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A Few Notes on Heads I Win, Tails You Lose

August 13, 2018 • Posted in Big Ideas, Strategic Allocation

Patrick Donohoe introduces his 2018 book, Heads I Win, Tails You Lose: A Financial Strategy to Reignite the American Dream, by stating that the book: “…will teach you many of the principles and strategies to help discover your own path to financial freedom. Most importantly, it will show you the mindset required to carry out a successful plan. …almost everything you will gain from this book conflicts with what the typical financial planner, financial celebrity, and most financial publications tell you to do. …You will…discover how to pivot the foundation of your wealth to…the private mutual insurance company.” Based on his experience, market research and many examples, he concludes that:

From Chapter 1, “Origins of the American Dream” (Page 40): “You will always be your greatest asset. Invest in yourself first to be more valuable to others.”

From Chapter 2, “The Perpetual Wealth Strategy” (Pages 66-67): “The Perpetual Wealth Strategy means storing your wealth with a mutual insurance company in a uniquely structured life insurance policy. The financing needs you experience…are then covered by a provision of the policy that allows you to borrow from the insurance company against the equity that you’re building.”

From Chapter 5, “Avoiding the Investing and Lending Trap” (Pages 111-112): “The best investment strategy is to figure out a way to make another dollar, not give money to a stockbroker so that they could make you another dollar. If you want money to grow, you need to figure out how to do it with what you can control, like your business or an investment you understand. …Investment covers…investments in yourself, like getting a certification, an education, advanced degrees, and improving upon or learning a new skill.”

From Chapter 6, “Think for Yourself” (Page 152): “The quickest way to more money is to maximize your earned income.”

From Chapter 7, “A Solid Foundation” (Pages 166-167): “The Wealth Maximization Account (WMA)…is a…whole life insurance policy with a paid-up additions (PUA) rider that creates instant liquidity. It is offered by a private mutual insurance company. …It is the only asset that exists to offer numerous foundational benefits. The growth is free from income, dividend, or capital gains tax. …Annual growth is contractually guaranteed. …The insurance company guarantees a line of credit against the total amount of policy cash value. …The policy can be pledged as collateral. …To be fair, the WMA isn’t going to yield double digits per year. By itself, it isn’t going to make you wealthy. …When you factor in the tax benefits and low costs, the typical market investment mutual fund has trouble outperforming the WMA…”

From Chapter 8, “Be Like the Wealthy” (Pages 194, 200-201, 204): “Your objective is to establish high cash value for wealth building. The primary factor in the policy design is NOT the coverage–it’s your contribution amount. …The ongoing cash flow is broken into two parts: the base long-term whole life policy, and another annual PUA rider that has the same liquidity and wealth building benefits. …The terms for a policy loan are by far the loosest lending terms, period.”

From Chapter 9, “Myths and Truths of Insurance” (Pages 221, 223): “The Wealth Maximization Account is best categorized with a savings account, CD, or money market account because of its guarantees. …If you then factor in all I’ve explained about taxes, fees, and inflation, your return over 30 years would still be higher than the stock market–and without the volatility that can wreck it.”

From Chapter 10, “Save, Borrow, Invest, and Build Wealth” (Pages 232-233): “The Wealth Maximization Account is your turbo-charged savings account and opportunity fund. When an opportunity arises, …you borrow from the insurance company to make the investment.”

From Chapter 11, “Start, Build, and Prosper Your Business” (Pages 256, 260): “Using a policy loan is just one approach, but the flexibility of payback and ease of borrowing makes it one of the best ways to add capital to a company. …To avoid carrying too much cash, you can use your established Wealth Maximization Account… The profits can be held outside of the business in a creditor-protected private asset.”

From Chapter 12, “Your Financial Future” (Pages 295, 301-302): “For those who consider themselves at the tail end of a career and have accumulated mostly dormant assets, perhaps the best, safest, and simplest way to achieve guaranteed income is by exchanging some of your dormant assets for a pure income-only annuity purchased from an insurance company. …The volatility buffer is another option… Let’s assume you are in a position to begin withdrawing money from your 401(k). …if you had a separate pool of capital that was interest-bearing and not correlated to the respective market, you could buffer the volatility by making withdrawals from it the year after a flat or market decline. That would allow your portfolio…to rebound. The cash value in your Wealth Maximization Account acts as the ideal, non-correlated account…”

From Chapter 13, “Make the Shift” (Page 310): “A typical financial advisor isn’t going to offer you life insurance, especially a policy structured according to the characteristics of a Wealth Maximization Account. You’ll need to ask for it specifically and perhaps teach them about it.”

In summary, investors will likely find Heads I Win, Tails You Lose a thought-provoking challenge to conventional investment-based wealth building.

Cautions regarding conclusions include:

  • Investors should consider what happens to their equity should the chosen mutual insurance company be unable to meet its contractual obligations.
  • The book has a promotional stream. A promotional mindset may indicate that the author emphasizes data favorable to conclusions and de-emphasizes or ignores unfavorable data. 
  • Conclusions may differ for benchmarks of self-directed, multi-class active investors versus the passive equity investor benchmark used in the book.
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