The Secret to Wealth: Why Buying Businesses is the Key
00:00:00.000 | It's not like you went into this other career that everyone knows, and it was very popular.
00:00:03.360 | You started doing something that I think, even years later, is not popular.
00:00:07.680 | So maybe give a little context to what it is to buy these businesses,
00:00:11.760 | but what led you to start doing it?
00:00:13.600 | The secret is, I think, that the really, really wealthy have always bought these businesses.
00:00:19.280 | I mean, richest guy in the world, owner of LVMH.
00:00:21.840 | How did he get there? Did he start those companies? No, he bought them.
00:00:24.960 | He bought a bunch of these companies, some of them basically out of bankruptcy, like Dior.
00:00:28.880 | And he amassed a massive empire from the fact of buying, I mean, if we think about it,
00:00:34.960 | really bag companies, right? Clothing companies.
00:00:37.360 | They just have fancy labels on them that are highly overpriced.
00:00:40.240 | And so that's how the richest guy in the world made his money.
00:00:44.240 | The richest guy in India made his money through a conglomerate of businesses that he bought.
00:00:49.120 | I mean, you look at a lot of the Fortune 500, and what you see, if you peel back the layers,
00:00:53.760 | and you get rid of all of the heirs of Walmart, let's say, and the heirs of some of the large
00:01:00.640 | historical industries like Rockefellers, etc, you find that most of these people actually got there,
00:01:05.600 | not always from starting companies, but from buying.
00:01:08.160 | The second most common is from buying companies.
00:01:10.480 | And so in finance, private equity, we did that all day, right?
00:01:14.000 | Like, I think that, oh, they're not going to like that I say this,
00:01:18.240 | but I think people in private equity are brilliant in a way,
00:01:22.640 | but it's slightly predatory. We are so sneaky that we make entrepreneurs
00:01:29.040 | think that putting their blood, sweat, and tears into companies is like the fun game.
00:01:35.040 | This is what it means to be an innovator. This is what it means to be a creator
00:01:39.360 | and to build huge businesses. And then right about at the point
00:01:42.720 | where they want to slit their wrists, private equity swoops in and we say,
00:01:47.520 | "Is it miserable running your company? Do you not want to do this anymore?
00:01:50.560 | Are you ready for something else? What if we give you a great offer?"
00:01:53.440 | And what the entrepreneur doesn't realize is that 0 to 1
00:01:56.960 | is the least profitable period of time in your business.
00:02:02.080 | The most profitable period of time is actually the next stage,
00:02:05.840 | and then the stage where you continue to cash flow for a really long time on it.
00:02:09.600 | And so we sort of scoop up these businesses at a period of time where
00:02:13.840 | the entrepreneur is in pain often, and then we cash flow on them forever.
00:02:18.320 | And it's a gross generalization. That's not what all private equity firms do.
00:02:21.440 | But once I realized that, I was like, "Wait a second."
00:02:25.040 | So we don't have to be clever enough to come up with an idea.
00:02:27.760 | I'm not clever enough to come up with some crazy new billion-dollar idea for a company.
00:02:32.000 | I don't know. But what I do know is how to look at
00:02:34.800 | what are expenses and what is income, aka P&L, and tell me if this business is making money or not.
00:02:42.480 | And do I think that this business could continue to exist inside of the next 3 to 10 years,
00:02:46.720 | at which point I'll have all of my money back plus 3 to 5x, let's say.
00:02:50.560 | I can't go figure that out. And because that's not that difficult,
00:02:53.600 | why couldn't I do for myself what the big, huge guys do with LBOs,
00:02:56.880 | leveraged buyouts, and all of that, but at a tiny scale with laundromats and car washes
00:03:01.120 | and things that cost $50,000 or $100,000, and then scaling up to a million and a five and a 10?
00:03:07.040 | It's the same game. It's just I'm playing it at a smaller level,
00:03:10.480 | at the mom and pop level, and what I call or what is called micro PE.
00:03:14.960 | And that mom and pop level, I think when anyone listening is thinking,
00:03:18.080 | "Oh, wow, Cody goes and buys businesses. She must be a billionaire."
