ATHLLC2057828088

00:00:00.000 | (upbeat music)

00:00:02.540 | - Hello, and welcome to another episode of All The Hacks,

00:00:05.480 | a show about upgrading your life, money, and travel.

00:00:08.520 | I'm your host, Chris Hutchins,

00:00:09.840 | and each week I sit down with the world's best experts

00:00:12.440 | to learn the strategies, tactics, and frameworks

00:00:14.740 | that shape their success.

00:00:16.040 | Now, one of the things about money

00:00:17.260 | that I've always been fascinated by

00:00:19.000 | is how wealthy people manage their finances

00:00:21.600 | and invest their money.

00:00:22.920 | And thanks to today's guests,

00:00:24.880 | I've been able to peek behind the curtain.

00:00:26.980 | I'm talking with Tad Fallows,

00:00:28.720 | who's become an expert on the topic

00:00:30.580 | since co-founding Long Angle,

00:00:32.200 | an online community for high net worth investors.

00:00:35.080 | It all started when his company was acquired in 2016,

00:00:38.400 | and he and his co-founder were abruptly confronted

00:00:41.040 | with a bunch of personal finance questions.

00:00:43.200 | So they created Long Angle,

00:00:44.700 | which has grown to become a diverse group of 1,000 members

00:00:47.920 | and offers a private online community

00:00:50.200 | where people can discuss a wide variety of issues

00:00:52.940 | from asset allocation to taxes, philanthropy,

00:00:55.680 | insurance, raising kids, and more.

00:00:58.560 | The community has no membership fees,

00:01:00.440 | no advertising, and no selling of member data.

00:01:03.200 | I wanted to invite Tad to join me

00:01:05.240 | to shed some light on the money and investment habits

00:01:07.840 | of wealthy investors

00:01:09.260 | by walking through the 2022

00:01:11.040 | Long Angle Portfolio Benchmarking Survey

00:01:13.320 | that he's releasing today

00:01:15.200 | to break down the mysterious world of alternative assets

00:01:18.600 | and teach you about some of the assets

00:01:20.200 | you might never have considered.

00:01:21.680 | Also to share some of our favorite real estate

00:01:24.320 | and home buying hacks and a lot more.

00:01:26.480 | So let's get started after this.

00:01:28.480 | - Hey, everybody.

00:01:29.360 | In my conversation with Tad,

00:01:30.760 | we talk a lot about alternative assets,

00:01:33.280 | one of which is crypto.

00:01:34.640 | And in light of all that's going on right now,

00:01:36.660 | I wanted to share a few things.

00:01:38.600 | As some of you know,

00:01:39.520 | BlockFi was a previous sponsor of the show

00:01:42.160 | and I use their platform to store all my crypto.

00:01:45.080 | I liked that they were domiciled and regulated in the U.S.

00:01:48.520 | And personally, I spent a lot of time talking to their team

00:01:51.120 | and reading their transparency reports

00:01:53.000 | to maintain my comfort using their platform

00:01:55.520 | for a meaningful amount of our money.

00:01:57.620 | I'm recording this on the morning of 11/15

00:02:00.160 | and after the downfall of crypto exchange FTX,

00:02:03.600 | BlockFi put a hold on all customer withdrawals,

00:02:06.520 | leaving many people, myself included,

00:02:08.960 | with lots of their crypto on the platform.

00:02:11.240 | Although BlockFi publicly communicated normal operations

00:02:14.320 | during FTX's collapse, that is no longer the case.

00:02:18.040 | Yesterday, BlockFi said they did not have a majority

00:02:21.120 | of their assets custodied at FTX,

00:02:23.480 | but that they still have significant exposure to FTX

00:02:26.440 | and their related entities.

00:02:28.060 | They also said that there are a number of scenarios

00:02:30.180 | that may be available to them

00:02:31.400 | and they're doing the work now

00:02:32.500 | to determine the best path forward.

00:02:34.580 | I honestly don't quite know

00:02:35.780 | what to make of those statements yet,

00:02:37.260 | but I'm really angry about the way this was all handled

00:02:40.700 | and communicated and I am certainly not happy

00:02:43.340 | about the financial situation they've put me

00:02:45.440 | and many others in.

00:02:46.940 | As for what I'm gonna do about it,

00:02:48.740 | I've taken screenshots of all of my balances

00:02:51.060 | and I've downloaded my full transaction history.

00:02:53.620 | At the end of the day,

00:02:54.460 | I truly hope that they're able to find a way

00:02:56.600 | through all of this

00:02:57.440 | that results in everyone getting back their money.

00:02:59.760 | And given all of this,

00:03:01.160 | I hope that a big takeaway from today's episode

00:03:03.600 | is that while many investors are seeking

00:03:05.440 | to add alternative assets like crypto to their portfolio,

00:03:09.000 | the entire category comes with more risk

00:03:11.400 | than most traditional investments

00:03:13.160 | and should only be considered

00:03:14.460 | for those comfortable with that risk.

00:03:16.080 | All right, let's get on to the episode.

00:03:18.120 | - Chris Hutchins works at Wealthfront.

00:03:20.040 | All opinions expressed by Chris and his guests

00:03:22.180 | are solely their own opinions

00:03:23.380 | and do not reflect the opinion of Wealthfront.

00:03:25.760 | This podcast is for informational purposes only

00:03:27.800 | and should not be relied upon for investment decisions.

00:03:30.560 | - Tad, welcome to the show.

00:03:31.960 | - So excited to be here.

00:03:32.840 | Thank you for having me.

00:03:34.160 | - Yeah, so I'm gonna just start and ask you a question

00:03:37.000 | and we'll get into a lot of why you're an expert here,

00:03:39.280 | but what do you think the most common misconception is

00:03:42.280 | around how wealthy people, high net worth people

00:03:45.320 | are spending and managing their money?

00:03:47.560 | - I don't know if this is a misconception or not,

00:03:49.480 | but what struck me is different

00:03:52.140 | from honestly the way I do things myself

00:03:54.240 | and the way I see a lot of other people do things

00:03:56.320 | maybe who are not in the high net worth demographic

00:03:58.360 | is how light on debt they are.

00:04:01.000 | We do a benchmarking survey where we look at overall

00:04:03.520 | how people allocate their portfolios

00:04:05.400 | and how much debt they hold and that sort of thing.

00:04:07.120 | And I would say a full 50% of the members of our group

00:04:10.640 | don't have any debt of any sort on their house.

00:04:13.440 | A quarter of them don't own a primary residence at all

00:04:15.560 | and then another quarter own their residence outright.

00:04:18.120 | And I think it's 80% of members

00:04:20.360 | have less than 25% of their assets is debt.

00:04:23.060 | To kind of put that in concrete terms,

00:04:25.020 | if you had 10 million of assets,

00:04:26.300 | it would mean that you had less than 2 million of debt.

00:04:28.180 | And I think if you look at general stats

00:04:29.700 | about the American population, et cetera,

00:04:31.500 | you've got a much higher debt to assets ratio

00:04:34.180 | than you see among this group.

00:04:35.860 | And it's not that it's a risk averse group.

00:04:37.340 | These are people who have started companies,

00:04:39.780 | work at hedge funds, work in venture capital,

00:04:41.780 | people who are willing to take a lot of risk.

00:04:43.660 | But I think one of the reasons

00:04:45.220 | they're comfortable taking that risk

00:04:46.180 | is they go quite light on debt or leverage,

00:04:48.180 | however you wanna phrase it.

00:04:49.340 | - We're gonna get to this benchmarking survey,

00:04:51.400 | but I just wanna talk a little about LongAngle.

00:04:53.080 | So can you talk a little about what it is

00:04:55.440 | and why you started it?

00:04:56.820 | - Yeah, sure.

00:04:57.660 | So I started this group about two years ago

00:04:59.240 | with my friend Sriram.

00:05:00.320 | We've been friends actually since,

00:05:01.800 | I think freshman year of high school.

00:05:02.960 | I remember watching the Smurfs with him

00:05:04.360 | after school some days.

00:05:05.440 | But what led us to start this is that shortly after college,

00:05:08.280 | we were both in consulting and then decided

00:05:09.720 | we wanted to kind of give it a try ourselves

00:05:11.400 | of starting our own company.

00:05:12.440 | So we started a software company

00:05:14.040 | and we ran that for about 10 years and we bootstrapped it,

00:05:17.520 | which means we basically didn't take

00:05:19.180 | any outside venture capital.

00:05:20.700 | And in practical terms,

00:05:21.540 | it meant we didn't make any money ourselves

00:05:23.180 | or didn't take any salary out of it.

00:05:24.500 | We just rolled every dollar we made back into the company.

00:05:27.500 | And then after about 10 years,

00:05:28.760 | we were fortunate enough to sell it to a strategic acquirer.

00:05:31.740 | So it meant from a kind of a personal finance dimension,

00:05:33.900 | we made no money until our mid thirties.

00:05:36.300 | And then on one day,

00:05:37.140 | we got our compensation for the last 10 years of effort.

00:05:40.260 | And so we were quite abruptly introduced

00:05:43.420 | to all these high net worth personal finance things,

00:05:45.780 | whether it's estate taxes, alternative assets,

00:05:49.040 | umbrella insurance, et cetera.

00:05:50.860 | For a variety of reasons,

00:05:51.820 | we didn't want to go the model of just saying,

00:05:53.260 | hey, Goldman Sachs, here's all my money.

00:05:54.860 | You guys are in charge, you take it from here.

00:05:56.420 | We wanted to sort of manage things ourselves,

00:05:58.380 | but we realized we had a lot to learn.

00:06:00.100 | So we basically wanted to set up a group of friends of ours

00:06:03.660 | who are all in a similar situation financially

00:06:05.980 | and where nobody was trying to sell each other anything.

00:06:08.540 | And that's really still what we're doing.

00:06:09.940 | I think our initial expectation,

00:06:11.180 | this would just be a couple dozen friends

00:06:12.940 | and sort of our first or second degree circle.

00:06:15.580 | It ended up that need was a lot more broadly felt.

00:06:17.940 | And so, you know, people introducing their brother,

00:06:19.740 | their co-founder, their board member, et cetera.

00:06:21.740 | We've grown to about a thousand members

00:06:23.860 | all across the US and growing share in Europe,

00:06:26.740 | Australia, Middle East, et cetera.

00:06:28.660 | We're not looking to like recreate LinkedIn or anything.

00:06:30.660 | So we either share them or myself

00:06:32.900 | interviews every potential member

00:06:34.140 | to kind of see what they're interested in.

00:06:35.860 | Not that we are trying to have

00:06:37.100 | one cookie cutter member profile of,

00:06:38.780 | hey, everybody's an early forties software entrepreneur

00:06:41.220 | with two little kids.

00:06:42.540 | We want as much diversity as we can get

00:06:44.300 | professionally, geographically, et cetera,

00:06:47.100 | provided everybody's on the same page

00:06:48.540 | around the non-solicitation and confidentiality.

00:06:51.300 | - When I came across Longigo,

00:06:52.780 | which I think I found in like a Reddit thread on Fatfire,

00:06:55.500 | which we can get to later.

00:06:56.580 | I was like, oh my gosh,

00:06:57.420 | this is exactly something I'm interested in, right?

00:06:59.220 | It's a community where it's private,

00:07:01.620 | so you can be transparent.

00:07:02.860 | There's no fake profiles, there's no anonymous.

00:07:04.980 | Everybody goes by their name

00:07:06.500 | and talk about every aspect of life.

00:07:08.660 | So I've been really excited to be a member.

00:07:10.940 | I've learned a ton.

00:07:12.220 | I've tried to do my best to give back

00:07:13.700 | and share what I know, but I'm so curious.

00:07:15.580 | You said a thousand members.

00:07:16.540 | You've done probably half of those interviews, at least.

00:07:19.180 | What kinds of things have you learned

00:07:20.780 | talking to all of these people who kind of fall into this?

00:07:23.820 | Where's the threshold for who's a member

00:07:25.460 | so people kind of get a sense of the profile

00:07:27.580 | of members of Longangle?

00:07:29.020 | - So say the typical demographics of our group,

00:07:31.860 | almost everybody's in their thirties and forties.

00:07:33.740 | The bulk of people are in what banks would call

00:07:35.780 | the very high net worth demographic.

00:07:37.820 | And that means between five and 30 million

00:07:39.900 | of investable assets.

00:07:41.020 | We've got maybe another 15 or 20% on each side of that.

00:07:43.780 | We do validate that everyone's at least a qualified client.

00:07:46.780 | And the SEC defines that as having 2.2 million

00:07:49.740 | or above in investable assets.

00:07:51.820 | And that's really just a threshold that sort of governs

00:07:54.180 | what kind of assets you're allowed to invest in.

00:07:56.700 | So those are the kinds of people

00:07:58.020 | that I've had these discussion with.

00:07:59.540 | I think there's a few things

00:08:01.140 | that have come as surprise to me.

00:08:02.220 | Well, first I would say,

00:08:03.060 | I've just really enjoyed these interviews.

00:08:04.140 | I've met 500 fascinating people.

00:08:06.100 | And maybe the biggest thing I've learned

00:08:08.700 | is there is no one path here.

00:08:10.620 | We've got members who started cybersecurity companies.

00:08:14.140 | We have members who were employee number three

00:08:16.300 | at Pick Your Public Company,

00:08:17.540 | people who work at hedge funds,

00:08:19.100 | people who work in real estate, corporate executives,

00:08:22.340 | people who put one paycheck into crypto back in 2011,

00:08:25.580 | people who inherited money.

00:08:26.580 | So I'd say one thing is there's a lot of paths

00:08:29.060 | to significant financial success.

00:08:31.300 | The second thing is I don't think any of our members

00:08:33.260 | feel like they "have it figured out."

00:08:35.540 | I think if you look on a personal level,

00:08:37.220 | probably 80% of our members have little kids.

00:08:39.860 | And I don't think anybody feels high confidence

00:08:42.180 | that they know the right way to raise kids with wealth.

00:08:45.980 | I think there's this balance of,

00:08:47.060 | hey, having significant resources

00:08:49.180 | creates these opportunities.

00:08:50.340 | I can get private tutors.

00:08:51.660 | I can help them pay for whatever activities

00:08:53.740 | they're interested in,

00:08:54.580 | get them private gymnastics lessons, et cetera.

00:08:56.860 | So there's a lot of opportunity there.

00:08:58.580 | But I think there's this real tension of,

00:09:00.460 | first, I don't want to spoil my kids

00:09:02.060 | and just have them not turn into good people.

00:09:04.260 | And second, I don't want to deprive them

00:09:06.580 | of their ability to feel they've succeeded

00:09:08.220 | on their own terms and struggled

00:09:09.820 | and figured out the right way to do things.

00:09:11.540 | I think that's something where, unfortunately,

00:09:13.060 | I don't have, hey, here's the answer about how to do it.

00:09:15.540 | But I do think if people are worried

00:09:17.540 | that they're not sure how to strike that balance,

00:09:19.220 | they're far from alone.

00:09:20.740 | And I think beyond that specific question of kids,

00:09:22.660 | I think even people who have achieved

00:09:24.780 | quite a bit of significant success financially

00:09:27.340 | feel like from a pure personal finance perspective,

00:09:29.940 | there's some big gaps in how they do things.

00:09:31.660 | Maybe it's, hey, I've heard about umbrella insurance

00:09:33.940 | and I know that's a thing,

00:09:34.780 | but I don't know what it is or how much I should buy

00:09:36.620 | or where to buy it.

00:09:37.780 | Or maybe it's, hey, I've got no trust in a state plan.

00:09:39.860 | Again, I know that's a thing.

