RPF0175-Friday

00:00:00.000 | Toyota's Black Friday deals are too good for just one day.

00:00:04.800 | So right now, every day is Black Friday at your Toyota dealer.

00:00:09.000 | Hurry in and get a low APR or a great lease on our most popular models,

00:00:13.640 | like the powerful Camry, sporty RAV4, tough Tacoma, rugged Tundra,

00:00:18.600 | and even the RAV4 Prime with its astonishing range.

00:00:21.800 | But don't wait.

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00:00:25.800 | We make it easy.

00:00:27.200 | Toyota.

00:00:28.000 | Let's go places.

00:00:28.800 | [MUSIC PLAYING]

00:00:31.500 | Step right up.

00:00:32.200 | Step right up.

00:00:32.900 | Ladies and gentlemen, have I got a deal for you.

00:00:35.080 | Pull out your wallet.

00:00:35.960 | You don't have to hand it over quite yet.

00:00:37.660 | But I do want you to know that I have something special in store for you.

00:00:43.600 | This thing that I am about to unveil for you

00:00:45.640 | is going to make you rich beyond your wildest dreams.

00:00:49.520 | It'll make you rich, not only you, but also your entire family.

00:00:53.160 | And it will not take any time at all.

00:00:55.600 | [LAUGHS]

00:00:58.400 | Aren't you glad you don't have to listen to that crap from me all the time?

00:01:02.000 | If you'd like to keep the show free of that kind of stuff,

00:01:04.800 | please go to radicalpersonalfinance.com/patron

00:01:09.640 | and help keep that off the show.

00:01:15.160 | Happy Friday, everybody.

00:01:16.160 | Today it's Friday Q&A. And let's see.

00:01:18.000 | I've got, I think, three or four questions lined up for you.

00:01:20.420 | We're going to have a quick conversation about the actual rate of return,

00:01:23.800 | what actual support for what the value of financial advisor

00:01:28.600 | can actually bring.

00:01:29.800 | We're going to have a quick conversation about what's the fastest

00:01:33.360 | way to become a 1%-er.

00:01:35.080 | We're going to talk about how on earth can you

00:01:37.040 | learn to trust insurance people.

00:01:38.840 | And we're going to talk about the role of an IPO

00:01:41.760 | within a broader investment portfolio.

00:01:44.320 | Here we go.

00:01:44.800 | [MUSIC PLAYING]

00:01:48.280 | Welcome to the Radical Personal Finance podcast.

00:02:02.960 | My name is Joshua Sheets, and I'm your overly effusive and overly

00:02:06.520 | ebullient host today.

00:02:08.560 | I can't help it.

00:02:09.200 | It's Friday.

00:02:10.160 | It's a beautiful Friday.

00:02:11.160 | I like doing Q&A. And sometimes, you know,

00:02:13.760 | I just got to have a little bit of fun.

00:02:15.320 | And I hope you don't mind coming along for the ride.

00:02:17.520 | On Fridays, I answer your show.

00:02:18.880 | And today, these are all voicemail questions.

00:02:21.160 | If you would like to get your question answered,

00:02:23.840 | go to radicalpersonalfinance.com and leave a message.

00:02:26.400 | But today, sit back, relax, and enjoy these answers.

00:02:30.080 | [MUSIC PLAYING]

00:02:33.560 | I do love doing these shows.

00:02:34.720 | And sometimes, I do emails.

00:02:35.760 | And sometimes, I do voicemails.

00:02:37.000 | I really like doing voicemails because it helps the audience

00:02:39.440 | to hear the questions.

00:02:42.200 | And if you want a much higher probability that your question is

00:02:45.320 | going to be answered, leave a voicemail for me.

00:02:47.560 | You can do that in one of two ways.

00:02:49.040 | Either pull out your phone, hit the Voice Memo button on it,

00:02:52.240 | record an MP3 file-- please make it about one or two minutes

00:02:55.160 | long--

00:02:55.800 | hit Email, and email that to me at joshua@radicalpersonalfinance.com.

00:03:00.080 | Or the other way that you can do it is go

00:03:03.760 | to radicalpersonalfinance.com.

00:03:05.560 | And over on the side, you'll see a little button that says,

00:03:08.080 | send us a voice message.

00:03:09.480 | That'll work on your phone.

00:03:10.800 | It'll also work on your computer.

00:03:12.160 | And you can record a voicemail message for me.

00:03:15.080 | If you have a question that you'd like me to answer for you

00:03:17.440 | that you would prefer to email me,

00:03:19.080 | you feel free to email it to me as a text file.

00:03:21.680 | And from time to time, I will do those questions.

00:03:23.760 | But I do give priority to the voicemails.

00:03:25.920 | And I get far more of those types of questions

00:03:27.920 | than I can get on the show.

00:03:29.320 | And if you want to get special consideration,

00:03:31.720 | just mark in there that you are a patron.

00:03:33.960 | In fact, if you are a patron at the $5 a month level and up,

00:03:39.320 | then you will, in fact, always get

00:03:42.360 | moved to the front of the line.

00:03:43.640 | And at the moment, I will actually

00:03:45.800 | guarantee you that your question will be

00:03:47.760 | answered on the Friday shows.

00:03:49.200 | I may not always be able to guarantee those.

00:03:51.040 | If we get a few thousand patrons at $5 a month, which

00:03:55.040 | is one of my goals over time, and if I

00:03:57.160 | get hundreds of questions, I won't always be able to get

00:03:59.480 | them to the front.

00:04:00.280 | But for right now, I can pretty much

00:04:01.440 | guarantee if you want your question answered,

00:04:03.320 | just let me know you are a patron at the $5 a month

00:04:05.680 | level and up, and I will answer it.

00:04:07.840 | So with that, let's get straight to it.

00:04:10.720 | Our first question comes in from Rick.

00:04:13.560 | Here we go, Rick.

00:04:14.080 | Sorry, it's a little bit noisy.

00:04:15.000 | Hi, Joshua.

00:04:15.680 | This is Rick Komaric.

00:04:17.080 | And in your last podcast, the Dole Roller episode interview,

00:04:23.560 | Rob asked you if there was any academic study showing

00:04:27.040 | that an investor could do better with an advisor than by himself

00:04:32.280 | using index funds.

00:04:33.360 | And yes, there is a study.

00:04:34.600 | It was done by Morningstar.

00:04:35.960 | And it showed that those who invest with DFA, which,

00:04:40.760 | of course, all have advisors.

00:04:42.520 | That's the only way to get those index funds,

00:04:45.640 | earned 109% of the fund return.

00:04:48.920 | So they actually earned more money

00:04:50.280 | than the fund itself returned.

00:04:52.480 | In addition to that, Vanguard just

00:04:54.160 | released its paper called "Advisor's Alpha."

00:04:59.320 | In addition to that, we have Morningstar,

00:05:02.040 | who issued the metrics of gamma, which

00:05:05.920 | is measuring its advisor's contribution to an investor.

00:05:12.120 | Hope that helps.

00:05:12.920 | And I'll talk to you later.

00:05:14.160 | And yes, I'm one of your Patreon members.

00:05:17.120 | Take care.

00:05:17.960 | So the reason that I wanted to make sure to play this for you

00:05:21.200 | is because I want to thank Rick publicly for sending me

00:05:24.480 | the paper regarding DFA's returns.

00:05:27.720 | I was not familiar with this particular paper.

00:05:31.080 | I will link to all three of these papers

00:05:34.560 | in the show notes that he referenced-- the Morningstar

00:05:37.280 | discussion of dimensional fund advisors results,

00:05:40.200 | also Vanguard's paper on what value a financial advisor

00:05:44.080 | actually can bring, and then the Morningstar corporate paper

00:05:47.720 | on gamma.

00:05:48.960 | What they're trending toward is calling

00:05:52.480 | what the value that an advisor can bring gamma.

00:05:57.160 | I don't know why we always have to stick with Greek letters,

00:05:59.660 | but for whatever reason, that's the deal.

00:06:02.080 | And in the financial comparison scenario,

00:06:05.640 | the words alpha talks about who can find the best advisor, who

00:06:12.520 | can find the best stock picker, or mutual fund manager,

00:06:14.840 | that type of thing.

00:06:16.360 | Basically, it's outperformance from one manager to another.

00:06:20.160 | Beta refers primarily to the asset allocation,

00:06:24.240 | the overall returns of a market.

00:06:26.160 | And then they're using this little catch-all term gamma

00:06:29.160 | now.

00:06:29.840 | And that's the term that is being

00:06:31.240 | applied to the results for an individual investor.

00:06:36.200 | I should, at some point, do an entire show on this topic.

00:06:39.600 | But I am glad to have the DFA Morningstar analysis

00:06:46.200 | that Rick mentioned to me.

00:06:47.640 | Because what it illustrates is that the investors who

00:06:51.600 | were using dimensional fund advisors' funds did better.

00:06:56.320 | And let me explain-- if you're unfamiliar with dimensional fund

00:06:59.720 | advisors, let me explain who they are and what they do.

00:07:02.100 | Dimensional fund advisors is 100%

00:07:04.320 | committed to a passive indexing strategy.

00:07:07.880 | So they pursue, just like Vanguard,

00:07:11.080 | who is much larger and more well-known,

00:07:13.680 | they only do passive investing, where they're not trying

00:07:15.880 | to specifically choose an active strategy.

00:07:18.760 | We're not trying to say, we think that ExxonMobil

00:07:21.160 | is going to do better than this other oil company.

00:07:23.600 | Or we think that Coca-Cola is going to do better than Pepsi.

00:07:28.000 | They're not pursuing that type of individual selection

00:07:30.640 | in their mutual funds.

00:07:32.200 | What they are pursuing is they are actually simply choosing

00:07:36.080 | and saying, we're going to own the whole market,

00:07:38.760 | but with a couple of twists.

00:07:40.360 | One of the things that they do is

00:07:41.960 | they don't try to always ride the indexes completely.

00:07:46.320 | So when the S&P 500 adds a new firm or kicks one firm out

00:07:52.960 | and firms are replaced, if you're

00:07:54.720 | running a normal index fund, you need

00:07:56.560 | to immediately update your mutual fund

00:07:59.400 | to match this change in the index.

00:08:02.680 | But the dimensional fund advisors, portfolio managers,

00:08:06.600 | have a little bit more of a leeway with what they actually

00:08:09.080 | do, when they actually get in and out.

00:08:11.240 | The big thing that, to me, is important about dimensional

00:08:13.960 | fund advisors is the only way that you're

00:08:16.680 | able to access dimensional fund advisors

00:08:18.640 | is through an individual financial advisor, to whom

00:08:22.360 | you are paying an additional fee for his or her purview

00:08:31.000 | over your accounts.

