How Do You Create Generational Wealth?

00:00:00.000 | Welcome back to Ask the Compound. I'm your host, Ben Carlson. With me as always is the

00:00:23.080 | world's foremost expert in Oatly stock, Duncan Hill. On today's show, we're going to be answering

00:00:28.640 | questions about, how safe is it to buy a Peloton, since the company seems to be in trouble? How

00:00:32.960 | to hedge large gains in NVIDIA? This question was asked before they blew out earnings again

00:00:37.260 | last night. What happens in the stock market if inflation falls? How to create generational

00:00:42.100 | wealth and how to prepare yourself for a finance career coming out of college? We have one

00:00:45.420 | of my favorite questions we've ever been asked today. At least by one of our -- it was one

00:00:49.440 | of my favorite people to ask. Remember, if you have a question, email us, askthecompoundshow@gmail.com.

00:00:56.440 | Today's show is sponsored by Fabric by Gerber Life. When I got life insurance, my first

00:01:00.840 | daughter was born. I figured I had to take that next step. That meant going down to an

00:01:04.840 | insurance broker in their office in some big glass building, sitting with them, having

00:01:09.960 | an awkward conversation, filling up on paperwork. It's like half a day, right? It was kind of

00:01:14.000 | a -- it's not fun. So Fabric by Gerber Life was designed by parents, for parents, to help

00:01:18.880 | you get a high quality, surprisingly affordable term life insurance policy. I mean, it could

00:01:22.880 | be less than 10 minutes. You could go from start to covered in less than 10 minutes with

00:01:26.240 | no health exam required. That's some people, not everyone. Join the thousands of parents

00:01:31.160 | who trust Fabric to protect their family. Apply today in just minutes at meetfabric.com/atc.

00:01:36.540 | That's meetfabric.com/atc. Policies are issued by Western Southern Life Insurance Company,

00:01:41.840 | not available in certain states. Prices subject to underwriting and health questions. Usual

00:01:46.080 | caveats apply.

00:01:47.080 | Mike, we got our own landing page there. That's cool.

00:01:49.880 | It is very nice. Next week's show, we're going to be talking about insurance. A lot of people

00:01:53.200 | ask us, term versus life, or term versus whole life insurance, all this stuff. We're going

00:01:59.120 | to be talking about that. So covering all of that questions. Before we get into the

00:02:03.560 | show today, I want to quick shout out to one of our viewers, Mike from South Carolina.

00:02:07.160 | Mike is a firefighter. We actually answered a question about his firefighter pension back

00:02:11.600 | on the show. He's going through a little bit of a tough time. He's got a wife, two kids.

00:02:15.640 | And just want to give him a shout out, tell him we're thinking of him. I think one of

00:02:18.680 | the things that we never take for granted here is how much personal information people

00:02:21.680 | are willing to share with us. It is kind of crazy. Some people just hate talking about

00:02:24.880 | money with their friends or family. People share with us so much personal information

00:02:29.840 | of the stuff they're going through, how much money they make, how much money they have

00:02:33.040 | saved, the goals they're thinking about. So we don't take that responsibility lightly.

00:02:37.240 | We appreciate it. And we appreciate people like Mike following the show.

00:02:39.720 | Yeah. Thanks, Mike.

00:02:40.720 | So let's do a question.

00:02:41.720 | And you're part of a compound family. If you're here, you're family. That's our solution.

00:02:46.400 | The people in the live chat that come here every single week, half the time I think they're

00:02:50.320 | just here to interact with each other because they've all become friends in the chat. But

00:02:54.440 | it's nice to know that it's like a little safety blanket that these people come here

00:02:57.560 | every week to listen to us.

00:02:58.560 | Yeah. That's cool.

00:02:59.560 | All right. Question one.

00:03:00.560 | Okay. I'll first say we have a question from Zane. Thanks for everything you and the Reholes

00:03:06.880 | team are doing. I've been a listener for a few years now and I've learned a lot. Also

00:03:10.840 | refreshing to hear from a fellow Michigander, which always sounds like a fancy kind of goose

00:03:16.360 | or something to me, you know, Michigander, but I've heard you mentioned before, but you

00:03:20.080 | owned a Peloton. The wife and I have been considering a Peloton bike for some time now

00:03:25.020 | and seem to be close to a purchase. But given the recent earnings report and poor guidance,

00:03:29.600 | do you think it's still safe to purchase a Peloton?

00:03:32.160 | I did purchase the Peloton during the pandemic. I use one of those 0% loans back in the day.

00:03:36.840 | It was like four years, 0% loan. I thought, why, why not? Why wouldn't I do this? So I

00:03:40.400 | think I just paid it off like a couple months ago. I was paying, I can't remember how much

00:03:43.240 | $60 a month or something. It wasn't even that much. I have to admit, I do share some of

00:03:47.980 | the concerns. Look at the stock price. John, give me a chart on here. This is Peloton stock.

00:03:52.920 | It's down 98% from the highs, just gotten slaughtered. I think at the peak it was a

00:03:58.040 | $50 billion company, which is just insane, obviously. I always say that any sort of diet

00:04:02.800 | or health fitness thing is really just a fad to me. People thought Peloton was going to

00:04:08.440 | be like a trillion dollar company. That just never made much sense.