00:09:41.140 | If I keeled over tomorrow,

00:09:42.580 | my assets would go into probate.

00:09:43.940 | That could cause all kinds of problems,

00:09:45.500 | but I don't know where to start

00:09:46.500 | or how to wrap my head around this.

00:09:48.380 | Or maybe I'm all in cash and can't bring myself to invest.

00:09:51.420 | For each person, it's different,

00:09:52.460 | but I would say most people feel like

00:09:55.180 | they have some real gaps and don't have it figured out.

00:09:57.740 | And finally, the last thing that actually just gave me

00:09:59.620 | a lot of personal comfort is I would say 80% or 90% people

00:10:02.900 | feel like they are the one sucker really paying their taxes.

00:10:05.700 | I think there's this impression of, hey,

00:10:07.140 | everybody out there is moving to Puerto Rico

00:10:09.460 | and doing 1031 exchanges and doing all these clever things

00:10:11.940 | that ends up with effective no tax rate.

00:10:13.580 | But the significant majority of people feel like,

00:10:15.820 | hey, I'm paying 30% plus in effective taxes

00:10:18.500 | and haven't figured out the way around it,

00:10:20.340 | which personally I think is actually not a bad thing.

00:10:22.260 | It just makes me feel better

00:10:23.300 | about being in that same situation

00:10:24.860 | to know that most people are paying their share.

00:10:27.460 | - Well, one, now I feel a lot better.

00:10:29.140 | I'm also paying my share.

00:10:30.340 | You know, as much as I love to find the tax hacks,

00:10:32.380 | it seems like it makes me feel better.

00:10:34.220 | I guess unless I talk to people in real estate

00:10:35.820 | that seem to always say they're not paying taxes.

00:10:37.700 | I thought the misconception you might say at the beginning

00:10:40.100 | was that, you know, everyone thinks

00:10:42.140 | that the wealthy have it all figured out.

00:10:43.820 | And if there's something I've learned being in the group,

00:10:45.740 | it's like people are open about the fact

00:10:48.300 | that they haven't figured it out.

00:10:49.460 | And I like that.

00:10:51.060 | Someone listening might say, well,

00:10:52.660 | is it just staying within the bubble of the wealthy

00:10:54.740 | and all this knowledge?

00:10:55.580 | And I think things like this,

00:10:56.780 | and we're gonna talk about your benchmarking survey,

00:10:58.540 | like hopefully are an opportunity

00:10:59.940 | to kind of get some of that information out.

00:11:01.420 | But I know that where they're not a closed door ecosystem,

00:11:05.460 | people might not be as open to sharing.

00:11:07.020 | So it's this catch 22 of if you made it open

00:11:09.620 | for anyone to come,

00:11:10.540 | you might not actually get the conversation going.

00:11:13.260 | But if you close it, how do you get that information out?

00:11:15.580 | Any thoughts on ways to share some of the knowledge

00:11:18.620 | that's coming out of a group like this with more people?

00:11:21.940 | So people that aren't there have a higher likelihood

00:11:24.300 | of getting to that group in the future?

00:11:25.940 | - Yeah, I think it's a fantastic question.

00:11:27.580 | And I think you're right, there is this tension there.

00:11:29.620 | So one of the guiding principles we put in place

00:11:32.140 | is this idea of confidentiality,

00:11:33.940 | because we do think that having a real names policy

00:11:36.980 | and people actually being who they purport to be

00:11:39.300 | is really important,

00:11:40.220 | but people are just not gonna open up.

00:11:41.780 | It's one of those things

00:11:42.660 | that people just don't talk about money.

00:11:43.900 | And I would say, at most wealth demographics,

00:11:46.220 | that's not unique to the high net worth.

00:11:48.220 | As you said, for example,

00:11:49.300 | we do this annual benchmarking study.

00:11:51.460 | And what we do there is we ask all of our members

00:11:54.380 | to put in a spreadsheet

00:11:55.740 | across 60 some different asset classes,

00:11:58.500 | how their portfolios break down in percentage terms,

00:12:00.860 | not absolute dollars, but across these asset classes.

00:12:03.300 | And then we synthesize all that data and normalize it,

00:12:05.820 | correlate it with a bunch of dimensions

00:12:07.540 | and create a report around that.

00:12:09.100 | That's something that actually we publicize

00:12:10.900 | and share with everybody.

00:12:11.740 | So anybody who wants that data

00:12:13.940 | is certainly welcome to access it.

00:12:16.060 | I think going forward,

00:12:16.980 | it's a great idea to think about other ways

00:12:18.500 | that we can look to share things

00:12:20.460 | that don't compromise confidentiality.

00:12:22.260 | I think there's always gonna be certain things

00:12:24.020 | and first person anecdotes that just can't be shared.

00:12:26.660 | We're looking to do more synthesized and aggregated data.

00:12:29.980 | And that's not something that I would look to prevent

00:12:32.660 | being more broadly disseminated.

00:12:34.300 | Once a week, we'll do what we call the mini benchmark

00:12:37.260 | in the forum where I ask one question,

00:12:38.820 | just give four possible answers.

00:12:40.300 | And that can be anything from

00:12:41.700 | what do you expect interest rates are gonna top out at?

00:12:44.140 | How much allocation do you have

00:12:45.420 | to emerging market securities?

00:12:47.260 | Do you use Wealth Manager or not?

00:12:49.020 | And I think that's a great idea.

00:12:50.140 | We can maybe just tweet the results of those out

00:12:52.100 | to anybody who follows us on Twitter.

00:12:53.780 | The one about Wealth Manager, actually,

00:12:55.140 | you'd asked earlier what might be surprising.

00:12:57.860 | And one thing also that's surprising to me

00:12:59.220 | is I personally don't use an RIA or Wealth Manager.

00:13:02.260 | I had been under the impression

00:13:03.460 | that I was sort of the oddball in that approach.

00:13:05.460 | But actually, if we look at overall membership,

00:13:07.500 | only about 40% of people have any sort of third party,

00:13:10.660 | whether it's a multifamily office,

00:13:12.700 | RIA, Wealth Manager, et cetera.

00:13:14.740 | About 60% of them do not.

00:13:16.180 | And I think it mostly comes down to,

00:13:17.900 | biggest thing is probably just this fee structure

00:13:19.700 | of paying half a percent or 1% of your assets every year.

00:13:22.220 | Just people both, I think, don't really like the idea

00:13:24.380 | of paying a percentage

00:13:25.220 | as opposed to just paying straight dollars.

00:13:27.020 | So like, "Hey, I pay my lawyer by the hour.

00:13:28.740 | "I pay my account by the hour.

00:13:29.700 | "Why can't I pay my Wealth Manager by the hour?"

00:13:31.700 | And then just the absolute number.

00:13:33.060 | If somebody has $10 million, paying 1% of that

00:13:35.180 | means you're paying $100,000 a year,

00:13:36.820 | which is just quite a bit of money.

00:13:38.620 | So that was another surprise to me

00:13:40.140 | is that I was not in the minority of saying

00:13:42.380 | that I'm just gonna do things myself.

00:13:44.340 | I think if I look at our membership,

00:13:46.300 | you get to a certain level and I aspire to be there,

00:13:48.860 | but not there myself.

00:13:49.780 | If you're over, say, 50 or 100 million,

00:13:51.860 | I think it just starts to get to this level of complexity

00:13:54.020 | that even just managing the paperwork

00:13:56.300 | and dealing with the tax returns,

00:13:57.580 | you really can't do that by yourself

00:13:59.260 | unless it's really your 100% job.

00:14:00.940 | So people do hire and help to that.

00:14:02.700 | But below that kind of level, I'd say most people,

00:14:04.900 | at least in our group, are managing everything themselves.

00:14:07.100 | - And managing it yourselves doesn't mean

00:14:09.060 | you don't have an assistant or you don't have a bookkeeper

00:14:11.580 | or you don't have someone that files your taxes.

00:14:13.180 | It just means you're not paying someone a percentage

00:14:15.580 | of all of your assets to manage your investments.

00:14:18.340 | - Yeah, that's exactly right.

00:14:19.340 | I would say almost everybody has a CPA

00:14:22.140 | who's doing their taxes and that can be

00:14:24.060 | a very reasonable amount of money.

00:14:25.580 | Somebody can be making $2 million a year

00:14:28.020 | and only pay 1,000 or 2,000 a year

00:14:29.900 | for somebody to file their taxes.

00:14:31.100 | It does not need to be a back-breaking amount of money.

00:14:33.340 | And I actually think at a certain point,

00:14:34.500 | it's just silly not to hire somebody else to do it

00:14:37.220 | because you can have all the good intentions in the world,

00:14:39.740 | but it's really easy to misread the tax code

00:14:41.580 | at a certain level and either underpay or overpay.

00:14:43.980 | And I'm not sure which is worse.

00:14:45.700 | I don't think people want to be doing either one.

00:14:47.220 | So certainly, as you're saying, yes,

00:14:49.340 | bookkeepers and assistants and that sort of thing.

00:14:51.180 | But I think just this principle of saying,

00:14:52.580 | I'm gonna pay somebody a half a percent or a percent a year

00:14:55.700 | just to tell me to put something into a 60/40 index fund.

00:14:58.500 | I will say our group tends to be younger, as I said,

00:15:00.820 | in their 30s and 40s and overwhelmingly 95% of people

00:15:04.100 | didn't grow up with this kind of wealth,

00:15:05.420 | but generated themselves at some point along the way.

00:15:07.740 | So I think probably has a relatively high dose

00:15:10.300 | of self-confidence in their ability to do it.

00:15:11.940 | So probably a bit of selection bias there,

00:15:13.980 | but it's not a unconventional approach.

00:15:17.140 | - One thing when it comes to taxes,

00:15:18.620 | even if you don't want to hire a CPA forever,

00:15:20.860 | I would encourage everyone to hire someone for one year,

00:15:23.580 | or even I found that as part of a sales tactic,

00:15:27.020 | most of the accountants I've talked to to file taxes,

00:15:30.420 | when you get to know you, they say,

00:15:31.420 | "Hey, why don't I review your last year's return?"

00:15:34.220 | And you're still within the window of being able to refile

00:15:36.660 | if you mess something up.

00:15:37.780 | And I wouldn't say I found any glaring mistakes

00:15:40.700 | from when I was doing it myself,

00:15:42.020 | but even when I hired a firm that was kind of not that great,

00:15:46.540 | the next firm I ended up hiring was like,

00:15:48.180 | "Well, here's a couple things

00:15:49.340 | you could have done differently."

00:15:50.340 | And so I found that at almost all levels,

00:15:53.260 | hiring someone to do this pays for itself

00:15:55.780 | in what they're able to understand and file for you.

00:15:58.660 | So I think that if I filed my taxes myself,

00:16:00.860 | forgetting the time it would take,

00:16:02.260 | I would actually end up not filling out the right things

00:16:05.140 | and ending up making less at the end of the year

00:16:06.980 | than I would if I paid someone.

00:16:08.380 | - I agree, and I think there's also value

00:16:10.100 | to have somebody throughout the years

00:16:11.620 | you're trying to make decisions,

00:16:12.660 | you can bounce ideas off of.

00:16:14.180 | So for example, we own a home in Southern California

00:16:17.300 | we used to live in, and we've moved since then.

00:16:19.540 | And I'd sort of like to sell it

00:16:20.980 | 'cause it's just sort of a hassle to manage,

00:16:23.300 | but then I had concerns about,

00:16:24.460 | "Okay, if I sell it,

00:16:25.420 | is that gonna have big tax implications?"

00:16:27.540 | And having somebody who I've worked with

00:16:29.260 | for a number of years knows my whole situation,

00:16:31.540 | so I can send her an email saying,

00:16:32.620 | "Hey, I see these options here.

00:16:34.060 | I could sell this and do a 1031 exchange

00:16:36.420 | and then defer sort of indefinitely paying taxes on it,

00:16:39.500 | or I could just sell it, but I'm worried

00:16:40.700 | I'm gonna have this big gain

00:16:41.660 | that's gonna be taxed under California tax rates

00:16:43.540 | and it's gonna sort of wipe out the whole point of doing it."

00:16:46.180 | And somebody who has that whole context,

00:16:47.900 | she was able to easily identify, say,

00:16:49.620 | "Okay, well, you've got these passive losses

00:16:51.580 | you haven't been able to take and you can net these out."

00:16:53.700 | And really, it's not just a matter

00:16:55.100 | at the end of the year of getting accounting right,

00:16:56.660 | but she was able to help me make better decisions

00:16:58.580 | along the way and say,

00:16:59.420 | "Hey, here's what the tax implication will be

00:17:01.540 | when you're filing your returns next year if you do this,

00:17:03.540 | but here's this other way of structure it

00:17:04.940 | that is just as good economically,

00:17:06.500 | but it's gonna be a lot smarter way to go about it."

00:17:08.980 | - You mentioned the benchmarking survey,

00:17:10.300 | and one of the things I think is really interesting

00:17:12.780 | is that so many of these benchmarking surveys exist.

00:17:15.700 | If you search Schwab RIA Benchmarking,

00:17:17.620 | you get a lot of them,

00:17:18.740 | but they all are tied to some brokerage firm or some RIA.

00:17:23.420 | And so the results end up looking very similar

00:17:26.540 | to whatever that investment advisor

00:17:29.140 | is recommending their clients do.

00:17:31.220 | And so I don't feel like it's as practically useful

00:17:34.100 | for anyone other than like,

00:17:35.180 | if I wanna steal clients from this RIA,

00:17:36.860 | I now know what their clients look like.

00:17:38.420 | But your benchmarking survey, like you said,

00:17:40.940 | 60% of people don't even have wealth managers,

00:17:43.020 | is really fascinating.

00:17:44.260 | So I thought maybe it'd be fun

00:17:46.260 | to go through some of the learnings.

00:17:48.340 | I think anyone listening would certainly be educated

00:17:51.780 | in many ways about what are all these people doing?

00:17:53.700 | How are they structuring their portfolios?

00:17:55.260 | What are they thinking about debt,

00:17:56.500 | leverage, all this stuff?

00:17:57.980 | So maybe we could just run through it.

00:17:59.540 | Like you mentioned, it'll be available.

00:18:01.140 | So I'll just link to it in the show notes

00:18:02.740 | if people wanna go take a look at it and follow along.

00:18:05.180 | But maybe we could just walk through it and talk about it.

00:18:07.780 | - The way that we run this, to be clear on that,

00:18:10.540 | is that we share it with all of our members once a year.

00:18:13.540 | We share the survey.

00:18:15.140 | And we define something like 60 to 65 different asset classes

00:18:19.380 | and ask people to put in how their personal portfolio

00:18:22.740 | is allocated across these different kinds of assets

00:18:25.020 | and these different kinds of debt.

00:18:26.580 | Then we gather all that data together.

00:18:28.860 | And we also know a lot of other demographic data

00:18:31.420 | about our members, how old they are,

00:18:33.220 | what was their source of wealth,

00:18:34.620 | where do they live, all of that sort of thing.

00:18:36.980 | And we now have a big enough N

00:18:38.420 | that we can actually correlate across those things,

00:18:40.460 | not just say, okay, on average,

00:18:41.700 | people have this much money invested in private equity,

00:18:43.780 | but say, okay, compared to people who are younger or older

00:18:46.300 | or more or less money in total,

00:18:47.900 | how does that affect their allocation

00:18:49.460 | to different asset classes?

00:18:50.860 | So that's sort of how we go about it.

00:18:52.620 | I know that radio is not the best medium

00:18:54.900 | for talking about a lot of numbers.