00:08:32.440 | Now, ultimately, obviously, this adds cost.

00:08:36.240 | So clearly, they're not going to be as inexpensive

00:08:39.080 | if you're layering advisor fees on top of mutual fund fees.

00:08:43.080 | But there are some benefits in that arrangement

00:08:46.240 | that go in all directions.

00:08:48.200 | There are benefits to the mutual fund company.

00:08:51.640 | There are also benefits to the advisor.

00:08:53.440 | And most importantly, there are benefits to the client.

00:08:57.160 | Now, I'm not trying to do a DFA commercial here.

00:08:59.520 | If you're interested, go and research their stuff.

00:09:02.840 | They are perfectly capable of marketing their own services.

00:09:07.120 | But the major aspect that I see as the benefit

00:09:11.360 | is that, with an advisor and a client working together,

00:09:16.800 | the client should be able to make

00:09:18.520 | more intelligent, non-emotional decisions.

00:09:22.400 | Emotions are the death of a good investment plan.

00:09:26.960 | Almost any emotional reaction is going

00:09:29.680 | to be wrong in any scenario, whether it's on the upside

00:09:33.320 | or on the downside.

00:09:34.560 | It's not to say that you can't move quickly.

00:09:36.920 | But even those who are moving quickly,

00:09:38.600 | it can't be based upon emotion.

00:09:40.400 | There may be such a thing as a gut feeling, I guess.

00:09:42.560 | In some scenarios, that's fine.

00:09:43.840 | But that's not necessarily emotion.

00:09:45.280 | But the problem is that we, as individual investors,

00:09:48.200 | are pretty horribly equipped to actually handle

00:09:51.320 | the raw emotion of investing at some times,

00:09:54.360 | especially in the world of stock investing,

00:09:56.840 | where any time of day or night, you can pull out your phone

00:10:00.080 | and you can get an exact to the dollar calculation of what

00:10:03.080 | your shares are worth.

00:10:04.880 | So there are many, many problems associated

00:10:07.600 | with the ability to actually know on a daily basis.

00:10:10.040 | But it makes us much more likely to overreact

00:10:12.320 | to good news and bad news and make improper decisions.

00:10:15.840 | Well, my thought is, I believe that a good financial advisor,

00:10:18.680 | in addition to all of the aspects of financial planning,

00:10:22.200 | that a good financial advisor should

00:10:23.880 | be able to bring some peace and calm to that situation,

00:10:27.920 | should be able to be, in some ways, a shock absorber.

00:10:31.840 | That's the best scenario I've come up with.

00:10:34.400 | The shock absorber is what takes the impact of the road

00:10:40.160 | and cushions it for the individual who's in the car.

00:10:45.440 | And that should be, in many ways,

00:10:46.860 | the role of a good financial advisor.

00:10:49.240 | And then there are many techniques

00:10:50.960 | to doing that as a good, competent financial advisor.

00:10:54.040 | It's techniques of warning in advance.

00:10:56.400 | Here's what's going to happen.

00:10:57.800 | Training and coaching your clients

00:10:59.400 | to be comfortable with the emotion

00:11:01.880 | that they're going to face.

00:11:03.240 | If you know you're going to face a certain emotion,

00:11:05.440 | if you know you're going to face a gut-wrenching fear,

00:11:07.640 | if you know you're going to face a euphoria that causes you

00:11:10.960 | to be tempted to do something that is probably not

00:11:13.640 | the best move, then if you're warned in advance,

00:11:16.800 | perhaps you can avoid it.

00:11:17.960 | Or you can think through how you're going to handle that.

00:11:20.440 | A simple scenario would be a financial advisor

00:11:22.640 | should take a client through the scenario and say, OK, it's 2015.

00:11:26.440 | There hasn't been a major stock market

00:11:28.640 | correction in quite a while.

00:11:30.120 | Let's talk through what that's going to feel like.

00:11:34.120 | Here is the balance of your account.

00:11:35.600 | You have half a million dollars.

00:11:36.960 | Let's talk through how you're going

00:11:38.600 | to feel if you pull out your phone

00:11:40.320 | and you're checking your account summary

00:11:41.960 | and you find out that you now have $285,000 in that.

00:11:45.480 | How are you going to feel?

00:11:48.240 | And smoke those feelings out in advance

00:11:50.480 | so you can make sure that the portfolio is positioned

00:11:53.440 | in such a way that we can get through that time.

00:11:57.000 | And then as an advisor, you have to use whatever tactics

00:12:00.240 | and techniques you can use in an individual situation

00:12:03.320 | to improve that.

00:12:06.400 | So maybe you need to adjust the asset

00:12:08.080 | allocation of the portfolio.

00:12:09.720 | Maybe you need to have assets that are pulled out

00:12:12.760 | and just sitting in cash.

00:12:13.880 | Maybe the client says, well, if I had $100,000 in cash

00:12:17.160 | instead of $30,000 in cash, I'd feel a lot better.

00:12:20.160 | Because I would know that I could

00:12:22.760 | get through a couple of years.

00:12:24.040 | Because the advisor would say to the client and say,

00:12:26.200 | well, listen, if you look over here

00:12:27.680 | and you're spending $50,000 a year,

00:12:29.400 | you have $500,000 invested.

00:12:31.160 | But in addition, you have $100,000 in cash.

00:12:34.200 | And you know that even though this account value dropped

00:12:37.200 | by that much, you're looking over here

00:12:38.800 | and you know that you've got two years of cash

00:12:41.600 | with no other change.

00:12:43.560 | Are you going to feel better about my simply saying,

00:12:46.600 | don't touch it, turn your phone off,

00:12:49.160 | and don't check your account summary?

00:12:51.400 | And so those are the types of conversations

00:12:53.240 | that a client and an advisor should have.

00:12:55.560 | So what was my point in this?

00:12:56.720 | My point was to A, expose you to these articles,

00:12:59.760 | because I think they're well-done articles.

00:13:01.560 | And for many of you who are financial advisors,

00:13:03.840 | I think this is a good resource for you

00:13:06.560 | to have in your back pocket.

00:13:08.040 | If you haven't read Vanguard's discussion of the value

00:13:11.120 | that an alpha brings, an advisor brings,

00:13:13.240 | it's an excellent job that Vanguard

00:13:17.080 | has done with that paper, and then also the corporate Morning

00:13:19.960 | Star paper.

00:13:20.440 | All three of those will be linked in the show notes.

00:13:23.360 | I'm going to answer another question for Rick

00:13:25.320 | without playing the question.

00:13:26.560 | He asked and called and said, basically,

00:13:28.240 | what's the best way to study for and pass the CFP exam?

00:13:31.160 | He said back in years ago, I think it was 2007,

00:13:34.240 | he had taken the classes that were

00:13:36.040 | required to be prepared for it, but never sat for the CFP

00:13:38.600 | exam.

00:13:39.120 | So Rick, quickly, and for anyone else who's interested,

00:13:41.840 | the answer is you need a CFP refresher course.

00:13:45.200 | The best one that I know of is the one

00:13:47.920 | that I went through, which was Ken Zahn's class.

00:13:51.080 | And Ken Zahn is spelled Z-A-H-N. So go to--

00:13:55.400 | let's see, it would be KenZahn.com.

00:13:57.360 | And he will send you--

00:13:59.120 | when you sign up for that class, he

00:14:01.320 | will send you a couple of books to prepare in advance.

00:14:04.560 | Those are the books that he actually teaches from for his 6

00:14:08.880 | or 7, or whatever, 6, 7, 8 classes.

00:14:10.920 | He actually uses those books as his textbooks

00:14:13.680 | that he teaches through.

00:14:14.920 | Prior to the refresher course, you

00:14:16.800 | will need to study and read those books,

00:14:18.440 | do all the practice questions.

00:14:20.360 | Then you'll go to a four-day refresher course.

00:14:22.760 | And that's a pretty intense scenario.

00:14:25.240 | And he'll walk through a four-day review.

00:14:27.560 | And then after that, you've got lots of practice exams.

00:14:30.240 | Take the practice exams and then go sit for the test.

00:14:32.880 | But I know there are others that do it.

00:14:35.720 | I don't have any experience with any others than his class.

00:14:39.840 | I liked his refresher course so much

00:14:41.800 | that I went through it twice.

00:14:43.520 | I went through it once, and then I had a scheduling conflict

00:14:45.960 | where I wasn't able to sit for the CFP exam as I had planned.

00:14:48.960 | So I actually went through it twice.

00:14:50.440 | And I learned a ton in that class and really enjoyed it.

00:14:54.760 | So that's what I would do.

00:14:57.200 | Ken is on one of those.

00:14:58.160 | I need to reach out to him.

00:14:59.360 | If I do ever take advertisers on the show

00:15:01.280 | or set up affiliate relationships or things

00:15:03.360 | like that to make more money on commissions,

00:15:06.640 | he is one of those that's on my list of products and services

00:15:10.480 | that I just had a great experience from.

00:15:13.760 | So KenZahn.com, check that out.

00:15:16.920 | All right, next, let's take a question on becoming a 1%.

00:15:20.840 | Great program.

00:15:21.480 | Love it.

00:15:22.440 | I had a quick question for you.

00:15:24.160 | Maybe it's not a quick answer.

00:15:26.440 | What's the fastest way you've seen to become a 1%-er?

00:15:29.600 | You see a lot of bashing and all the trashing of the 1%-ers.

00:15:34.240 | But I'm just curious, from your experience,

00:15:36.560 | what's been the fastest way you've seen someone become one?

00:15:40.040 | You don't see much about that versus the, oh,

00:15:43.280 | look at how evil they are.

00:15:45.040 | So I'd be curious as your perspective of this.

00:15:47.960 | Hopefully, I'd be really interested in your response

00:15:51.000 | and your experience.

00:15:51.880 | Love the show, and keep it up.

00:15:54.280 | Fun question.

00:15:55.600 | Short answer.

00:15:57.560 | Well, how do I--

00:15:58.560 | I was going to say it was a two-word answer,

00:16:00.400 | but I don't know how many words it is.

00:16:02.680 | Facebook.

00:16:03.560 | Start Facebook.

00:16:04.720 | Or start Twitter.

00:16:06.240 | Start something like that, or Instagram,

00:16:08.480 | or something like that.

00:16:11.440 | In 2015, that certainly is the fastest way

00:16:14.640 | that I know of to make a massive--

00:16:17.720 | to go and become a 1%-er.

00:16:19.160 | Just Mark Zuckerberg.

00:16:20.640 | How long ago did he actually start Facebook?

00:16:22.560 | I think I got my Facebook account,

00:16:24.520 | it would have been 2005.

00:16:26.280 | I remember where I was when I first signed up for Facebook.

