052 - FIRE State of the Union Todd Tresidder rough

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0 - 54 Alright guys welcome to that Choose FI podcast today we have an extremely special episode that we are thrilled to present and I should take one step back and just set this up we've got an e-mail from Matt basically saying Guys I love the content that you print producing and I think it's time you take it to the next level. There's a few conversations you just have to have one of them would be essentially the state of the Union for the fi community. What if you could get this elder FI statesman someone that really has this amazing grasp on all the content that we've been struggling with and adopting into our own lives but also could bridge that gap to maybe the traditional personal finance community and even the hedge fund community. What if you could find an individual to help you pick apart the problems with FI and then rebuild it on the back side. That is a conversation that we wanted to have and there was only one obvious choice to have this conversation. And it's Todd Tresidder So we went and we got the financial mentor. He's on the show today and we're going to be breaking down the FI community into its smallest rebuildable parts without any further do Todd Tresidder the financial mentor. How are you doing today.
54 - 70 I'm doing great. So first of all big big shout out to Matt thanks for even leading me in that way I'm honored. You know I know all these guys I mean Pete over at Mr. Money Mustache Brandon and mad fientist I mean all of these guys are great. So to sit there and tee me up that way is quite a compliment thank you.
70 - 83 Well we're thrilled that you're on the show. I mean Brad has been raving about you for months and months and we have been trying to make this happen. Honestly we wanted to make this happen back in August so it only took us an extra three or four months. But I think it's going to be worth the wait.
83 - 102 Todd welcome. It was fun to meet you a couple of years back. I think my lasting memory is actually getting walloped by Brandon from the mad Fientists at Ping-Pong. That's what we were sitting there at Fincon and I didn't realize he was such a ringer. But yeah he definitely put the smack down on me and I think he beat you as well.
102 - 104 Yeah. Were you his victim before me or after me.
104 - 106 I think I was right before you.
106 - 113 Know he was nailing that ping pong. I think we got to pick a real sporting event like bowling or something to really test his skills.
113 - 116 That's the one you went with for real sport. Bowling.
116 - 125 No I'm joking obviously. none of them are real sports right. But we have we had a lot of fun over beers it was a good time.
125 - 134 Indeed So what do you think about this idea. Todd I mean this idea of breaking down FI taking a look at essentially the state of the union of the FI community how do you feel about that.
134 - 203 Well I think that I think he pulled me out of the woodwork because I do have some some specific thoughts on it. I published on it so that's probably where he was coming from. when He said Get me in here. First of all there's absolutely nothing wrong with how financial independence is traditionally taught and particularly within when you say FI community I think of it as fire right financial independence retire early community and there there's a type of blog that dominates that where it really was headed out. I mean Pete over at Mr. Money Mustache and Brandon kind of launched the whole thing and there was a prototype and then all their followers started launching their own blogs right. And so you ended up with this multiplication of pretty much one line of thinking which was let's get our expenses down as low as we can get them. And then what that does is that lowers because your financial independence is a multiple of how much you spend. I mean the math is just the math so let's back up a second. The math of financial independence is governed by two equations. You've got the mathematical expectancy equation and you've got the future value equation right and so the mathematical expectancy equation determines the compound growth that goes inside the future value equation. Future value equation adds the dimension to time. So on then so you've got these two equations that run it regardless of how you look at it. Right. Is that fair enough.
203 - 205 You have me to this point. Absolutely.
205 - 282 OK. So then what the traditional fi standpoint does is they say OK let's take expenses down as low as we can because financial independence is a multiple of expenses that lowers the total amount of savings and that allows you to retire early. So as long as you can find happiness down at that lower level of savings then you can retire early. Right. And there's absolutely nothing wrong with it. They are 100 percent correct usually accompanying that is the idea of a low cost passive index portfolio. Right. So traditional asset allocation and paper assets as your investment choice with low cost passive index portfolio that's usually another component that you see virtually universal. And then I think that's about it. I might be missing something. Oh and the other thing that usually goes with it is what I'll call a Stoic philosophy. Right. So in order to find happiness on less it pretty much has to accompany a viewpoint in life that's best represented by stoicism. And so you kind of get those components thrown together and you've got pretty much what makes up all the fire blogs out there. Often they'll wrap them in with a little bit of travel too since adventure and travel is often a motivating factor for financial independence. Is that a fair representation or am I off base. What do you guys think.
indexfunds, savings, travel
282 - 291 I think that's pretty spot on from our perspective for a real high level intro to fi essentially like you're saying is evidenced on many of the popular blogs.
291 - 439 Yeah. So and again there's nothing wrong with it. They are 100 percent correct. I'm not making anyone wrong here. What I'm saying though is there's more to it. OK. You can take another dimension to it. So what some people have started dubbing me is fat fire. Right. So if you take what most people view financial independence as it would be lean fire right lean fire being get your spending way down and the way I've taken is I come from a no right or wrong position. So just as I was really carefully pointing out these guys aren't wrong. Right that was their approach to it and it worked for them and they're respecting the math of how financial independence works. They absolutely aren't wrong. But there's more dimensions to it you can build it the way it fits for your life. So for example you know I was telling Pete when I when I first met him I was telling him Geez I mean do you really live on 20 something grand a year. I mean it was just amazing to me right because I was looking at going between piano and dance lessons and private school for my kids I think I spend more on just my kids education than he was spending to support his entire family you know and I was like wow this is fascinating. I wish I wish I could find happiness at that level I really wish I was Pete in that way because life would be so much easier right. But I'm not I'm not. I don't find I don't like to live life from the left side of the menu and I don't like to relentlessly optimize my life to minimize my spending in my view point a lot of people that pursue that line of thinking spend as much effort figuring out how to save money as they would just to earn it in the first place. And that being bound to the restrictions of having to save money is antithetical in my experience to what is really freedom. And again I'm not making anybody wrong what I'm saying is there is different value systems here. I'm simply not as advanced as Pete in terms of stoic viewpoints. I'm not. I like nice things. I like to take a vacation where everything isn't optimized in terms of cost structure. Sometimes I like to go to a nice restaurant sometimes I like to go to a less expensive restaurant sometimes I don't want to eat out at all. I just don't want my choices decided by price. I want to choose things based on quality and based on the experience I'm choosing not based on price. I don't want to relentlessly optimize my life. And so I kind of headed towards the thing fat fire the other thing I started figuring out was that and by fat fire and I'm being cute with it. Right. Just try to play off lean fire versus fat fire and create cute little sayings I guess is the marketer in me right.
439 - 442 Hey you're good with fat fire just roll with it man. No no criticism there.
442 - 456 And so if I could just interject what would do you have a definition of what fat fire is as far as you know generally FI is 25 x like do you even do it on that level or is this just more of a.
456 - 564 Well no it's the same thing. The math doesn't change it just changes how you work with the math. OK. OK. Math is inviolable right. That's why I started out with giving you the two you know a few. It's math expectence and since a future value equation. And so those multiples are pretty realistic but the realistic base on 4 percent rule that's where the that's were you know 25 multiple comes from is it's the reciprocal of the 4 percent rule. I mean that's true for passive index traditional asset allocation portfolio on paper assets right. But you can turn that all around if you go into real estate and see that's where I'm trying to go to with this conversation. There's different spending levels you can go there's different equity levels you choose and there's different asset classes and investment strategies you can choose. So again and not to pick on Pete because Pete is the best. I mean I've met Pete talked to him. He's 100 percent integrity. He walks the talk. He lives the talk. Nothing but compliments to I am not picking on Pete in any way with this. I'm using him because he's one of the top players. And so I'm using his with his examples. OK. So Pete if you're listening love you baby. You know there is absolutely no disrespect here at all is very fact quite the opposite I'm respecting you by choosing you. And so one of the things that you can look at with Pete is an example of choosing different asset classes is you know Pete getting financial independence with traditional low cost passive index portfolio where he saved money got his expenses down save a few hundred thousand bucks and a 4 percent rule he was financially independent. And so he's published all about that there's no secret on it. But he's also published and disclosed his blog makes 400 grand a year. That should give a little pause here. So here's a guy that's teaching you financial independence using traditional passive index portfolio low cost structure. And yet in a couple of years he built a blog that makes four hundred thousand but he's not telling you about using the business asset class to achieve financial independence. Do you see the contradiction.
indexfunds, passiveincome
564 - 568 That really is remarkable when you highlight it like that isn't it Brad.