00:18:56.180 | So I'm not gonna get into exactly what percentage point

00:18:59.020 | to each one, but happy to talk about

00:19:00.940 | sort of a few high-level takeaways here.

00:19:02.700 | As I said, I'd encourage people to look at the link

00:19:04.580 | if they wanna see more details.

00:19:06.260 | I'd say at the highest level,

00:19:07.460 | in terms of how people's portfolios are allocated,

00:19:10.060 | it is roughly 1/3 into public stocks or public equities.

00:19:14.580 | So that's anything, whether US or international,

00:19:16.980 | buying Microsoft, Apple, et cetera,

00:19:18.580 | mostly via index funds,

00:19:20.020 | but it could also be individual shares.

00:19:21.540 | It's about 1/4 into equity in real estate,

00:19:24.300 | whether that's somebody's primary residence

00:19:26.140 | or whether that is investment properties,

00:19:28.220 | vacation homes, commercial buildings,

00:19:30.380 | warehouses, what have you.

00:19:31.580 | And then about 1/4 into alternative assets,

00:19:34.860 | which could either be private companies they hold,

00:19:37.500 | could be crypto.

00:19:38.460 | We can get a little bit more later into the show

00:19:40.300 | into what alts are, but about 1/4 into alternative assets.

00:19:43.140 | And then the rest, about 15% into cash and bonds.

00:19:46.420 | In terms of changes that we've seen over the last year,

00:19:49.620 | you can see there was a big drop

00:19:51.340 | in terms of shares and public equities

00:19:53.100 | that went from about 1/2 of people's portfolio

00:19:55.020 | down to just 1/3.

00:19:56.580 | And what made up the difference was more in real estate

00:20:00.260 | and more in alternative assets.

00:20:02.100 | - And do you think that some of that

00:20:04.140 | is just the market was down

00:20:06.740 | a pretty significant amount between years

00:20:08.700 | or do you have any kind of qualitative data around this

00:20:12.140 | to understand how much of it was market-driven

00:20:14.860 | versus portfolio structure-driven?

00:20:17.180 | - I think it was both.

00:20:18.100 | I don't know if I can break down exact percentages,

00:20:20.100 | but yeah, the fact is the market's down

00:20:22.020 | something like 20% over the last year,

00:20:23.980 | whereas the real estate market's gone down

00:20:25.620 | a little bit lately, but it's probably up

00:20:27.380 | and alts have also done well.

00:20:28.900 | So I think some of it's market-driven,

00:20:30.740 | but yeah, your question about qualitatively,

00:20:32.740 | I can say with confidence that people,

00:20:34.420 | partly 'cause we asked in the survey,

00:20:36.460 | what are you personally doing to change your allocation?

00:20:38.860 | And that is something people are intentionally doing

00:20:40.860 | of feeling like the environment that we were in before

00:20:44.700 | was not the one we're in now.

00:20:45.860 | And so something like real estate, for example,

00:20:48.060 | two years ago, that was probably a fantastic buy.

00:20:50.060 | You had 2.5% debt that you could get on things

00:20:53.180 | and very reasonable expectations of inflation

00:20:56.660 | at two to three times that level.

00:20:58.140 | So that was a real smart move to do.

00:20:59.860 | I'd say today, something like real estate is less attractive.

00:21:02.300 | Again, higher interest rates

00:21:03.460 | tend to make public stocks less attractive.

00:21:05.580 | So I think we are seeing people intentionally

00:21:07.780 | trying to increase their allocation,

00:21:09.260 | especially to alternatives.

00:21:10.660 | And then a couple of other sort of to dive into the details,

00:21:13.380 | things that people may find surprising.

00:21:15.020 | I think I mentioned earlier on here

00:21:16.460 | that about a quarter of our members

00:21:18.540 | don't own their own home.

00:21:19.900 | And I would say for almost everybody, that is by choice.

00:21:22.460 | It's not a matter of if you've got $5 million,

00:21:24.340 | you could afford to buy a house.

00:21:26.100 | But again, asking people qualitatively,

00:21:28.140 | why don't you buy a home?

00:21:29.740 | I would say it probably falls into two categories.

00:21:31.780 | There's a set of people who just don't wanna live

00:21:33.460 | in any one place.

00:21:34.460 | Now these often tend to be the people without kids,

00:21:36.220 | but they're nomads and say,

00:21:37.380 | "Okay, I wanna be in Mexico City for the next three months.

00:21:39.540 | Then I wanna be in Switzerland.

00:21:41.100 | And I just don't see a point in owning a house if I do that."

00:21:43.740 | And then there's also a lot of people

00:21:44.900 | who just don't want the sort of mental burden,

00:21:47.540 | the time burden, the financial risk, et cetera,

00:21:49.900 | associated with owning.

00:21:50.780 | They would rather just rent and know I'm gonna pay this.

00:21:52.900 | And if the lights need to be changed, the plumbing breaks,

00:21:55.540 | the roof leaks, that's not my problem.

00:21:57.060 | I'm just gonna call the landlord

00:21:58.140 | and tell him to deal with it.

00:21:59.100 | That's a big thing.

00:21:59.980 | And then if you look at the three quarters of people

00:22:02.180 | who do own a home, again,

00:22:03.700 | a quarter of those don't have a mortgage on it.

00:22:05.860 | So you have pretty much fully half of members

00:22:08.020 | without a mortgage.

00:22:08.860 | So I found that interesting.

00:22:10.340 | And another thing on the personal real estate,

00:22:12.380 | leaving aside the caveat I had

00:22:13.940 | that there's a material percentage of people

00:22:15.620 | who don't own a home.

00:22:16.500 | If you look at those who do, up to about $50 million,

00:22:19.780 | the home continues to be a pretty significant piece

00:22:22.180 | of people's net worth.

00:22:23.100 | If you get somebody who's a billionaire,

00:22:24.420 | of course their primary residence

00:22:25.580 | is probably not a big part of their portfolio,

00:22:27.660 | but somebody could have over $25 million

00:22:29.620 | and still have 10 or 15% of their net worth in their home.

00:22:32.100 | So that's something else that's interesting to me

00:22:33.740 | is how much people's primary residence value

00:22:37.060 | continues to scale along with their net worth.

00:22:39.260 | First, I wanna point out,

00:22:40.500 | I'm a big fan of the fact that Ramit Sethi

00:22:42.820 | spends a lot of time telling the world

00:22:44.820 | that renting is not the worst thing in the world.

00:22:47.780 | And I love that you're seeing that here.

00:22:50.420 | And this is another message that's reinforced.

00:22:52.100 | I know so many people that think that renting a house

00:22:55.260 | is just throwing away money.

00:22:56.620 | I've spent a lot of money on property tax.

00:22:58.420 | I've spent a lot of money on insurance.

00:23:00.180 | There's a lot of costs that come with owning a home

00:23:02.140 | that end up getting thrown away.

00:23:03.300 | Mortgage interest being another one.

00:23:04.900 | So I wanna make sure we pause for a second

00:23:07.900 | and reinforce the fact that renting is not a decision

00:23:11.300 | that is something that means you won't make money.

00:23:13.460 | It means you're throwing all your money away.

00:23:15.220 | I've done the breakeven analysis

00:23:17.140 | and built spreadsheets to figure it out.

00:23:19.020 | If you look at the costs

00:23:19.940 | and you look at the cost of mortgage interest and all stuff,

00:23:22.260 | I generally think that if you're not in a house

00:23:24.260 | for more than five years,

00:23:25.860 | all the money that you're spending to buy a home

00:23:28.940 | and the brokerage fees, everything,

00:23:30.620 | you're also throwing away

00:23:31.860 | and you actually would have been better off renting.

00:23:33.820 | Now, there are a lot of factors that play into this

00:23:36.460 | that who knows if rents are gonna rise,

00:23:37.980 | who knows what happens to mortgage rates

00:23:39.300 | and home prices and appreciation.

00:23:41.220 | But my rule of thumb has always been less than five years,

00:23:44.180 | owning actually doesn't make sense.

00:23:46.260 | And if you think, oh, I could stay in the place I am

00:23:49.380 | for the next 10 years and you buy a place,

00:23:51.660 | but you buy a place that's so big

00:23:53.700 | that it will work five to 10 years from now,

00:23:56.340 | but it's actually way bigger than you need

00:23:57.980 | for the next one to five years,

00:24:00.060 | you're effectively overpaying.

00:24:01.980 | And if you were renting,

00:24:02.860 | instead you might rent a one or two bedroom,

00:24:05.100 | but now because you wanna adhere to this five year rule,

00:24:07.940 | you buy a four bedroom,

00:24:09.540 | then you're also still gonna come out behind

00:24:11.500 | because for the next three, four or five years,

00:24:13.620 | you would have saved so much money

00:24:15.020 | renting the one to two bedrooms.

00:24:16.380 | I just try to take every opportunity I can

00:24:18.700 | to reinforce the fact that buying is not the end all,

00:24:22.180 | best path forward for everyone.

00:24:23.780 | And renting certainly,

00:24:25.140 | while you don't get to recoup that money,

00:24:27.020 | you also have a lot of expenses associated with buying

00:24:29.940 | that you don't get to recoup.

00:24:30.940 | Yeah, I agree with that.

00:24:32.180 | And I think the other thing I would say is

00:24:34.020 | when you're looking at real estate,

00:24:35.380 | not only should you look at how long should I stay there,

00:24:37.860 | but it really matters

00:24:39.060 | what is the economic environment I'm buying in.

00:24:41.380 | And by that, I primarily actually mean

00:24:43.180 | what's the interest rate you're paying.

00:24:45.220 | If you buy a house in cash, it's not a bad investment,

00:24:48.660 | but nobody is becoming a multimillionaire

00:24:51.020 | by buying property in cash.

00:24:52.420 | The reason that real estate often turns out

00:24:54.060 | to be a very good investment

00:24:55.740 | is that you're putting in 20, 25% of your own money

00:24:58.580 | and 75, 80% of somebody else's money.

00:25:01.740 | In that case, if it goes up 5%,

00:25:03.340 | you're seeing a 25% return on your money.

00:25:06.060 | And that's great.

00:25:06.900 | Over the past five years,

00:25:08.060 | I've actually personally been buying a lot of real estate

00:25:10.260 | and trying to take on as much of that leverage as possible,

00:25:13.180 | but that is not a universal answer.

00:25:14.940 | That was the case when interest rates

00:25:16.620 | were down at two or 3%.

00:25:18.380 | And I think anybody who is looking at government policy

00:25:21.020 | and that sort of thing knew

00:25:22.020 | that inflation was gonna be a lot higher than that.

00:25:24.500 | That's not the environment we're in anymore.

00:25:26.060 | Rates have gone up 3% over the last number of months,

00:25:29.100 | and you're seeing the highest average mortgage rates

00:25:31.620 | we've seen in the last 20 years.

00:25:33.780 | So you can still take on debt,

00:25:35.980 | but you're paying way more for that.

00:25:37.380 | And so it's unlikely to be that same wealth generator now.

00:25:40.180 | So I think you need to look at your own situation,

00:25:42.220 | but also just look at

00:25:43.060 | what's the overall economic environment.

00:25:44.860 | And this doesn't just go for real estate.

00:25:46.220 | This goes for other asset classes.

00:25:47.740 | If you look at bonds two years ago, I didn't hold any.

00:25:50.420 | In my opinion, that was a terrible investment.

00:25:52.020 | If you look at something that's a 30-year bond

00:25:54.180 | that's yielding 2%, there's no uncertainty.

00:25:56.540 | Mathematically, if you hold that to maturity

00:25:58.460 | over the next 30 years, you're going to earn 2% a year.

00:26:01.180 | And there's near total certainty

00:26:02.420 | that inflation's gonna be higher than that.

00:26:03.660 | So you're basically locking yourself

00:26:04.980 | into losing money over 30 years.

00:26:06.900 | Now that environment by the flip side

00:26:08.100 | has become a lot more attractive.

00:26:09.420 | Personally, I still don't buy bonds

00:26:10.700 | because I'm not that compelled by a 5% rate or 4% rate,

00:26:13.940 | but that's way better than the 2% you had before.

00:26:16.300 | So I think across any asset class,

00:26:17.780 | there's not one universal, hey, here's the right answer.

00:26:20.900 | Here's a portfolio that makes sense.

00:26:22.220 | You have to be somewhat reactive

00:26:24.020 | to the situations you see it.

00:26:25.820 | Unfortunately, you only get to sort of live your life once,

00:26:28.900 | and it may be that ideally when you're 28,

00:26:30.820 | you'd like to buy a home,

00:26:32.020 | but it's not a great environment to buy a home.

00:26:33.500 | You just have to kind of react to that fact,

00:26:35.260 | but you need to look at a combination

00:26:36.380 | of what's going on internally and externally for you.

00:26:39.060 | Being a parent can be scary,

00:26:41.980 | whether it's watching your toddler

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00:26:46.380 | or the indescribable pain of stepping

00:26:48.620 | on tiny plastic dinosaurs in your bare feet,

00:26:51.500 | both of which happened to me recently.

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00:28:47.320 | of beer, wine, and spirits across multiple stores.

00:28:50.300 | So when I really wanted to make a few cocktails

00:28:52.340 | while we were hosting family last week,

00:28:54.180 | not only could I get an Italian Amaro

00:28:56.220 | delivered in less than an hour,

00:28:57.860 | but I found it for $15 less than my local liquor store.

00:29:01.340 | So whatever the occasion, download the Drizzly app

00:29:04.420 | or go to drizzly.com.

00:29:06.280 | That's D-R-I-Z-L-Y.com today.

00:29:10.300 | Must be 21 plus, not available in all locations.

00:29:14.400 | I will also add right now,

00:29:16.100 | 'cause I know there are people,

00:29:17.080 | especially in my friend group that are like,

00:29:18.500 | I finally have the money for the down payment,

00:29:20.480 | but interest rates are so high.

00:29:22.500 | I will say two things.

00:29:23.500 | One, I have noticed even in the Bay Area

00:29:25.960 | that there've been a lot of price decreases.

00:29:27.660 | So if you factor in the fact

00:29:29.460 | that you might get the house a lot cheaper

00:29:30.900 | than you would have a year ago, that could be an impact.

00:29:33.140 | And then the second is you're never locked into 7%, right?

00:29:36.580 | If you get a mortgage right now and it is 7%,

00:29:39.060 | and hopefully for the sake of those people

00:29:41.460 | that that comes down quickly,

00:29:42.740 | like if mortgage rates drop back down in three years,

00:29:45.720 | you can always go ahead and refinance.

00:29:48.480 | And so, funny enough, I had been doing some calculations

00:29:51.960 | when I was trying to decide whether we got

00:29:54.120 | a 30-year mortgage or a 10-year mortgage.

00:29:56.120 | And I was looking at the break-even point

00:29:58.020 | on the 10-year mortgage.

00:29:59.880 | And it's not 10 years.

00:30:01.120 | In my worst case scenario math, I was saying,

00:30:03.120 | okay, well, at the end of the 10-year period,

00:30:05.900 | rates go up to 7%.

00:30:08.120 | And now I'm paying way higher than 2 1/2

00:30:10.640 | or whatever I would have done on the 30-year mortgage.

00:30:12.960 | And the break-even point was still like 12 or 13 years.

00:30:17.080 | And so what that meant was,

00:30:18.640 | if I had gotten a 10-year mortgage and paid,

00:30:20.880 | let's say, half a percent lower

00:30:22.840 | than my 30-year fixed for 10 years,

00:30:24.640 | and then it rose up to 7%,

00:30:26.860 | the savings I got for those first years

00:30:29.320 | was totally made up for by even having to pay 7%

00:30:32.720 | for three years.