00:16:29.480 | I remember I was actually in a lobby of a hotel,

00:16:33.080 | a lounge of a hotel I would often go to when I was living

00:16:36.720 | in San Jose, Costa Rica.

00:16:38.240 | This is a place some friends and I like to go,

00:16:40.240 | and I would take my laptop down, and I would work there

00:16:42.600 | because they had Wi-Fi.

00:16:43.600 | And this was before Wi-Fi was widely prevalent

00:16:46.600 | in individual homes.

00:16:47.520 | So I had to go to the hotel lobby.

00:16:52.520 | And I remember signing up for my Facebook account,

00:16:54.600 | and there were my 55 friends from high school.

00:16:57.720 | But compare that to where it's grown to be today, to be 2015.

00:17:01.600 | That is the fastest way that I can think of.

00:17:03.560 | Now, it's also the most riskiest way.

00:17:06.920 | You've got some pretty heavy, stiff competition.

00:17:10.400 | And so you've got to balance that.

00:17:13.240 | What is the likelihood of your inventing the next app that

00:17:17.520 | goes from $0--

00:17:18.760 | the next Instagram that goes from $0 of value to huge value?

00:17:23.000 | It's pretty low.

00:17:24.640 | But it's probably the fastest way

00:17:26.880 | I know to go from $0 to a billion dollars.

00:17:31.000 | So that's my quick answer.

00:17:34.760 | Probably the more important question

00:17:36.880 | that I would demonstrate out of it,

00:17:38.480 | though, is that the speed is purely due to--

00:17:45.280 | well, if we're talking about wealth,

00:17:46.720 | let's talk about actual wealth retained.

00:17:49.320 | So the only thing that's going to impact the wealth

00:17:52.600 | that you make is the first four parts of my five-part path

00:17:57.320 | to wealth, or what you can actually do,

00:17:59.560 | your plan for wealth.

00:18:01.160 | The first thing is, how much is your income?

00:18:04.240 | Number two is, how much are your expenses?

00:18:06.240 | And number three is, what rate of return

00:18:08.360 | do you gain on the difference?

00:18:10.360 | And then can you avoid catastrophe?

00:18:11.840 | Those are the ones that are going to apply to the speed.

00:18:14.240 | So if you want to go from nothing to a 1-percenter,

00:18:17.960 | you need to amp up all of those things massively.

00:18:21.200 | You need to earn a very high level of income.

00:18:23.760 | You need to have a proportionately very low level

00:18:26.200 | of expenses.

00:18:27.000 | And you need to earn massive rates of return

00:18:30.000 | on the difference.

00:18:33.040 | Now, what is it that the tech people do?

00:18:34.880 | What's the theme that goes through that?

00:18:37.040 | Well, what they do is they are earning

00:18:38.760 | a massive rate of return.

00:18:41.280 | A good general rule of thumb is that the highest rates of return

00:18:43.880 | are always going to come from business.

00:18:46.960 | Business, private enterprise, that's where you create money.

00:18:50.840 | So if you can create money, you can

00:18:52.760 | earn a higher rate of return.

00:18:54.640 | The highest rates of return, potential rates of return

00:18:57.320 | from businesses, are going to come

00:18:59.280 | from businesses that can exponentially

00:19:01.400 | increase their reach.

00:19:03.320 | So if you and I start a garbage company,

00:19:05.560 | we've got to invest in a massive number of garbage trucks.

00:19:09.640 | We've got to hire a bunch of employees.

00:19:11.320 | We've got to start getting contracts.

00:19:13.000 | And let's assume that we just need to, one to one to one

00:19:15.440 | to one, go and sell and get contracts

00:19:18.680 | with various municipalities to start a garbage business.

00:19:22.240 | That business can grow, and it can scale.

00:19:25.040 | And it can scale much more quickly than, say,

00:19:27.880 | me working in my backyard making handmade bird feeders

00:19:31.760 | and selling them out of my driveway.

00:19:34.440 | But it's nowhere near the scalability of something

00:19:37.840 | like Instagram, an app that can be created once and put out

00:19:41.600 | there, and then the number of users

00:19:44.000 | can go from zero to massive overnight.

00:19:47.400 | So the reason why the tech companies grow so fast

00:19:51.360 | is because they don't have the constraints on their growth

00:19:54.760 | that many other businesses have.

00:19:57.640 | They're able to just simply generate massive rates of return

00:20:00.920 | as measured by their user base.

00:20:03.200 | And then once they have a massive rate of return

00:20:05.560 | from their user base, then that creates

00:20:08.240 | money, that creates value that can be sold,

00:20:11.160 | either through an IPO or through a takeover, a private sale,

00:20:13.720 | something like that.

00:20:15.720 | That's why they grow so well.

00:20:17.000 | So speed in that situation is going

00:20:19.160 | to be driven by the fact that they can expand.

00:20:22.880 | They can compound, because they're not

00:20:25.120 | subject to the constraints of real life.

00:20:28.680 | They're a purely digital product,

00:20:31.440 | a purely digital medium.

00:20:33.960 | That's exactly the same thing that what

00:20:36.480 | I'm trying to do with Radical Personal Finance.

00:20:38.400 | One of my motivations, why did I go

00:20:40.160 | from working face to face with individual clients

00:20:42.600 | to creating a podcast?

00:20:44.160 | Well, I looked at it and I said, I want to grow wealth quickly.

00:20:48.960 | And I believe that I can grow wealth steadily and slowly

00:20:53.200 | face to face with clients.

00:20:55.240 | But I can grow wealth far more quickly

00:20:58.120 | if I can get my content into the digital medium.

00:21:01.360 | Because in this type of scenario,

00:21:02.960 | it doesn't matter whether--

00:21:04.160 | it's no extra cost to me whether 100,000 people download

00:21:08.240 | my show or whether 100 people download my show.

00:21:11.080 | It costs me exactly the same amount of money.

00:21:13.960 | But the flip side, as I build out additional business models,

00:21:17.800 | the flip side is that my income can grow exponentially.

00:21:23.480 | Now, originally, it was going to be the show and my practice.

00:21:27.080 | Then I could harvest the best of both worlds.

00:21:29.040 | Well, unfortunately, the financial services business

00:21:32.000 | is stuck in 1937.

00:21:33.800 | And so we can't allow any kind of interesting--

00:21:36.520 | so I had to walk away from any kind of interesting advertising.

00:21:39.040 | So I walked away from the financial services business.

00:21:41.600 | But this is what I am taking advantage of,

00:21:44.600 | the fact that my show is able to now, in a digitized form,

00:21:49.080 | it's able to get into a scenario where

00:21:51.360 | it can grow at a compounded rate over time.

00:21:55.000 | That's what I'm taking advantage of.

00:21:57.400 | Now, as far as applying it to your actual life--

00:21:59.520 | so if you actually want to go from 0% to the 1%,

00:22:05.080 | you've got to say, well, what's appropriate for me?

00:22:07.200 | So I don't have any skill with coding applications.

00:22:11.440 | Unless I have a brilliant business idea or a brilliant

00:22:14.920 | app idea and I can hire the actual coding work done,

00:22:18.120 | which is doable, I don't have any skill with that.

00:22:21.560 | So what I'm going to do is-- if I

00:22:23.200 | were going to do this with looking at business,

00:22:25.360 | I would look and say, where do I see a need in the marketplace?

00:22:29.440 | And then you just go and try to fill that need.

00:22:31.360 | And if possible, I would personally

00:22:33.720 | want to go and look at an industry that's out of favor,

00:22:37.040 | that's unpopular, that's dirty, or that's not

00:22:40.480 | sexy or glamorous in any way.

00:22:42.240 | And I would try to find a place where my competition is

00:22:46.040 | relatively low.

00:22:48.120 | As much as possible, I would try to build an infrastructure

00:22:51.600 | onto this that would allow me to actually profit from something

00:22:58.680 | that can compound.

00:23:00.360 | And I would try to serve an industry in a way

00:23:03.160 | that other people aren't serving.

00:23:04.680 | Let me give you an example.

00:23:05.800 | It's still related to tech.

00:23:06.920 | But one of my brothers is actually a web programmer.

00:23:09.760 | And he works in an industry where they service home health

00:23:14.680 | care providers.

00:23:15.880 | Now, what this company that he is involved with has done

00:23:20.080 | is they have created software that

00:23:22.720 | works within this one specific industry.

00:23:25.040 | And they grew it from nothing to the best software

00:23:28.480 | in the industry in a relatively short amount of time.

00:23:31.680 | But that's not the large, massive, mass competition

00:23:35.120 | space.

00:23:35.880 | But they're still taking advantage of the same trend.

00:23:38.480 | So if you can create and figure out

00:23:40.360 | what's a business that I can serve that's--

00:23:42.200 | I mean, there's nothing-- what is

00:23:43.880 | sexy about the home services, the home health care industry?

00:23:47.640 | There's nothing particularly attractive to that.

00:23:50.640 | Very few college students are saying, well, when I get out,

00:23:53.140 | I'm going to go and work in the home health care industry.

00:23:55.520 | Well, that's the type of industry

00:23:56.480 | that I would go and look for.

00:23:58.000 | It's like law and medicine and politics,

00:24:01.320 | I don't want to be around there.

00:24:02.680 | Because where do you have to deal with?

00:24:03.800 | You have to deal with all the smartest people in the world

00:24:06.100 | who are all going into there.

00:24:07.300 | So your level of competition is much higher.

00:24:10.520 | I don't want to go into law.

00:24:11.840 | All the lawyers are brilliant people.

00:24:13.520 | And they all work super hard.

00:24:15.160 | And now my competition is this much different caliber

00:24:18.520 | of person.

00:24:19.520 | I want to go to where the industry is that nobody

00:24:22.800 | else wants to touch.

00:24:24.960 | The best example in my personal life was--

00:24:28.080 | one of my backup business ideas is

00:24:30.040 | to start a daycare, a daycare or a school.

00:24:33.440 | You say, what kind of 30-year-old guy

00:24:36.000 | wants to go and start a daycare for kids?

00:24:38.400 | This one.

00:24:39.600 | Because the competition, I think, is much lower.

00:24:41.680 | That is not a very prestigious type of industry

00:24:45.440 | to set yourself apart in.

00:24:48.440 | That's not the kind of thing that most people aspire to.

00:24:51.960 | But it can be very profitable.

00:24:53.280 | And I know of a number of other industries

00:24:55.480 | like that where you can go and you can find

00:24:57.440 | something that's profitable.

00:24:58.800 | Now, once you're in an industry that you

00:25:00.480 | feel like you have a competitive advantage into,

00:25:02.800 | if you're going to go, you need to create some ability

00:25:05.120 | to where you can compound your efforts.

00:25:07.040 | So let me give you an example.

00:25:08.680 | Franchising.

00:25:09.320 | Look at franchising.