568 - 576 Yeah it certainly is. Obviously Todd I see the contradiction but I guess he would argue he reached financial independence prior. And I don't want to put words in.
576 - 597 You're absolutely right and that's why I said from the outset before I started this Peter's 100 percent integrity he walked the talk exactly as he teaches it. There is no there is no slight to Pete at all in this at all. I'm using him because he's one of the top guys. He's respected he has integrity. And because of that I'm pointing out a contradiction in the message that should be clear. When you look at it.
597 - 631 I mean you're making a valuable point. One of the places that we've landed is helping the middle class essentially achieve a level of financial independence without crushing the income game you know without changing their their job or their business structure essentially taking the tools they have available to them today and then getting themselves on a path that 10 or 15 years. But I feel like what you're highlighting is the fact that just because we showed how the math would work to accomplish that doesn't mean that's the only path. In fact there may be another lane or several other lanes that we haven't spent enough time talking about which can open up the floodgates within a year or two.
631 - 848 Absolutely. And you know that's intuitively true right. We use Pete as an example to show it but you can look at any twentysomething millionaire if you go interview 20 something millionaires and you say how do you attain that goal. And then they replied Well you know I made a bunch of money in my job in my W2 job and I turned it over to my financial planner who invested in low cost passive index mutual funds with traditional asset allocation it'll be a laughable joke. It's a laughable joke right. Twenty something millionaires don't get there that way they get to business entrepreneurship asset class you know and the guys that are doing it in their 40s or 30s and they work their way up the traditionally do it through rental real estate. And so the way I teach financial indeopendence is a little bit different what I do is first of all I start out with you you are the primary asset. OK. And you know that's true because we all have the same investments we can choose from right investments are generic commodity items. So it doesn't matter what broker you go to or financial planner you go to you can all choose the same investments. But we're all going to get wildly different financial outcomes in life and the difference is you. Right. So that's your first asset you develop is you. And then I go through and I point out that there's really two fundamentally different models that you're picking from to achieve financial independence. I do the traditional model which is what you guys have studied probably ad nauseum and talked about on the show. And it's what traditional financial planning works with which is again low cost passive index portfolio is kind of the the current vogue version of it. And so you take traditional financial planning and you know you make basically model is you're supposed to Goes make as much money as you can spend as little as you can scrimp and save and shove it all over to your portfolio. And then at the end of the rainbow you're financially independent wherever that's defined in time. And so because the magical asset allocation will get you there. And so that's kind of the traditional approach and it's fine it's valid it works right it's well-proven it's well documented there's nothing wrong with it except if you don't cut the expenses way down as traditional F-I teaches you to do it will take you a lifetime to achieve it. The breakthrough for traditional F-I is nothing more than saying Don't spend your money if you don't spend your money and you get your expenses under a certain structure. Then what happens is all kinds of cool things particularly for US people right because then they you know they get their income under a certain level now they qualify for health care for free under Obamacare. You know they pay little or no tax. You know once you get your your life structured right it doesn't take that much to live comfortably and so they've figured that out and they're absolutely right. OK. But there's other asset classes that you can get there quicker you can do it differently and it's still the same math. It's still the mathematical expectancy equation it's still the future value equation that's inviolable but you work with the math different. So when you use business asset class and you use real estate it works differently because for example business asset class is unique in that you're not compounding from the equity side of the equation. OK. You literally in the business asset class you can create equity out of thin air. Right. Because it's your time that you're doing it so you're not stuck in a compound equation. And so it works with the math very differently. So it has very different principles. Another thing that FI never teaches or I shouldn't say never teaches I don't see it regularly talked about I think is more accurate is there not a focus on risk management. But when you start understanding compound returns and the math of compound returns Risk management has to be a focus. So I'm kind of trailing a little bit we've got two trials would go down here you guys got to direct me we got one which is risk management. How that plays into the math of this process as well as using different asset classes you guys tell me where you want to take this.
health, indexfunds, tax
848 - 893 I don't think there's anything that you've said that I could strictly disagree with. What I'm very interested in is basically how to rebuild this or how to do a better job with this messaging and so what I basically heard you say is the math works. And what Pete did work stoicism works crushing your expenses work but it's not the only way. And in fact if you add a couple of extra dimensions to this it makes the messaging better and it sounded to me like you're saying there's two things you think that the FI community could do better. One is talking about the two other asset classes that you don't feel like we spend enough time on. And that was the business asset class and the real estate asset class and then the third component that is the risk management. I think we should take a few minutes and talk about each of those. And honestly the point of this conversation is that you kind of set the tone for the next several years on our show in terms of how we go about acquiring this information.
893 - 1014 So actually what I'm going to do is back up a second give you one more level to add to the conversation so I what I would I like to do is I like to explain that there is level 1 understanding there's a level two understand. So let me explain the difference between level 1 and level two understanding so level 1 understanding is what I'll call static. It's generally a very simple clearly structured answer that anybody can follow and that's what gives it its universal appeal. That's why it goes popular that's what people love it is it's plain and simple and easy to understand so a great example of that in investing is buy and hold. OK. Buy and Hold. I mean everything you need to know about buying hold it low cost pass have been next out. Asset allocation you could fit in a paragraph and have room left over. Right. You could put on one page and have room left over. It's so simple. And so for that reason it's easy to sell. And what happens on level 1 understaning is it's close enough to the truth that it passes the smell test. But what we know about Life is Life is dynamic. There's there's a more dynamic more complex truth it's nuance. Truth is nuanced. And so that's the level to understand that's where I'm trying to take this conversation is to a level two understanding. So now what we're doing is we're introducing things like active risk management and the principles that plays out in the asset classes. We're introducing multiple asset classes. We're taking it to another level now that adds complexity. But what it does is it better represents reality and that's what you're just sharing when you're asked me that is you're sharing how yeah you're nodding your head. You can see that what I'm saying is right. But yet the conversation hasn't gone there in the past. But when you hear it it's obvious it's like when I point out that Pete's making 400 grand a year with his web site that he built in a couple of years but he spent years hitting F-I through traditional means. There's something interesting there it doesn't make Pete wrong. It's just interesting it's like wait a minute here's another asset class. Here's another understanding of how to do this. And so that's where I want to take the conversation is level two understanding it's dynamic it's nuanced and it better represents reality that's the key it's more complex. It's harder to wrap your head around. But the key point it better represents reality and therefore you can be more successful with it. That's the key.
1014 - 1058 And Todd. I definitely agree with that additional layer of complexity and an understanding that life is dynamic. I think you said before quote you build it how it fits for your life. That's a crucial point is everyone's situation is different and clearly when we're talking on a podcast generally we're trying to give advice that will fit the most people right because it's hard. We cannot dive into each individual scenario for every single one of our tens of thousands of listeners so we're trying to give blanket advice I guess that that what's the most realistic and most likely for people to follow and I think I think that's a crucial point like I've found in life that what separates successful people from unsuccessful ones is people who take action. And I think that's why that level one.
1058 - 1168 You're close. So you're right that it's action action is absolutely key. Nothing happens without action. There's another piece that's not coming the conversation that's key that fits right in which is that every person brings to their F-I game. Everybody brings a different set of skills resources goals timeframes. OK we're unique. And so a standard static formula isn't going to fit everyone when you bring in the other asset classes when you open it up and you stop making certain choices wrong and allow it to be open. Then what happens is people can design their wealth plan to fit them. OK. And that's the other key to succeeding. It's when you get a wealth plan that's properly designed takes the specific characteristics of each of the three asset classes because each asset classes different characteristics you match them to the specific characteristics of your life. As somebody who's pursuing FI and that is your skills your interest your resources your goals your timeframe. You start looking at those you assess yourself and then you match it up and then it's the plan. The math is the math. But when you match the characters it's like velcro when you get it right. Those hooks and those loops mesh together and they hook well and that's what creates success when you get it wrong you can try all you want it doesn't work. I can't tell you how many people come to me and they talk about how they're sick of traditional F-I they don't fit the mold and they're just excited to finally find the message where hey you know now I can do it on my terms. This guy isn't making me wrong because I want to go out to dinner occasionally or I actually like working from Starbucks in the afternoon and I don't care that the coffee is a rip off. There's so many people that just don't want to be made wrong and they don't have to be if you're willing to pay the price of the tradeoffs. It's ok you just have to recognize that there's tradeoffs for every decision you make. You just build that into your math and you decide what you want what fits your life. Does that make sense.