00:30:33.560 | So if you inverse that and say, if I get a mortgage now,

00:30:36.160 | and for three years, I have to pay 7%,

00:30:38.200 | and then after that, I can refinance,

00:30:40.400 | like the net effect over a decade or more

00:30:43.080 | is not gonna be as impactful.

00:30:45.160 | I have not done any math, this is not financial advice,

00:30:47.640 | but probably not going to outweigh the fact

00:30:50.800 | that you might be able to get the house

00:30:52.320 | at a significantly better deal right now

00:30:55.200 | because so many people are scared off by mortgage rates.

00:30:57.480 | - Yeah, I would agree with that.

00:30:58.720 | The only other hack I would add

00:31:00.840 | in the world of buying a house,

00:31:01.960 | so I bought three houses since my wife and I

00:31:04.640 | have gotten married.

00:31:05.840 | And we have followed the same strategy on all of them.

00:31:08.480 | And I've been very happy with the purchase on each one.

00:31:10.880 | And that has basically been looking for houses

00:31:12.960 | that have been on the market for a year, two years,

00:31:16.040 | and they came on way too high, nobody wanted it.

00:31:18.680 | And so then after a while, they started cutting,

00:31:20.600 | they kept cutting and kept cutting.

00:31:22.800 | And to the point where when we bought it,

00:31:24.440 | in each case, it was about 30% below

00:31:27.080 | where they'd originally brought it on.

00:31:28.900 | And I am confident that any one of those,

00:31:30.920 | if they had brought it on

00:31:32.120 | just at the right price at the beginning,

00:31:33.760 | it would have sold right away,

00:31:35.120 | it would have sold for more than we paid.

00:31:36.760 | But you start to get this dynamic

00:31:37.880 | where a house just gets stale.

00:31:39.200 | The most recent one we bought,

00:31:40.400 | it was actually a vacation house in Southern California

00:31:42.880 | near my brother.

00:31:43.700 | I was really excited about this opportunity.

00:31:45.520 | We'd been working with a realtor for a while there

00:31:47.680 | and couldn't find anything that sort of

00:31:49.520 | was what we were looking for,

00:31:50.920 | as price we could afford, et cetera.

00:31:52.680 | Till finally my wife, she was on Zillow said,

00:31:54.360 | "Hey, what about this one?

00:31:55.200 | This looks amazing.

00:31:56.020 | This has great ocean views,

00:31:57.560 | has exactly what we're looking for.

00:31:58.920 | And you know, this price seems super reasonable."

00:32:00.760 | And we talked to our broker, she said,

00:32:01.820 | "No, you don't wanna see that,

00:32:03.320 | it's been on the market forever."

00:32:04.400 | And so we pushed her, you know,

00:32:05.240 | like we really do wanna see it.

00:32:06.080 | She was like, "Ah, it's hard to show,

00:32:07.600 | tenants there are messy."

00:32:08.720 | I was like, "Why on earth would I care

00:32:10.240 | the tenants there are messy?

00:32:11.320 | Like, I'm not looking for tenants,

00:32:13.100 | I'm looking for a property."

00:32:14.400 | Anyway, we finally got into it, finally saw it,

00:32:16.720 | and we bought it.

00:32:18.000 | And then afterwards, she's saying,

00:32:19.120 | "I don't know why this thing was here.

00:32:20.600 | This thing should have gotten a heartbeat at,

00:32:21.800 | you know, 20% higher than this."

00:32:23.240 | That is a strategy, as I said, it wasn't a one-off.

00:32:25.320 | It's been all three houses we bought,

00:32:26.880 | just this idea of a stale house is no longer hot.

00:32:29.240 | And then people just get spooked by it.

00:32:30.840 | They say, "Hey, if it's been there for a year or two,

00:32:32.480 | there must be something fundamentally wrong with this house.

00:32:34.320 | There's a reason nobody else wants it."

00:32:36.000 | And then you just get these sellers

00:32:36.920 | who keep having to do these little salami slices

00:32:38.800 | of cutting 3%, 5% at a time,

00:32:41.160 | and end up well below the market.

00:32:42.760 | My two house buying hacks,

00:32:44.120 | one that we've done for both,

00:32:45.440 | one that we've done for one,

00:32:46.920 | was earlier in our careers, we were like,

00:32:48.600 | "Well, we knew that we wanted to be in a house

00:32:50.080 | for a long period of time if we wanted to buy it,

00:32:52.240 | because you kind of needed that for the math to work."

00:32:54.600 | But we also didn't want a pre-buy space we didn't need.

00:32:56.840 | So we found a house that had three bedrooms,

00:32:59.160 | but it had a private entrance for one of the bedrooms.

00:33:01.720 | And we basically converted that to a studio

00:33:03.920 | and rented it out.

00:33:05.080 | We locked the door from the inside

00:33:07.280 | between that bedroom and the rest of our house.

00:33:09.400 | It didn't have a kitchen,

00:33:10.360 | but in the Bay Area, there are lots of young people

00:33:13.040 | who either work at a company

00:33:14.600 | that provides them all their meals,

00:33:15.880 | or don't mind cooking in a microwave

00:33:17.680 | and going out to eat and all of that.

00:33:19.600 | And so for almost a decade,

00:33:21.360 | we rented a room out in our house.

00:33:23.280 | And then right about the time

00:33:24.920 | we were about to have our first daughter,

00:33:26.720 | we were like, "You know what?

00:33:27.560 | We need that third bedroom now."

00:33:29.080 | And we are in a financial position

00:33:31.360 | to not need the rental income anymore

00:33:33.880 | to make the mortgage payments.

00:33:35.040 | Now, all of a sudden we're like,

00:33:35.880 | "Now we've just upgraded

00:33:36.800 | from a two bedroom to a three bedroom,

00:33:38.320 | but we didn't have to move."

00:33:39.680 | And we had that extra income.

00:33:41.280 | So right now, that could be a great opportunity.

00:33:43.960 | And at the time, it seemed so crazy to me to think,

00:33:46.360 | "What if it didn't have a door?"

00:33:47.760 | Now, knowing everything I know,

00:33:49.320 | the cost to cut a hole in a house and put a door

00:33:52.480 | is probably actually not as much as I thought.

00:33:55.240 | So I think early on,

00:33:56.400 | I was only looking at houses that were set up for this.

00:33:59.240 | Knowing what I know now, you could look for any house.

00:34:01.640 | And relative to the cost to buy a house,

00:34:04.080 | the cost to cut a hole and put a door

00:34:06.400 | is actually gonna be pretty insignificant.

00:34:08.280 | So it doesn't even have to be perfectly situated for this.

00:34:11.240 | It could just be perfectly situated

00:34:12.720 | for you to make that modification.

00:34:14.480 | And then the second one,

00:34:15.760 | which most people have told me is a terrible idea,

00:34:17.800 | but I've done it twice and I like it.

00:34:19.760 | So this is again, not advice for you,

00:34:21.440 | but I've gone to a house

00:34:22.840 | that we found the house we liked ourselves.

00:34:24.560 | We found it on Redfin or Zillow or somewhere.

00:34:26.480 | We went and looked at it.

00:34:27.840 | And then we convinced the selling agent

00:34:30.680 | to be our agent also, which is called a dual agency.

00:34:34.160 | And so the seller's agent now represents

00:34:36.280 | both the buyer and the seller.

00:34:37.880 | They have to get permission from the seller to do this.

00:34:40.280 | And if you find someone that you reasonably would trust

00:34:43.120 | to act fair and impartial,

00:34:44.240 | because they're legally required to do that.

00:34:46.040 | You have both the law,

00:34:47.360 | but also you want someone that you feel like

00:34:49.240 | can ethically handle that circumstance.

00:34:51.720 | You end up in a situation which they make two commissions

00:34:56.280 | if you buy the house and they make one commission

00:34:58.680 | if anyone else buys the house.

00:35:00.560 | So I will say they are very motivated

00:35:03.200 | for you to buy the house.

00:35:04.600 | As a seller, I don't know if I would ever do this.

00:35:06.720 | Maybe I would do it if I could agree

00:35:08.280 | that the agent would rebate a significant part

00:35:10.400 | of that commission back.

00:35:11.840 | But as a seller,

00:35:13.160 | I don't want someone to be motivated by one buyer.

00:35:15.360 | I want someone to be motivated by the highest price.

00:35:17.280 | As a buyer, I would much rather want an agent

00:35:20.200 | who's motivated to sell to me than anyone else.

00:35:22.680 | And so in both scenarios,

00:35:25.360 | we were able to close a purchase contract

00:35:29.400 | before other higher offers came in.

00:35:32.200 | In some cases by hours and in some cases by a day,

00:35:36.480 | but we were able to make an offer on the house we're in now

00:35:39.400 | before it went on the market and have it accepted.

00:35:42.280 | And the backup offers that came in

00:35:43.800 | were higher than our offers,

00:35:45.000 | at least as best I understand it, so.

00:35:47.120 | - Yeah, I like that hack and I would build on it.

00:35:49.200 | I think that works the way you did it.

00:35:51.080 | That works great in a competitive market

00:35:52.840 | where the challenge for you is to actually get the buy.

00:35:55.640 | I think if you say, hey, maybe today's market's not so high.

00:35:58.280 | I've got time.

00:35:59.280 | It's more of a buyer's market

00:36:00.600 | or maybe a more balanced market.

00:36:02.080 | But I think you can easily flip that around.

00:36:03.760 | And I haven't done this myself,

00:36:05.000 | but I have a friend who's done this several times

00:36:06.920 | where he'll put in an offer and he'll write into his offer,

00:36:10.040 | I'm not represented by an agent.

00:36:11.600 | And part of my offer is that the seller

00:36:14.840 | is no longer paying a 6% commission.

00:36:17.000 | They're only paying a 3% commission.

00:36:18.600 | So he's basically saying, hey,

00:36:20.040 | when you look at my offer here

00:36:21.960 | and maybe I'm bidding 970,000,

00:36:24.160 | my competitor is bidding a million,

00:36:25.760 | but you, Mr. Owner, are gonna net the same amount

00:36:28.040 | because I am explicitly stating

00:36:29.720 | that that commission goes back to the seller,

00:36:31.480 | then I think that you can basically get a lower price on it.

00:36:34.520 | Again, it's not something I've done,

00:36:35.680 | but I think it's the flip side.

00:36:36.760 | If it's not a competitive market,

00:36:38.120 | if it's more of a buyer's market,

00:36:39.480 | you can use that as a way to find a lower price

00:36:41.600 | that's not gonna hurt your seller.

00:36:43.000 | - When we did it the first time,

00:36:44.120 | the second time this didn't work,

00:36:45.360 | but the first time we convinced the agent

00:36:48.000 | to rebate 1% of their commission back to us,

00:36:51.200 | meaning one of the 6%, not 1% of their overall thing.

00:36:54.440 | So we were able to bid a little higher

00:36:55.800 | because we were getting it back.

00:36:57.280 | I've never thought about what you just described,

00:36:58.760 | which is like, just take the commission out

00:37:00.560 | and then you can offer lower.

00:37:01.760 | So those are fun hacks,

00:37:03.320 | especially if you're buying a house in this market

00:37:05.120 | and wanna try to find a way to get the best deal.

00:37:07.480 | So we were talking about real estate

00:37:08.840 | as part of your portfolio.

00:37:09.680 | We talked about what happened to stocks.

00:37:11.440 | Let's talk about a few of the other interesting things.

00:37:13.560 | And I think alternative assets is one,

00:37:15.800 | maybe because I have a lot of questions there,

00:37:17.440 | we could start with cash and then jump to alternatives

00:37:20.280 | 'cause I think we could spend a bit more time there.

00:37:22.440 | Anything you learned particularly interesting about cash

00:37:25.080 | or anything else that we've kind of missed

00:37:26.920 | when we talked earlier?

00:37:28.080 | - Yeah, I would say that

00:37:29.360 | if you think of conventional financial advice,

00:37:32.040 | it would probably look like a 60/40 portfolio,

00:37:34.680 | 60% stocks, 40% bonds.

00:37:37.280 | If I look at our typical member,

00:37:39.040 | and so again, we're talking about people

00:37:40.480 | with five to 30 million,

00:37:42.320 | their typical portfolio is only 15% cash

00:37:44.880 | plus bonds altogether.

00:37:46.040 | There's just been very little appetite historically

00:37:48.560 | for those instruments.

00:37:49.960 | Now that could be different.

00:37:50.960 | Now the interest rates have tripled

00:37:52.640 | over a past number of months.

00:37:54.120 | If we run this next year,

00:37:55.280 | we might find that bonds become more interesting.

00:37:57.760 | But to date, I think people keeping

00:38:00.240 | very little cash and bonds.

00:38:01.800 | And part of the flip side of that

00:38:02.720 | is probably not having much debt either.

00:38:04.280 | It's saying, "Hey, I'm not gonna take a lot of risk here

00:38:06.320 | "and put a lot of leverage in my portfolio.

00:38:08.400 | "But by the same token, what I'm putting my money into,

00:38:10.640 | "I wanna have a high expected return.

00:38:12.160 | "I'm not happy with the expected return of 2%.

00:38:14.200 | "I wanna get 10% or 20% or something like that."

00:38:16.960 | Apologies if I'm taking a little field

00:38:18.360 | from your question here.

00:38:19.840 | But if I think about how people

00:38:21.400 | have been very successful financially,

00:38:23.400 | look at investments differently than conventional advice

00:38:26.400 | and what sort of leads this lower bond allocation,

00:38:29.160 | I think there's historically been this notion,

00:38:32.800 | I'll call it driven by the investment industrial complex

00:38:35.720 | that volatility and risk are the same thing.

00:38:38.720 | And I think that is just the wrong way to look at it.

00:38:40.720 | So you look at terms like a Sharpe ratio

00:38:42.600 | and a Sharpe ratio is a way that people often look

00:38:45.280 | at assets like hedge funds or something like that

00:38:47.360 | and say, "How good is it?"

00:38:48.600 | You don't just say, "What is the typical rate of return?"

00:38:51.280 | But it basically divides that rate of return

00:38:53.280 | by the volatility.

00:38:54.280 | So say, "Hey, if option A returns 20, option B returns 10,

00:38:58.240 | "but option A is twice as volatile as option B,

00:39:01.160 | "then effectively they're just as good as each other."

00:39:03.160 | You can choose how much risk you're willing to take

00:39:05.160 | and then you get proportionally rewarded in your upside.

00:39:08.320 | But I think this idea of volatility and risk

00:39:09.920 | being the same thing,

00:39:11.000 | I personally just don't follow that in my portfolio.

00:39:13.200 | I think if you have an amount of money

00:39:15.240 | that say you don't need it until retirement,

00:39:17.360 | so that could be 10, 20, 30 years away,

00:39:20.240 | what matters to me much more is how much money

00:39:22.560 | am I gonna have at age 70 when I wanna retire

00:39:25.200 | and not how smooth is my path to age 20.

00:39:27.560 | Not that I don't care at all,

00:39:28.760 | everyone of course is somewhat emotional,

00:39:30.240 | is not gonna be happy about seeing a million dollars

00:39:32.280 | go down to 100,000, then jump up to 5 million,

00:39:34.760 | but you're much better off ending up at 3 million

00:39:37.160 | than having it in a bond going from a million

00:39:39.440 | to a million one to a million two

00:39:40.920 | and ending up only a million and a half in 30 years

00:39:43.120 | rather than the 3 million.

00:39:44.320 | And so this idea that risk is very real,

00:39:47.040 | but I see risk much more as what is the chance

00:39:50.120 | that in the end I'm gonna have a permanent loss on this,

00:39:52.960 | a permanent impairment of capital.