00:25:10.720 | Look at the difference that it makes

00:25:12.280 | between one guy in a truck going and hauling junk versus one guy

00:25:17.000 | saying, here's a business idea.

00:25:19.360 | Maybe I can teach other people to do that.

00:25:21.800 | And so the money, the big growths

00:25:23.520 | are always when you can get leverage on your time.

00:25:27.520 | When instead of going and being two guys hauling junk,

00:25:30.560 | or instead of going and-- what is the ones?

00:25:32.720 | 1-800-GOT-JUNK or College Hunks Hauling Junk.

00:25:35.760 | Instead of being the guy out driving the truck

00:25:38.440 | and hauling the junk, you figure out the business model.

00:25:41.680 | You crack the business model.

00:25:43.360 | And then you sell the franchise rights.

00:25:46.200 | You sell something that's not connected to you.

00:25:50.120 | So that's where you get the much higher rate of return.

00:25:52.720 | Now, the flip side might be, let's

00:25:54.440 | say that you have the potential for a high earning capacity.

00:25:59.360 | There's no reason why you have to go and make

00:26:02.240 | a fortune in private business.

00:26:03.840 | You can also do it just simply with earning capacity.

00:26:06.080 | So maybe you're running a company

00:26:08.120 | and you're a well-paid CEO or upper level management.

00:26:12.000 | Well-paid CEO-- what do these guys make?

00:26:15.000 | I mean, the CEO of Home Depot or Walmart, $30, $40, $50 million

00:26:19.040 | bucks a year.

00:26:20.280 | I don't know anything specific.

00:26:21.680 | But they make tens of millions of dollars per year.

00:26:24.640 | It's hard not to get into the 1% if you

00:26:26.400 | can make tens of millions of dollars per year.

00:26:28.520 | Or being a highly paid professional.

00:26:30.580 | You're a very accomplished neurosurgeon.

00:26:33.080 | So you command with your surgery ability.

00:26:36.080 | You can command millions of dollars

00:26:37.840 | per year of compensation.

00:26:40.160 | If you've got that skill, or if you're

00:26:42.080 | willing to go down that path, that can work just as well.

00:26:45.520 | Or you could be the business person behind the scenes.

00:26:48.280 | So any of these things work.

00:26:50.080 | The point is that it's all a function of those three things.

00:26:55.280 | Just this morning in our private irregulars Facebook group,

00:26:59.240 | one of the things that the patrons of the show who

00:27:01.520 | are at the irregulars level, which used to be $10 a month,

00:27:04.120 | is now $25 a month.

00:27:05.720 | One of the major benefits of that level of patronage

00:27:08.880 | is access to a private Facebook group.

00:27:10.800 | And that's where I try to spend most of my time interacting

00:27:13.640 | with the listeners.

00:27:15.160 | Shared this article this morning.

00:27:16.640 | And it's called "Root to an $8 million

00:27:18.280 | portfolio started with frugal living."

00:27:20.920 | And I'll just read a few paragraphs from it here,

00:27:23.240 | because it's going to emphasize my point.

00:27:25.640 | "Ronald Reed may have spent years pumping gas,

00:27:27.920 | but he was even more adept at pumping up his portfolio.

00:27:31.280 | Mr. Reed, a longtime resident of Brattleboro, Vermont,

00:27:34.160 | died in June at the age of 92.

00:27:36.600 | His friends were shocked when they learned his estate was

00:27:38.920 | valued at almost $8 million.

00:27:41.240 | Long widowed and with two stepchildren,

00:27:43.480 | he left most of his money to a local hospital and library."

00:27:47.080 | So how did he manage to pull it off?

00:27:48.920 | "Besides being a good stock picker,

00:27:50.560 | he displayed remarkable frugality and patience,

00:27:53.120 | which gave him many years of compounded growth.

00:27:56.160 | He lived modestly, worked as a maintenance worker and janitor

00:28:00.160 | at a JCPenney store after a long stint at a service station that

00:28:03.560 | was owned in part by his brother.

00:28:05.760 | Those who knew him talk of how he at times used safety pins

00:28:09.360 | to hold his coat together, and sometimes parked

00:28:11.800 | his 2007 Toyota Yaris far from where

00:28:14.600 | he was going to avoid having to feed the parking meter.

00:28:17.600 | Quote, 'If he could save a penny, he would,'

00:28:19.600 | says Bridgette Boakum, a senior client

00:28:21.360 | associate at the Wells Fargo Advisors Office in Brattleboro,

00:28:24.520 | who was assisting with his estate.

00:28:26.560 | When he died, Mr. Reed left behind a five inch

00:28:29.040 | thick stack of stock certificates

00:28:30.760 | in a safe deposit box.

00:28:32.440 | The shares represented the bulk of his estate,

00:28:34.600 | and his executor and Wells Fargo still

00:28:36.560 | are working to determine their exact worth.

00:28:39.840 | Mr. Reed owned at least 95 stocks

00:28:41.800 | at the time of his death, many of which

00:28:43.440 | he had held for years, if not decades.

00:28:45.880 | They were spread across a variety of sectors,

00:28:47.880 | including railroads, utility companies, banks, health care,

00:28:51.120 | telecom, and consumer products.

00:28:53.040 | He avoided technology stocks.

00:28:55.080 | Friends say Mr. Reed typically bought shares of company

00:28:57.440 | he was familiar with, and those that paid out hefty dividends.

00:29:01.200 | When dividend checks came in the mail,

00:29:02.740 | he plowed the money back into more shares, Ms. Boakum says.

00:29:06.200 | He goes on and talks about what he actually did.

00:29:10.200 | Now, my point here is here's a guy

00:29:12.240 | who works at a service station and as a janitor,

00:29:15.440 | and he dies at the age of 92 with an estate valued

00:29:19.160 | at $8 million.

00:29:20.800 | Now, of course, many people listen to that and say,

00:29:23.040 | what a waste.

00:29:23.560 | He could have spent the money.

00:29:24.760 | Ignore that.

00:29:25.360 | Just focus on the point that he was wealthy.

00:29:28.440 | How did he-- he's in the top 1%.

00:29:30.560 | How did he become in the top 1%?

00:29:32.880 | It wasn't necessarily through his income.

00:29:35.440 | It was through a little bit of his income,

00:29:37.480 | coupled with his frugality, and strong investment performance.

00:29:41.520 | He invested in stocks instead of bonds or CDs,

00:29:45.000 | so he took advantage of the growth potential of businesses,

00:29:48.840 | which led to a much higher rate of return over time,

00:29:51.160 | and he had a long time period.

00:29:52.680 | That's the function of wealth.

00:29:54.400 | So you've got to look at your own situation,

00:29:56.760 | and you've got to see what are my advantages.

00:29:59.120 | If you don't have the ability to go--

00:30:00.800 | I'm not a neurosurgeon.

00:30:02.360 | I'm not an attorney, so I'm not going to go out there

00:30:04.840 | and start working as a trial attorney making $5 million

00:30:08.040 | a year.

00:30:08.600 | So for me, I'm drawn to business,

00:30:10.800 | and I would say, let me give me a business

00:30:12.560 | and let me figure out how to grow this business,

00:30:14.760 | and I'll just apply my sweat equity to it and make it grow.

00:30:18.080 | That's my skill.

00:30:19.360 | But another person may not be.

00:30:21.720 | There are lots of 1% attorneys.

00:30:23.680 | There are lots of 1% physicians.

00:30:27.400 | So the point is, look at your situation

00:30:30.120 | and recognize what your advantages are.

00:30:32.840 | The higher the income, the better.

00:30:34.400 | The lower the expenses, the better.

00:30:36.080 | And the higher the rate of return, the better.

00:30:37.960 | There's nothing else you can do.

00:30:40.640 | There's nothing else you can do.

00:30:42.000 | You do have to avoid catastrophe along the way,

00:30:43.600 | but there's nothing else you can do.

00:30:45.400 | So what that means, you get a multimillion dollar contract

00:30:48.240 | playing basketball.

00:30:50.080 | For some people, that's the path to the 1%.

00:30:52.640 | And for others, it's working as a janitor.

00:30:56.240 | Those are the only things you control, though.

00:30:58.160 | So getting into the 1% is just simply a transition

00:31:02.120 | of getting through that.

00:31:03.560 | And if you mess up any of those things,

00:31:07.480 | if you're on a low income--

00:31:08.600 | trying to think of how many-- if you have a low income,

00:31:14.120 | but you invest very wisely, and your expenses are low,

00:31:17.640 | you can get wealthy.

00:31:18.760 | If you have a low income, but your expenses are

00:31:20.720 | high or equal to your income, you

00:31:22.320 | don't have any money to invest.

00:31:24.800 | And so you're not going to be wealthy.

00:31:26.380 | If you have a low income and low expenses,

00:31:28.280 | but you don't invest well, then you're not going to be wealthy.

00:31:31.800 | So you've got to do each of those things right.

00:31:34.320 | Now, if you have a high income and you have high expenses,

00:31:37.680 | you're not going to be wealthy.

00:31:39.360 | And there's a massive percentage of NFL players

00:31:41.680 | that, after they are retired from the NFL,

00:31:44.440 | after making millions for some of them,

00:31:46.560 | they're broke and bankrupt.

00:31:48.640 | Why?

00:31:49.480 | Well, you can spend millions just as-- not as easily,

00:31:52.240 | but you can spend millions pretty easily

00:31:53.900 | if you develop a certain lifestyle.

00:31:56.680 | So a high income is not a guarantee of wealth.

00:31:58.920 | But a high income, coupled with frugality,

00:32:02.000 | coupled with great investment returns,

00:32:03.680 | will lead to potentially massive wealth.

00:32:06.200 | And that's why, when you start looking

00:32:07.760 | at some of the athletes that you can look at--

00:32:11.680 | I mean, look at Shaquille O'Neal.

00:32:13.080 | The dude has more money than--

00:32:14.920 | I mean, he's done very well for himself.

00:32:16.920 | It's awesome.

00:32:18.000 | What has he done?

00:32:18.660 | He's invested wisely.

00:32:19.960 | And you can go and research them at some--

00:32:21.760 | I don't remember all the names, but you can go and research.

00:32:24.240 | I mean, you find this guy has 60 restaurant locations of this

00:32:28.240 | and another.

00:32:28.840 | I mean, you can build your wealth.

00:32:30.800 | So a high income is going to be great.

00:32:35.200 | And so the best, fastest results are

00:32:38.960 | going to be with the highest income possible,

00:32:40.920 | the lowest expenses possible, and the very highest

00:32:43.440 | investment returns.

00:32:46.240 | And you've got to figure out, in your situation,

00:32:48.240 | how to achieve that.

00:32:49.040 | So hopefully that helps a little bit.