1168 - 1215 It makes 100 percent sense. And we we hear at choose FI don't tell anybody that they're wrong with any decision it's what they value. And I think as a term you know we use here is valuist . I'm not frugal. I'm not cheap. I'm a valueist. I might make decisions that Pete Mr. Money Mustache might cringe at but I've determined that that adds value in my life and therefore that's a spending decision I'm willing to make 100 times out of 100. So there is no there is nothing doctrinaire here at choose FI certainly it's it's what you value and you need to assess that on each individual case and that's fine. You might decide that buying a BMW is something you value great go for it. I totally agree with you. You have to make decisions that work for yourself. And I guess I'm curious
1215 - 1261 That's a key point because respecting your values is one key component of happiness and the whole point of this is to be happy who gives a damn about the money right. The money is just a means to an end. The whole point is you want to be happy. And the reason you pursue financial independence most people do it off kind of a mistaken idea. Most people pursue financial independence because they have a high value on freedom. And so what they do is they project that internal experience of freedom or that value onto money and that becomes financial freedom. But what happens is when most people attain financial freedom they realize that that was actually a mistake that the real goal is freedom. And there's a much deeper experience of what freedom is and that can include different spending decisions and so that's why it's so key to really work with that idea of values and to build that into your wealth plans.
1261 - 1272 Todd you mentioned happiness and what you value. I'd be curious to hear. Just personally like what have you done to pursue happiness in your post. Financial independence life
1272 - 1336 Well one thing has been clear to me is its experiences not stuff. And the other thing that's become clear to me is that I do like buying some conveniences. I don't like mowing my lawn. I don't like maintaining the yard. I don't like maintaining the cars or working on the house. I used to like building so I used to like working on a house but I don't anymore. So maybe it's just me getting old. I don't know. I like buying the convenience of some of the stuff and I like having the money to do that and not have to worry about it. And frankly it's more efficient. I can make more by building my business and working and contribute more to people's lives through this education process I'm developing then I can buy by fixing something on my house. And so for me it's all about experiences versus stuff. So I like to vacation. For me the balance point is about three to four months a year is what I like to vacation and then I like to work when I work. When I work very aggressively and so I would probably consider extremes you know like when I'm working I'm working a lot which is when the kids are in school and then when we vacation I literally don't even answer my phone.
1336 - 1341 Wow that's amazing. Yeah I was going to ask do you. Are you plugged in at all on these vacations you're totally off line.
1341 - 1426 Pretty much. You know so like sometimes I'll go camping where there's no reception at all in which case I'm totally off line. Like what I like. I like the John Muir Trail which is 250 miles from the base Yosemite to the peak of Mount Whitney going along the Sierra Pacific range. And I was there was a 17 day trip and most of that I had no reception. You know people like oh my god what happened if your site crashed and I be like Well then my site crashed. You know it didn't. But life isn't going to end. You know that was that was a great trip. I'm so thankful I took it when we did the Camino to Santiago which was the whole family did that that was 500 miles across the top of Spain. We hiked across the top of Spain from France out to the coast. And that trip what I would do is I had my cell phone but I didn't even get a foreign plan for my cell phone. Instead what I did was I wouldn't check it at all during the day or anything. And we roll into the hotel where we'd been hiking all day so would be tired I'd have a beer the kids that have an ice cream and I'd sit down and at that point almost always we had Wi-Fi and I'd pull up the phone and I would just mass delete you know like just delete delete delete and delete everything and then there'd be like one or two that I couldn't just get rid of. And then I would leave those in about every four or five days if we're in a hotel with good Wi-Fi I would actually pull up my computer and clear a few e-mails by replying to them. So I might put an hour or two into every four or five days.
1426 - 1446 Sounds like a pretty unplugged vacation to me. That's fantastic. Can you tell us about that hike across Spain. I've heard about that before. So I'm assuming you said family is home. You have kids. How long was that trip. We talked about like adventure travel slow travel on the podcast. Talk us talk us through that trip and how that works with with an entire family.
families, travel
1446 - 1517 Well we went two months to Europe so we started out in Paris just to kind of get over the jet lag and just get used to being out there. And so we spent I think what was it 10 days or so in Paris and then spent about 30 days on the trail. It was almost mostly hiking but we had mountain bikes for about four or five days and it took about 30 days to accomplish it. We had several down days there was about four or five down days like we were there right before the running of the bulls in Pamplona. And so they were setting up all the barricades and everything so we had an extra day there and just kind of hung out. That was a really neat town. So there's four or five cities where we picked an extra day and just hung out. But generally we were on the road hiking each day we would hike anywhere. A short day would be 12 miles a long day would be 22 or 24 miles over mountain passes and everything carried all our stuff in our backpacks. And then when we finished than we did a beach vacation so we stood up so we started with Parisian city life. And then a 30 day hike across Spain as like kind of an adventure Trek trip and then hung out at the beaches of Portugal afterwards so we had a nice little beach hang out to relax after the long hike. So it was two months on the road. It was really nice.
1517 - 1526 You know it sounds amazing and it sounds like you have achieved a level of financial freedom and I guess at this point your life I mean working is optional you're working for the passion of working right.
1526 - 1536 Well I've been working optional since.....I mean you could see me I'm 56 and grey haired I've been working optionals since age 35.
1536 - 1560 And the reason I pointed that out is I wanted to come back to this concept of you know I think we've we've done a great job of maybe highlighting the weak points of fire. But what I wanted to highlight is the life that you just described that's a life of financial independence. It's still subject to the same math as the rest of us but you chose different levers and you chose different asset classes. And I'd love to hear you highlight the difference in the characteristics of the asset classes that you chose.
1560 - 1702 Yes I think one of the unique things about my teaching is that I've done it in all three asset classes so I've been successful in all three asset classes I've also had tremendous mistakes. in all three asset classes. So I started out in the hedge fund industry when I came out of college. So that was 1983 I ran a hedge fund until 1998 when we sold it and that was when I was quote unquote financially independent. And so you know that's where I learned a lot of the math around investment how investment works because we ran a quant fund which means that everything was quantitatively driven. It was all discipline math and statistical risk management models which we can go into a little bit but it really is more connects to how you develop financial independence and a investing. And then when I transitioned out of that I started buying large apartment buildings not across the country in a few different states with the money from when I sold the hedge fund and then carried that until about the 2005 2006. I started getting really uncomfortable with the market conditions and credit bubble conditions in 2005 2006. And so I committed I didn't want any financial leverage at that point because financial leverage is the only type of leverage that cuts both ways. You know it can kill you if you get it wrong and it can make you very wealthy when you get it right. And so I was carrying a lot of financial leverage on these apartment buildings. And I was just like you know this is a credit bubble. I'm not comfortable with it. And so I started selling and I had everything sold by the 2007 top. So the only thing I owned going into the real estate decline after being long real estate since 98 was my home. The home I live in. And so obviously then the collapse came in 2007 through 2009 and that's when I shifted towards business asset class a second time. My first round in the business asset class was with the hedge fund. And really when you understand real estate real estate is about half business half investment. So it's kind of a hybrid asset class when you actively own your own real estate. And then I went back to the business asset class to develop financial mentor which I'd been playin with since 98. I actually started financial mentor in 98 but I never really took it seriously until kind of 2008 or so I started building it and taking it seriously I had a vision for it where I wanted to go once I discovered Wordpress and then focused on paper assets to maintain liquidity. I hadn't gone back to real estate since so I guess I missed a huge rise in real estate after that. But again my focus is always risk management which we can talk about and why that's true.
1702 - 1722 The rules apply to all of us and I think what's so cool about the lane you chose is instead of picking one you had a foot and an arm and all three. And many of us just say well no we're just going to stay over here we're just going to do this one thing because this is our comfort zone. I think you're the first person that we brought on this show that can legitimately say that they didn't choose they just did everything. And I think that's just an amazing perspective.