00:39:54.480 | And these are not new concepts for me.

00:39:55.920 | Warren Buffett talks about it in these same terms,

00:39:58.120 | the risk that you permanently lose this money,

00:40:00.640 | not just how much does it bounce around in the interim.

00:40:03.480 | And that would be something that I would encourage

00:40:05.480 | everybody to think about is,

00:40:07.040 | especially if you do work as a financial advisor,

00:40:09.040 | I'll give an anecdote.

00:40:10.560 | When we sold our company,

00:40:12.160 | and I was talking to a number of financial advisors,

00:40:14.000 | one of the big name, high profile banks,

00:40:16.440 | I was talking with actually a good friend of mine

00:40:18.080 | who works there, he's a wealth manager,

00:40:19.400 | and he was sort of giving their pitch.

00:40:21.120 | He said, "You know what we can do for you?

00:40:22.640 | "We can give you half the return of the stock market

00:40:24.680 | "at a quarter of the volatility."

00:40:26.720 | I said, "Why would I want that?

00:40:27.840 | "Why don't you give me twice the return of the stock market

00:40:30.760 | "at the normal volatility?"

00:40:31.960 | And he just looked at me like I was crazy,

00:40:33.520 | like, "No, that's not what we do.

00:40:34.360 | "We give you lower returns and lower volatility."

00:40:36.640 | I think that's fine if you have a known need for this.

00:40:39.040 | You know, if you're sending your kid to college in two years

00:40:40.840 | and that money needs to be there,

00:40:42.360 | and it's no good for you that you'll have money in 10 years,

00:40:44.360 | well, then you shouldn't take risk with it.

00:40:46.200 | But I think a lot of your listeners

00:40:47.720 | are probably earning good salaries

00:40:49.920 | in an active savings phase,

00:40:51.520 | and if they're younger and earlier in their careers,

00:40:53.320 | are gonna be in a savings phase for decades to come.

00:40:56.040 | I would encourage them,

00:40:57.040 | unless that they know that they personally

00:40:59.200 | just don't have the risk appetite

00:41:01.680 | and are gonna panic and sell in a downturn,

00:41:03.640 | unless that that's the case,

00:41:05.040 | just not to be as worried about near-term volatility.

00:41:07.760 | And I think there's less panic selling

00:41:09.720 | than people are led to believe.

00:41:11.480 | I think it's in the interest of the financial advisors

00:41:13.640 | to sort of say, "Hey, if you're going into these things

00:41:15.800 | "by yourself and you're going to these risky asset classes,

00:41:18.720 | "you are gonna panic the next time .com bubble happens

00:41:21.640 | "or next time a great financial crisis happens."

00:41:24.080 | But that's not universally true.

00:41:25.160 | That's some people, but that's not everybody.

00:41:27.040 | I think there's a lot of people who can just say,

00:41:28.480 | "I'm gonna set on autopilot.

00:41:29.800 | "I save 1,000 bucks a month, and I never look at that,

00:41:32.080 | "and I just check my portfolio once a year

00:41:33.600 | "and hope it goes up."

00:41:34.800 | - The good news, this is not good news for our accounts,

00:41:37.440 | but in the last, I don't know, three years,

00:41:40.280 | we've had what happened when the pandemic started,

00:41:43.360 | people that were invested in equity

00:41:44.840 | saw their portfolio crash,

00:41:45.800 | and you can ask yourself, "How did I react?"

00:41:47.760 | And if you were able to hold back your fear and not react,

00:41:51.400 | well, now you've been able to test yourself.

00:41:52.880 | Now we're again in like a double-digit,

00:41:55.480 | 20 plus percent correction in the stock market.

00:41:57.920 | And then anyone who's held basically any amount of crypto

00:42:01.480 | in the last handful of years

00:42:02.920 | has probably had a separate, sometimes correlated,

00:42:05.480 | sometimes uncorrelated, 50% haircut in that market.

00:42:08.680 | So a benefit to young people today,

00:42:11.360 | I'm gonna pretend I'm young right now,

00:42:12.760 | is that these things were things

00:42:15.000 | that some people didn't see for 10, 20 years.

00:42:17.920 | And now we've seen two in the public stock market

00:42:20.840 | in the last two years.

00:42:22.640 | And so people have really gotten to understand

00:42:24.480 | how they feel and even understand

00:42:26.840 | how they felt the first one

00:42:27.960 | and now see how it changed in the second one.

00:42:30.360 | And I think that's something that historically,

00:42:32.480 | people have needed maybe 20 years to find out.

00:42:35.280 | And now we're fortunate, I guess,

00:42:37.080 | maybe not right now with our portfolios being down,

00:42:39.160 | but we're at least fortunate

00:42:40.000 | that in a very short period of time,

00:42:41.680 | we've gotten two opportunities to see how we would react

00:42:44.360 | and what happens and understand our own appetite

00:42:47.400 | for risk and short-term volatility.

00:42:49.320 | And for me, I don't love logging in

00:42:51.280 | and seeing that my portfolio is down 20%,

00:42:53.920 | but the portfolio is down 20%.

00:42:55.720 | I don't need now.

00:42:57.040 | So you can get caught up and say,

00:42:58.480 | "Oh man, my net worth is down."

00:43:00.200 | But it's like, I'm not trying to withdraw this money

00:43:01.840 | to spend it now.

00:43:02.680 | So maybe it doesn't matter.

00:43:04.040 | One thing we didn't touch on

00:43:05.080 | before we talk about cash and alternatives

00:43:07.440 | is the balance between indexes

00:43:09.880 | and individual stock investing.

00:43:11.680 | And I'm a little curious what you've seen

00:43:13.680 | in the long-angle community with this survey

00:43:16.600 | of people kind of trying to pick stocks and pick winners,

00:43:19.600 | which is, I know often a thing that people are told

00:43:22.520 | you can't do, but then you're like,

00:43:23.640 | "Well, Warren Buffett's doing it."

00:43:24.920 | What are people in the community doing here?

00:43:26.800 | Yeah, I would say they're probably picking

00:43:28.400 | a lot fewer individual stocks than you would expect.

00:43:30.760 | We did ask of your total public equity exposure,

00:43:33.280 | how much of that is in index funds versus individual stocks.

00:43:36.600 | And the significant majority is index funds.

00:43:39.440 | And I would say those individual stocks,

00:43:41.320 | they often tend to be employer stocks.

00:43:43.960 | I was a employee of X company before it went public

00:43:47.160 | and I've got a lot of shares,

00:43:48.360 | or I just get every year as part of my compensation package,

00:43:51.120 | I get a certain number of shares

00:43:52.240 | and haven't gotten around to sell them.

00:43:53.840 | So I would say that there is not a lot

00:43:55.520 | of individual stock picking.

00:43:56.840 | Now, of course, nothing's universal.

00:43:58.200 | There are the guys who love it,

00:43:59.280 | but in general, I'd say that for their public equity exposure,

00:44:03.160 | people go diversified.

00:44:04.720 | Now, the one plug I will put in favor

00:44:06.440 | of individual stock picking,

00:44:07.600 | and I do a little bit of this,

00:44:08.840 | not that I think I'm great, but mostly for fun,

00:44:11.280 | is to your point around,

00:44:12.120 | "Hey, the market went down 20%, I feel 20% poorer."

00:44:16.000 | I think that's largely a perception

00:44:17.280 | of people's relationship with a stock

00:44:19.160 | is just this number on the screen.

00:44:20.840 | But the more you're actually thinking about,

00:44:22.160 | "I own one, one millionth of a percent of Apple,

00:44:24.800 | and that's the thing I own.

00:44:25.800 | I don't own a share of Apple that today is worth a hundred,

00:44:28.040 | tomorrow is 140, but I own this little share

00:44:30.120 | on their future income."

00:44:31.320 | You sort of know intuitively,

00:44:32.680 | Apple didn't just become 20% or 30% less valuable.

00:44:35.760 | This is just sort of the market pinging around

00:44:37.600 | or a more extreme case.

00:44:38.680 | Facebook did not lose 75% of its value

00:44:41.080 | over the last six months,

00:44:42.000 | even though the price went down 75%.

00:44:44.360 | So I actually think it's not that harmful.

00:44:46.680 | If you're somebody who enjoys it,

00:44:48.520 | I wouldn't just put all your eggs in one basket.

00:44:51.160 | But if you wanna buy a sort of balance

00:44:53.000 | of 20, 30 different stocks,

00:44:54.800 | you're almost certainly just gonna track the overall index.

00:44:57.320 | But if either you find that a fun diversion,

00:44:59.160 | it's something that you enjoy,

00:45:00.400 | and maybe that's like a form of spending.

00:45:01.960 | So rather than going on a fancy vacation,

00:45:03.320 | you're spending by investing in these stocks.

00:45:05.080 | It's not a bad thing financially,

00:45:06.840 | but especially if it makes you more comfortable

00:45:08.440 | and a draw down,

00:45:09.280 | because you can really just look at a profit

00:45:10.920 | and loss statement and say,

00:45:11.760 | "Hey, P&G sold 3% more tie this year than last year.

00:45:14.840 | So I don't really care that the market's down

00:45:16.680 | because they're still paying their dividends.

00:45:18.200 | They're still making tide.

00:45:19.640 | Exxon's still pumping oil."

00:45:21.200 | I think that can actually be really helpful.

00:45:22.560 | People sort of ride out some of this volatility.

00:45:24.840 | - But to your point about Warren Buffett and picking stocks,

00:45:27.720 | I think that's exactly how he talks about it.

00:45:29.240 | He says, "Don't look at my market to market.

00:45:31.360 | Just look at what is the operating cashflow

00:45:33.400 | of the businesses we own,

00:45:34.440 | and sort of do a look through basis.

00:45:35.880 | I own 5% of Apple,

00:45:37.120 | and that made X billion dollars of profit next year.

00:45:39.480 | So that's what I think it's worth,

00:45:40.920 | not what I could get if I happened to sell

00:45:42.960 | all my Apple shares today."

00:45:44.240 | - Let's move to the topic of alternatives,

00:45:45.960 | 'cause I think it's something

00:45:46.880 | that seems so mysterious to people.

00:45:49.520 | In some ways, even just through the long angle community,

00:45:52.680 | I've started learning like,

00:45:53.920 | wow, even I felt like there was a lot more that I knew.

00:45:57.120 | So maybe if you could give a little bit of an overview

00:45:59.760 | to people listening on what you even mean by alternatives,

00:46:03.000 | what does that whole space look like?

00:46:04.680 | And then we can talk a little bit about

00:46:05.880 | how to think about them, when to think about them,

00:46:07.880 | where to get them, what kinds, and all that.

00:46:10.120 | - Awesome. I'm super excited to talk about this.

00:46:11.880 | I think this is just a really interesting asset class.

00:46:14.560 | So first of all, I'll say alternatives is a very broad term.

00:46:18.440 | At its highest level,

00:46:19.400 | it means really anything that is not stocks, bonds,

00:46:22.720 | cash, or real estate.

00:46:24.440 | Now, some people will call real estate an alternative,

00:46:26.360 | but I don't think it really belongs there.

00:46:27.800 | But it's basically everything else.

00:46:29.680 | So when I talk about it here,

00:46:31.360 | I'm sure you'll have somebody writing in,

00:46:33.320 | listing 10 different alternatives I left out,

00:46:35.160 | because pretty much anything you can think of

00:46:36.520 | putting your money into, you can define as an alternative.

00:46:39.520 | But it's everything except those conventional ones.

00:46:42.520 | They tend to share a few characteristics.

00:46:44.240 | I would say they tend to be less regulated.

00:46:47.080 | When you're buying stocks or buying bonds,

00:46:49.480 | you have this whole infrastructure of the federal government

00:46:52.240 | and the Securities Exchange Commission

00:46:54.040 | and all these rules and courts

00:46:55.680 | that make sure that you have full information

00:46:57.800 | and every company has to publish their quarterly earnings

00:47:00.240 | or else the CEO and the board's gonna be sued

00:47:02.080 | and that sort of thing.

00:47:02.920 | And there's a lot to ensure transparent information

00:47:07.120 | and effectively efficient pricing.

00:47:08.720 | This is part of the reason that you can just go out there

00:47:10.400 | and sort of buy whatever stocks you want to.

00:47:12.760 | And if you buy enough of them,

00:47:13.640 | you're probably just gonna track the index

00:47:14.840 | because there's good information.

00:47:16.480 | But there is a lot less regulation

00:47:18.560 | and a lot less information alternatives.

00:47:20.640 | In terms of less information,

00:47:22.240 | I can go out there today and find a list

00:47:24.160 | of every publicly traded company in the US

00:47:25.920 | and that's just an objective factual list.

00:47:27.640 | If you said, "Hey, what is every alternative out there?"

00:47:31.880 | There is no list you can look at.

00:47:33.280 | You can do Google searches and say,

00:47:35.000 | "Okay, what's every hedge fund out there?"

00:47:36.480 | And you'll find different lists,

00:47:37.520 | but it's only gonna be people

00:47:38.800 | who opt into that hedge fund index.

00:47:41.120 | And also they tend to be usually less liquid.

00:47:44.000 | That's not universal.

00:47:44.960 | Something like crypto, I can go sell it tomorrow.

00:47:47.000 | It's very liquid market.

00:47:48.080 | Or maybe foreign currencies,

00:47:49.360 | I can go sell those tomorrow, very liquid.

00:47:51.360 | But a lot of them tend to be less liquid.

00:47:53.560 | Just means it's a higher friction to buy and sell

00:47:55.920 | and longer holding periods.

00:47:57.360 | Now, this idea of being less regulated,

00:47:59.760 | less transparent, less liquid, that sounds bad,

00:48:02.720 | but it's not necessarily bad.

00:48:04.240 | There's both a good and bad on it.

00:48:06.080 | The bad is that it is a lot more dangerous

00:48:08.560 | to be a naive investor in alternatives.

00:48:12.240 | The good is that if you actually know

00:48:13.800 | what you're talking about,

00:48:14.680 | there's a lot more opportunity

00:48:16.240 | to sustainably have high rates of return.

00:48:19.160 | Somebody tells you they're gonna buy public stocks

00:48:21.320 | and return 25% a year consistently with low risk.

00:48:24.640 | I would just run away from that.

00:48:25.680 | It's just not possible.

00:48:26.840 | The market is efficient.

00:48:28.520 | Any good news, good information

00:48:30.840 | just gets arbitraged away very quickly.

00:48:33.640 | But in the alternative space,

00:48:34.960 | you can find a little niche

00:48:36.320 | where if you really understand it,

00:48:37.920 | the people you're partnering with are good.

00:48:39.960 | Because it's not transparent, because it's not liquid,

00:48:42.520 | you don't have trillions of dollars of capital

00:48:45.080 | flooding into that particular niche

00:48:46.720 | and arbitraging away the whole opportunity.

00:48:48.360 | You can have consistent sustainable source of,

00:48:50.960 | it's called alpha,

00:48:51.800 | or just a consistent above market rate returns.

00:48:54.680 | And so I think it's extremely attractive.

00:48:56.760 | And personally, I'm doing most of my investing there,

00:48:58.920 | but it's one where you have to be more careful

00:49:01.480 | because you can either make a lot

00:49:02.720 | or lose a lot of money depending on how you do it.

00:49:04.880 | If you wanna be happy to kind of get a little bit more

00:49:06.920 | into what some of the specific kinds of alternatives are,

00:49:10.640 | classes and what to expect in each of those.

00:49:12.960 | Yeah, I think that'd be really helpful

00:49:14.160 | and include some examples of some of the interesting ones

00:49:17.000 | that maybe people would have never thought of

00:49:18.400 | as an investment.

