, “Hey, you should buy real estate because real estate is the path to wealth creation.” And Kiyosaki’s right. But he’s a little loony, by the way, from a political perspective, but he’s right.
[00:17:41] The crazy part about that is the most– almost all of the, uh, wealth creation that has happened in the Western world has hap- happened through equity in businesses and equity through real estate. And so when I was running our first real estate company, TELUS, which we grew 10X in five years and sold the business to Douglas Elliman, we was– it was a $3.5 billion business, and we got it– we grew it from 300 million to 3.4 billion in under five years.
[00:18:07] And I had access to a lot of off-market real estate, so I was able to buy a lot of real estate. At one point in time, I owned 198 single-family homes, 198 real estate, uh, pieces of real estate. And I will tell you, it was the most stressful time in my life. And I- I thought, “Well, this is crazy. How do I, how do I do better with this?”
[00:18:28] So it had capital preservation, yes. It had some tax efficiency, yes. Not great, but yes. It had some cash flow, yes. And it had some moderate growth. And I was thinking, “Well, how can I make this significantly better?” Now, capital… What if I had the same exact thing but my life was easier, and I was able to get significantly better in one of those areas?
[00:18:46] Well, I sold all my 198 single-family investments, and I turned it all into multifamily because the capital preservation was significantly higher because you could insure the entire property. The Tax efficiency was out of this world because the US tax code allows you to have bonus depreciation today, so you can– I can almost write off the entire value of that against my ordinary income.
[00:19:08] The cash flow, the cash flow is significant because you, uh, the, the based on the leverage that you can get, I, I started getting significant cash flow checks. And growth, uh, the growth is still moderate, but over the investments that we have right now, um, I’m projecting a double your money every five years, which is crazy.
[00:19:27] So if I invested $100,000 today, it would be completely passive, meaning I would have operators run this, and in five years, my $100,000 would be net net worth $200,000. Now, if I did that over a 20-year period and I didn’t have anything to do with it, that dramatically changes how I look at the world, right? And I don’t have any inve- uh, uh, I, I don’t have to, like, answer a, uh, a broken toilet call for 198 properties.
[00:19:51] Even though I had property management, it was still a pain. The reason I’m sharing all this with you is to realize that there is a framework for evaluating an investment, and if you can’t do it live, you get paralyzed. You get stuck, and one of two things happen. Number one is you get paralyzed, and so you don’t make any moves.
[00:20:08] You don’t actually do anything, and so you leave good opportunities even though they may be good ones for you. Second, you evaluate the opportunity and you get stressed, and you just make them out of fear or stress because you don’t have a framework for evaluating it, and then you make a bad decision. I recommend just internalizing this framework for yourself.
[00:20:24] Think about it as here’s the X-ray: capital preservation, tax efficiency, yield, which is cash flow, and growth. So the next time you get pitched on a, uh, investment or a big idea, or you hear some investment advice from a guru, remember that if this is good enough for a billionaire from Goldman Sachs, it’s probably good enough for you