1722 - 1989 Thanks. Yeah there's a reason why. And that is has to do with risk reward. Right. So the opportunity isn't great in every asset class at every point in time. So what happens is risk reward ratios vary at different points in time. So like when I got in a paper assets back in 1983 I can remember I was going out to retirement plans for entrepreneurial companies where I would meet with the CEO the CFO and we were pitching them on our investment management services and these guys would only touch get this right. It was back then it was CDs because they were government guaranteed and they were paying in the teens in the 80s or I mean in the late 70s going into the 80s they were paying in the teens so their government guaranteed they were looking at me and the stock market the Dow kept bouncing off one thousand. And so they're looking at me going well the stock market's gone nowhere for over a decade and I'm getting government guaranteed in the teens why would I mess with you. And it was a hard argument to beat. But of course that was the exact turning point. Whenever anything is obvious it's pretty much over. And so you know as it turned out I was exactly right. We went consecutive all winning years all the way to 98. As I explained we had one actual loss to investors. It was a fraction of 1 percent and that's because the fund made less than enough to cover all the management fees and expenses sitting investors lost a tiny fraction of 1 percent one year. But the fund itself actually made money every year and that was you know the beginning point right there when everybody wouldn't even touch it. They wanted nothing to do with the stock market. And of course that was one of the best times in history to ever invest in the stock market. Well now you go fast forward to 97 98 and I was looking at one day market risk and realizing I had a hard time managing one day market risk that volatility was picking up. The Internet bubble was kicking in. You look at the final top the Nasdaq was at over 200 times earnings for the entire index. At the final top that is insane. There is no possible way that that can make any economic sense at all and of course it didn't you know and it subsequently fell. What I don't know 70 80 90 percent whatever the number was and it didn't come back for years afterwards. And so what you see me do throughout my career is I'm opportunistic picking risk reward where the risk and reward makes the most sense. So now let's fast forward to real estate right. What happened in real estate was I had been buying apartment buildings for I don't know about like 30 cents on the dollar of new construction costs I was buying them out in Oklahoma Kansas City kind of Midwest area. And around 2006 people were willing to buy them off me for what I'd paid $18000 for people were wanting to pay 40 $45000 for new construction back then was about 60000 a door. And so I knew that I'd probably get up to about 80 percent with C-Class apart buildings but I wasn't going to get to the full cost of new construction. And so to me they were paying full value. They were paying way more than I ever would have paid for it because I knew the building inside out I owned it. And so I let them have it. You know and I moved the money over and what I was concerned about is I had tenants that didn't even qualify to rent a $600 apartment from me. And you know because I knew their credit history because they would apply for the apartment. They didn't even qualify to rent the apartment from me and I was having to take them and then they were leaving me because they get a $300000 loan with a 30 year fixed rate mortgage for a house and I was like oh my god if this is in a bubble I don't know what is. These guys don't even qualify to rent a $600 month apartment in so that I just said you know enough I just didn't want the financial leverage I could see it was a credit bubble. And the thing about real estate real estate it's a great wealth builder most of the time and that's because inflation ever since 1933 when we went off the gold standard and we already had the Federal Reserve Bank from 1914 I believe it was. We had pretty much consistent inflation ever since with small bouts of deflation and see real estate as a leverage play on inflation. And so what happens is though it's also because it's leverage play on inflation. If you get credit deflation it can be devastating to your portfolio and that's what we saw in the 2008 2009 decline where the banking panic set in and you had credit deflation and that destroyed real estate investors because their leverage cuts both ways as we talked about earlier. So I sidestepped that. You know I cleared out because the risk didn't favor the reward. You know it just didn't make sense. Assets were fully valued just like they were. The stock market topped they were fully valued at the real estate top too. And the risk was clear and so I'd exit the market. And so what you see me ever since is I've been working from the paper asset side to maintain liquidity as well as the business side because again I can manage the risk very very carefully.
banking, career, indexfunds, stocks
1989 - 2026 Let's set up a hypothetical. Todd what do you say to the person that says life is literally a limited amount of time and in that time you only have so many you know decisions that you get to make before that time runs out. And I can learn a small degree about each of these asset classes but I don't have time to become a master of any of them. I guess you could find a team of people to do that for you but that sounds expensive and somewhat risky in and of itself. I found an asset class a paper asset class that will give me predictable rates of return and I'm and I'm willing to sacrifice maybe a percentage of results and except potentially a little bit more volatility while taking the remainder of my time and focusing it on the business and the real estate asset class.
2026 - 2116 First of all it's not a predictable rate of return. I mean you can get drawdowns that are absolutely astounding. And here's. OK so let me to let me teach another point here that's not taught since this goes back to our State of the FI right. OK. So then how does that with a paper asset portfolio. You've got to pretty much assume you're going to go through at least a 50 percent drawdown at some point. Now let's go through and understand that the the the math of compound returns is asymmetric so a 50 percent drawdown requires 100 percent return to get back to even that doesn't happen quickly. It takes years to develop a 50 percent drawdown it takes years to get that hundred percent return to get back even. So are all the traditional financial advisers correct that eventually the market will come back. Yes absolutely true. OK. And there is a reason for that that has to do with inflation's embedded rate of return inside of there plus the growth of the economy. It all gets built in and we can go into that later on there's a math reason why it's true okay. So it is true there right. But here's the key point. Your portfolio won't. OK if you're living off your assets which is the whole goal of becoming financially dependent right you want to live off your assets let's just use the 4 percent rule. I'm not saying it's right I wrote a whole book on it right. Again it's close enough to reality to approximation but there's a lot you got to understand about it. So let's just use it for fun for argument's sake 4 percent rule. Let's use the actual 2000 top right. The actual 2000 top. So from 2000 What was it like 2012 or 2013 before the S&P got back to its old point. Do you guys remember the exact number.
2116 - 2120 I don't. That sounds roughly right but I can google it while you're talking.
2120 - 2254 Let's just use 2012 for argument's sake. OK. So it's 12 years right before the S&P got back to even. So if you got the 4 percent rule and you're living off 4 percent your portfolio you're down 50 percent in your portfolio before you even adjust for volatility affects on the portfolio. And so let's just rough compound it. You're probably down for something like 50 60 percent. So you do that twice in your lifetime and you're toast. So the point being when you live off your portfolio the math of drawing down a portfolio is different than the math of compounding the portfolio I'm building in the first place. They work different ways. And so you've got to understand that when you when you develop your F-I equations. And so again you know I develop all this in the teachings over at the site. But there's periods where you're going to have much higher rates of return like we had from the you know the bull market in the 80s and 90s which is what a lot of people think they're basing their conclusions on because that's where most of the data comes from is usually kind of 73 forward. And so it's got a lot of built in bias you've got a 35 year bull market almost a 40 year bull market in bonds in there. You've got the greatest bull market in stocks in recorded history where every decline was a deflationary decline and therefore the Fed bailed it out with lower interest rates. We haven't had an inflationary decline built in that data. There's times when stocks and bonds correlate to the downside you don't get the diversification value that you've seen in all the in the last 40 years of data says a lot more to understand is it is not a predictable rate of return there's periods where it's going to be higher. There's periods where it's can be lower but the key point is that you can go for over a decade without getting a positive return your portfolio that has occurred multiple times in history. And when you're living off your portfolio that drawdown is huge because I'm not building in the inflation costs. I'm not building in all kinds of things. When we talk about the asymmetric returns of getting back to even which is you know like a 10 percent loss equals an 11 percent return to get back to even 25 percent equals a 33 percent return to get back to even 50 percent equals 100 percent return to get back to even those are just getting back to even. OK. In real life you've got inflation in real life you've got spending in real life you've got the portfolio expenses in real life you've got all kinds of other stuff in there. And so the math is really harsh on this stuff. OK it's more complex than most people teach.
2254 - 2257 Man Todd you're setting my hair on fire over here man.
2257 - 2262 I'm just but I'm. I'm just telling you. I mean it's it's obviously true as soon as I explain it that way isn't it.
2262 - 2271 Yeah. Todd for sure. You know it comes to mind when we're talking about this. This volatility usually that extreme volatility would be associated with being 100 percent equities right.
2271 - 2361 That's not true because you could have stocks and bonds correlate to the downside. You just haven't seen it in the data you're looking at where you get stocks and bonds coorelating on the downside is when you have inflation as a problem because then the Fed can't turn around and bail it out with lower interest rates which is the kind of de facto thing that everybody assumes is always true. So here's a fun little side nugget. OK this is not related to our conversation but you want to but it's a fun side nugget a little little gem here to leave for people is as an investor you always want to look for the obvious thing that nobody's looking at. And so we're recording this in 2017 right now right. October 2017. And the thing nobody's looking at is inflation. If inflation comes back everybody's just assuming it's dead inflation's gone when inflation comes back. All rules change all rules will change in how the Fed can manage the problem. What responses will occur and whether or not the market could go down and stay down because another thing that's not commonly understood is equities do worse in inflationary environments which is counterintuitive to what most people think as well as bonds do poorly that's where you get the correlation on The downside Not only that the government response isn't quite as cookie cutter because they can't just lower interest rates in an inflationary environment and so that could be a game changer you always want to look for that thing that is obvious and could be there but nobody's looking at. So for example I did that back in 2005 2006. If you recall back then you guys are old enough to remember this. Back then people used to believe real estate never went down. Dear do you remember that.