00:03:21.040 | It sounds like something you could actually make part of your investment portfolio
00:03:26.400 | at a very early stage in your wealth building journey and grow from there.
00:03:31.200 | Would you say it's for anyone or who is buying a small business for?
00:03:35.840 | Yeah, the only people it isn't for are the lazy and the completely risk averse.
00:03:40.800 | So if you want to do zero work, if you want to have zero risk, then don't buy businesses.
00:03:46.080 | It's just not going to work out for you. And so if people are trying to sell you
00:03:50.320 | Airbnb arbitrage and you take no risk and you bring on these people and you make your millions,
00:03:55.600 | okay, fine, do that. But I think for people that are willing to put in some work,
00:03:58.960 | there's no better way to make a return on it than having equity ownership that cash flows over time.
00:04:04.800 | And the problem is, if you look at the S&P 500 or where people typically invest,
00:04:09.440 | what is a good dividend paying stock? 3% to maybe 9%. I mean, gosh, if you could get a 12%
00:04:15.200 | paying dividend stock, you're probably thinking that it's going to have some downside, right?
00:04:18.880 | Because that's too much. But in a small, boring business, you could have a return on your money
00:04:24.080 | of high double digits in a year. You could return all of your capital within a year.
00:04:28.880 | And so I think it is for "anybody" that's willing to put in some work.
00:04:34.160 | Now, the flip side to that is then people go, "Cody, sounds great, but I don't actually have
00:04:39.120 | millions." And I like to give examples like I bought a newsletter for $3,000
00:04:43.680 | just for shits and giggles. I wanted to put it into our media empire. I realized it didn't really
00:04:49.520 | fit. It wasn't going to grow the way that I wanted to. So I turned around and sold it,
00:04:53.280 | I think a week later for $8,000. And that for me at the stage that I was at was not meaningful.
00:04:59.280 | But for young Cody, like the Cody whose parents had no money, who used to bounce her checking
00:05:04.400 | account every weekend, who kind of thought her first job making $37,000 a year was amazing.
00:05:10.880 | That was like, "I'm rich. I just made $5k in a week off of flipping somebody else's asset."
00:05:16.320 | That's fascinating. And so if you can start at that level, you can start to understand the
00:05:21.440 | bigger levels, the $100,000 deals, the million dollar deals, and the $100 million deals, I think.
00:05:26.800 | Yeah. So one of the nice things... So yes, the return expectations of the stock market,
00:05:30.880 | maybe 5%, 7%, 8%. But it's very easy to maintain a job and do that on the side because there's no
00:05:37.440 | work. Is the amount of work you need to go buy a boring business, a laundromat or something,
00:05:42.240 | enough that you don't need to quit your job? Can it be a side hustle? Or how full time
00:05:46.960 | is doing this type of investing? I think it's very similar to rental
00:05:51.600 | properties, right? What sucks about getting rental properties? Well,
00:05:55.760 | first you have to understand the market. You got to understand what's a good buy, what's a bad buy.
00:05:59.920 | Then you've got to actually get a mortgage. You've got to figure out what that looks like.
00:06:03.920 | Then you have to figure out how to get somebody to rent your property out. But after you have
00:06:07.520 | that first period of understanding, you either Airbnb it out with some consistency or you get
00:06:12.480 | a property manager that manages it, right? And I think it's really similar to businesses.
00:06:16.720 | Depending on the size and scale and type, you can have a business that's less active.
00:06:23.040 | I try to not say passive because I think that's a fallacy overall, but that's less active.
00:06:27.600 | And those businesses are, I think, all around. I use the example of car washes and laundromats
00:06:33.440 | and vending machines. Less because they're incredibly passive, but more because I call
00:06:37.520 | them the gateway drug businesses. So basically, you can get your little skin in the game. You
00:06:42.080 | can get your little first hit of being in business and being the owner. And then as you do that,
00:06:46.720 | you're like, "Oh, wait, this game is kind of fun. Maybe I'll do another one. I'm more capable than
00:06:51.200 | I thought." And I just think the world looks a lot better if we have more humans with skin in
00:06:55.360 | the game. And I think you can absolutely do it while you're still working.