Episode Details

There are three ways to generate passive income; start a business, invest or speculate. The key word in that sentence is passive. Passive means you can generate economic benefits without the requirement of your personal exertion. Since it doesn’t require personal exertion, it frees up your time to spend it on activities or with the people you love.

Each of these three options have merit. But the important thing to note is that not all three will suit everyone. This point is very important to appreciate, and could save you a lot of time, stress and money!

A quick bit of theory first

Legendary author and prolific researcher, Jim Collins formulated a concept called the “Hedgehog Concept”. The Hedgehog Concept was based on the famous essay by Isaiah Berlin in which he refers to an ancient Greek story: “The fox knows many things, but the hedgehog knows one big thing.”

It was Collins’ thesis that successful companies are laser-focused on the Hedgehog Concept, which is the intersection of 3 important considerations or questions (i.e. the orange portion in the illustration below):

1. what you are deeply passionate about,

2. what you can be the best in the world at, and

3. what best drives your economic or resource engine.

Successful companies focus on delivering products or services that they can be the best at and ignore all other opportunities.

(By the way, Jim Collins’ book, Good to Great is one of the best business books I have read.)

Let me share a quick story about me

Before I relate this theory to personal investment, let me share a story with you.

I have some friends that are successful property developers and make substantial six-figure profits. In the past, I have considered whether I should get involved in property development too, especially since I have the property, finance and taxation knowledge. However, many years ago, I decided to focus on my Hedgehog. Property development just isn’t for me.

Property developing takes a lot of time. So, I could either spend my time on developing property with the aim of generating a once-off profit. Alternatively, I could spend that time thinking about and helping my clients build wealth. Just one idea that helps a client creates a lot of value for them and me. That client will continue to do business with my firm and will likely refer their friends. And that will generate long term value for both of us.

I am deeply passionate about delivering the best independent financial advice. I am good at the work I do. And accumulating a number of happy ongoing clients generates stable economic returns. This is my Hedgehog and when I stick to it, my personal wealth grows. The reverse is true when I have deviated (which I did before I learnt this lesson).

One of my mentors, who has operated a successful business for more than 50 years and built significant personal wealth, advised me; “Every time I’ve done something outside of my core business, it has cost me time and money.”

Medico mortgage default rates are low if they stick to what they know

The big 4 banks all have special divisions that target doctors (and have for many years) because it is widely accepted that mortgage default rates are substantially lower than the average. This stands to reason given few doctors are ever unemployed and their income is very stable and typically higher than the average.

This is true when lending to a doctor