00:49:19.240 | I love helping you answer all the toughest questions

00:49:23.680 | about life, money, and so much more.

00:49:26.160 | But sometimes it's helpful to talk to other people

00:49:28.760 | in your situation,

00:49:30.200 | which actually gets harder as you build your wealth.

00:49:32.800 | So I wanna introduce you to today's sponsor, Longangle.

00:49:36.080 | Longangle is a community of high net worth individuals

00:49:38.920 | with backgrounds in everything from technology,

00:49:41.080 | finance, medicine, to real estate,

00:49:43.200 | law, manufacturing, and more.

00:49:45.600 | I'm a member of Longangle.

00:49:47.000 | I've loved being a part of the community,

00:49:49.000 | and I've even had one of the founders, Tad Fallows,

00:49:51.280 | join me on all the hacks in episode 87

00:49:53.440 | to talk about alternative investments.

00:49:55.800 | Now, the majority of Longangle members

00:49:57.520 | are first-generation wealth,

00:49:59.320 | young, highly successful individuals

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00:50:04.880 | in a confidential, unbiased setting.

00:50:07.480 | On top of that, members also get access

00:50:09.800 | to some unique private market investment opportunities.

00:50:13.120 | Like I said, I'm a member,

00:50:14.540 | and I've gotten so much value from the community

00:50:16.680 | because you're getting advice and feedback

00:50:18.680 | from people in a similar situation to you

00:50:21.160 | on everything from your investment portfolio

00:50:23.600 | to your children's education to finding a concierge doctor.

00:50:27.240 | So many of these conversations

00:50:28.700 | aren't happening anywhere else online.

00:50:30.920 | So if you have more than 2.2 million in investable assets,

00:50:34.600 | which is their minimum for membership,

00:50:36.440 | I encourage you to check out Longangle,

00:50:38.560 | and it's totally free to join.

00:50:40.640 | Just go to longangle.com to learn more,

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00:50:45.300 | be sure to let them know you heard about it here.

00:50:48.240 | Again, that's longangle, A-N-G-L-E, .com.

00:50:52.320 | I just want to thank you quick for listening to

00:50:55.920 | and supporting the show.

00:50:57.400 | Your support is what keeps this show going.

00:51:00.240 | To get all of the URLs, codes, deals,

00:51:02.960 | and discounts from our partners,

00:51:04.720 | you can go to allthehacks.com/deals.

00:51:08.280 | So please consider supporting those who support us.

00:51:11.440 | And again, with the caveat that I'm sure

00:51:12.880 | I'm gonna be leaving out more than I mentioned here,

00:51:14.840 | I would probably put them into four big groups.

00:51:16.720 | I think the first one is some sort of equity,

00:51:19.240 | some sort of ownership in a business.

00:51:21.040 | Now, typically, people think of stocks

00:51:22.600 | buying Microsoft or Google,

00:51:24.280 | but that's really only the biggest

00:51:25.760 | 5,000 or 10,000 companies in the country.

00:51:28.000 | There's another multiple millions of companies

00:51:30.000 | in the country that are not publicly traded,

00:51:31.960 | and so they're all accessed through

00:51:33.640 | some kind of alternative.

00:51:35.160 | And within there, I think there's some

00:51:36.160 | really interesting asset classes.

00:51:37.760 | Maybe people are most familiar with angel investing.

00:51:40.200 | It's basically at an idea stage,

00:51:42.480 | you've got a small team of two or three founders

00:51:44.640 | who want to build something,

00:51:46.120 | and they're raising maybe half a million

00:51:47.760 | or a million dollars to sort of start hiring a team,

00:51:50.280 | start proving this concept works.

00:51:52.160 | So that's very early stage, super high risk.

00:51:54.800 | Most of those are gonna go bankrupt,

00:51:56.000 | but super high return.

00:51:57.000 | If you happen to be the angel who invests in Google,

00:51:58.960 | you're gonna get 1,000 times your money back.

00:52:01.200 | So that's angel.

00:52:02.600 | You get a little bit further along in the process,

00:52:04.560 | and you move into what's called venture capital or VC.

00:52:07.480 | And there, there's different stages.

00:52:09.080 | The earliest stage is seed round,

00:52:10.720 | then you've got A, B, C, D, E, and so on.

00:52:13.400 | As the companies get bigger and bigger,

00:52:15.240 | their valuation gets higher and higher,

00:52:16.800 | but the risk goes lower and lower.

00:52:18.360 | Angel people often do themselves,

00:52:20.160 | and I would only recommend doing that.

00:52:21.800 | If you work in technology or biotech or robotics

00:52:24.320 | or something like that, or AI,

00:52:25.760 | and people who are starting these companies,

00:52:26.960 | you have a lot of confidence in them,

00:52:27.960 | that's a great way to do it.

00:52:29.400 | If you don't have as much access there,

00:52:30.920 | I probably would go light on that.

00:52:32.880 | Venture capital is more traditionally done

00:52:34.720 | through venture capital funds.

00:52:36.200 | So you can think of a lot of big names there,

00:52:38.200 | like Sequoia, or there's a million of them,

00:52:40.640 | and often have a very good historical track record.

00:52:43.360 | And those are the ones that are putting money

00:52:44.600 | into companies that are usually growing quickly.

00:52:47.400 | They have some degree of proof that their model works,

00:52:49.680 | but they're not yet at scale.

00:52:51.000 | And so they're giving them millions or tens

00:52:53.240 | or hundreds of millions to basically scale up

00:52:55.240 | and reach their opportunity there.

00:52:56.720 | Again, it's still risky

00:52:57.960 | compared to investing in a public company,

00:52:59.320 | but it's a lot less risky than angel,

00:53:00.840 | especially the further down the trail you get

00:53:02.720 | into these late stage series C and D and E.

00:53:05.840 | The companies are fairly proven and mature,

00:53:08.160 | but you still have some upside there.

00:53:09.640 | A third one is private equity.

00:53:12.280 | And basically what private equity does

00:53:14.040 | is they're not looking to turbocharge these smaller companies

00:53:16.560 | but they're buying companies

00:53:17.520 | that are usually fairly mature companies.

00:53:20.320 | Sometimes they're very profitable,

00:53:21.600 | sometimes they have some dents and scratches on them

00:53:24.080 | and need to be fixed up,

00:53:25.040 | but they're basically buying mature companies

00:53:26.840 | and they might take them private.

00:53:28.360 | So a company that is publicly traded,

00:53:29.840 | they'll take it private.

00:53:30.800 | Like if you think of Twitter,

00:53:31.880 | that being sample of a company taken private recently,

00:53:34.560 | or they might just be buying them from the guy who started it

00:53:37.760 | or a previous private equity firm that bought it.

00:53:40.200 | So buy it somewhere in private market transaction.

00:53:43.040 | And their idea there is they'll usually put in

00:53:45.280 | some amount of their own money,

00:53:46.520 | maybe 25 or 50% of the purchase price,

00:53:48.680 | then they'll borrow the rest.

00:53:49.760 | And their idea is to run that company better

00:53:51.960 | and to throw off more cash.

00:53:53.080 | And then eventually after maybe five or seven years

00:53:55.400 | to sell it to somebody else.

00:53:57.080 | Those tend to also have very good historic returns.

00:54:00.080 | If you think of VC maybe having the 20% plus returns,

00:54:04.640 | I think private equity often the good ones

00:54:06.120 | can get in a similar return range there.

00:54:08.800 | And again, that was almost entirely done

00:54:10.720 | through a fund or a third party,

00:54:12.520 | unless you happen to be somebody

00:54:13.760 | with an enormous amount of money,

00:54:15.480 | you can't personally take a company like this private,

00:54:17.640 | but you can invest in some of the big names

00:54:19.880 | or companies like KKR or Blackstone or Carlyle,

00:54:23.920 | some of the better known private equity funds

00:54:25.920 | that hold many billions of dollars.

00:54:27.760 | And then there's one other actually really interesting class

00:54:29.800 | of equity alternatives, which is search funds.

00:54:32.640 | People don't know about this as much,

00:54:34.000 | but it has one of the highest returns

00:54:36.240 | actually of any asset class out there historically.

00:54:39.120 | Stanford does a lot of studies on this

00:54:40.840 | and they've been tracking it for more than 30 years.

00:54:43.640 | And over that period,

00:54:45.560 | the average internal rate of return or IRR,

00:54:48.840 | just the average return on money there has been above 30%,

00:54:52.760 | almost consistently every year over the past three decades.

00:54:55.840 | And basically the search fund model

00:54:57.600 | is that someone typically a new MBA graduate

00:55:02.320 | from some high end school like a Harvard or Stanford MBA

00:55:05.800 | will spend a year or two going and looking

00:55:07.960 | to find a small company to buy.

00:55:09.680 | And they will get maybe half a million

00:55:12.320 | or a million dollars of backing

00:55:13.600 | from a number of investors to pay their own salary

00:55:15.920 | and pay their expenses

00:55:16.800 | as they're looking for this company to buy.

00:55:18.640 | Then after a year or two, they've identified the company,

00:55:21.440 | they buy it often from the person who started that company.

00:55:25.120 | And then they try and scale it up or run it,

00:55:27.760 | somehow improve it for five years or so.

00:55:30.440 | And then they sell it off into another private equity company

00:55:32.800 | and this idea of basically buying it

00:55:34.880 | at a relatively low multiple from the founder,

00:55:37.360 | and then improving it and selling it at a high multiple

00:55:39.920 | to a follow-on private equity company

00:55:41.760 | has just almost like clockwork returned unbelievable returns.

00:55:45.360 | This one, the flip side,

00:55:46.680 | and this is what I was talking about in general

00:55:48.240 | where alternative assets can be low information,

00:55:51.600 | hard to get into, but then really good.

00:55:53.680 | Let's say search funds tend to be an example

00:55:55.200 | of that really good.

00:55:56.560 | It's hard to get into,

00:55:57.480 | but if you find a good search fund sponsor,

00:56:00.000 | you can see those kinds of returns.

00:56:01.720 | And if I look at the deals that we have done

00:56:03.600 | within the long-angle community,

00:56:05.240 | that's probably some of the ones I'm most excited about

00:56:07.040 | are those search fund opportunities.

00:56:08.960 | So we talked about sort of a class of equities.

00:56:11.240 | I think there's also a class of commodities,

00:56:13.640 | examples of that could be crypto.

00:56:15.520 | That's probably one of the most accessible

00:56:17.000 | alternative assets out there.

00:56:18.480 | If you're looking at a major coin,

00:56:19.880 | like an Ethereum or a Bitcoin

00:56:21.640 | or even anything in the top 10, top 20,

00:56:24.000 | you can go buy that in Coinbase

00:56:25.440 | or really any marketplace for crypto.

00:56:28.160 | And you're gonna get basically the exact same thing.

00:56:30.080 | You don't need somebody's help to buy Ethereum.

00:56:32.600 | You can go just do that yourself.

00:56:33.960 | Another example of commodity might be like a whiskey.

00:56:36.440 | And this is something that we've done a few deals

00:56:38.600 | and recently I've found it really interesting

00:56:40.120 | where there has been a pretty consistent appreciation curve

00:56:43.760 | where newly distilled whiskey

00:56:45.520 | that's just put into the barrel,

00:56:46.880 | or maybe I should say like Kentucky bourbon

00:56:48.600 | to be more specific,

00:56:49.800 | will often be about maybe $1,500 a barrel.

00:56:52.920 | And then when it's three years old,

00:56:54.160 | it's usually worth more like 3000.

00:56:55.800 | When it's five years old, it's worth maybe 4,500.

00:56:58.240 | And there's been this just very consistent

00:57:00.080 | and rapid appreciation curve.

00:57:01.560 | And don't wanna spend too much people's time

00:57:03.320 | to talk about exactly why that curve has existed there.

00:57:06.120 | But that's an example of something

00:57:07.200 | that I never would have thought before,

00:57:08.600 | this idea of, okay, I'm buying a barrel

00:57:10.400 | or shares of a hundred barrels

00:57:12.120 | of newly distilled Kentucky bourbon.

00:57:14.480 | But historically, if you have a good operator there,

00:57:16.680 | you can consistently see these

00:57:18.160 | really pretty exceptional rates of return.

00:57:20.240 | And I won't say that that is totally uncorrelated,

00:57:22.720 | assets, especially in a down market

00:57:24.440 | tend to have some degree of correlation.

00:57:26.200 | So when it's a bad market for public stocks,

00:57:28.480 | probably art, probably real estate, probably whiskey,

00:57:30.880 | probably everything's gonna get hurt to some degree,

00:57:33.200 | but it's not perfectly correlated.

00:57:34.520 | You're gonna get some benefit of that lack of correlation.

00:57:37.160 | So commodities are another example.

00:57:38.760 | Then there's a whole set of things

00:57:39.920 | that are just around kind of complex financial structures

00:57:42.920 | where basically there's some stream of money or some asset

00:57:46.280 | that someone then wants to structure in a certain way

00:57:48.520 | and sell on to somebody else.

00:57:50.400 | So I'll give you a more concrete example.

00:57:51.960 | There's something called equity finance,

00:57:54.400 | where if you have someone who's lucky enough

00:57:56.880 | to be an early employee at a company,

00:58:00.560 | maybe it's like a private company,

00:58:01.840 | but it's been quite successful.

00:58:03.240 | So think of like a SpaceX or a Stripe

00:58:05.520 | or some private company that now their shares are worth,

00:58:08.360 | let's call it $10 million.

00:58:09.800 | That person may actually want some liquidity from that,

00:58:12.760 | but it's not a public stock today.

00:58:15.000 | So they can't just go and sell it

00:58:17.000 | through their brokerage account.

00:58:18.640 | And also to actually realize the value of that

00:58:20.960 | to a stock option, to get a little bit into the weeds,

00:58:24.000 | a stock option, if I actually wanna turn it from an option,

00:58:26.960 | so-called exerciser, or turn it into a share,

00:58:29.320 | I have to spend a certain amount of money

00:58:31.160 | called the strike price to actually say,

00:58:32.720 | okay, maybe this share is really worth a dollar,

00:58:34.480 | but my option is to buy it at 10 cents.

00:58:36.800 | Well, at a million shares,

00:58:37.920 | I need to now come up with $100,000

00:58:39.840 | to buy those shares at 10 cents.

00:58:41.160 | I know it's a great deal 'cause they're worth a million,

00:58:42.920 | but I still gotta find the $100,000.

00:58:44.960 | I can't necessarily sell them for a million here.

00:58:47.560 | So what do I do?

00:58:48.680 | There's something called equity finance

00:58:50.160 | where a third party will go give that employee

00:58:52.440 | the $100,000 and tell them to use it

00:58:54.400 | to exercise these shares.

00:58:56.120 | And that in return for that,

00:58:57.920 | you can negotiate however you want to,

00:58:59.280 | but they will get some fraction of the upside on it

00:59:02.120 | and some shared downside on it.

00:59:03.920 | So if that million dollars of share

00:59:05.320 | now doubles to 2 million,

00:59:06.960 | maybe the person who put in $100,000

00:59:09.120 | to allow the person to exercise their options,

00:59:11.560 | maybe he or she gets 50% of the upside

00:59:13.760 | and the other 50% goes to the employee.

00:59:15.640 | Those are just illustrative numbers,

00:59:17.200 | but this idea of a sort of structured financial arrangement

00:59:20.680 | where I'm putting in money to get a certain claim

00:59:22.600 | on a certain asset,

00:59:23.480 | there's an almost unlimited number of these.

00:59:25.400 | There's also things called secondaries.

