Transcription
How do you think about deconstructing what wealth looks like? What should people do in order to achieve financial security?
Well, the first thing is to define what wealth is. I define rich as the following: passive income that's greater than your burn. I'll give you two examples. I have a close friend who runs the M&A group of a large bulge bracket investment bank. He makes $3 million in a bad year, $14 million in a great year. Because it's all current income, and he lives in Connecticut, he pays about a 52% tax rate. Uh, but that's still a lot of money. But between his ex-wife, his alimony, his child support, his home in the Hamptons, his master of the universe lifestyle that he thinks he needs and wants to signal to his friends, I know firsthand he doesn't save a lot of money, and it is an enormous source of stress for him and on his marriage. And then, uh, he's what I call poor, or the working poor, despite how much money he's making. He's hugely stressed out; it's a money, and the need for money is a huge source of stress for him.
My father, between his Royal Navy pension and Social Security, and he owns about a dozen washing machines that he collects quarters from in trailer parks, he makes about $52,000 a year without really working. He enjoys going and collecting quarters; my dad is Scottish, he's like tragically cheap. I'm pretty sure he goes home, lays the quarters out on his bed, and rolls around in them. I think that's probably fun for him, but his passive income—he spends $48,000—he's rich. His passive income is greater than his burn; that's the definition of rich. And so that's a point you want to get to—a point where you have enough investments that are spinning off capital or growing such that your passive income is greater than your burn. And you can do the math, right? Well, okay, if I'm going to need $120,000 a year, and I think I'll get 8% or 6% on that, I need to save $2 million. All right, this is how many years I have to work. I'll assume the market will go up 8% a year. You can kind of do the math around how much you should be saving and putting into low-cost index funds. So that's the goal. You want to be rich; you want an absence from anxiety; you want to be able to live well without having obligation. If you decide to keep working, which I would suggest anyone does, it's a choice, and that that in itself is like—when I sold my company in 2017, and I was finally kind of—dun dun dun—I felt like I exhaled relief for a good two years. It was just like, Jesus Christ, now this is all—this is all things I wanted to get to choose.
Just to digress, one of my role models, a guy named Barry Ritholtz, senior partner at Janus, said there's three buckets in life: there's things you have to do—your biggest investors are in town, you have to do it, you know, you get invited on Joe Rogan, and this is the date, the window, you have to get there for that date, right? There's things you want to do—"Oh, I'm going to Cannes to the creativity festival," or your mates are meeting up for, you know, in New York, all your friends from the UK, right? You want to do that. And then there's things you should do—"You know, my co-worker's kid is having a wedding; I really should go to this. There's this—it's South by Southwest; I got invited to a party with all these podcasters; I should go and network; I should, I should, I should." The great thing about having economic security, and Barry taught me this, he said, "You can totally delete the 'should' bucket." I no longer do things I should, and it's actually a bit of a point of contention with my partner, but she'll often say, "Oh, we should do this; they're nice people," and I'm like, "I don't want to do this, and I don't need to do this; I should do it, so I'm not doing it." And that is so liberating to just say, okay, there's just some things you have to do, the stuff you want to do; that's easy, but get rid of the "should" bucket.
But the algorithm itself, or the equation itself, is the following: the first is focus, and it goes back to what we said earlier—find something that you're naturally good at, that you could become in the top 10 or top 1% in, in an industry that has a 90-plus percent employment rate, and focus on it. I hate side hustles. A side hustle is fine for exploration if you're not happy with your main hustle, and you can't give it up because you need the money, but it's exploratory. And if your side hustles are going on too long, it means you got to change your main hustle, because I would bet, and I'm fairly confident the research shows this, that the incremental 10 or 20% effort reinvested into your main hustle will provide greater return than the distraction caused by an incremental side hustle. So find something you're good at that you could become great at through focus, and that's your job. Find that thing; that's not easy. The rest is a—the product of the following, and this is probably the wrong word, but I like the word I said: stoicism. Recognize what's out of your control. My company went Chapter 11 in 2008 after a Wells Fargo analyst pulled our credit—credit line because they did some equation showing that the market recently was going into a credit crisis. I can't control that. Um, I can't control that. I got in—in some ways, a lot of my wealth since 2008 isn't my fault; isn't my fault. The market's ripped up, but I can't control my spending. I can control—I can recognize that no one's thinking about me as much as I'm thinking about me, and I don't probably need a BMW at a young age.