00:32:50.800 | It did make me think of--

00:32:52.120 | and I went and looked it up.

00:32:53.560 | Joshua Kennan wrote an excellent article--

00:32:56.120 | it was a few years ago--

00:32:57.560 | and I went and found it.

00:32:58.920 | And I guess it's called, "How Much Money Does It

00:33:01.080 | Take to Be in the Top 1% of Wealth and Net Worth

00:33:03.640 | in the United States?"

00:33:04.840 | It's an excellent article.

00:33:05.960 | I will post it here in the show notes for today's show.

00:33:09.240 | So you can go and read that.

00:33:10.360 | It'll give you something else to look at as far as even

00:33:12.600 | how to measure the 1%.

00:33:14.440 | The stats that are thrown around are really not well done.

00:33:18.240 | Well, what else is new when you pay attention to the media?

00:33:21.520 | But my point is, he actually goes through and tries

00:33:23.680 | to figure out how to do it.

00:33:25.080 | Here's my last-- how to calculate

00:33:27.320 | what the numbers are.

00:33:28.200 | He does a good job with it.

00:33:29.440 | Here's my last thing that I want to mention on this subject.

00:33:33.720 | Getting in the 1%, I think, is probably not

00:33:36.160 | a great financial goal.

00:33:38.120 | I mean, I hesitate to say it's stupid,

00:33:40.360 | but I'm pretty strongly there.

00:33:42.520 | What does it matter to get into the 1%?

00:33:45.960 | Do you think-- and if you do get into the 1%,

00:33:49.000 | I think it's more accidental than not.

00:33:52.640 | Did Mark Zuckerberg plan to get into the top 1%?

00:33:57.400 | Did Bill Gates plan to get into the top 1%?

00:34:01.800 | These things can happen.

00:34:03.320 | And yes, good decisions can get you closer.

00:34:07.320 | But to me, I think it's a vanishingly difficult goal.

00:34:10.120 | And if that's your goal, you're likely to spend your life

00:34:12.960 | and waste it on a useless goal.

00:34:18.080 | Ronald Reed is dead.

00:34:20.440 | And all his money went to a library and to a hospital.

00:34:25.160 | My hat's off to him.

00:34:26.480 | And I am glad that he is able to send the money to where

00:34:30.000 | he thinks it's valued.

00:34:31.680 | I really do respect that.

00:34:33.800 | But I look at that, and I say, what a waste.

00:34:37.920 | What a waste to send all your money to a library,

00:34:40.680 | to a hospital, in a world where the libraries around me--

00:34:45.960 | I don't know what they are about you,

00:34:47.500 | but the libraries around me are massive.

00:34:51.400 | They're incredibly fancy.

00:34:53.280 | And they're empty.

00:34:54.200 | Now, maybe that trend will change.

00:35:00.360 | I like to use my fancy library.

00:35:02.640 | But man, that seems like a total waste of money to me

00:35:05.160 | to put money into that.

00:35:06.920 | And hospitals, I don't want to put money

00:35:08.860 | into the hospital system the way it is right now.

00:35:11.400 | It's a disaster.

00:35:13.360 | So that's probably a little bit uncharitable of me.

00:35:16.800 | Because on the one hand, if that was his goal,

00:35:19.200 | and that was what he wanted to accomplish,

00:35:21.480 | I mean, I applaud the man for following through.

00:35:23.640 | And it's his money.

00:35:24.440 | It wasn't my money.

00:35:25.400 | So in many ways, I have no right to say anything.

00:35:27.640 | But I look at that, and I say, what a waste.

00:35:30.240 | Not a waste of a life.

00:35:32.240 | If he was surrounded by people that loved him,

00:35:34.440 | if he was able to do good in a way that made an impact,

00:35:36.960 | then awesome.

00:35:37.680 | I'm not saying it's a waste of a life.

00:35:38.800 | And I admire his frugality.

00:35:39.920 | But I look at it and say, how much better to actually,

00:35:42.680 | instead of accumulating all that wealth,

00:35:44.560 | to actually put your life into something

00:35:46.240 | that you can make a difference in?

00:35:48.920 | The problem with making money a goal is money is stolen.

00:35:54.680 | It's swindled, another way for stolen.

00:35:57.680 | It's taxed.

00:35:59.960 | It's a very poor goal.

00:36:01.280 | But yet the other things that people mainly want

00:36:06.520 | can be achieved without money.

00:36:08.800 | So I think wealth should be a natural byproduct

00:36:11.280 | of a life well lived.

00:36:13.840 | But I think it's a better byproduct than it is a goal.

00:36:18.800 | If you develop the character of a man like Mr. Reed,

00:36:24.920 | the habits of a man like Mr. Reed, then it's natural,

00:36:28.560 | I think, that you will wind up wealthy.

00:36:31.000 | And then you'll be faced with the burden of saying,

00:36:35.200 | what do I do with all this money?

00:36:37.880 | And was that a good use of my life?

00:36:41.480 | I personally-- and again, I hope--

00:36:43.640 | I'm not being uncharitable toward Mr. Reed.

00:36:47.440 | I just heard of this story this morning.

00:36:50.080 | My only point is I hope he left behind a much greater legacy

00:36:55.240 | than just the money.

00:36:57.800 | Because the man's dead.

00:36:59.800 | And that money will be spent quickly by the organizations

00:37:03.680 | that he left it to.

00:37:06.680 | Again, the libraries around me are not lacking for funding.

00:37:10.480 | They have the fanciest buildings.

00:37:11.840 | They have the fanciest new carpet.

00:37:15.120 | And they are empty.

00:37:18.680 | And the hospitals around me are not lacking for funding,

00:37:20.960 | either.

00:37:22.320 | So that money is a drop in the bucket

00:37:24.480 | in their operating budgets.

00:37:25.680 | But it's everything in his life.

00:37:27.080 | I just hope it wasn't everything in his life.

00:37:30.280 | And I'm sure it wasn't.

00:37:32.160 | He sounds like the kind of guy I'd love to have on the show.

00:37:36.080 | So don't take my comments as being uncharitable.

00:37:38.120 | Just my point is, being in the 1% is not a goal.

00:37:44.080 | Build the life that you want somebody

00:37:47.560 | to eulogize at your funeral.

00:37:50.800 | And if money is a byproduct of that, great.

00:37:54.340 | And if money is not a byproduct of that, great.

00:37:57.400 | But build the life that you want somebody

00:38:00.280 | to eulogize at your funeral.

00:38:02.200 | So I hope that helps.

00:38:03.800 | Let's go to Brian.

00:38:04.960 | Hi, Josh.

00:38:09.120 | My name is Brian.

00:38:10.000 | And I'm calling because I really enjoyed your show

00:38:14.320 | since I found it a month or so ago.

00:38:16.800 | By the way, Brian was very complimentary.

00:38:18.560 | He also gave a bunch of details.

00:38:20.560 | And what I'm going to do is I'm going to skip forward here

00:38:24.160 | to get to his questions, I guess.

00:38:26.580 | I think we're in pretty fair shape when

00:38:28.240 | it comes to saving, both short and long term,

00:38:30.400 | living within our means, and making sound decisions

00:38:33.160 | with our income and investments.

00:38:35.960 | My big problem really comes to my confidence level

00:38:40.200 | in insurance and in insurance salesmen.

00:38:44.600 | I have basic car health insurance, renter's insurance,

00:38:49.360 | but have very little confidence that they'll actually

00:38:53.080 | be there to help in a time of need

00:38:56.560 | and really assume that the insurance companies will

00:39:00.000 | find a loophole to deny claims if they need to.

00:39:06.000 | So I'm calling to ask you to please help me get over

00:39:11.080 | this great distrust of insurance.

00:39:15.400 | These are very important financial planning instruments.

00:39:18.480 | I know that they're vital to any family

00:39:23.480 | and sound financial planning.

00:39:26.000 | So any recommendations that you have or conversation

00:39:29.200 | you can have about this, I'd really appreciate.

00:39:33.600 | Thanks a lot, and we'll talk to you.

00:39:37.520 | Brian, it's a great question.

00:39:38.680 | And I'm not going to talk you out of your distrust

00:39:41.880 | of insurance people.

00:39:42.720 | I don't trust a lot of people.

00:39:47.160 | And I don't think that skepticism or cynicism

00:39:50.040 | is particularly a bad thing.

00:39:51.360 | I will talk about the insurance industry and what I've learned.

00:39:56.920 | But to me, what's the old joke about paranoia?

00:40:01.760 | Just because you're paranoid doesn't mean

00:40:03.600 | they're not out to get you.

00:40:04.760 | The financial world, in fact, the world

00:40:09.560 | is rife with problems.

00:40:11.480 | What happens, especially in the United States of America,

00:40:13.840 | we have become very complacent with the idea

00:40:16.600 | that there's always a fallback position.

00:40:21.560 | Think about how conveniently and easily you'll swipe

00:40:24.280 | your credit card everywhere.

00:40:26.000 | Well, the reason you'll do that is because your credit card

00:40:28.760 | company wants you to have that confidence in them.

00:40:31.280 | So that's why you have all the fraud prevention stuff.

00:40:33.600 | That's why you can dispute the charges

00:40:35.400 | and all of those things.

00:40:36.400 | They've got to create that trust.

00:40:38.320 | So that's not-- but you've got to be careful,

00:40:42.440 | because the world is not necessarily

00:40:44.560 | full of people who are all moral and upright,

00:40:47.200 | always willing to do the right thing.

00:40:50.120 | Depending on where you are and who you're dealing with,

00:40:52.960 | you've got to be careful.

00:40:55.200 | You're the steward of the resources that you have,

00:40:57.600 | and you've got to make sure that you are caring for them

00:40:59.960 | properly.

00:41:02.720 | Now, with regard to insurance, well, I

00:41:05.960 | think it's good to be suspicious.

00:41:08.440 | I think it's important to do your research carefully.

00:41:11.840 | I think you should research your insurance agent.

00:41:14.600 | I think you should research your insurance company.

00:41:17.240 | I think you should read your insurance contracts.

00:41:19.040 | So I think these are important things to do.

00:41:23.640 | My wife is an amazing, wonderful woman.

00:41:26.240 | And one of the things that I love about her

00:41:28.600 | is she will not sign anything until she

00:41:32.440 | has read the entire thing.

00:41:35.640 | And when we close on our house--

00:41:37.640 | so I'm almost as uptight as she is, but not quite.

00:41:42.000 | But she is much more particular than I am,

00:41:43.960 | and she's less subject to peer pressure than I am.

00:41:46.120 | I'm the kind of guy, I'm much more easily pushed over

00:41:49.720 | and rushed or hastened, things like that.

00:41:52.920 | Just sign, Josh.

00:41:53.560 | OK, OK.

00:41:54.440 | I'm much more likely to give into that.