00:04:12.480 | I mean, there was a time during the pandemic when people were on long wait lists to get

00:04:16.220 | them and stuff, right? It did have a boom.

00:04:18.920 | And I think they just pulled forward. So, John, show the next one. I did a little deep

00:04:22.400 | dive on Peloton's financials. This is their net quarterly operating net income. And you

00:04:27.680 | can see, they were basically in the black for two or three quarters. Other than that,

00:04:31.920 | every single quarter, they've lost money. They lost a lot of money in 2022. They've

00:04:36.320 | cut some costs, made it back a little bit. But they're still losing money every quarter.

00:04:41.520 | John, do the next one for segment data. This is one of the reasons that I'm still okay

00:04:46.760 | by them remaining a going concern. I'm not talking about the stock at all, I'm talking

00:04:50.360 | about the company. Subscriptions make up almost 40% of their revenue. So, they sell their

00:04:55.440 | products and that's 60%. But subscriptions and recurring revenue is 40% or so of their

00:05:01.200 | revenue. That's not bad. And if you, John, fill the next one up. I just pulled this from

00:05:05.600 | their latest quarterly report. They have 3 million paid subscribers and it's basically

00:05:11.640 | been flat for a while now. They might bring a few in and they lose a few, but it's more

00:05:15.880 | or less they have these 3 million customers that are paying subscribers and paying them

00:05:21.080 | anywhere from, I don't know, I think you can pay like $15 to $40 or $50 a month, depending

00:05:25.160 | on what kind of subscriptions you use. Because you can actually use a subscription for their

00:05:28.640 | fitness classes without having one of their pieces of equipment, because they do all this

00:05:31.720 | other stuff like aerobics and weight lifting and all this stuff. So, it's still a $1.5

00:05:39.400 | billion company. So, it's not like it's going away any time soon. So, I think the biggest

00:05:45.000 | worry would be, what if they just stop having new classes? They can't pay some of these

00:05:48.040 | teachers who have now become mini-celebrities in the Peloton world. So, the thing I like

00:05:53.960 | about this is, they actually have this old library. So, let's say, Duncan, I'm going

00:05:57.900 | on my jog and I step off the curb and I get hit by a bus tomorrow. That'd be kind of sad,

00:06:03.400 | but you still have 10 plus years worth of Wealth of Common Sense catalog to go back

00:06:09.880 | to. That's the same thing with Peloton. They're digital stuff. They have it on the machine

00:06:14.520 | already. So, you can go back and use the old. So, I use the old classes. I don't always

00:06:18.160 | use the new ones. So, I think you still have that old library to use. So, maybe they have

00:06:23.400 | to bring the cost in. They don't have as many teachers. They don't have as many new classes.

00:06:27.060 | All that stuff. Maybe we'll have some sort of AI-based teachers in the future, where

00:06:31.320 | they don't need to have the actual people. They can just say, "This is the kind of teacher

00:06:34.880 | I want. I want them to show me how to do this." And you can create it for yourself on the

00:06:37.720 | spot. So, I don't know. I know a lot of people think that, well, Amazon or Nike or Apple

00:06:43.280 | should just buy them. I think that's a terrible investment strategy. But maybe with 3 million

00:06:46.720 | recurring subscription payers, that's a pretty good, something to keep them going as a floor

00:06:53.800 | for someone who could come along and have some sort of strategic partnership with them.

00:06:57.720 | A lot of people just say, "Well, Peloton's just a bike with an iPad on it." And I get

00:07:02.280 | that. But it is a really good product. And the people that use them like them. Unfortunately,

00:07:05.880 | I don't think they're getting many new customers. I think whoever was going to buy one, for

00:07:09.080 | the most part, has already bought one.

00:07:11.440 | Why wouldn't they just open up the Apple App Store and let other companies create classes

00:07:18.240 | and things and then just take a cut of their revenue? Wouldn't that be an easy way to help

00:07:23.240 | people that have these fears?

00:07:24.440 | That makes sense. Or give these new teachers some exposure. And say, "You're doing this

00:07:29.040 | for free, but you're going to get some exposure from us, and you can sell your own." Yeah,

00:07:32.960 | that makes sense. But you wonder if they have to scale back substantially on the classes

00:07:38.680 | and stuff. That makes sense first. But it's still a $1.5 billion company, so I don't think

00:07:42.560 | it's going out of business anytime soon. But I am a little worried that the experience

00:07:47.000 | is going to deteriorate. So, I don't know. I still like it. I'd feel okay buying another

00:07:53.160 | one today if I had to. That's where I stand.

00:07:57.040 | If Peloton goes out of business, it's a good coat hanger.

00:08:00.920 | Yeah. I was about to say, you always have a really nice place to hang coats and shirts

00:08:06.080 | and things.

00:08:07.080 | Alright, next question.

00:08:08.800 | Up next, we have a question from Sarah. "I have 3% portfolio positions in Nvidia and

00:08:15.240 | AMD. I've already trimmed them some, but don't really want to sell any more at this time,

00:08:19.760 | even though I think the semiconductor space is overbought in the short term. I'm not comfortable

00:08:24.200 | with buying options, but I was looking at the Sox S ETF."