2361 - 2362 Absolutely.
2362 - 2414 Yeah. I mean that was actually a truth. Like people believed it was true. Nobody believes it. Now it sounds laughable. But back then it was a truth when I was selling my real estate. I was openly criticized. I was told that I was stupid. Literally I was told I was stupid to pay the taxes on those gains. Now in hindsight it was obviously smart right. It's hard to do. It's hard to be out of sync when everybody believes one thing. So what is the universal truth right now as we record this universal truth is the belief in low cost passive index buy and hold is the one answer to paper asset investing and that the other universal truth is that every decline in the market will be met by the Fed put right. The government will bail out every decline and you'll march on to new higher highs. That's the universal truth so watch out for it.
indexfunds, tax
2414 - 2419 I'll keep sticking my face in front of the fire here Brad unless you want to hop in feel free.
2419 - 2439 No I was just going to say so. I mean we're talking about the state and future of of FI and Todd you describe two of these exits are you called the The Nasdaq the high the Nasdaq and the real estate bubble. What do you see in the future. I mean do you see that issue coming where the Fed doesn't balance things out.
2439 - 2685 Now. Great point. I don't predict the future. All I do is manage risk and it takes care of it for me if you look at everything I've done I've never once predicted the future. I've just left unfavorable risk reward ratios on the table. And so sometimes it doesn't work in your favor so just to be totally fair. Look at how I miss the real estate rise from 2009 bottom to current. That's an epic rise. Man that was huge. People made fortunes off it. I completely missed it. Why risk management. Ok I wasn't willing to make a bet that those government bailouts were actually going to turn that market on a dime the way it did and that you get the kind of move you did. Now in my opinion they only kicked the can down the road. I don't think anything's fundamentally been solved. But that road went a lot longer than I ever expected in fact it went long enough that we get to call me wrong. OK. I was just wrong. OK. And so but I'm ok with that because what happens is when you focus on risk management and you're wrong all that happens is you left opportunity on the table it doesn't mean that you fail because there's other markets right. There's other markets to invest in. I didn't have to be in the real estate market. OK so let's go to unique. I'll tie this in with unique characteristics unique characteristic of real estate is it's illiquid. OK. There's two reasons for that. OK there's a mathematically optimum transaction frequency is determined by volatility and transaction costs in a market. And so real estate is historically a low volatility asset with high transaction costs and therefore the optimal holding period is relatively long in real estate. Now you can do a fix in flips you can do other stuff there's ways around it but it's just kind of a characteristic. And so the thing about real estate and it's kind of a joke in the real estate market is that real estate never goes down it just goes illiquid. Right. That's kind of a joke in real estate. Well it actually does go down and when it goes down you can't sell it. So all your risk management in real estate has to occur up front when you either choose to accept the deal and how you structure the deal. And so I couldn't figure out a way once once I could no longer do condo financing on large properties because when the credit bubble burst all the different all the Democratic policies changed right. Different ways of financing property changed and I can no longer do condo financing whereas basically I was no longer on the hook for the building. I could just turn the building in if I wanted to and so different forms of risk management. I was going to have to basically accept the entire risk of downside of owning a property and I wasn't willing to take that risk. So that's why I chose to remain liquid. I want to remain flexible because first of all I can't call where this economy is going to go to answer your question because you know there's really smart people that can make a great deflationary case. I mean basically there's no there's no point in history where a credit bubble has been resolved without first deflating and destroying the bad credit. And that's essentially what the government is trying to do they're trying to kick the can down the road take the bad credit over helped the banks re recapitalize all these different things that are trying to get the bad credit to be dealt with in some way without actually letting it just go bad. And so they're trying to do that desperately and they're trying to reflate and yet they can't seem to get the reflation that's because all the bad debt still around in the economy is still totally leveraged. And so this thing runs on a knife edge of stability. I mean you can make a really smart case for it going into a major inflation and you can make a really smart case for it going into a deflation if you ask me for my opinion I think we're going to get both. I think I think we're going to see kind of the worst of both worlds at some point. And so my only prediction is volatility which of course is the direct opposite of what we have now we had the lowest volatility lows VIX as of this recording its lowest vix in history. I think it's going to move to volatility at some point but again I don't make predictions off of that. I should say I make the prediction but I don't bet any money on it. What I do is I remove money based on it. I choose where not to be where I can see unfavorable risk but I can't actually place based on a prediction because one of the tenets of what I teach when I teach this stuff is that the future is unknowable. And so the essence of investment success is you put capital at risk and into an unknowable future. And so you have to ask yourself how do you do that you know and that gets into really interesting stuff around investing.
2685 - 2702 And Todd your risk management reminds me of what Warren Buffett says with his rules of investing which is rule number one never lose money. Rule number two never forget. Rule number one. And I don't know if you agree or disagree with up and say but that that just was very reminiscent of it for me.
2702 - 2761 Yeah Well Warren's Warren's way smarter than me. I mean you know I'm not going to disagree with him and yeah you're right I mean it's exact same message just said with different words. And you know who cares what Warren or Todd says. OK. There's a math reason why it's true. It has to do with the asymmetric returns it has to do with the way wealth compounds. And so there's a math reason why it's absolute true. And if you look it's interesting like in in the course where I teach this stuff there's a whole section of quotes I do from famous hedge fund managers the guys who have the best track records in the industry and every one of them emphasizes risk management as a primary discipline. Now take that and compare that to traditional low cost passive index asset allocation or compare that to how most people talk about investing. I'm saying that has to be the first word out your mouth risk management if he knows in this interview it's been the first word out of my mouth every time. And you look at the tracker. The most successful investors in the business is what they talk about. It's not what most people talk about though.
2761 - 2769 So Todd I mean ultimately I guess the funnel that I'm trying to move us towards is when would it be appropriate to consider low cost passive investing in index funds.
2769 - 2922 When it fits your personal characteristics lemme give an example let's say that you're a really highly compensated attorney and you're making. I don't know several several hundred thousand a year. Right. And you love your career. You're very happy with it. And so what you do for your wealth plan is rather than pay rent on the building where your attorney practices you go and you buy the real estate that your attorney practices and that'd be a real estate position that's kind of a no brainer right. Any accountant worth his the salt will say that if you've got a business time horizon of 10 or pretty much about 15 20 years that it almost always makes sense to own rather than rent. So and then it's very low risk because you control both sides the equation. So as long as you're in business you know you're going to pay enough rent positive cash flow on the property you may as well own it and so you might have that in your wealth plan and then the rest you just use to maximize your retirement plans and you max them out you shovel it over and ratehr than become an investment expert if you plan in being your career for 2030 years. You're happy with it and don't shovel it in the passive index funds it is going to work great. Why. Why make life more complicated that fits your situation. Now let's contrast that though with the 30 year old school teacher who is making enough to live but not a lot more. It's it's really difficult for that person to save substantially and it's going to take them an entire lifetime to do it. Maybe they want FI in 10 years because they love to travel and they want to do something other than teach. And so maybe it might make sense because their characteristics are different. They have summers off. Maybe this individual is very good and actually enjoys working with their hands and doing repairs. So maybe they do one house a year right. They focus on one house a year. They find investor who put up the downpayment say don't worry about saving the money. They find the one deal they want to work on they fix it up each summer they keep it for long term rental. They share the profits. And in a few years they can be financially independent that way because as a schoolteacher they never developed the huge spending habits it's not going to take that many properties. That plan will work for that individual but it won't be smart for the lawyer right because why does he want to sit there and be fixing up houses his his best value for his time this source of wealth is his legal practice. There's several things you got to do in wealth building you've got to identify the source of wealth. That's something everybody skips over. Right but that's integral to developing the plan properly. Again I teach all this in this course right we're just grabbing fragments of it. But it's you know you've got to get these components right in order to fit the plan right to your life situation. So to answer your question low cost passive index asset allocation can work perfectly when it fits your plan your life situation. It just happens that a lot of people it doesn't but they're using it anyway because it's the only answer they know.
accountant, career, indexfunds, savings, teacher, travel
2922 - 2936 So Todd what a lot about that is we've covered investing. I've gotten my haircut and we've also talked about real estate. The one path that we haven't really talked about is the business could take just a couple of minutes and talk about the unique characteristics of the business asset class.