00:41:56.840 | She won't give into that at all.

00:41:58.680 | So when we close on our house, I specifically

00:42:00.560 | told the real estate attorney who handled the closing,

00:42:03.320 | I said, if you want us to sign anything, either A,

00:42:05.640 | be ready to sit there and wait, or B, send it to us in advance

00:42:10.000 | so we can have read it in advance.

00:42:13.240 | And so we did.

00:42:14.040 | We sat there, and we read.

00:42:15.240 | They didn't send it to us in advance, so we sat there.

00:42:17.360 | And I read every page, and she read every page.

00:42:19.440 | And then we signed, and we asked questions, and we signed,

00:42:21.200 | and we asked questions.

00:42:22.440 | Well, let me tell you how many people in the years

00:42:24.480 | that I worked as a life insurance agent--

00:42:26.480 | let me tell you how many people actually read their insurance

00:42:28.980 | contracts.

00:42:31.200 | About one.

00:42:32.840 | I can't remember who it was, but I think one person I actually

00:42:35.480 | worked with was detailed enough that actually went and read

00:42:38.280 | the insurance contract.

00:42:39.200 | Actually, I do know who it was--

00:42:40.280 | a guy who was a real estate investor.

00:42:41.840 | And he actually read his insurance contracts.

00:42:44.200 | Now, in the insurance business, with life insurance,

00:42:46.400 | disability insurance, long-term care insurance,

00:42:48.320 | that kind of thing, whenever you deliver an insurance contract,

00:42:50.360 | depending on the laws of your state,

00:42:51.840 | there's a certain period of time in which you have

00:42:53.920 | what's called a free look.

00:42:55.640 | And in that free look, in Florida, it's two weeks.

00:42:59.160 | You could read the contract, and any time

00:43:00.840 | in the first two weeks of owning it,

00:43:02.280 | you can return the contract, and you're

00:43:03.920 | entitled to a full refund of your money

00:43:06.080 | without any costs or expenses associated with it.

00:43:08.400 | There's no risk to it.

00:43:10.360 | So that's the point, is you're supposed

00:43:12.600 | to have time to sit there and read the contract.

00:43:14.720 | But nobody does.

00:43:16.000 | But you should.

00:43:17.480 | So what I always tried to do was I actually

00:43:19.960 | tried to walk people through their contracts.

00:43:22.320 | Once I realized that people didn't read them, I said,

00:43:25.280 | listen, most people don't ever read this.

00:43:27.120 | Let me show you a few things that are important in here.

00:43:29.960 | Now, obviously, that can be done in a way

00:43:32.060 | to disguise pertinent facts.

00:43:33.600 | Let me point to paragraph B, section 2,

00:43:36.080 | when actually the section where the gotcha is

00:43:39.360 | is paragraph A, section 4.

00:43:41.520 | But I used it as just a point, like, look, notice this,

00:43:45.200 | notice this, notice this, notice this.

00:43:47.120 | And insurance contracts are actually

00:43:48.960 | pretty usually well-written.

00:43:51.120 | They're nothing like reading a prospectus.

00:43:53.880 | Prospectuses are hard to get through.

00:43:55.520 | But insurance contracts are not that tough to get through.

00:43:57.920 | Just sit down and read it.

00:43:58.960 | But you know what's even a more damning statistic?

00:44:03.160 | It is not how many clients read insurance contracts,

00:44:06.080 | but actually how few agents read their insurance contracts.

00:44:10.360 | It's horrible.

00:44:12.560 | Or how few people read their prospectuses

00:44:14.280 | for their investments.

00:44:15.600 | Or how few people read their annual reports.

00:44:18.840 | We don't do it.

00:44:20.800 | So I think you should be distrustful.

00:44:23.280 | I think you should be careful.

00:44:24.480 | And I think you should read the fine print carefully.

00:44:28.040 | In today's modern world, when people get snookered,

00:44:31.520 | if you go back and you actually read the contract,

00:44:34.000 | it was written in there.

00:44:35.000 | They just didn't understand it.

00:44:37.160 | So don't sign anything that you don't understand.

00:44:39.960 | Now, as far as people, there's often this reputation,

00:44:43.880 | I think, especially with insurance.

00:44:45.480 | There's a reputation that insurance people have of perhaps

00:44:48.200 | not being so trusted.

00:44:52.760 | If you don't trust your insurance agent, get a new one.

00:44:56.760 | My experience has been that many of the agents

00:45:00.160 | and financial advisors that I've known personally

00:45:03.600 | are mostly intending to do the right thing.

00:45:07.960 | But the business can start to wear on you over time.

00:45:11.960 | You can start to get frustrated with how little people know

00:45:14.440 | and how little they question, how little valued

00:45:16.720 | you can tend to be.

00:45:18.160 | That can be a real scenario.

00:45:20.080 | If you're working with somebody and you value them,

00:45:22.920 | let them know.

00:45:25.120 | Because what happens if you only hear from the people that

00:45:28.320 | don't value what you're doing or you only hear from the people

00:45:31.600 | that are unhappy, that's tough.

00:45:34.520 | So let the people that you know know.

00:45:37.880 | The biggest thing that I would say

00:45:39.880 | that would help you to be well-protected when dealing

00:45:43.000 | with insurance people or investment people

00:45:46.240 | or frankly, anybody is ask questions.

00:45:49.120 | One thing I have noticed, and this is primarily

00:45:52.000 | anecdotal from my experience, but I have observed it also

00:45:55.760 | in reading about other people's stories,

00:45:58.200 | is it seems like wealthy people are just

00:46:00.680 | willing to ask more questions and ask better questions

00:46:03.560 | and aren't scared of asking dumb questions.

00:46:07.520 | If you don't understand something, ask about it.

00:46:11.720 | If you are dealing with a debate of what kind of home insurance

00:46:15.720 | should I get, just ask the agent and ask

00:46:18.520 | lots and lots of questions.

00:46:20.160 | And if you get somebody who's not

00:46:21.600 | willing to answer your questions and doesn't simply say,

00:46:24.160 | I don't know the answer to that, but let me write it down,

00:46:26.280 | let me go get you an answer, then find a new agent.

00:46:28.960 | That will protect you from the majority of problems

00:46:31.080 | that you'll face.

00:46:32.640 | If people ask questions, I think they would actually do better.

00:46:36.480 | It's like this.

00:46:39.720 | I don't trust insurance companies.

00:46:43.280 | I think you should verify and then trust and then verify

00:46:46.720 | and then keep verifying and keep verifying.

00:46:48.880 | Companies should be working to earn and keep your business.

00:46:52.800 | But look at the population that we live in.

00:46:56.280 | When's the last time that anybody around you actually

00:46:58.840 | questioned our government on something?

00:47:03.120 | The United States of America and most

00:47:04.660 | of the major Western economies, Western countries

00:47:07.600 | where people are listening to this show,

00:47:09.400 | the United States of America is utterly bankrupt.

00:47:12.960 | We owe over $200 trillion of total debt,

00:47:18.840 | about $18 trillion of direct debt

00:47:20.920 | and the balance of that unfunded liabilities to Medicare,

00:47:24.520 | Medicaid, and Social Security.

00:47:26.920 | It will never be paid.

00:47:29.080 | But yet, when's the last time somebody actually questioned

00:47:32.200 | the people who are running our money and asked, wait a second,

00:47:36.520 | what are you doing?

00:47:37.280 | The problems that the US government faces

00:47:42.080 | are not the problems of the government.

00:47:43.420 | It's our problems because we don't hold people accountable.

00:47:47.560 | If we fix our own houses, then maybe theoretically

00:47:50.840 | at some point our corporate houses might be fixed.

00:47:54.280 | I'm not going into a political rant here,

00:47:56.520 | but let me wrap up with just this.

00:47:59.560 | Don't worry about trusting.

00:48:00.920 | Research and verify and read and question

00:48:05.060 | and then make sure the companies that you're doing

00:48:07.140 | are doing business with you.

00:48:08.300 | The final comment that I would make in addition to those

00:48:10.640 | things is, be careful with the companies

00:48:14.840 | that you do business with.

00:48:18.560 | And be careful as far as how long of a leash

00:48:23.040 | that you give them.

00:48:25.600 | I'll give you a simple example.

00:48:28.480 | I have Comcast Internet.

00:48:30.600 | Comcast is probably the worst company

00:48:32.480 | I've ever dealt with in my life from a business perspective.

00:48:36.880 | If I could fire them and still get internet today,

00:48:39.400 | I would fire them in an instant.

00:48:40.880 | It is horrendous.

00:48:43.180 | It has been an absolutely horrible experience.

00:48:45.880 | Unfortunately, in my area, they're pretty much it.

00:48:48.440 | And they keep on sewing up their little monopoly,

00:48:50.680 | freezing out the competition, integrating with Time Warner.

00:48:56.160 | It just gets worse and worse and worse.

00:48:58.200 | And the United States keeps falling behind and behind

00:49:00.400 | and behind in terms of the quality of the service.

00:49:02.800 | And every time a company comes in and says, OK,

00:49:05.360 | we're going to fix something and do a little bit better,

00:49:07.840 | then what happens?

00:49:09.280 | Well, Comcast sends their lobbyists up.

00:49:11.360 | And they're all the same, all the big ones are the same.

00:49:14.400 | I don't trust Comcast a bit.

00:49:17.000 | Not a bit.

00:49:19.960 | But I still have to use them.

00:49:21.560 | But I keep them on a short rope.

00:49:22.920 | And so if I got in a situation where

00:49:26.880 | I were dealing with a bill, I know I got to move quickly.

00:49:30.640 | Because I don't trust them.

00:49:32.040 | They're thieves, crooks and thieves.

00:49:35.360 | Now, there are other companies that I've worked with.

00:49:37.560 | I'll give an example.

00:49:38.400 | I've done banking for years with USAA.

00:49:41.200 | USAA has treated me amazingly well.

00:49:44.760 | USAA holds my car insurance.

00:49:46.840 | They have done a tremendous job.

00:49:48.720 | They've earned my trust.

00:49:50.040 | Still going to verify.

00:49:51.800 | But they've earned my trust to where I'm much more comfortable

00:49:54.280 | with them from years of dealing with them,

00:49:56.960 | that they have a culture in which they actually

00:49:59.240 | care about me.

00:50:00.960 | Part of that goes to the ownership structure

00:50:03.040 | of the company.

00:50:03.680 | It's a mutual insurance company.

00:50:05.080 | It's not a stock insurance company.

00:50:07.720 | So I feel much more confident with them.

00:50:10.280 | Now, USAA won't write my homeowner's insurance.

00:50:12.480 | I don't trust my homeowner's company a bit.

00:50:15.400 | But I still have to have it, and that's

00:50:16.920 | about the best I can get.