00:08:28.160 | Have you heard of this one before, Duncan?

00:08:31.200 | I have. You know I've heard of this.

00:08:33.480 | I had to look it up. It's a three-time semiconductor bear.

00:08:36.600 | Yeah, inverse.

00:08:37.600 | Yeah, inverse. Three times inverse.

00:08:39.680 | So they say, "Is taking a small position in this inverse-leveraged semi-ETF crazy? It

00:08:46.600 | feels like an easy way to hedge against the red-hot semiconductor space." But what are

00:08:50.520 | your thoughts?

00:08:51.520 | Alright, let's bring in an expert on this. I originally started reading this guy's stuff.

00:08:57.360 | I think it was called the Apprentice Investor Series at thestreet.com. Mr. Barry Rittholz.

00:09:01.920 | Barry, is that right?

00:09:03.000 | Yeah, that was early 2000s. God, you were reading that in grade school. That has to

00:09:09.440 | be crazy stuff.

00:09:10.440 | I'm doing book reports.

00:09:12.120 | But you wrote about this kind of stuff.

00:09:13.120 | Nobody was writing about that then, right?

00:09:14.760 | But you wrote about this kind of stuff, and you wrote about the psychology behind it.

00:09:17.760 | I'm sure we could give this person some tips about different ways to hedge, but this is

00:09:22.600 | really a psychological question more than anything.

00:09:25.440 | Well, it's important. She sounds like an institutional investor whose clients want her hedged against

00:09:31.040 | potential short-term -- oh, wait, this is an individual investor? What does she care

00:09:36.600 | if semiconductors are overbought or oversold? Why is she talking about hedging? And by the

00:09:43.000 | way, the leveraged ETFs, see the long and short? If you want to hedge, they're a terrible

00:09:48.840 | way to hedge because of the time decay of options. It's an expensive way to hedge.

00:09:54.920 | It's like a daily hedge. So you have to not only get the direction right, you have to

00:09:58.280 | be right on the day that you're hedging.

00:10:00.480 | Also, this expense ratio has to be 1% or something, right?

00:10:03.920 | It's crazy because of the cost. So the first question is just simply, why do you own these

00:10:09.960 | stocks? Is it for alpha? Is this part of your cowboy account, your fun account? If that's

00:10:16.520 | the case, well then, let it run.

00:10:19.160 | On the other hand, if you have a concentrated stock-picking portfolio and that's where all

00:10:24.400 | your money is in, it seems like that's a lot of work to be stressing about one-thirty-third

00:10:33.920 | of your portfolio.

00:10:34.920 | You're right. The whole hedging thing sounds really good in theory. It's really hard to

00:10:39.200 | pull off in practice, especially if you're trying to hedge individual positions that

00:10:42.520 | have their own idiosyncratic risks. Obviously, NVIDIA is probably a big part of that semiconductor

00:10:47.120 | ETF, and so is AMD.

00:10:48.680 | It's funny, look, AMD goes back to, I don't know, the 1980s or something?

00:10:52.920 | '90s, '80s, yeah.

00:10:53.920 | Listen to some of the drawdowns this stock has had since then. 93%, 90%, 72%, 89%, 95%,

00:11:01.160 | and 65%. That's what they've recovered from. NVIDIA's had 92%, 82%, 56%, and 64%. It's

00:11:09.360 | funny, NVIDIA was down 64% in 2022. I tweeted about this today, it was down to $280 billion

00:11:16.160 | in market cap in October 2022, and now it's close to $2 trillion.

00:11:20.120 | Wow.

00:11:21.120 | So, I can see why people are thinking about this. And we've gotten a million questions

00:11:24.080 | about NVIDIA. I hold this thing, listen, if it gets too high of your portfolio, you sell

00:11:29.040 | it. I think you probably want some rebalancing rules here. If it gets to 5% of my portfolio,

00:11:32.560 | I'm going to trim it back to two or three. I think that's kind of the way you can think

00:11:36.680 | about this if you want to not let it get too crazy, where it's going to really hurt you

00:11:41.240 | if it falls.

00:11:42.760 | To me, if it's in my fun account, I just let it run, and if it goes to zero, so be it.

00:11:48.000 | But you said something a couple of shows ago that is very relevant here, and has to do

00:11:53.640 | with the psychological impact. You take out homeowner's fire insurance, not because you're

00:12:00.480 | hedging your house, but in case of a catastrophic disaster, you want to be protected and you

00:12:07.040 | don't want to worry about it day in, day out.

00:12:10.160 | So if you're thinking about hedging a position that's done well, it means you're stressing

00:12:15.800 | about it, and that's kind of revealing. I think there's a bigger issue here than the

00:12:20.580 | semis and hedging. It's why do you own this? How does this fit into your portfolio? And

00:12:26.840 | what are you doing that's making you so uncomfortable?

00:12:30.800 | This is like the George Soros back pain. She's feeling the back pain. Maybe it's time to

00:12:35.500 | sell a little bit and be okay with it. I don't know, hold on to some of its house money,

00:12:41.000 | but sell a little bit if you're really that worried about it. And to your other point,

00:12:44.600 | if you really believe in this stock for the long term, then you're going to have to hold

00:12:47.400 | through some volatile times because it is so crazy.