2936 - 3126 Yeah yeah business has some fascinating characteristics right. Because as I said earlier it's the only asset class where you're not actually compounding from equity. Right. So like in paper assets you have to throw a certain amount of equity at it and your compound growth is based on that equity you're compounding on the equity. And similar in real estate you can get around it by using investor financing and you can do some other stuff where you can get around the equity. But see that's the rules that govern the compound return. But in business it's not true in business you're literally creating equity out of thin air. And so there's a unique characteristic in business that you don't find in any other asset class which is you could fail a hundred times in a row. But if you're an excellent risk manager and you know how to use lean startup principles and product development principles to keep your risk down low when your first beta testing it really figuring out if you've got a viable business model you could go through 100 failures and if you get the hundred and oneth business right and know how to leverage it up and know how to multiply it you can be a huge success. So it's unique characteristic of businesses you can fail 99 times in on the hundredth time you can be financially independent or you can get it right the first time there's no compound return equation involved. And so that frees you up. So for example let's apply that to a 50 year old listener right now who has never been a great saver. He knows he's getting older he doesn't doesn't want to sit there and start saving and scrimping and saving and go the traditional F-I route. He knows he's behind the eight ball business asset class opens the door. He can achieve financial independence in just a few short years. And this is not some big stretch it's not some pie in the sky thing. It happens all the time. And the other interesting thing about business asset classes you can take it build it up and then you can convert it to a cash flow stream and there's various strategies around that. And so business asset class frees you from those compound return equations that govern the other two asset classes. It's completely unique and it fits specifics life situations. Again it goes back to what I'm saying. You've got to understand the characteristics of the asset classes and tie em back. And so that also ties back to risk management. We talked about risk management on real estate and how the biggest risk factor in real estate is owning being leveraged in real estate in front of a credit bubble bursting in front of a banking panic that type of thing deflationary bubbles. And so you know that's a risk characteristic unique to real estate. In business it's unique because you can get your risk down to where literally the way I manage risk so tightly in business when I fail I usually still profit. You know you can get it down to that level with the business asset class and then with paper assets though it's very limited you can't do those things right. There's different risk management principles that you apply to a paper asset classes. So what I like to say is I'm very careful with paper assets for one reason volatility. I'm very careful with business because of my time. OK business chews up my time paper assets have volatility. I'm very careful with real estate because of illiquidity combined with deflationary bubbles. I don't want to be illiquid and leveraged in front of a deflationary collapse. And so if I see that risk I'm not touching it because I don't have to have it. And so each asset has its own characteristics. You've got to tie them together into a wealth-plan that is going to work for your life.
3126 - 3146 Yeah that's that's incredible stuff. And I'm curious how someone determines what the best path is for them let's say. Let's say someone is just finding FI for the first time. They're not terribly sophisticated as far as finances go. Like how did they determine which of these asset classes is the best for them like how do they even get started.
3146 - 3196 So I mean you're giving me a perfect lay up to pitch my course. I mean basically that's exactly what I do with the course right in the course and the whole reason I built it is for this conversation right. We've touched on so many of these things but we haven't really covered it in a way that's actionable because we can't in 45 minutes you can't do it right. But we've covered what we can in the time we had. And so in the course I go through all of this in excruciating detail step by step I build all the logic brick by brick and it starts with you then it goes to the traditional model and then it goes through the advanced planning framework and then you develop the plan then you take the plan and you convert it back down to action steps you reverse engineer back to actionable steps and then you take and you build a correct and just mechanism in the plan. And so it's a totally different approach to wealth planning then you know is traditionally taught or even taught within the F-I community. And again it's all in the course soup to nuts.
3196 - 3240 Todd that's the most compelling case I've ever heard for a financial mentor in my life. So just to our audience if that appealed to you and you're interested in that I'm going to set up a short link for you guys if you want to go check out Todd's class that he offers. The link is going to be ChooseFI dot com slash mentor Todd thank you so much for honestly I mean you say this wasn't actionable but I can attest that it was incredibly actionable. I'm shocked at how deep you went into this content and it was a reframing. And you know I took a little bit of a haircut on this one. I love that you called me out maybe for my own limiting beliefs in some cases but I think you did more than that. I think you you may have burned the barn down but I think you helped us rebuild it and you helped us show where we need to work further on developing this message. And so for that I mean Brad and I are both grateful and I think our community will benefit from this as well.
3240 - 3267 Thanks. I mean I love this stuff I'm a nut for. You know I mean I've I've been fascinated by the wealth building game it's had a huge positive impact on my life. And this is my give back. You know I'm creating this business. It's I mean if anyone has done this stuff it's ridiculously hard work to build these courses. So to do it right takes a lot of work but it's super rewarding to the response of the students has been beyond my expectations. And so that's why I'm really really happy about it and enjoying building it.
3267 - 3268 What's the best way for people to reach you.
3268 - 3317 Well it's financial mentor dot com you know for people who enjoyed the interview they got value. They should just come over to the site. I give away some free bonuses when they subscribe I give away free ebook 18 essential lessons of a self-made millionaire covers a lot of stuff we didn't even touch on in this interview. It's FREE. You know so you can read it and see if you resonate with it. There's a free course 52 weeks to financial freedom. No you won't get rich in 52 weeks but I'll give you the framework of what I call the Seven Steps to seven figures I have a process called Seven Steps to seven figures again. You know all this is on the Web site most of it's free there's only a few things you ought to pay for I got some books on Amazon you got to pay for. I've got the courses that you have to pay for. But you know I've got the largest collection of financial calculators on the internet short of the guys that sell them and they're all free. So again just tons of free resources financial mentor dot. com Come on over and enjoy it and if you resonate with it then you can take the next step.
3317 - 3324 All right. Well normally that would be the end of this interview but on this podcast we'd like to offer you the chance to tackle the hot seat. Are you ready for this.
3324 - 3325 I'm ready.
3325 - 3326 Have you heard or hot seat yet.
3326 - 3335 I'm flying blind dude shoot.
3335 - 3361 In a world drowning in debt and rampant consumption. Trapped by the chains of lifestyle inflation. These questions highlight the secrets of those who are broken free. Welcome to the choose F-I hot seat.
3361 - 3363 My buns are burning Let's go.
3363 - 3401 All right. Todd Question number 1 your favorite blog that's not your own. Ok so I'm actually kind of funny because I don't think that way. So like I have favorite blogs but they cycle through all the time right. So like when I was really into copywriting and learning copywriting I was really into a cocky blogger when I was first learning about internet marketing and starting to develop understanding web site I was really into smart passive income. So my favorite site cycle's with whatever I'm focused on learning I generally tend to deep dive to grab that level two understanding we talked about earlier. Once I get it I pretty much ignore after that so I don't really have a favorite. It just depends on what I'm trying to learn at the time.
hotseat-blog, passiveincome
3401 - 3407 So the obvious follow up is what are you trying to learn now. What in the last year have you dove deep into.
3407 - 3435 Another interesting question. Nothing. Here's the interesting reason why is at least interesting to me right. It's my life. I find it interesting is because I'm putting out I'm not taking in so there's a rule when you're taking in you can't put out. And so I'm creating the courses we talked about earlier. I'm creating the stuff I'm trying to build up the site and so I can't produce if I'm doing nothing but gather information and so my focus has been putting out not taking in.
3435 - 3445 It's interesting and that's a theme I've heard before. It's one to a varying degree that I can identify with but I know you're in the past you've been a rabid consumer of knowledge from books and from blogs I would imagine as your.
3445 - 3474 Oh my gosh yeah huge. I mean I'm an avid reader. Don't don't take this to mean I don't run around and learn. I learn when I have to gather to get to a level to understand. Till I know it once I know it. I take action. And so what you're seeing me right now is I'm in a prolonged action phase where I know what I need to do. I know how to do it and the projects are so large that it's that the action phase is running over a period of years. And so that's just the nature of where I'm at. I know what I need to do I'm just doing it.
3474 - 3483 Todd in this prolonged period of action right. Are you still reading for pleasure. Are you reading fiction nonfiction or are you just consuming nothing.