00:50:18.080 | What's my point?

00:50:18.760 | My point is simply, understand who you're doing

00:50:21.120 | and cover yourself.

00:50:23.000 | Read your contracts from cover to cover.

00:50:24.760 | If you've never read your insurance contracts,

00:50:26.600 | get every one of them out and make it a project.

00:50:28.440 | I'm going to read my homeownership policy.

00:50:29.720 | I'm going to read my car insurance policy.

00:50:31.080 | I'm going to understand the terms.

00:50:32.480 | And if you don't understand, stand up for yourself.

00:50:35.040 | Ask the agent.

00:50:35.800 | Explain this word to me.

00:50:38.840 | Read your investment statements.

00:50:40.280 | I used to hate it.

00:50:41.440 | When I was handling investment accounts,

00:50:43.320 | we would do sometimes account opening statements

00:50:45.600 | that were 200 pages.

00:50:48.120 | 200 pages.

00:50:51.000 | Zero people ever read those 200 pages.

00:50:54.680 | But you know what?

00:50:56.040 | Nobody ever cared.

00:50:57.360 | The clients trusted me.

00:50:58.360 | And thankfully, I had looked--

00:50:59.720 | I hadn't read all 200 pages, every one,

00:51:01.440 | but I'd looked carefully through it.

00:51:02.920 | I knew there wasn't anything there that was screwing them.

00:51:05.240 | I carefully pointed out the parts where

00:51:07.000 | they needed to be aware of them.

00:51:08.920 | And so the clients trusted me.

00:51:12.040 | And that was what happens.

00:51:13.400 | But the problem is we've gotten so numb to it

00:51:15.920 | that we just sign stacks of stuff without reading it.

00:51:18.640 | If every one of you listening, and I as well,

00:51:21.320 | if you sat there and said, OK, Mr. Investment Advisor,

00:51:24.360 | you're going to put this 200-page document in front

00:51:26.480 | of me.

00:51:27.000 | Well, I'm going to sit here right in your office,

00:51:29.000 | and I'm going to read it.

00:51:30.880 | All of a sudden, maybe the advisors

00:51:32.360 | would start pushing back.

00:51:33.440 | And they would call up the attorneys.

00:51:35.000 | And the attorneys would say, well,

00:51:36.440 | we've got to change something.

00:51:37.640 | And we might actually get to some reasonable contracts.

00:51:40.920 | Unfortunately, nobody does that, because we're all conditioned

00:51:43.440 | to simply sign stacks of paper.

00:51:46.600 | Research the company and choose the person carefully.

00:51:49.560 | Ask lots of good questions.

00:51:51.160 | And caveat emptor.

00:51:52.640 | It's your money.

00:51:53.280 | You're responsible for it.

00:51:54.680 | You don't need to trust an insurance company.

00:51:56.440 | You just need to trust that they're going to follow through

00:51:57.960 | on their contract.

00:51:58.680 | You need to verify that they have the ability to do it.

00:52:01.440 | You don't need to necessarily trust your bank.

00:52:03.280 | You need to research them and make sure

00:52:05.000 | that they have a good history and are capable of performing.

00:52:09.000 | You are responsible.

00:52:13.160 | I don't think it's a bad thing to have distrust.

00:52:15.280 | But I think most of the people that are involved,

00:52:17.320 | which I guess is the question, is most of the people that

00:52:19.760 | are involved, they're not necessarily untrustworthy.

00:52:23.000 | They are doing the best they can.

00:52:24.360 | Most insurance agents I know are pretty good people.

00:52:28.200 | And they really care.

00:52:29.040 | And they're doing the best thing they can do.

00:52:30.920 | So just ask them questions.

00:52:32.200 | Let them do their job.

00:52:34.960 | I hope I didn't get too much of that.

00:52:36.600 | Next question.

00:52:37.160 | Last question for today comes from Pete.

00:52:40.520 | Hi, Joshua.

00:52:41.080 | I'm going to just send you a voicemail

00:52:42.640 | since the mailing you a voice memo from my iPhone

00:52:45.360 | didn't work.

00:52:46.840 | This is Pete up in Boston.

00:52:47.920 | I love the show.

00:52:48.580 | Call them one other time.

00:52:50.240 | I have a question in general about investing in IPOs

00:52:53.360 | as part of a broader investment strategy.

00:52:57.200 | In particular, I'm curious about the Shake Shack IPO tomorrow,

00:53:01.000 | which is a burger and fry joint that started in New York City

00:53:04.000 | and is expanding quite rapidly all over the world now.

00:53:07.640 | But what is the role of that within a broader investment

00:53:11.960 | portfolio?

00:53:13.520 | Thanks so much.

00:53:14.160 | Love the show.

00:53:15.400 | So it's an interesting question.

00:53:16.720 | And obviously, if any of you know,

00:53:18.240 | Shake Shack went public a couple months ago.

00:53:19.720 | I sat on this intentionally for a few weeks

00:53:22.040 | because I didn't want to comment on Shake Shack.

00:53:24.040 | And I also just got behind with Friday Q&A shows

00:53:28.480 | with the work on the new website.

00:53:30.200 | But I do want to answer the question.

00:53:32.160 | And I'm going to answer the question from two perspectives,

00:53:34.660 | from the portfolio question that Pete asked,

00:53:37.200 | and then also from the flip side of the portfolio question,

00:53:44.640 | and also the role of an IPO.

00:53:48.240 | From a portfolio perspective, I don't

00:53:50.320 | think there's any difference of an IPO in your investment

00:53:53.880 | portfolio than any other aspect of your investment portfolio.

00:53:57.720 | If you are going to invest in, let's say, Shake Shack,

00:54:01.000 | then you're going to have an investment philosophy.

00:54:03.280 | It's going to be a reason why you're investing.

00:54:05.200 | And then that investment philosophy

00:54:06.660 | is going to drive the role that that investment has

00:54:09.120 | in your portfolio.

00:54:11.440 | If you are a short-term trader, and this

00:54:13.240 | is what you're doing, and you're managing

00:54:14.940 | your portfolio or a portion of your portfolio

00:54:16.840 | towards short-term trading, then you're

00:54:18.720 | going to be measuring the mood and the sentiment of the crowds.

00:54:24.160 | And you're going to try to take a guess as to what you think

00:54:26.580 | is going to happen with the stock price once it goes live.

00:54:30.960 | And you're going to go ahead, and you're

00:54:32.080 | going to put your trades in just like you

00:54:33.960 | are accustomed to doing.

00:54:35.680 | If you're an investor, and you are accustomed to investing

00:54:39.280 | in quick, casual, or fine, casual, quick serve

00:54:45.960 | restaurants like Shake Shack, then you're going to sit down,

00:54:49.160 | and you're going to say, well, where does this company stack

00:54:51.620 | up against its peers?

00:54:52.580 | What's the price that I think I can get it for?

00:54:54.680 | What are the earnings?

00:54:55.600 | What's the return on equity?

00:54:57.160 | How does this actually-- is this a good investment?

00:54:59.600 | And you're going to slide it into your portfolio based

00:55:01.900 | upon that.

00:55:03.080 | Now, what most people do when they're investing in IPOs is--

00:55:06.400 | not what most-- what some people do when they're investing in IPOs

00:55:09.080 | is they just jump in.

00:55:10.920 | And sometimes that can work, and sometimes it can't.

00:55:13.880 | Compare Shake Shack with Facebook as an example.

00:55:17.280 | So if you're just a Shake Shack customer,

00:55:19.080 | and you say, well, I don't know anything about investing,

00:55:20.640 | but I heard they're having an IPO,

00:55:21.880 | and so I want to just own some because I really

00:55:23.420 | like this company.

00:55:24.640 | If you're right about your gut feeling of the company being

00:55:27.240 | a solid scenario, and if it's well-run,

00:55:29.480 | and if they do a good job of avoiding

00:55:31.320 | all the risks of their business and growing their empire,

00:55:34.480 | maybe it was a great decision.

00:55:37.480 | Or maybe you just got in on a gut

00:55:39.600 | with actually no knowledge of investing

00:55:42.400 | and didn't actually sit down and figure out

00:55:44.200 | how much is the company worth?

00:55:45.760 | What's the intrinsic value?

00:55:47.040 | What am I willing to pay?

00:55:48.320 | How much of a premium am I willing to pay

00:55:50.080 | for their future growth versus their earnings currently,

00:55:52.600 | et cetera?

00:55:54.920 | That's the hard type of investing

00:55:56.440 | that most people don't do.

00:55:58.840 | So the role of an IPO in your portfolio

00:56:02.680 | should be congruent with your overall strategy and approach

00:56:07.760 | to investing.

00:56:08.400 | And that's the major thing that most people need to focus on.

00:56:14.440 | Do I know what my overall strategy and approach

00:56:17.160 | to investing is?

00:56:18.720 | Have I selected an asset allocation?

00:56:21.680 | Do I have a need for something that fits this?

00:56:25.840 | And it very well might be the fact

00:56:27.560 | that I always keep 5% of my liquid capital

00:56:29.880 | available for long shots that are home run options.

00:56:33.760 | And I think Shake Shack is the next Chipotle.

00:56:38.320 | If that's the case, then you already know.

00:56:41.320 | These things should be decided in advance of the IPO,

00:56:44.960 | and then the IPO just fits that characteristic.

00:56:47.560 | Or if you're aware of an IPO that you know,

00:56:50.480 | OK, this company is kind of interesting,

00:56:52.800 | then you should go back to your investment plan

00:56:54.760 | and you should see, how do I moderate this?

00:56:57.000 | How do I modify my asset allocations here?

00:56:58.960 | Where's the money going to come from?

00:57:00.520 | How is this going to fit?

00:57:01.320 | Is this going to overexpose me to the restaurant industry?

00:57:03.920 | Is this going to overexpose me to shakes and burgers

00:57:07.360 | and fries in an era where everyone's going

00:57:09.400 | to salads and chicken wraps?

00:57:13.720 | It's got to be built in as an investor into your portfolio,

00:57:16.560 | into your plans.

00:57:18.240 | That's simply not how most people approach

00:57:20.160 | investing in an IPO who are talking about it.

00:57:23.880 | Many people approach it from--

00:57:25.200 | individual people from an excitement perspective.

00:57:28.520 | Sometimes it works out.

00:57:30.440 | Academic research that I've read indicates

00:57:33.400 | that it mostly doesn't.

00:57:34.560 | And that's why I want to talk about the role of an IPO.

00:57:37.120 | I think it's important to recognize what

00:57:38.780 | the actual role of an IPO is.

00:57:40.840 | Let's say that you started a burger joint that

00:57:44.600 | serves malts and burgers.

00:57:47.800 | I guess we can do shakes.