00:12:50.240 | That's right. In that Apprentice Investor Series, one of the rules for selling was figure

00:12:56.000 | out your sell discipline before you own something while you're still objective. Once you own

00:13:03.080 | something and it's run up, your objectivity now, is she concerned about a drawdown or

00:13:08.720 | is she concerned about this going all the way back down and this big win, this perhaps

00:13:13.680 | change of standard of living win is going to be disastrous. In which case, then you

00:13:19.560 | have to think in terms of regret minimization, not portfolio optimization, but why do you

00:13:26.280 | own this? How does it fit into your investing and how does it affect your ability to sleep

00:13:31.440 | at night?

00:13:32.520 | Yeah. And there's no right or wrong answer here because we don't know what's going to

00:13:36.560 | happen next. This stock could keep going up and make people who are saying I should have

00:13:40.880 | sold to look like idiots, but you have to think about what you're going to regret more

00:13:44.120 | if it falls 50% or the rest of the year if it goes up another 100%.

00:13:47.800 | I won't bore you with war stories, but I could give you hundreds of examples of stocks that

00:13:53.080 | had run up $5,000 and $10,000 and people wrote them up and wrote them down. It was terrible.

00:13:58.600 | You have to know why you own it and how it fits into the overall investment philosophy.

00:14:04.560 | I sold GameStop around like $11 after a double back right before the meme mania.

00:14:11.640 | No one ever went broke taking a profit.

00:14:14.440 | I got to look at the newfangled iPod in the early 2000s and bought Apple and made fun

00:14:20.320 | of the guys at 15 who sold it at 20 because I held it for a triple. Aren't I a genius?

00:14:27.560 | Yeah.

00:14:28.560 | All right. Next question.

00:14:29.560 | Okay. Up next we have a question from Mike. Is the supposed primary driver of the monster

00:14:37.100 | move in stocks since November, if, sorry, if the supposed primary driver of the monster

00:14:41.880 | move in stocks since November has been the Fed pivoting, and if inflation stickiness

00:14:46.440 | puts off cuts or puts rate hikes back on the table, then why wouldn't the S&P fall back

00:14:52.000 | to October and November levels?

00:14:54.240 | Okay. This might be true if the only thing the stock market cared about was the Fed and

00:14:59.560 | inflation. I think some people get it twisted in their head that because it seems like the

00:15:04.920 | market and the news flow only pays attention to certain things at certain times, that there's

00:15:08.640 | this single variable that can control the stock market when there's so many other moving

00:15:12.600 | pieces and sometimes the market really does care about whatever economic data piece you're

00:15:17.040 | looking at, and sometimes it just completely forgets it. So we could certainly fall back

00:15:23.440 | some if inflation stays sticky and stays high and the Fed puts off cuts or has to hike again.

00:15:29.120 | I wouldn't throw that out of the realm of possibilities. That doesn't necessarily mean

00:15:31.920 | you have to retest that exact level.

00:15:34.200 | Yeah, I don't disagree. And I have to point out if inflation stickiness, we're recording

00:15:41.600 | this in February 2024, inflation peaked at 9% year over year in June 2022. We're coming

00:15:51.280 | up on two years. I'm genuinely shocked when people talk about the stickiness of inflation.

00:15:57.240 | Not only year over year are we in the threes, but if you just look at the past six months,

00:16:02.280 | we're in the twos. Inflation is over. Are we still fighting the last war again? I'm

00:16:08.760 | not focused on the Fed. I'm not focused on inflation. Assume rates are going to be somewhat

00:16:14.120 | lower in the next year, but we ain't going back to zero. But what's much more important

00:16:19.360 | to me at this stage than the Fed, corporate earnings, which looked to be pretty good,

00:16:25.600 | the economy, job creation, consumer spending, all of which to be pretty good, long-term

00:16:33.280 | low in unemployment, consumer spending starting to slow, but that's just after the giant post-pandemic

00:16:40.560 | surge.

00:16:41.560 | And then investor psychology, which is slowly improving after really getting battered by

00:16:47.260 | inflation. But the Fed's one issue. It's one of many.

00:16:51.500 | At the lows, in October 2022, when the market bottomed, inflation was still 8%. You're right.

00:16:58.120 | People say it's sticky, but it's basically at the long-term average. And I'm sorry, instead

00:17:02.500 | of 3%, it's 3.1% or something. People are worried about a decimal point. That's still

00:17:08.380 | way, way better than it was back then. And yeah, maybe the market doesn't like it if

00:17:13.500 | the Fed doesn't cut and puts off cuts for a few more months, and maybe there's some

00:17:17.040 | short-term volatility. But again, that doesn't necessarily mean that things are now as bad

00:17:21.140 | as they were back then, because things seemed pretty bleak back then on the stock market

00:17:24.980 | bottom.