00:59:27.640 | So basically anything that's in a fund,

00:59:29.480 | whether it's a real estate fund, a venture capital fund,

00:59:32.440 | any kind of fund where there's not day-to-day liquidity,

00:59:35.520 | where you can't just go to the venture capital fund

00:59:37.520 | and say, "I want my money back,"

00:59:38.720 | because they'll say, "Well, too bad.

00:59:39.680 | It's invested in private companies.

00:59:40.960 | I can't give you your money back

00:59:42.000 | until those companies go public."

00:59:43.880 | I can turn around and sell it to you, Chris,

00:59:45.560 | and say, "Hey, Chris, I wanna sell you my stake

00:59:48.080 | in this Sequoia fund here.

00:59:49.840 | I think the underlying assets are worth a million dollars."

00:59:52.120 | Typically these secondaries will have a discount

00:59:53.960 | and you'll say, "Well, I'll give you 800,000

00:59:56.280 | for that million dollars of shares in Sequoia."

00:59:58.480 | This is, again, across any of these asset classes,

01:00:00.440 | this idea of secondary transactions

01:00:02.080 | at a discount to the underlying value

01:00:04.040 | is a very common form of settlements.

01:00:06.480 | There's even more esoteric things

01:00:07.880 | like buying somebody's life insurance policy from them

01:00:10.120 | and assuming the premium when they pass away,

01:00:11.800 | you get the money.

01:00:12.640 | I haven't done that particular one myself,

01:00:14.640 | but that'd be another example of structuring something.

01:00:17.000 | And then finally, you've just got a whole grab bag

01:00:19.080 | of sort of esoteric approaches you can take.

01:00:21.320 | For example, there's a professional athlete revenue share

01:00:24.360 | where let's say somebody just signed a minor league contract

01:00:27.360 | and they don't have any money right now.

01:00:29.920 | They're making very little on that,

01:00:31.600 | but they're likely to become the next major leaguer

01:00:34.400 | and sign a very big contract,

01:00:35.720 | but it's gonna be quite a while out

01:00:36.920 | because they're gonna be in the minors

01:00:38.040 | for three years or five years.

01:00:40.080 | And then the way contracts are structured,

01:00:41.560 | the major leagues is your rookie contract,

01:00:43.840 | lasts another five years and it's not worth that much.

01:00:46.240 | So they could be 10 years out

01:00:47.920 | from their high earning potential.

01:00:49.520 | You could say, "Okay, I'm gonna give you $100,000.

01:00:52.240 | "And in return, I want 2% of your salary

01:00:54.960 | "should you make the majors.

01:00:56.120 | "If you don't make the majors, I've lost my money.

01:00:58.280 | "You got $100,000, that's the risk for me.

01:01:00.940 | "But if you do make it and I get 2% claim on it,

01:01:03.420 | "if you sign a $100 million contract,

01:01:05.180 | "now I'm getting a $2 million payout there."

01:01:07.380 | So that's just an example of how almost anything

01:01:10.260 | can be an alternative asset.

01:01:12.100 | - And where do things, art, farmland,

01:01:14.300 | do those fall in one of these buckets also?

01:01:16.620 | - Yeah, to this point of almost anything you say

01:01:18.620 | is that an alternative?

01:01:19.500 | And the answer is gonna be yes.

01:01:20.660 | Something like farmland,

01:01:21.840 | that probably falls into your overall world of real estate.

01:01:24.780 | And I would analyze those deals

01:01:26.020 | the way I'd analyze any other real estate deal.

01:01:28.060 | That's probably a low risk, low return version

01:01:30.660 | of real estate.

01:01:31.500 | It's pretty predictable yield.

01:01:32.660 | I'm gonna rent it to a farmer for a few percent a year,

01:01:35.000 | and it's probably just gonna slowly appreciate.

01:01:37.860 | This sort of jackpot for farmland real estate

01:01:40.420 | is if you happen to be in the path of urban sprawl.

01:01:42.580 | Like I live here in Dallas,

01:01:43.900 | there's a neighborhood north of town called Plano

01:01:45.740 | that 20 or 30 years ago was cornfields,

01:01:48.100 | and now it's all 10 and 15 story skyscrapers.

01:01:50.540 | The guy who owned a ranch there did super well.

01:01:53.300 | But that's kind of what farmland looks like.

01:01:55.160 | You've got these things as you're saying,

01:01:56.380 | like art, like watches,

01:01:58.300 | and probably crypto is like this as well,

01:02:00.740 | where there's not really an obvious measure

01:02:03.860 | of what's the intrinsic value here.

01:02:05.760 | Is a Picasso worth a dollar

01:02:07.880 | or is it worth a hundred million dollars?

01:02:09.600 | It's really only worth what somebody will pay for it.

01:02:11.360 | There's no cashflow stream there.

01:02:13.460 | So in those,

01:02:14.300 | I personally have not gone heavily

01:02:15.960 | into any of those collectibles.

01:02:17.560 | Baseball trading cards would be another example of this.

01:02:20.000 | The ways you can do well there

01:02:21.360 | is either you can just look at this as a hobby and say,

01:02:23.640 | "Hey, I am really excited

01:02:25.000 | "about owning this cool Rolex watch.

01:02:27.980 | "And I don't really care if I've quote lost money

01:02:29.840 | "and can't sell it,

01:02:30.880 | "because that's something I'm excited about owning."

01:02:32.600 | Like my wife's wedding ring.

01:02:34.660 | I have no idea if that's worth more or less than I paid,

01:02:36.740 | but I really don't care.

01:02:37.580 | We're not looking to sell her wedding ring.

01:02:38.720 | We just like it to be a wedding ring.

01:02:40.360 | And art, again,

01:02:41.420 | you could pay a few thousand dollars

01:02:42.660 | for commissioning a piece of art from a local artist.

01:02:45.100 | You're probably not gonna make money on that,

01:02:46.540 | but the point wasn't as an investment.

01:02:47.860 | The point was to have it.

01:02:48.780 | I think if you're looking at it as a pure investment,

01:02:51.300 | I would say this is really a case

01:02:53.020 | where you have to know what you're doing.

01:02:55.060 | I think there's the old apocryphal story

01:02:56.940 | about the poker player,

01:02:58.140 | where if you don't know who the sucker at the table is,

01:03:00.380 | it's probably you.

01:03:01.860 | Then I think that could be very true

01:03:03.280 | in collectibles markets or art markets,

01:03:05.340 | where if you don't know what you're doing

01:03:06.500 | and are just sort of buying at the price it's given to you,

01:03:09.460 | if you have fun along the way, that's great.

01:03:11.020 | But I think your odds of making money as a non-expert

01:03:13.660 | in something like art are probably pretty low.

01:03:15.820 | - I imagine anyone listening here,

01:03:17.820 | it probably doesn't feel like they're an expert

01:03:19.540 | in evaluating art or baseball players

01:03:21.860 | or companies to angel invest in.

01:03:24.220 | So you mentioned at the outset,

01:03:26.460 | the reason you set a kind of threshold

01:03:28.180 | for long angle members

01:03:29.180 | is 'cause they have to meet some requirements.

01:03:31.060 | Whether that's a qualified customer

01:03:33.220 | or in other cases, there's accredited investor,

01:03:35.820 | are those things always gonna be the minimum

01:03:38.500 | and someone who doesn't meet them,

01:03:39.740 | is there any accessible way

01:03:41.300 | to partake in a lot of these alternatives?

01:03:43.460 | I know that's two questions.

01:03:44.340 | So maybe we could talk on who's even eligible for this,

01:03:46.820 | then we can move into how would you even go about

01:03:49.540 | evaluating it or finding it?

01:03:51.060 | - Yeah, great question.

01:03:51.980 | So as you said, two things.

01:03:53.260 | First, who can, and then second, who should.

01:03:55.660 | I think in terms of who can,

01:03:57.060 | it really depends on the asset class.

01:03:58.860 | As you said, there's sort of accredited investor,

01:04:01.580 | which basically means you've got a six-figure income

01:04:03.740 | or you have a million dollars.

01:04:05.380 | Then there's some higher thresholds

01:04:06.740 | like qualified client and qualified purchaser.

01:04:09.100 | Qualified purchaser is actually a very common one.

01:04:10.980 | That's the highest level.

01:04:11.820 | That means you have $5 million or more.

01:04:13.580 | The most interesting ones,

01:04:14.620 | you have to be a qualified purchaser and you can't get in

01:04:16.820 | if you don't have that $5 million of investable assets.

01:04:20.220 | I think there's also a question of,

01:04:21.740 | hey, you shouldn't be putting 10 or 20% of your portfolio

01:04:25.820 | into any one of these.

01:04:26.900 | You wanna diversify across them,

01:04:28.220 | the same way you shouldn't put 10 or 20% of your money

01:04:30.700 | into a single company's stock.

01:04:32.500 | You should diversify across stocks.

01:04:33.820 | Same thing, you should diversify across alternative assets.

01:04:36.660 | So if you're talking about putting 1% of your portfolio

01:04:38.820 | into something, you need to have enough money

01:04:40.820 | that 1% is gonna be a meaningful investment.

01:04:43.060 | If 1% is $100,

01:04:45.660 | then no good sponsor is gonna wanna take your money.

01:04:47.980 | It's not worth your time thinking about it.

01:04:49.820 | There can be some complex taxes with 1099s

01:04:52.420 | and it's not worth the administrative burden.

01:04:54.540 | So I think typically this range of low seven figures

01:04:57.260 | of having a million or 2 million,

01:04:58.900 | or certainly if you have 5 million,

01:05:00.220 | it's definitely plenty to play.

01:05:01.580 | But I think that if someone has maybe $100,000,

01:05:05.260 | I would probably not yet go into alternatives.

01:05:08.220 | I think the two exceptions I'd make there,

01:05:10.100 | one, as I said, crypto is a very accessible alternative.

01:05:12.980 | You can put in as little money as you want

01:05:15.300 | and there's very good information about pricing.

01:05:18.100 | I don't know what a Bitcoin is inherently worth,

01:05:20.380 | but I have as much information as anybody else does

01:05:22.460 | about what it's inherently worth.

01:05:23.460 | So I think there's nothing wrong with dabbling in that.

01:05:25.740 | I also think angel investing,

01:05:27.420 | if you happen to have friends who you know

01:05:29.620 | and trust and respect and think that they're very successful,

01:05:32.820 | angel investments are often relatively small dollars

01:05:35.100 | compared to some of these other ones.

01:05:36.220 | So you don't need an enormous amount of money

01:05:38.500 | to make a bet on your roommate from college

01:05:41.260 | if you think he's gonna start a very impressive company.

01:05:43.780 | But for a lot of the other ones,

01:05:44.780 | I think it often needs to get into high six figures,

01:05:47.540 | low seven figures before the administrative burden

01:05:50.380 | is worth it and before the good sponsors of these funds

01:05:53.380 | will be interested in talking with you.

01:05:54.820 | So having spent a lot of time in venture capital,

01:05:58.620 | I'll push back a little and share one stat.

01:06:00.740 | I believe 95% of all the returns in venture capital

01:06:05.260 | are derived from the top 3% of funds.

01:06:08.460 | So I've always been someone who,

01:06:10.340 | as much as I've played in this space

01:06:11.660 | and even professionally invested others' money in startups,

01:06:15.260 | I have been very reluctant to angel invest,

01:06:17.860 | mostly because I've started companies,

01:06:20.500 | they haven't all worked.

01:06:21.500 | I have friends that I thought were smart

01:06:22.860 | and those companies didn't work.

01:06:23.940 | I feel like it's just a very hard game

01:06:25.660 | where you have to be willing to lose all the money.

01:06:28.300 | The one place where I will consider

01:06:30.900 | writing a small check in a person's company

01:06:32.660 | is if it's a person I just know really well

01:06:34.580 | and I believe in.

01:06:35.540 | But I will say I've also had enough reps

01:06:39.780 | working at, investing in, and meeting people

01:06:42.660 | who start and raise money and build companies

01:06:45.300 | that I feel like my barometer for someone who's great

01:06:49.420 | is adjusted for what it takes to also build a big company.

01:06:53.020 | And I think that if you had asked me 15 years ago

01:06:55.940 | which of my friends were awesome and I would wanna back,

01:06:58.740 | I'm not sure I would have picked the same way I would now.

01:07:01.780 | So I'm probably the person that sat by the sidelines

01:07:04.260 | more often here and I'm sure I have

01:07:06.540 | at least a handful of friends who didn't

01:07:08.660 | and have hundreds of thousands or millions

01:07:11.460 | or tens of millions because of it.

01:07:13.060 | I remember lots of people trying to write

01:07:14.540 | early stage checks in Uber

01:07:15.820 | and it wasn't even something that crossed my mind

01:07:17.980 | and that turned out really well.

01:07:19.540 | So I'm a little bit more risk averse in that space

01:07:22.460 | than maybe you are, but maybe I'm a little jaded

01:07:25.060 | from living and breathing it.

01:07:26.460 | And feeling like my real estate's in the Bay Area

01:07:29.100 | tied to tech, my jobs that I've had,

01:07:31.060 | my jobs my wife's had are all tied here.

01:07:32.740 | So I think that's another factor to consider

01:07:34.660 | is if you work at a technology company

01:07:36.980 | and your spouse works at a technology company

01:07:38.940 | and you live in a place where technology's a big part

01:07:41.420 | of the neighborhood or the city you're in,

01:07:43.900 | thinking about diversifying how you invest

01:07:46.060 | a little differently.

01:07:47.220 | You know, if you're getting paid in Facebook stock

01:07:49.100 | and your spouse is getting paid in a startup stock,

01:07:51.660 | maybe tech is not the place to invest.

01:07:53.420 | So I just wanna flag a few of those before

01:07:56.060 | and then get your reaction to,

01:07:58.980 | there are a bunch of platforms online

01:08:00.700 | that let you invest in both alternatives as we've discussed,

01:08:04.140 | but also things like private REITs and real estate funds

01:08:07.460 | that aren't public, wine, that kind of stuff.

01:08:11.020 | What thoughts do you have there?

01:08:12.060 | Because I think many of them have made it

01:08:14.660 | almost as accessible as buying crypto

01:08:17.980 | and not something where you're necessarily going direct

01:08:20.220 | to a fund that has a higher threshold.

01:08:22.220 | I think that's a great question.

01:08:23.540 | At first, I would reinforce what you said

01:08:25.100 | around the angel investing.

01:08:27.100 | You should only put money into that

01:08:28.740 | that you can afford to lose.

01:08:29.980 | The question is just, if you have a friend

01:08:31.460 | who you think is the best thing since sliced bread,

01:08:33.540 | you wanna put 5,000 into that

01:08:35.060 | and you can afford to lose 5,000, go for it.

01:08:37.340 | But I would certainly agree,

01:08:38.300 | I wouldn't count on that money for retirement.

01:08:40.740 | Now, to your question around these investment platforms,

01:08:42.940 | I think that's a fantastic one.

01:08:44.260 | I'll start with the disclaimer that I do not invest

01:08:47.100 | through any of those platforms.

01:08:48.980 | And I'm both happy to share what I see as the pros and cons

01:08:51.660 | and can share how I go about it personally

01:08:53.860 | to the degree that may be helpful to some of your guests.

01:08:55.940 | So as you said, there are a huge number

01:08:58.300 | of these crowdsourced investing platforms

01:09:00.860 | to whether you wanna get into wine, venture capital,

01:09:05.220 | farmland, private equity, et cetera.

01:09:07.740 | There are crowdsourced platforms for you there,

01:09:10.580 | fine art, et cetera.

01:09:11.780 | I won't get into the sort of pros and cons exactly

01:09:13.740 | of each specific one and like their fee structure.