00:57:49.000 | Let's say that you started Shake Shack.

00:57:50.960 | And you've grown this thing little by little,

00:57:52.800 | and you're growing pretty well.

00:57:54.120 | You've got a pretty successful restaurant.

00:57:56.480 | You've taken on a few investors.

00:57:58.400 | What's the role of an IPO for you?

00:58:02.840 | It's diversification.

00:58:04.760 | It's a way for you to cash out.

00:58:08.000 | And to me, this is what most people don't seem to understand.

00:58:11.240 | When an IPO is offered, it's being

00:58:14.040 | offered so that the current owners can cash out.

00:58:18.720 | So the current owners are saying,

00:58:20.160 | we don't want to continue to own this,

00:58:21.840 | and we want to make our millions.

00:58:23.880 | We want to convert this stock that we own,

00:58:26.360 | which we can't get cash for right now

00:58:28.680 | because it's privately held, and we want to convert it

00:58:30.960 | into money.

00:58:34.320 | Everyone who's involved on the sell side of an IPO

00:58:37.760 | has an incentive to get the highest price possible.

00:58:42.520 | So if the owner of the company-- let's

00:58:44.200 | say there's an individual owner, and then there

00:58:46.160 | are a few early stage investors, some angel investors that

00:58:48.720 | came in, and they own that.

00:58:50.120 | If the owners of the company, they need an exit plan.

00:58:53.200 | That's what these guys do, people

00:58:54.320 | that run a venture capital firm.

00:58:55.660 | They need an exit plan.

00:58:56.760 | OK, we're going to come along.

00:58:58.200 | We're going to invest in your small company.

00:59:00.040 | We think it's going to multiply by 5x

00:59:02.320 | within this period of time.

00:59:03.520 | We think it's going to multiply by 20x

00:59:05.060 | within this period of time.

00:59:06.400 | And our exit is, yes, this is a type of industry

00:59:09.000 | that's going to do well in an IPO.

00:59:10.480 | And that's how they cash out.

00:59:11.800 | They've got to find a buyer.

00:59:12.920 | And you're the buyer in the IPO.

00:59:15.680 | So the seller has an incentive to get the highest

00:59:17.680 | price possible.

00:59:18.360 | The individual owner or owners who started the company

00:59:21.640 | have the incentive to get the highest price possible,

00:59:24.160 | because they're giving up ownership and control now.

00:59:26.520 | They've got to deal with the hassle of going public.

00:59:29.000 | The early stage investors who may have funded the company,

00:59:31.400 | they've got an incentive, because this

00:59:33.120 | is how they're going to measure their return on equity.

00:59:37.560 | Also, the investment bank that's handling the offering,

00:59:40.600 | the investment bank is being paid based upon commission.

00:59:43.720 | It could be a fee, depending on how they've arranged it.

00:59:46.760 | But in essence, they're getting a commission.

00:59:49.680 | And their job is to market this product, the stock

00:59:53.520 | that they're selling, at the highest possible price

00:59:57.400 | they think the market will bear.

00:59:59.480 | This is why you'll see the market adjust.

01:00:01.200 | And they're offering it at the highest price.

01:00:03.040 | And the higher the price and the more shares they can sell,

01:00:05.960 | the more money they'll make.

01:00:07.920 | So they go out, and they do their roadshow.

01:00:09.680 | And they go out, and they offer their terms sheets.

01:00:12.040 | And here's all the company, and here's all the information on

01:00:14.480 | it.

01:00:14.980 | And they're trying to whip up the market

01:00:16.720 | into a froth, a frenzy of people saying,

01:00:20.440 | we want to buy this company.

01:00:22.840 | Every IPO is a great investment.

01:00:24.520 | So you recognize that.

01:00:28.480 | The decks are kind of stacked a little bit against you.

01:00:31.320 | Now, of course, they've got to release all the information.

01:00:33.760 | They've got to do a full disclosure.

01:00:35.800 | And so that can help you.

01:00:37.520 | But recognize that everyone on the other side

01:00:39.360 | is trying to get the highest possible price.

01:00:42.120 | That's different than a stock that's

01:00:43.760 | traded for a period of time, and you're just

01:00:45.560 | buying some shares that are being offered.

01:00:47.920 | And especially if you're trading in a small volume,

01:00:50.680 | and there's always shares available,

01:00:53.640 | you don't know what's going on.

01:00:55.120 | And just on any given day, the share price

01:00:57.600 | reflects the totality of all the investors.

01:00:59.400 | But in an IPO, the initial public offering price

01:01:04.280 | is reflecting the highest price they can get.

01:01:06.040 | Now, of course, they need to get an incentive.

01:01:07.960 | They need to theoretically sell and offer it

01:01:11.000 | at a lower price than what it's worth so that you'll buy it

01:01:13.800 | then, and they can get the market going for it.

01:01:16.600 | So it all works pretty well.

01:01:19.320 | The research indicates that usually the IPOs

01:01:22.000 | tend to underperform.

01:01:24.800 | Most people don't seem to understand that, at least

01:01:26.960 | the offering process.

01:01:29.920 | So I say tread carefully.

01:01:32.800 | If there is a company that you feel very strongly about,

01:01:36.200 | and you sit down, and you run the value,

01:01:38.840 | and you say, here's what the value of this company is worth.

01:01:41.520 | Here is what I'd be willing to pay

01:01:46.680 | for this business, which is a good way to approach stock

01:01:49.320 | investing.

01:01:50.320 | I'd be willing to pay total--

01:01:52.040 | if I could buy this business today for this amount of money,

01:01:55.240 | here's what I would be willing to pay.

01:01:58.440 | And then you can get it at the per share price

01:02:00.600 | that you're happy with, fine.

01:02:02.280 | And if that comes in the form of an IPO, awesome.

01:02:05.160 | There are some IPOs that have done--

01:02:07.280 | all companies have gone through an IPO initially.

01:02:09.960 | But by that, there's some companies

01:02:11.720 | that have gone public recently that

01:02:13.220 | have continued to perform well.

01:02:14.880 | And there are many companies who haven't.

01:02:16.720 | So as long as you understand the game,

01:02:19.040 | and you know who the suckers are--

01:02:21.680 | what's the old quote from poker?

01:02:24.520 | I can't remember exactly, but basically, there's

01:02:26.800 | a sucker in every game.

01:02:27.960 | And if you don't know-- or there's a patsy in every game.

01:02:29.720 | If you don't know who the patsy is or who the sucker is,

01:02:32.060 | it's you.

01:02:32.760 | Make sure you're not the sucker.

01:02:34.280 | Make sure you know what's going on,

01:02:35.720 | and you're dealing with something that

01:02:37.320 | is a business that you're confident in.

01:02:40.520 | And hey, if there's a restaurant that you love,

01:02:43.000 | and you just want to send some money that way

01:02:44.960 | as a show of support and something to tell your kids,

01:02:47.440 | go for it.

01:02:49.080 | There's lots of things we can spend money on.

01:02:50.920 | So you can't get too serious about it.

01:02:54.680 | But that would be how I would answer your question.

01:02:57.080 | Hope that helps.

01:02:58.600 | I guess the last caveat is just I'm really not

01:03:00.800 | an expert on that type of thing.

01:03:02.800 | So I know the process, but I've never been involved.

01:03:05.760 | I've never worked inside of an investment bank.

01:03:08.480 | I've never been a trader trying to swoop up shares on day one.

01:03:12.200 | So it's more for me an academic knowledge,

01:03:14.820 | and that's what I've shared with you.

01:03:16.360 | So if anybody else out there is more knowledgeable or knows

01:03:19.440 | of great resources, feel free to come by for today's show

01:03:22.520 | and comment and share those with us.

01:03:25.760 | Hopefully that was helpful to you guys.

01:03:28.200 | I know I was a little bit loose and made some mistakes

01:03:30.880 | and whatever.

01:03:31.480 | But hopefully this was helpful to you.

01:03:33.600 | I had fun with these questions.

01:03:34.920 | These are great questions.

01:03:35.920 | Love to answer your questions.

01:03:37.000 | So make sure you come by radicalpersonalfinance.com,

01:03:39.120 | leave a voicemail.

01:03:39.960 | Hope these answers have been useful to you.

01:03:41.720 | If you're enjoying these answers and if it's

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01:04:26.480 | Next week we will be doing the monthly Google Hangout

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01:04:35.160 | So if you would like this weekend to get in before that,

01:04:39.080 | come by radicalpersonalfinance.com/patron

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01:04:46.120 | of the other benefits for the previous levels.

01:04:49.320 | So I think that's it.

01:04:51.440 | It's a beautiful Friday here in South Florida.

01:04:53.320 | I hope that those of you who live in the frozen, frigid

01:04:55.200 | north that you're warming up a little bit.

01:04:57.200 | I'm going to go out and fire up the grill and spend some time

01:05:00.600 | and spend some of my life energy with those that I love.

01:05:04.920 | I'm going to cook some steaks on the grill tonight

01:05:06.960 | and have a good time with my family.

01:05:08.880 | Doing a little financial coaching over dinner

01:05:10.760 | as well, if someone's coming over for dinner.

01:05:12.720 | So the perks of being a financial advisor.

01:05:15.720 | And the perks of not wearing a suit and tie anymore.

01:05:17.840 | So sometimes you do financial advice

01:05:20.280 | over steak and baked potatoes.

01:05:23.160 | So y'all have a lovely weekend.

01:05:25.280 | We'll talk with you next week.

01:05:27.640 | [MUSIC PLAYING]

01:05:31.120 | Thank you for listening to today's show.

01:05:43.280 | If you'd like to contact me personally,

01:05:45.400 | my email address is joshua@radicalpersonalfinance.com.

01:05:50.560 | You can also connect with the show on Twitter @radicalpf

01:05:54.040 | and at facebook.com/radicalpersonalfinance.

01:05:57.880 | This show is intended to provide entertainment, education,

01:06:02.200 | and financial enlightenment.

01:06:04.800 | But your situation is unique, and I cannot deliver

01:06:08.200 | any actionable advice without knowing anything about you.

01:06:12.520 | Please, develop a team of professional advisors

01:06:17.000 | who you find to be caring, competent, and trustworthy.

01:06:21.400 | And consult them, because they are

01:06:24.000 | the ones who can understand your specific needs,

01:06:27.440 | your specific goals, and provide specific answers

01:06:31.720 | to your questions.

01:06:33.520 | I've done my absolute best to be clear and accurate

01:06:36.360 | in today's show.

01:06:37.640 | But I'm one person, and I make mistakes.

01:06:40.320 | If you spot a mistake in something I've said,

01:06:42.560 | please help me by coming to the show page

01:06:45.000 | and commenting so we can all learn together.

01:06:48.200 | Until tomorrow, thanks for being here.

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