00:17:26.260 | Humans have a terrible time conceptualizing, transitory, conceptualizing. The transitory

00:17:31.940 | didn't happen in a week. Everybody was upset. You look at a chart from the peak of inflation

00:17:37.480 | to now, it's like 18 months, 20 months, something like that. The whole spike in inflation, as

00:17:44.180 | Ed Yardini has written about, and crash, they tend to be symmetrical. So when it goes up

00:17:49.500 | really quickly, it tends to come down really quickly. And again, there's a whole collection

00:17:54.460 | of economists from the '60s and '70s, folks like Larry Summers, who think this is a '70s

00:18:00.980 | era inflation.

00:18:02.460 | It's not. If you want to draw historical analogies, look at the post-World War II era, where you

00:18:08.340 | had this spike in inflation. You had unemployment plummet as all these GIs came back to work.

00:18:15.180 | The economy did great. And that inflation also was transitory. To me, the COVID lockdown

00:18:22.060 | is more akin to a war than we had a decade of inflation, and oil embargoes, and--

00:18:27.900 | And we did have wartime-like spending, too.

00:18:29.940 | Yeah. It was very-- that's right, massive fiscal stimulus. So I'm much-- and I lived--

00:18:35.700 | I remember as a kid going to get gasoline for my lawnmower side hustle. And they would

00:18:42.940 | ask me, are you an even license plate number or an odd license plate number? Because there

00:18:48.620 | was gasoline rationing. And I'm like, dude, I'm a 12-year-old kid. I don't have a car.

00:18:53.460 | You're like, this is America.

00:18:54.460 | I just need a gallon of gas.

00:18:55.460 | Give me my gas.

00:18:56.460 | One of my favorite stories from my father is he said in the late '70s, to keep up wages,

00:19:00.940 | he got a raise twice in the same year. They gave him a raise, and six months later, gave

00:19:04.300 | him another one. And wage growth is still pretty good right now. It's above the rate

00:19:07.700 | of inflation, but it's not like it's a crazy high number like it was in the '70s.

00:19:11.420 | Right. And it's making up for about three decades of very slow wage growth in the bottom

00:19:17.820 | half of the earnings scale. In fact, one of the things people don't talk about, wages

00:19:24.180 | were deflationary up until the pandemic for like 30 years. Now they're playing catch up.

00:19:30.860 | We should really tie minimum wage to CPI so it goes up gradually instead of these big

00:19:38.060 | steps every 10, 20 years.

00:19:40.460 | Yeah, this is a huge step up for the bottom quartile of income. Yeah, I agree. And you've

00:19:45.260 | written too, I think you probably wrote on the Apprentice Investor or on the Big Picture

00:19:49.300 | about single variable analysis. And you look at it through the lens of, don't look at just

00:19:53.100 | a P/E ratio or whatever for the stock market, but the same thing is true with economic data.

00:19:57.060 | You can't just look at one piece of data and think that's going to be the tell.

00:20:00.700 | If P/E was the sole tell of markets and investing, then A, it would be really easy to invest,

00:20:08.500 | and B, big, well-equipped firms would figure this out and arbitrage that advantage away.

00:20:15.300 | It's always much more complicated than that. I hate oversimplified solutions to complex

00:20:21.340 | questions. It just leads us to the wrong place.

00:20:25.620 | Yeah, and the market is a very complex system.

00:20:29.020 | For sure. The three-body problem, not only are you predicting what's going to happen,

00:20:33.460 | then you have to predict people's first-order reaction to that, then the second-order reaction

00:20:38.820 | to the first thing that happens. You can throw a pebble in a pond and see those rings, but

00:20:44.020 | if you throw a handful of pebbles in, you have no idea where the rings are going to

00:20:47.780 | pop.

00:20:48.780 | Are we in a safe space here? I tried to read the book and I couldn't do it.

00:20:51.620 | It's tough. It's a tough slog.

00:20:52.780 | It was a hard read. I know everyone loves it, and I think it's going to make it into

00:20:57.220 | a series on Netflix or Apple, but I couldn't make it through it.

00:21:01.420 | It's hard. Anytime something's written originally in another language, like Chinese,

00:21:05.780 | and then translated into English, it doesn't make for the most flowing of prose.

00:21:11.260 | All right. Don't tell anyone I said that. All right. Next question.

00:21:14.660 | All right. Up next, we have a question from Bruce. "I'm 73, and my wife is 58, and

00:21:21.420 | I have a 15-year-old son. We own a small farm and house in Iowa. We also own three properties

00:21:28.140 | in Spain, where we spend most of the year." Maybe we can get an invite to Spain out of

00:21:33.300 | this. I don't know.

00:21:34.700 | "We have no debt and are sitting on $2 million in cash, most of it in short-term bills. I

00:21:39.740 | deal in vintage guitars and will keep doing it as long as I can. We have a great life

00:21:44.420 | and are careful with our spending. I would like to have a plan to create generational

00:21:48.220 | wealth. Is this possible? Any suggestions?"

00:21:51.060 | All right. Bruce might be the most interesting man in the world because he lives on a farm

00:21:55.300 | in Iowa. He sells vintage guitars, and he owns three properties in Spain. In his email

00:22:01.740 | signature line, you would appreciate this, Perry. He had a link to his guitar website,

00:22:06.380 | and we looked at it. He's got all these old guitars, and it's fantastic. They sell

00:22:11.260 | for a lot of money, but he's got guitars from the 1800s, 1950s, 1960s. I saw one there

00:22:16.900 | from 1929, which I wouldn't buy just because it would be a bearish omen. He's got a

00:22:22.020 | really fantastic set of these guitars that he sells.