The first thing I did with my first bonus—Morgan Stanley, I got a $28,000 bonus—I went and bought a $35,000 BMW, and I hung swimming goggles from the rearview mirror, despite the fact I didn't swim, thinking that would, you know, impress women. And I thought about it; I thought, okay, of course you're not smart enough to do this, but if I had just bought a Hyundai for $11,000 and invested the other $20,000 in the markets, I think that money would be worth like $3.1 million now. So recognize there are some things within your control—specifically how much you spend, how much you save, being thoughtful about trying to be disciplined about putting some money in low-cost ETFs and index funds—that you do have some control. Focus on the things you can control. Uh, the next thing is time. One of our species' great flaws is that because for the majority of our time on this planet we haven't lived past 35, we just can't calibrate time and strategy. Answers one question: What can I do that's really hard? That's basically leaning into your advantages. When you're young, you have one advantage: you have time. Most young people at 25 don't really recognize two things: one, they're probably going to be—be here for another 80 years at this point if they're 25 right now, and—and this is the hard part—and you have to ignore your brain because your brain isn't wired this way; it's going to go a hell of a lot faster than you think. It's just like, I look at you, and I immediately think, "Oh, I'm his age," because I was 30 or whatever the—you are, you know, yesterday. It's, "Wow, life has gone so slow," said no one ever. And if I could give you a magic box at 25 and said, "If you find a thousand bucks to put in here in an instant, and it will feel like an instant, in 30 years you're going to have $12,000, $16,000, $24,000," what kind of effort would you make to find that thousand bucks? The power of compound interest is amazing.
I've been doing—I'm kind of on this idea of—at some point we're going to move back to the US, and in New York you signal with your clothes, your home, but you also signal with where you send your kids to school. And I'm a narcissist and big ego, and I thought, okay, I would want my kids to go to First Presbyterian, Grace Church—we sort of these two tony schools downtown. The tuition is $62,000—it's probably more than that. In the interview when we were here 10 years ago, they asked—they ask you how philanthropic you are, which is how much money are you going to give us, but college is $62,000. You're the—you're the people who don't spend any money or give any money. Now, why do you do that? We—I bet for two-thirds of the people that send their kids there, it's a sacrifice; probably a third don't care; it's like they're so rich in New York they just don't care. But if you're talking about $62,000, you're really talking about $100,000 at least pre-tax; I mean, it's real money; that's real money every year. And if you got three kids, $300,000. So for people, it's a financial strain, which you could argue puts strain on the whole household; kids pick up on that strain. And why are you doing it? Well, I want to give my kids everything. What's everything? Well, I want to give them the best chance to get into a great college. Okay, why? So they can have, you know, more options than I did growing up. What do you mean by that? What do they get? Well, a better job, more—more opportunity. Well, why do they need more opportunity, better job? Well, so that at the end of the day they can do what they want and maybe get some economic security and afford a home and—and have a family and—and have economic security and have an absence from stress line. Okay, got it.
Instead of sending them to First Presbyterian and Grace—and I've heard you talk about this—there's a lot of research showing that the best school for kids is the one closest to their home. And then take and reinvest that commute time and studying, sleep, play, and try and be disciplined; take that $62,000 a year from the age of 4 to 18 and invested in low-cost ETFs. On average, they've returned 9% since 2008, 8% now, 11% since 2008, 8% since the beginning of the market; assume it does 8%; assume you are wrong; you sent that kid to public school, and you screwed up; they didn't get into the best college; they ended up with a mediocre career; they have trouble buying their first home; they don't have—they can't live the life that you got to lead or that you'd really hope for them. Here's what's going to ease your pain: if you were disciplined and reinvested that money you would have spent on Grace Church, by the time they are 35, you'll have $5.3 million to give to them; that will ease a lot of economic anxiety. So I would just love to have a banner that says, "Public school or $5.3 million," you know? It's—it's or public school and four—$5.3 million, like Grace Church or $5.3 million, because people just don't realize how—how fast time goes and how powerful compounding is.