01:09:16.260 | But I would say generically,

01:09:18.180 | I think the biggest advantage of this

01:09:19.700 | is it does allow you to get access to an asset class

01:09:23.580 | without needing to have personal relationships

01:09:25.900 | with the partners at those firms.

01:09:27.940 | And without being able to write six or seven figure checks,

01:09:30.940 | often the minimums will be 5,000 or 10,000 or 20,000,

01:09:34.580 | not in some cases, five or 10 or 20 million

01:09:36.940 | to get into some of the best funds.

01:09:39.060 | So it definitely gives access and it democratizes that access

01:09:42.940 | and brings down the barriers to entry.

01:09:44.580 | Now, in terms of what I would say are the downsides

01:09:46.900 | and the reason I don't do it personally,

01:09:48.900 | there's two of them.

01:09:49.740 | I think the obvious one

01:09:50.940 | is that there are extra layers of fees on it.

01:09:53.060 | And I think there's nothing inherently wrong

01:09:54.820 | with those fees.

01:09:55.660 | They are providing a service, they have real costs.

01:09:58.300 | I would just caution people to make sure

01:10:00.100 | that they truly understand the fees

01:10:01.700 | of what they're looking at,

01:10:02.900 | because often there'll be an advertised fee of saying,

01:10:04.820 | "Okay, we take 0.75% per year of assets under management,"

01:10:09.380 | something like that.

01:10:10.540 | But what they won't necessarily disclose

01:10:12.300 | is that there's also certain administrative fees

01:10:14.460 | being paid or maybe the asset that went in there,

01:10:17.260 | they purchased it on the open market

01:10:18.540 | and then marked it up 10% and then sold it into their fund.

01:10:21.100 | There's certain things like that,

01:10:22.020 | which can actually make the fees a lot higher

01:10:23.860 | than they first appear to be.

01:10:25.260 | So you wanna just make sure you really understand

01:10:26.980 | the fee structure of those.

01:10:28.700 | The second thing, and I think potentially

01:10:30.140 | the more important disadvantage and reason I don't do it

01:10:33.260 | is that there's a selection bias.

01:10:35.140 | Now, you said earlier that if you look at venture capital,

01:10:37.940 | you said something like 90% of the returns

01:10:39.860 | are driven by the top 3% of funds.

01:10:42.060 | That's gonna be true across a lot of these asset classes

01:10:44.820 | where the top 5%, 10%, 25% of the funds

01:10:49.340 | are driving all the returns and really skewing the averages.

01:10:51.940 | And you're gonna have adverse selection almost universally

01:10:54.900 | where I would be shocked if you're gonna find Sequoia

01:10:57.540 | as a venture capital fund offered on one of these platforms.

01:11:00.060 | They're not gonna have the very top tier funds there

01:11:02.660 | because those guys are much more careful if there's access.

01:11:05.380 | Again, if you want to get into search funds,

01:11:07.660 | the good search funds or probably any search funds

01:11:09.500 | are not gonna be on there.

01:11:10.340 | It's not an asset class that is looking for

01:11:12.780 | quote retail investors.

01:11:14.380 | And I think that selection bias

01:11:15.980 | is gonna cause you problems

01:11:17.060 | because if you're expecting that venture capital

01:11:18.740 | returns 20 or 30% a year,

01:11:20.700 | but then you slice off the very best part of that,

01:11:22.580 | what you're left with, the venture capital

01:11:24.260 | you can actually get through these crowdsourcing platforms

01:11:27.420 | is not gonna have nearly those same returns.

01:11:29.180 | You won't necessarily lose money

01:11:30.300 | and you'll get some exposure to the asset class,

01:11:32.020 | but it's not gonna be the same sort of profits there.

01:11:34.180 | You're seeing the deals that couldn't get funded

01:11:36.020 | by the more connected private investors.

01:11:38.020 | That sounds like a negative story.

01:11:39.220 | And so I'm not saying this can't be done.

01:11:40.700 | I'll share the way that I do it

01:11:42.820 | is I think basically the most effective way

01:11:44.540 | is to do it via networking.

01:11:46.300 | That was actually part of the reason I started Long Angle

01:11:48.300 | is I was interested in getting

01:11:49.340 | into a lot of these asset classes,

01:11:51.100 | but I didn't have the network.

01:11:52.700 | There's some things I knew well.

01:11:53.820 | I'd started a software company.

01:11:55.140 | So I do know other people who are starting

01:11:56.860 | software companies.

01:11:57.780 | I can do that angel investing by myself.

01:12:00.180 | I maybe even know some VCs and could do the VC investing,

01:12:03.260 | but I don't know anything about mineral rights.

01:12:05.100 | And I don't know guys who are buying acreage

01:12:07.340 | in the Permian Basin and that sort of thing.

01:12:09.100 | I didn't have the right first person connections

01:12:11.540 | at private equity funds, search funds, et cetera.

01:12:14.980 | So the way I do is actually,

01:12:16.740 | it's all through the Long Angle network

01:12:19.100 | where basically we've got a thousand members every day.

01:12:22.300 | One of them is sending me a deal,

01:12:23.700 | a thousand members with very different

01:12:24.860 | professional backgrounds.

01:12:25.780 | So in every one of these industries.

01:12:27.620 | So there are people who if you're interested in AI

01:12:29.580 | and ML driven crypto trading strategies,

01:12:32.100 | there's people who that's part of their whole job.

01:12:33.500 | They start funds that do that.

01:12:35.020 | So they're both seeing access to them.

01:12:36.460 | They send them to me or one of the other guys

01:12:38.420 | who's helping manage the community.

01:12:39.660 | We then pick out the ones we think are most promising.

01:12:42.140 | And I think in addition to the access,

01:12:43.820 | you want the evaluation.

01:12:45.260 | So we also get a volunteer deal team of three or four people

01:12:48.220 | who really know a particular asset class well.

01:12:50.740 | So for example, we were looking at one

01:12:52.220 | that was around tertiary oil field rejuvenation

01:12:55.020 | through oxygen injection,

01:12:56.300 | and it was fairly technically complex.

01:12:58.220 | So we just got a team of three or four members

01:12:59.900 | who were all petroleum engineers by background.

01:13:01.860 | That team did a deep dive on it.

01:13:03.340 | We ended up passing because we sort of weren't confident

01:13:05.340 | with the technology of it.

01:13:06.660 | The point being that it was both sourced

01:13:08.860 | by somebody who worked in that industry

01:13:10.220 | and then evaluated by people who work there.

01:13:11.900 | And so that's how I've done my private market ones

01:13:13.900 | is that the handful of ones where that deal team likes it.

01:13:17.100 | And I would say this is only one to two deals a month

01:13:19.300 | across a variety of different asset classes.

01:13:21.780 | We then create a special purpose vehicle or SPV,

01:13:25.220 | basically a fund within our group

01:13:27.100 | where anyone in the community who's interested in investing,

01:13:29.460 | everybody's making their own decisions,

01:13:30.700 | but they can read the deal notes and look at the calls

01:13:33.340 | and talk with the guy running it.

01:13:34.980 | And if they like that fund,

01:13:35.980 | they can then choose to put in a little bit.

01:13:37.980 | And again, we're able to bring down the sort of minimums

01:13:40.300 | because collectively making that investment there.

01:13:42.700 | So that's how I go about personally.

01:13:44.100 | Now I realize that only works for me

01:13:45.700 | because I'm within the network.

01:13:46.980 | If somebody joined the community,

01:13:48.100 | they could certainly participate there.

01:13:49.820 | But I think this is also extensible to people

01:13:51.500 | who are not in our community.

01:13:52.940 | We're saying leverage your personal network.

01:13:55.900 | And I don't think you have to invest

01:13:57.820 | in every one of these alternative asset classes.

01:13:59.860 | I think it would be a lot better for you to say,

01:14:01.420 | "Hey, there are one or two or three of them

01:14:04.140 | where either I have personal expertise

01:14:06.300 | or I am good friends with somebody

01:14:07.780 | who really has expertise here.

01:14:09.220 | And I'm gonna leverage that person's connections

01:14:11.540 | and that person's expertise."

01:14:13.220 | As opposed to saying,

01:14:14.060 | "Hey, I just think that watch is a really cool asset class

01:14:16.820 | and I don't know anything about watches

01:14:18.140 | and I'm not gonna take the time to learn it,

01:14:19.380 | but I'm just gonna throw some money at it."

01:14:20.980 | You might make money, but you're likely to lose money there.

01:14:23.900 | So I would focus on fewer asset classes

01:14:26.220 | where you really can get that first degree network yourself.

01:14:29.380 | I totally agree.

01:14:30.380 | And full disclosure,

01:14:31.820 | while I've signed up for many of these platforms

01:14:33.620 | and played around,

01:14:34.460 | the only one I actually use is Masterworks.

01:14:36.740 | And that's because I like the idea of investing in art

01:14:39.140 | with a small part of my portfolio,

01:14:40.740 | but certainly didn't have the assets

01:14:42.740 | or the expertise to do it myself.

01:14:44.500 | And I was okay with the fees,

01:14:45.980 | especially when I felt like they were doing something

01:14:48.180 | more than just charging for access to a fund.

01:14:51.260 | But there weren't a lot of platforms

01:14:52.900 | to do anything 10 years ago.

01:14:54.340 | So I was just kind of learning

01:14:55.420 | and I kind of did what you did,

01:14:57.100 | which was pick an industry where it was technology

01:14:59.180 | and dive into it and understand it deeper

01:15:01.220 | and feel like I understood the companies

01:15:02.660 | and then worked in venture capital.

01:15:04.420 | And even with all of that,

01:15:05.820 | I'm still pretty hesitant when it comes to angel investing.

01:15:08.140 | So it doesn't mean you have to do it,

01:15:09.700 | but now I have enough knowledge about that space

01:15:12.420 | that people ask me questions.

01:15:13.700 | And every now and then someone will share a deal

01:15:16.020 | or something that makes sense.

01:15:17.780 | And I've heard the same thing is true with real estate.

01:15:20.140 | I've asked lots of people,

01:15:21.020 | how do you find all these great real estate deals?

01:15:23.500 | Because the number one thing I hear

01:15:25.260 | when I ask someone about real estate deals

01:15:26.940 | is they seem to always say two things

01:15:29.500 | and they're like the most stressful two things

01:15:31.140 | to be paired with each other.

01:15:31.980 | One is, gosh, real estate deals are so great.

01:15:33.980 | I've made so much money on real estate deals.

01:15:35.780 | And oh, by the way, 90% of all the real estate deals

01:15:38.220 | are terrible and you're gonna lose money.

01:15:39.620 | So I basically decided I have two options.

01:15:42.300 | I can either really try to understand

01:15:43.980 | the real estate community,

01:15:45.300 | understand what makes deals good or bad,

01:15:47.220 | meet people that can help guide me through that,

01:15:49.260 | or I could just steer clear.

01:15:50.740 | And so for me, real estate has been one

01:15:52.900 | where I just haven't been involved,

01:15:54.220 | but the opportunity to go to real estate investing meetups

01:15:56.820 | and meet people and understand they're out there.

01:15:58.620 | And I know that if that was one of the asset class

01:16:00.580 | I wanted to get into, I could.

01:16:02.060 | It just hasn't been an exciting passion of mine.

01:16:04.140 | And so I'm okay missing out on all those deals.

01:16:06.500 | There are probably a handful of deals

01:16:07.580 | that are gonna come up in LongHail

01:16:08.580 | that I'm more interested in now than I was before.

01:16:10.860 | So I'm glad we got to talk about it.

01:16:12.700 | Yeah, I would agree with you that I wouldn't pressure myself

01:16:15.380 | to invest in an asset class 'cause I'm gonna miss out.

01:16:17.860 | If you put all your money into an S&P 500 index fund,

01:16:21.380 | keep it there for 30 years, you're gonna do fine.

01:16:23.820 | There may be an opportunity to make a little bit more

01:16:25.860 | by doing certain well-selected alternatives

01:16:29.060 | or mixing them in the portfolio,

01:16:30.860 | but I would not do it at the expense of stretching

01:16:32.740 | and investing in something where you don't understand it

01:16:34.940 | or don't have the access

01:16:36.060 | or don't feel like you can really evaluate it.

01:16:37.780 | And it's funny 'cause in advance of this call,

01:16:39.460 | I went and filled out the benchmarking survey

01:16:41.020 | and I went and looked at mine.

01:16:41.860 | It's like, even despite my passion in this,

01:16:43.660 | even despite all of these deals

01:16:45.020 | that come up on the platform, I'm at,

01:16:47.260 | I think it was like 88% of everything that I have

01:16:50.860 | is in equities and my primary residence.

01:16:54.700 | And of the 12% that's left,

01:16:57.100 | it's like half split between cash and alternatives.

01:17:00.380 | So even for me, it's still something that I try to keep down

01:17:03.380 | to the sub 10% part of my portfolio.

01:17:06.420 | And the vast majority of it,

01:17:08.460 | 85% of all of that equity is in index funds.

01:17:11.020 | So for me, as much as this is exciting and interesting

01:17:14.260 | and I like to think about it and dabble in it,

01:17:16.180 | and maybe that'll grow over time,

01:17:18.340 | I just wanna make it clear that my passion and excitement

01:17:20.900 | about learning about it is certainly not commensurate

01:17:23.260 | to its position in my portfolio.

01:17:25.380 | - So that was like a masterclass on alternatives.

01:17:27.340 | Where can anyone listening that wants to check out

01:17:30.460 | more of what you're working on with Long Angle,

01:17:32.460 | where can they go?

01:17:33.380 | - I'd love to hear from any of your listeners here.

01:17:36.340 | So best place to find about Long Angle

01:17:38.340 | is just on our website, longangle.com

01:17:41.060 | or feel free to email me directly.

01:17:43.380 | It's T Fallows, T-F-A-L-L-O-W-S at longangle.com

01:17:48.380 | if you wanna drop me an email.

01:17:49.500 | In terms of people joining the community,

01:17:51.100 | we do have the qualified client threshold.

01:17:53.260 | So it would be any of your listeners

01:17:55.060 | with 2.2 million or above of investable assets

01:17:58.260 | is the threshold for the community there.

01:18:00.500 | But anybody who wants to join, who's in that demographic,

01:18:02.820 | I'd love to have a conversation with you

01:18:04.700 | and see if it seems like a fit.

01:18:06.220 | - Awesome, thank you so much for joining me.

01:18:08.220 | - Well, thanks so much for your time, Chris.

01:18:09.340 | I really enjoyed this conversation.

01:18:11.140 | (upbeat music)

01:18:12.180 | - I really hope you enjoyed this episode,

01:18:13.900 | but I wanna let you know that I am totally aware

01:18:15.900 | that the vast majority of people listening

01:18:17.620 | aren't eligible to join Long Angle,

01:18:19.660 | but I still hope the conversation was interesting.

01:18:22.340 | And also by no means is this podcast moving towards a place

01:18:25.660 | where the topics and guests

01:18:26.900 | are only for a high net worth audience.

01:18:29.220 | Finally, there was actually a little bit more left

01:18:31.100 | in this conversation with Tad

01:18:32.740 | about how he thinks about money and kids

01:18:34.900 | from allowances to transparency about family finances

01:18:38.180 | and college savings,

01:18:39.740 | as well as his top recommendations for his hometown, Dallas.

01:18:43.220 | So I'll release that as a little bonus episode on Friday.

01:18:45.980 | And if you wanna get in touch, chris@allthehacks.com,

01:18:49.100 | I'll see you then.

01:18:49.980 | (upbeat music)

01:18:52.580 | (birds chirping)

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