00:22:25.300 | Why would it be bearish? Markets are way up since 1929.

00:22:28.860 | That's fair.

00:22:29.860 | It's true.

00:22:30.860 | So I think there's two ways to look at the question of generational wealth. So there's

00:22:35.100 | the estate planning, tax planning, investment planning, wills, trust, et cetera. That side

00:22:40.700 | of things, that's money stuff. That's actually the easy part of the equation, I think. You

00:22:43.860 | can hire experts at a wealth management firm to help you with that stuff. You can hire

00:22:47.140 | lawyers and CPAs and all that stuff. I think the hard part is a psychological hurdle that

00:22:51.780 | comes with teaching the next generation about money, and I think the next generation can

00:22:56.380 | really screw it up if you're not careful.

00:22:58.500 | My favorite example of this, I wrote about this in one of my books, Cornelius Vanderbilt

00:23:01.860 | was the richest man alive when he died, would still be one of the richest people alive if

00:23:06.460 | you put it in today's dollars. We're talking hundreds of billions of dollars. He even told

00:23:10.500 | his kids, "Any fool can make a fortune, but it takes a real man, a wise man, to actually

00:23:15.860 | keep it." And then there's this book that talks about how 100 years after his death,

00:23:21.820 | all his descendants showed up to the university that bears his name in Tennessee, and not

00:23:26.180 | a single one of them was a millionaire, even though he passed on the largest fortune ever

00:23:29.820 | at the time.

00:23:32.100 | So I think you've talked about this before, about the first thing is do no harm. I guess

00:23:37.180 | the first question is how do you not screw it up? That's the big question, not how do

00:23:41.100 | we grow it? How do you not screw it up?

00:23:44.580 | So a couple of things leap out of this letter. The first is, what does he mean by generational

00:23:51.180 | wealth? I assume he wants his wife, who's 15 years his junior, to have a comfortable

00:23:59.500 | life, and then his son, who's 40-something years younger than her, to have a comfortable

00:24:05.420 | life. So let's define that as the generational wealth.

00:24:11.180 | And then just ballparking what they're saying, the farm, the house, three houses, properties

00:24:16.960 | in Spain, whatever guitars he has, I'm guessing he has three, four, five million to start

00:24:24.180 | to work with, maybe more, maybe less. The first question is, why are you sitting in

00:24:29.540 | two million of cash? That kind of leaps out. Especially, at the very least, you should

00:24:36.100 | be getting 4% or 5% in bonds or depending on--

00:24:40.300 | That's the barbell portfolio. You've got cash on one side, guitars on the other.

00:24:45.220 | And then the other thing is, there's a tendency for 73-year-olds to not think about stocks.

00:24:53.180 | Because hey, my lifespan is I'm going to live to 89, so I only have another 10, 15 years,

00:25:00.900 | and I'm nervous about that. But you have to think in terms of a 58-year-old woman and

00:25:04.980 | a 15-year-old son. So that means this is now a 30, 40, 50-year portfolio.

00:25:10.940 | The generational wealth part of it is your son's time horizon is super duper long.

00:25:15.740 | Is equity. Right, exactly. So he needs a portfolio that is constructed so that he could live

00:25:22.900 | comfortably on the income it throws off, that his wife could spend 20, 30 years. And I'm

00:25:30.900 | not a big fan of the wealthy families that put the kids' money in trust and don't let

00:25:35.980 | them touch it till they're 40 or 50. I just think about how much easier life would have

00:25:40.540 | been if I could have bought that first house at 30, and now it's so difficult for young

00:25:46.420 | people to buy houses.

00:25:47.460 | Right, help them when they need it.

00:25:49.620 | Right. There should be a way that-- it really depends on the specifics of the dollar amount,

00:25:55.020 | but plan on helping your kid buy that first house.

00:25:58.580 | I think people are terrified of having a bunch of spoiled brats, you know, that are trying

00:26:02.380 | to balance that.

00:26:03.380 | But there's a difference. There's a huge difference between having an unlimited amount of cash.

00:26:09.300 | You know, I'm always aghast when I see around the corner from me, my backyard neighbor,

00:26:15.820 | I'm walking the dogs, there's a lime green Lamborghini Spider out there. And I ping my

00:26:21.540 | neighbor, I'm like, "I didn't know you were a Lambo guy." He's like, "It's my son's friend.

00:26:26.020 | He's 16." I'm like, "Get the hell out of here. I would kill myself in that car at 16." You

00:26:32.780 | don't want to do that.

00:26:33.780 | Yeah, you have to teach them to value the dollar and to work hard and all that.

00:26:38.580 | Earn it.

00:26:39.580 | Yeah, but that's true whether they have one or not.

00:26:41.480 | Right out here on 40th Street, when I was coming to the office today, I saw a guy that

00:26:44.780 | couldn't have been older than 22 driving a Rolls-Royce SUV.

00:26:50.460 | That's $300,000, $400,000.