And then the last thing, and this is something—you know, do as I say, not as I do; it really killed me a couple times; took me from wealthy to not wealthy. I've been rich three times; this is the third time, and I'm really hoping it sticks this time, but the first two it went away, and it's because I didn't understand diversification. I assumed that if I threw myself into anything that I should go 110% in, not only with my time but my capital, and that anything I devoted 110% of me to, because I was so awesome that I could move mountains, and you need to recognize that market dynamics will trump individual performance all of the time. Most of my success and my failure is not my fault, and the way you protect against that is diversification. And now—so, for example, I don't put more than 3% of my net worth in any one investment. And last week, if you'd asked me, "What is the best investment you had that has the most potential to be a 10xer?" I would have said, "It's this company; I invested in this healthcare company that does preventative—message—excuse me, preventive medicine through text-based messaging, selling into the enterprise, baller CEO tier one VC, huge, huge hitters, investors; had to elbow my way in to get in; what a thrill." I got to invest; went out of business last week; zero, zero. Right, my investment goes to zero, and but here's the thing, it bummed me out for about an hour because diversification is your Kevlar. Okay, I lost 3% of my net worth; doesn't mean anything, whereas in 2008, when I was um, running, or when my biggest investment was a public e-commerce company called Red Envelope, which was doing really well at the time, when I met with my investment bank, they—you know, I think I owned $10 million in stock, and I said, "Well, how much can I borrow against it?" And they said, "You could probably borrow $3 million," and they said, "What are you gonna do with it?" "Buy out—" I'm like, "No, I'm gonna buy more Red Envelope stock." And there—Steve Ballmer did the same thing with Microsoft, and it worked out. You should assume you're not Steve Ballmer because when my company went bankrupt, it meant that I owed $3 million. I went from being worth $10 million to owing $3 million. The tax on my emotional and mental well-being was enormous, and diversification is your Kevlar because you don't need to be a hero; you don't need to find the needle in the haystack; you can buy the whole haystack. And again, see above: time will go fast; you'll be financially secure. And Kahneman wrote about loss aversion theory: the joy you'll get from being smart enough to pick Nvidia two years ago, which most of us were not, the joy you'll get of—like, a lack of diversification in the potential upside it offers is a fraction of the pain you will feel when Nvidia gets cut by 90%. So for your own financial well-being, much less your own mental well-being, embrace diversification because now I just don't—I don't want to say I don't think about my investments; I'm constantly looking for new opportunity, but because I never put more than 3% in any one thing, it's like, "Give me your best shot; I can take anything." It's a bullet to the chest when it goes to zero, but I got Kevlar; yeah, knocks me off my feet, and then I get up, and I got a bruise, and I'm like, "I'm fine; nothing's ever critical," much less—F—F, whereas before, when I got shot in the chest in 2000 with a—doomsday bomb explosion or implosion and the great financial recession in 2008, I almost never could get up again. I mean, I came very close to just never getting up again.
So focus: find what you're good at; double down on it; uh, diversification; stoicism; save more than you—or spend less than you make, so you can save; and appreciate just how powerful time and compound interest is. And the kind of the way I would wrap it up is: I know to get you rich, that's the good news; the bad news is slowly; and then it's all wrapped in—and I didn't know how to put this into an equation, but I call wealth a full-person project, and that is—there's a myth that really wealthy people crawled over other people to get there, that they're billionaires lighting their cigars with $100 bills. That's—the majority of self-made people are actually good people; they're high character. And the reason why is: if you want to be really wealthy, you need to collect allies along the way; people have to want to put you in a room—room of opportunities, even when you're not physically in the room; they want to give you the benefit of the doubt; they want to go easy on you when you're up; they want to include you in deals; they want to come to work with you; they want to present opportunities to you. And the only way that's going to happen is if you show generosity and character from—from an early age. Uh, so like I said, greatness—greatness and wealth is in the agency of others.
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