3483 - 3511 No no no. If I'm on a trip like if we travel or something I'll read some stuff. But OK so here's an example so my daughters get ready for college right. And I actually did an interview for my podcast about college financing with a different couple of college financing experts. And so I read a couple of books in advance of that. So that would be an example. But yeah I'm basically consuming very little compared to what I used to I used to spend you know hours a day consuming info and I'm not doing that right now because I can't produce.
college, travel
3511 - 3516 Question number two your favorite article of all time. Now this can be one that you wrote or somebody else's.
3516 - 3555 Again I'm sorry I'm just not an absolutist. I don't have a favorite of all time. That just even comes to mind. Like on my site you know I really like the one about Happiness isn't about money. Another one was how anyone retired ten years or less but they're about different subjects. One is about fulfillment and freedom and leading a free life. Even if you're not financially independent The other one was like really boiling down the whole F-I game into a single article. You know like this is the math. This is how it works. This is what it is. It's straight and simple. Bam done one article. So I like them for different reasons. But do I have a favorite. NO I don't I just don't think that way.
3555 - 3561 Well you may not be an absolutist but I would say you are contrarian and in that regards you're right at home.
3561 - 3566 No you know what I am absolutely contrarian and like it's part of my nature.
3566 - 3584 All right Todd so I will adapt our question number three since you're not an absolutely honest. Normally it's. What's your favorite life hack. But do you have any life hacks that you've found especially valuable that have maybe saved time or energy or made you more efficient or just anything. Any type of life that you could pass on to the audience.
3584 - 3608 I don't know if this qualifies as a life hack but the thing that comes to mind when you ask me this is exercise. So I go for long distance runs or cycling every other day. And so what that does is that keeps me centered grounded as well as healthy right as I age it becomes even more important. And so I don't know if that qualifies as a life hack but I can't imagine life without it.
health, hotseat-lifehack
3608 - 3618 That certainly works as a life fact for me. I'm curious do you have anything else that you do for your mind and body to to keep them in tip top shape other than cycling and running.
3618 - 3640 Well I have to give a hat tip to my wife. I mean only fills the house with healthy food she prepares healthy food. I'm very fortunate that way. So the combination of her sourcing local food and organic food and seasonally appropriate food and how she builds our diet. She's taking care of that whole side of the equation. All I have to do is the exercise part and takes care of our health.
3640 - 3643 All right. Question number four your biggest financial mistake.
3643 - 3721 Selling the business selling the hedge fund business. Do you get an absolute one on that. Nothing comes close. I. That was a multimillion dollar error. So to bring it full circle we had a hedge fund that I could have had you know the other part owner was willing to just give it to me and I didn't want it. I was to move on with life I really want to travel I had you know I'd work straight out of college just to back up. I was not born with a silver spoon in my mouth. I committed to financial independence when I came out of college. So basically then you know built the hedge fund with this one guy and when he got tired of it I got tired of the same time and I really wanted to travel. I'd always wanted to just kind of backpack around Europe with you know nothing more than a backpack on. So I married my girlfriend at the time is now still my wife. We traveled around Europe and stuff in order to do that. I sold the hedge fund which was just stupid because I easily could have converted that into a cash flow machine that I probably still would have today and that one decision has cost me many many millions. But on the bright side you said financial mistake. I want to be clear it was a stupid stupid financial mistake. But in terms of a life decision that was brilliant because it took me down paths and put me in different paths that I wouldn't have gone if I had maintained the hedge fund. And so from that regard I'm thankful that I was stupid enough to do it because my I think my life was better for it but of course we never get to now.
college, travel
3721 - 3730 I love that I love that you highlighted the fact that it was a financial mistake but not a life mistake. And I think that's a thread we've seen with other people. Those are not necessarily the same.
3730 - 3731 Yeah. No they're not at all.
3731 - 3737 And Todd this sale of the hedge fund was not a risk management issue at all. It was a purely a lifestyle play.
3737 - 3810 Well at the time we were uncomfortable with you know daily volatility and our ability to manage risk the way we had successfully done it for years. You know the market was heading into uncharted territory. I mean the previous high on the Cape ratio was just a price earnings ratio was I think what was it twenty nine or something like 30. Now 36 back in the Great Depression before the Great Depression. I'm pulling numbers at the top of my head so don't hold me to them. But I think it was like 36 and we were heading above that. And it was unprecedented territory. We only you know there was only a very small sample size of just historic horrid bear markets that were subsequent to those types evaluation levels which coincidentally are the valuation levels we're in now as we record this but it's a who's who of the worst times to ever invest in the stock market. And so I was getting uncomfortable with running an investment management firm at the time. And I just really had. So it was a risk management a little bit but it was really more driven by the fact that I just really want to get out and do something else and I had enough money to afford to do it. So I just did it. You know so it was kind of a little of both but really it was more about life.
3810 - 3819 You know I know this would extend the interview but I just wanted to highlight for our audience that your wealth was due to your savings rate. Not that not the sell off of the hedge fund am I'm right about that.
3819 - 3881 Yeah yeah. So I was financially before we sold the hedge fund and it was because I basically I mean you know even though we we took Pete to task again I want to be clear he's right. And one of the things that I did right was I never really raised my spending much above a college kid. So I you know I started the hedge fund out of college or started working as a partner in a hedge fund out of college or shortly after college I should say. And then I never really raised the lifestyle. I mean I can still remember my mom turn to me into because you're making all this money why don't you do something. Why don't you buy yourself a Corvette get a boat. And I was just like I don't want those things like that. That's not true. I love playing volleyball on the beach with my friends. I love mountain biking those things don't cost money. You know like I didn't want the inconvenience of all the toys and the expense and stuff. So I mean I really do have some level of those values which drove the savings rate. I mean when you know when I was making good money in the hedge fund I was saving 70 percent plus of everything I made which is you know if you go into that post how anyone could retire in 10 years or less. I mean I point out that how I did it. You know I saved my way to wealth.
college, savings
3881 - 3901 I know you understand the math. I mean you obviously understand it and can explain it to me it a way deeper level than I ever could. And so I'm curious your thoughts on which we've mentioned the 4 percent rule your thoughts on the safe withdrawal rule. How does someone that is so aware of how to manage the risk. How do you tackle a problem like the 4 percent rule and what is you know what safe withdrawal rate are you comfortable with.
3901 - 3907 Because of my investment management skills and my risk management skills my safe withdrawal rate is higher than 4 percent.
3907 - 3907 Wow.
3907 - 4035 Something. Yeah you guys just got a little bomb in here that that I haven't shared in any other interview myself withdrawal rate is higher than 4 percent because I do have risk management skills and I do have investment management skills in the paper asset class developed over the hedge fund years. Is it an exact number of what. No. No there's no exact number I know it's higher four percent because I know that 4 percent is determined by the drawdown periods. And since I risk management that controls Max drawdowns in how I manage my portfolio I'm not exposed to the same risk level that causes those 4 percent thresholds. If you think about the 4 percent rule it's pretty funny right. I haven't heard too many people talk about it. You know the 4 percent rule the whole premises no amount of money you can spend from your portfolio that you won't outspend the portfolio in 30 years. Well 30 years of not making any money on your portfolio results in 3.3 percent. Right. So that's just you never make a dime you never lose a dime nothing you just take the portfolio is a chunk of cash throw out a mattress and spend 3.3 percent a year and the last 30 years. Now I'm playing rough and dirty with the math because I'm not adjusting for inflation. Four percent will actually adjust for inflation in there but you can make a case for it because the research shows that your spending drops roughly 10 percent in retirement for every decade that you live in retirement. And so you know that offsets inflation. So I mean I can make a case why it's still an intimate claim anyway. 4 percent a paltry number is the point I'm trying to make. It's really a pretty pathetic number. And as Michael Kitsis has done a lot of research on this as well as Wigfall points out it's a worst case scenario. But what they're also not telling you is that's for us data which is the most optimistic case scenario U.S. data is the economic prom queen of the world for the data research that the research that the is done on or the data. The research is done sorry I fumbled that. And so anyway you know there's a lot of issues that go into looking at this. But really once you dig into it deep you'll see that certain types of investment strategies and ways of constructing portfolios can support a higher safe withdrawal rate. But again that's way beyond the scope of this interview. But it is a reality that exists.
4035 - 4043 While we would continue this interview for four plus hours if we could get away with it. but Question number five the advice you would give your younger self.