00:26:51.460 | But I think the not screwing it up part, especially like you mentioned, sitting in cash, you have

00:26:56.100 | to figure out, you got to make sure you don't trust the wrong person or organization to

00:26:59.580 | help you manage it because you're going to need someone to manage it. You can't take

00:27:02.540 | on insane amounts of leverage and spend too much. And it sounds like he's already got

00:27:05.820 | that figured out. He said they don't spend very much. He's obviously sitting in cash.

00:27:10.420 | So I think you just have to kind of give some of those same traits to your children and

00:27:16.460 | they'll be fine. But yeah, I think teaching them to value a dollar is probably the true

00:27:20.980 | way that you help them compound, not just giving them the money and saying, "Here,

00:27:26.260 | have at it."

00:27:27.260 | Right. For that planning, plan to make sure your wife has enough income for the rest of

00:27:31.300 | her life. If you want to pull money aside to help your kid with the down payment, that's

00:27:36.580 | something you could do. "Hey, you're going to have to pay for the house. We'll help

00:27:39.820 | you with the 10% down." So whether that's $100,000 or whatever, I'm extrapolating out

00:27:46.580 | home prices 15 years from now.

00:27:48.700 | Yeah. Well, maybe that's part of it, is just having the conversation early, right?

00:27:52.180 | Yeah, absolutely. It's an uncomfortable, for a lot of people find it an uncomfortable

00:27:56.860 | conversation, but it's crucial. So everybody is on the same page. Everybody's expectations

00:28:03.620 | are the same. You don't want to find out the wife is like, "I don't want income.

00:28:07.420 | I want to go travel." Once you're gone, "I'm hopping on a flight and I'm traveling

00:28:11.620 | around the world." You need to have those conversations so you can make the appropriate

00:28:16.940 | plans.

00:28:17.940 | At what point do you buy a university building? What level of wealth is that?

00:28:22.180 | Well, you have to do the Larry David thing where you have it donated by anonymous, though.

00:28:25.700 | Right, right.

00:28:26.700 | I'm going to say that's a billion dollars.

00:28:28.900 | Oh, okay. Wow.

00:28:30.340 | Because it's probably 50 to 100 million. And that has gone up because I think the Booth

00:28:39.300 | School in Chicago was like a $300 million gift. And they named the whole school after

00:28:45.460 | him. So somewhere around there.

00:28:48.180 | Your first point, though, about defining what is generational wealth, what does that even

00:28:51.420 | mean to you? I think some people just think, "Yeah, you have to figure out what you mean

00:28:55.620 | by that first."

00:28:56.620 | It's not going to keep your great, great, great grandkids going to school for free.

00:29:04.100 | It's worry about your wife and kid and generations beyond that. You need hundreds of millions

00:29:11.340 | of dollars to start thinking true, sustainable generational wealth.

00:29:15.300 | So Jared in the chat says that 20 years ago as a bank teller, they had an old couple who

00:29:19.700 | would drive through one time a week in a Rolls Royce to get $500 and 20s to tip people with.

00:29:24.540 | That's what I like. It's a piece of generosity.

00:29:25.540 | 20 years ago. Spread the wealth.

00:29:27.460 | Yeah, I like that.

00:29:28.900 | I'll never forget. I can't mention the person's name. I'm at lunch. And the check comes and

00:29:34.140 | he slips a $100 bill. This is before his company got bought. He was doing well. Slips a $100

00:29:40.380 | bill into the check that was like $100 in addition to his credit card. So the company

00:29:45.660 | paid for lunch, but the tip was on him. And then the co-check person, he gave the woman

00:29:52.220 | a $20 tip on an umbrella that could not have cost more than $10. Spread it around.

00:29:58.180 | Generosity. That's a good one to teach. All right, we got one more question.

00:30:01.860 | Okay. Last but not least, we have a question from Grant. I'm currently a junior in college

00:30:06.860 | working toward my finance degree with a concentration in investments. What are your thoughts on

00:30:12.020 | why larger companies like Goldman Sachs and Morgan Stanley seek out internship applicants

00:30:17.020 | two years in advance when most people like myself explore various interests throughout

00:30:21.180 | college? This is a serious disadvantage to those discovering a late-blooming passion.

00:30:26.020 | I love the idea of being in college and having a late-blooming passion. Considering the first

00:30:31.700 | half of college isn't major specific, what tools can be utilized to jumpstart a finance

00:30:36.860 | career straight out of college?

00:30:38.340 | I do think the sheer amount of information available these days, at least the people

00:30:42.380 | that I interact with coming out of college, they know way more than I ever knew about

00:30:46.900 | the stuff that they want to do. They know the kind of company they want to work for.

00:30:49.900 | They know the type of job they want to do. And they want to have that dream job right

00:30:53.780 | away. I came out of college completely clueless. And I think the thing you have to realize

00:30:58.340 | is you don't have to have it all figured out. Barry, what was your path? You were law

00:31:02.140 | school to trader to macro strategist to blogger and podcaster and then wealth management founder.

00:31:08.020 | You couldn't have plotted out that course if you tried.

00:31:10.820 | I have a totally ass-backwards career path. We call that atypical career path. But I will

00:31:18.300 | tell you, my favorite question that I ask at the end of every Masters in Business is,

00:31:24.020 | what sort of advice would you give to a recent college grad interested in going in your career?

00:31:31.340 | And it doesn't matter what the career is. The advice always seems to be the same. Build

00:31:36.560 | a stack of skills. Always be learning. Always generate a network. Assemble a group of people

00:31:44.420 | that you trust and trust you so that you can grow together. Be a great asset to whatever

00:31:49.700 | your boss needs in whatever field it is, whether it's finance or not. And develop good habits,

00:31:57.100 | meaning we make our habits and then our habits make us. So make sure that—I develop the

00:32:04.660 | habit of reading and writing. You should really develop a good diet and exercise habit. You

00:32:10.780 | should learn to be on time. You'd be shocked at the little things that can get a boss angry.

00:32:19.500 | Whatever your first job is or even your first internship, doesn't matter to your career,

00:32:25.540 | but it's a place to meet people, to learn, to act as a stepping stone, to create a group

00:32:31.340 | of either mentors or someone who can be a reference.

00:32:35.220 | You also have to learn how to be an adult in some ways and how to act around people.

00:32:40.060 | So I did an internship when I was a senior in college. And for me, it was helpful because

00:32:43.820 | I learned what I didn't want to do. I think that's half the battle when you're young,

00:32:46.780 | is even if you know, "This is where I want to go," working for one of these big companies,

00:32:51.180 | there's so many different places you can go, especially in the finance world. There's so

00:32:54.320 | many different career paths that you can take. So I think checking off the list of, "Okay,

00:32:58.060 | I know I don't want to do this one. I know I don't want to do that."

00:33:00.620 | I had a friend who did an investment banking internship in college, and he said he wanted

00:33:05.780 | to do it because he heard he'd make a ton of money. But he did it for a semester, and

00:33:08.700 | he thought, "I'm not going to work 90 hours a week. Are you kidding me? There's no way

00:33:12.100 | I could do this." So you have to learn what you don't want to do first.

00:33:15.180 | I did that as a summer associate. You made a ton of money. You worked crazy hours. And

00:33:20.180 | you learn, "Oh, I don't want to do this. This is a terrible job." You're making a little

00:33:24.700 | more than minimum wage, but you're working 100 hours a week. What fun is that?

00:33:29.740 | But the key takeaway that I just keep coming back to is what you said, is you're learning

00:33:35.900 | how to be an adult navigating in the real world. And they don't teach you those, at

00:33:41.620 | least when I went to college or grad school, they never taught us those skills. Stop and

00:33:46.780 | think about it. I remember the guy who was the office next to mine in my first job was

00:33:52.020 | always late, really smart, really good, super talented, eventually got fired because he

00:33:57.300 | just couldn't get to the office on time. You have to figure out ... Every dog likes to

00:34:02.620 | be pet differently is an old expression. Figure out what your boss wants. Figure out how to

00:34:08.260 | do the best possible job and be of value to the company, even if it's not what you want

00:34:15.420 | to do for the rest of your life, because especially in your 20s, every job is a stepping stone.

00:34:22.780 | You meet people, you learn skills, and then you move on to the next gig.

00:34:29.000 | Last week was career advice from Josh. This week from Barry. That's pretty good, right?

00:34:32.020 | I hope we're not conflicting with each other.

00:34:34.180 | Nope. Two different types of people. Thanks to Barry, as always, for hopping on. Check

00:34:38.620 | out Barry's new podcast, At The Money.

00:34:40.580 | Yup.

00:34:41.580 | Duncan was ... And it's on the Masters of Business podcast feed, right?

00:34:44.340 | Right. It will eventually get its own feed, but since it's just a couple of months old,

00:34:48.540 | we wanted to ...

00:34:49.540 | Duncan wanted to know who you had to pay off to get the "Who" as your song.

00:34:52.020 | Yeah. How did you get that?

00:34:53.020 | The crazy thing, in the first couple of episodes, it was like the usual stress-filled news sort

00:35:01.940 | of soundtrack, and I hate it. And I went to somebody and said, "What can I do to change

00:35:08.100 | this music?"

00:35:09.100 | They're like, "Well, how much do you need?" "I don't know. 10 seconds?" "Hey, as long

00:35:12.740 | as it's less than 30 seconds, here's the catalog. Get whatever you want." Last week was Fortunate

00:35:18.180 | Son. I've been enthralled with the music I've had access to.

00:35:24.100 | Yeah. I was listening to your most recent one with Dunning, and I was like-

00:35:26.580 | Right. "Who are you?"

00:35:27.580 | "How did you get the 'Who'?" Yeah.

00:35:28.580 | Right.

00:35:29.580 | And I handed it out the F-bomb in the middle, which was ... I'm like, "You know, sometimes

00:35:32.940 | this gets broadcast, so you've got to be careful."

00:35:34.980 | Sure.

00:35:35.980 | Okay. Thanks again to everyone in the live chat. We love you showing up every week. Leave

00:35:39.620 | us a comment on YouTube. Leave us a review on Apple Podcasts. Email us, askthecompoundshow@gmail.com,

00:35:46.580 | and we will see you next time.

00:36:05.540 | Bye.

00:36:09.420 | you

00:36:11.480 | you

How Do You Create Generational Wealth?

Chapters