4043 - 4141 I think I would have bought more real estate on just a buy and hold basis. You know like apartment buildings and stuff you know I spent years renting apartments and renting houses. And I think my younger self if I could go back I would beg borrow whatever to get that down payment and I'd buy that first fourplex and then I would live in it and learn all the ropes of being a landlord by living in one of the four units and dealing with my tenants and figuring out what are good tenants what are bad tenants. Learn the ropes. Everything. My whole lifestyle will be deductible at that point. I'd start the amortization equation on a on a fully amortizing fixed rate loan on the property. Right. That's a key point of this whole discussion is got to be fully amortizing fixed rate loan. Start the amortization question as soon as I got that thing cash flowing as soon as I got it working. Based on four units of rental I'd go out and get another one by time you get three of those. You're done you're done. It's like the simplest easiest way to achieve financial independence for somebody in their 20s. It's it's like such a no brainer plan. So I I think in hindsight I probably would have done that. I just didn't know enough back then. You guys understand. I was committed to financial independence but I didn't know what I'm teaching you guys now I mean I've only learned this is school of hard knocks and making all the mistakes and doing all the stupid things. And so I didn't understand the real estate asset class fully I didn't understand buy and hold fully. I started out in the rocket science of investing and I was really enamored with really extraordinary turns in the paper asset class. You know I since learned to balance it out and to recognize that all these asset classes work their different characteristics. You know there's a way to put this together. It's taken me a while to figure it out.
4141 - 4155 Todd I'm curious if you had taken that advice for your younger self and invested in these rental real estate properties. Would you think based on your risk management that you've talked about throughout the episode that you would have sold in 2005 2006.
4155 - 4226 No because they would have been free and clear you know so there would there wouldn't have been a financial leverage component to be concerned about. So they would just be cash flowing and if you owned your property free and clear at the time you were still cash flowing through that downturn. The point of looking out for a deflationary collapse is the does the financial leverage involved in mortgage financing because as I pointed out mortgage financial leverage cuts both ways. So like where that applies to me as I was leveraged up with a bunch of apartment buildings. And so you know that can destroy my wealth that I created. Right. And I don't want to carry that risk. So I did of her risk management perspective too to basically take any. It's the equivalent of like in football right. The you know they kicked the ball and the guy calls for a fair catch. Right because he's got like these you know 300 pound guys that can run a 40 in four seconds or whatever. They're bearing down on him they're going to slaughter him because they got hang time on the ball right. So he calls for a fair catch to conserve and not get slaughtered not get the ball knocked out of them. And it's the same thing here right. I kind of called for a fair catch and said enough is enough I don't need financial leverage in the face of a credit deflation.
4226 - 4255 That makes perfect sense. Thank you for the clarification. Yeah I was curious when you're going through earlier about selling those apartments like if they were a business in and of themselves that were presumably producing cash flow positive net income. I was curious why you sold them but I guess I'm not familiar enough with the financing of Real Estate of that sort. So you would not have been able to weather whether that storm and that is that the issue or was it just purely risk management based on not wanting to deal with it.
4255 - 4470 Yeah it's a risk management so I don't want to carry that risk. It does. It's not a risk reward ratio. If people are offering to pay me twice what I think a building's worth. Why would I carry that risk why wouldn't I just harvest the equity and move on. And again you understand I had no I mean I felt that we were going to have some sort of real estate decline. I felt that we were in a credit bubble which in hindsight turned out to be right. If you had interviewed me at the time would I have predicted that we were going to go through a 50 percent decline or more in California real estate prices. No. You know I don't have a crystal ball here right. What I did know was that it had gone about as far as it could go like I just couldn't see how it could go much further. You know I had C-Class properties when they were mining my tenants and giving them 30 year fixed rate mortgages at like 300 grand. I mean this one guy that left me was the straw that broke the camel's back. I mean he shouldn't have even had an apartment for me. He got a $300000 mortgage on a house down the street from my building. And I was like really like that was impossible. You know it dawned on me that that anybody who could fog a mirror could get a loan at that point on almost any dollar amount it was you know they call them liar loans back then. Now I was like what's left. I mean ultimately all prices are determined by supply and demand there's no violating that rule if this guy is part of demand. Where is it going to come from after he's done. You know at some point it has to tilt and prices have to decline now. Did I have a crystal ball and know that we're going to have this epic real estate decline. Did I know that the banking system was almost going to go to the point of collapse that ING was going to go under. Merrill Lynch was going to vanish. All these things going to happen as the credit bubble came around. No you know it's just like if you like right now the same questions would be fairer. Right we're sitting in front of. Clearly some sort of problem here. Do I know how it's going to come unwound. No I just know that we're sitting in front of a problem because risk reward makes no sense. Bonds make absolutely no sense right now as they approach zero percent interest rate 0 percent is a logical floor and bonds approach that there's no mathematical upside to Bonds. I wrote about it. You can link to a post in the shownotes so people can find it it's called the bondbubble is here what to do next. I wrote about that a couple of years ago and I pointed out I have no forecast of a future. This could go on for a while. I said best case scenario is that kick the can down the road and this thing just go sideways. But there is no mathematical upside to own bonds in combination with inflation that makes zero math sense. It makes sense to leave the asset class on a risk reward basis so I did. Right. And that's proven absolutely correct. I left that article intact and dated. So people can see it. I haven't changed any words in it. And so I did the same thing with stocks. You know as the as the Internet bubble took place I was like this makes no math sense. You know I don't know where the final top is. I don't know how it's going to come unwound. So right now you can look at it and go stock valuations make no math sense. The current volatility that's in the market makes no math sense from historical perspective. Bonds make no math sense real estate. I can't find real estate to make math sense. OK. This is a bubble created by artificially low interest rates the lowest in recorded history. Do I say it's going to come unwound this year. I have no crystal ball. I don't know. I just know on a risk reward basis. I want to remain liquid and I want to remain nimble that I'm willing to stake my reputation on in terms of where this goes and how it comes uwound I don't know. I just know it will. There's a principle in investing I teach right one of there several but one of them is called mean reversion. What I'm pointing out is this will mean revert with absolute certainty it will mean revert. We just don't know how far and how it'll develop.
banking, stocks
4470 - 4479 With you trying to stay liquid if you don't mind saying what percent roughly of your net worth is in cash cash equivilence right now.
4479 - 4514 So it's the definition of liquidity. The paper assets you can go to cash with the click of a mouse at my size right. We're not talking callipers or Fidelity management or something big where they're going to move the market at my wealth. I'm a nobody. And so I can I can go liquid at the at the click of a mouse when I talk liquid I'm talking about an asset class that I can that I can convert to cash and so my investment exposure varies regularly. My point is I'm in liquid assets which I can count on paper assets stocks bonds mutual funds ETF as liquid assets.
4514 - 4518 Wonderful there. Thank you for the clarification that's very interesting.
4518 - 4554 And the same thing with my business my business carries no risk exposure either because it's 100 percent I own it outright. There's no debt on it. And you know the margin on everything that's sold is not quite a hundred percent but not that far from it. And so there's almost no way for me to lose money on the business. And so that that's another example of managing risk. I'm just I'm just in a very much risk management mode right now. But I always am I'm always looking for that risk I'm always looking for that way to get hurt. But you can see how I'm structured that I'm you know where I'm out.
4554 - 4579 TODD This is incredible. We clearly can just keep going down different paths for hours. I'm sure if you're willing to come back on I can guarantee you when this goes live that we're going to have feedback from the audience and they're going to have very specific pointed questions and we'd love to have you on with almost like a A.M.A. type scenario of you know let's just talk about the questions and things that Jonathan and I didn't pursue. And if you're open for that we'd love to have you back.
4579 - 4598 Yes. Happy to come back. It's a great conversation I enjoyed talking with you guys we can deep dive into you know more narrow subjects we you know the broad scoped FI here. Right. And so we can go deep dive on narrow subjects that people want to hear about whatever I'm cool with that it's you know I'm totally FI and I am like hardcore. I'm just not traditional fi.
4598 - 4617 Yeah I think that's such a great point. I mean it's easy to see that there are many things about the traditional way that fi is explained that you disagree with. But I think it would be silly to say that you're not a part of the FI community. Of course you are. You just chose a different path. Well again just thanks so much for just being willing to come on the show. This has just been a real treat.
4617 - 4618 Thanks for having me on the show I appreciate it.
4618 - 4631 And to our audience this was probably the most controversial episode that we have done but it's also maybe one of the most important. And yeah I look forward to talking about it some more on the Friday roundup. So thanks for listening and thanks for being a part of the community.

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