I grew up with a very different perspective on personal finance and investing than most. My parents were immigrants, and when they arrived in this country, they didn’t come with any preconceived notions of conventional financial wisdom.

My father grew up dirt poor in India—that’s really poor and he had never even heard of investing as a kid. But he was blessed with a tremendous intellect and used it to rise from nothing to truly live the American dream.

He came to the U.S. in the 1960s on an engineering scholarship and started working as a bridge engineer in Minnesota. When he finally began making a little money, he was confronted with the idea of investing for the first time. 

Until then, life had always been hand-to-mouth. So he was approaching investing like an alien coming to this planet for the first time with an unbiased view on anything financial.

With that perspective, the stock market didn’t make sense to him. He wanted cash flow that would immediately improve his quality of life. Intuitively, it felt smarter to buy “streams of cash” than to “gamble” on stocks.

So with whatever money he could scrape together, he bought small rental properties. Nothing glamorous—mostly low-income houses and duplexes in Minneapolis. But guess what? It worked.

Before long, he started making real money and quit engineering altogether. The apple didn’t fall far from the tree, I guess. Years later, I would also walk away from my career as a doctor to become a full-time investor.

My father did really well. By the 1980s, he was having million-dollar years—that’s a lot now, but back then it was a lot more!

But then came the ’90s. Like many others in the dot-com era, he got in over his skis. It seemed like everyone was making easy money in the stock market, and he got greedy. 

Unfortunately, he sold a large chunk of his real estate portfolio and went all in on tech. And of course, we all know how that story ended—the bubble burst and so did his brokerage account.

So there he was, in his 50s, starting over again after being obliterated by the dotcom bubble. He was terrified. But he knew what he had to do. He had to rebuild the same way he had built wealth the first time: cash-flowing real estate. Today, in his 80s, he’s still at it.

To be clear, his real estate career wasn’t all smooth sailing either. This isn’t a fairy tale. It’s real life.

For example, in the late ’90s, Alan Greenspan suddenly cranked up interest rates, creating a situation not unlike what investors faced post-COVID when the Fed raised rates at record speed. 

That hurt him, but each setback brought lessons, and he kept moving forward with an asset class that he trusted. Eventually, he recovered. We were always comfortable, and my dad made enough to pay for 3 kids’ college tuition and medical school for me while still living comfortably, traveling, and enjoying his life. He’ll be the first one to tell you that he only ever made money in real estate and that’s what he believes in.

Now, why am I telling you all this? I’m telling you this story because it shaped the way I see investing. Unlike most, I grew up hearing that the stock market was risky and that real estate was the safer, smarter path—pretty much the opposite of what everyone around me grew up with.

And despite my own challenges from the post-COVID rate hikes, I can still say without hesitation that focusing on real estate has served me better than following the traditional investing playbook.

Still, no one wins all the time. Every investor loses money sometimes. Surgeons have a saying: “If you haven’t had a complication, you haven’t done enough surgery.” That’s as true for the best surgeons in the world as it is for the best investors.

So what do you do? Sitting on cash guarantees you’ll lose purchasing power to inflation. Money markets barely keep up.

For me, the answer is to keep investing with discipline. Real estate is my medium, and like my father, I learn from my mistakes and keep moving forward. 

I still see it as the greatest wealth-building asset in the world—just look at how many billionaire real estate investors there are.

But wealth doesn’t build blindly. Every project I invest in has to have underwriting I believe in. Beyond that, I pay close attention to macroeconomic shifts and form my own view on what comes next.

Right now, I believe in the right markets, real estate has bottomed out. I think we’re on the buyer’s side of the cycle. 

I also believe interest rates are headed lower—both because the Fed has signaled it and because the Trump administration will do everything possible to keep them moving in that direction. And for real estate investors, investing in a descending interest rate environment is nothing short of a gift.

So now I look at the deals in the right market. That involves underwriting and understanding what all those numbers mean. In this week’s episode of Wealth Formula Podcast, my guest and I break down how you—even as a passive investor—can do your own due diligence.

This week’s Wealth Formula Podcast features an interview with a tax attorney. While I’m not a tax professional myself, I want to drill down on something we touched on briefly that is incredibly relevant to many of you: the so-called short-term rental loophole.

If I were a high-earning W-2 wage earner, this would be at the top of my list to implement—and I know many of you are already doing it. The short-term rental loophole is one of those quirks in the tax code that most people don’t even know exists, but once you do, it can be a total game-changer.

Here’s why. Normally, when you buy a rental property, depreciation losses can’t offset your W-2 income. They’re considered passive, and they stay stuck in that bucket.

But short-term rentals—Airbnb, VRBO, whatever—work differently. If the average stay is seven days or less and you materially participate, the IRS doesn’t classify it as passive. It becomes an active business. 

That means the paper losses you generate can offset your ordinary income, even from your day job. Normally, you’d need a real estate professional status to get that benefit. This is the one situation where you don’t.

So let’s walk through how it works. When you buy a residential property, the IRS requires you to depreciate the structure—the walls, roof, foundation—over 27½ years. On a million-dollar property, that’s about $36,000 a year. It’s a slow drip.

A cost segregation study changes that. Instead of treating the property as one block of concrete and wood, it carves out the parts that don’t last 27 years. Furniture, carpet, appliances, cabinets, and even ceiling fans—those are considered 5-year property. In other words, you can depreciate them much faster.

Now add bonus depreciation. Instead of spreading those 5-year assets out over five years, the current rules let you write off most of them all at once in year one.

Here’s the example. You buy a $1,000,000 short-term rental and finance it at 70 percent loan-to-value. That means you put in $300,000 cash and borrow $700,000. A cost seg often shows about 30 percent of the property—roughly $300,000—is 5-year personal property. Thanks to bonus depreciation, you deduct that entire $300,000 immediately.

So you put in $300,000 cash, and you got a $300,000 paper loss in the same year. In practical terms, you just deducted your entire down payment against your taxable income. This is what real estate professionals do all the time and why they often end up with no tax liability at all.

In this case, it works for you as a W2 wage earner. And for that reason, I think its one of the most powerful tools out there for high paid professionals that is grossly underutilized.

Remember, the biggest expense for most people is the amount of tax they pay—especially W2 wage earners. This strategy lets you use money you would otherwise pay the IRS to build a cash-flowing asset for yourself. 

Listen to this week’s Wealth Formula Podcast to learn other ways to legally pay less tax!

Transcript

Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].

 In general, W2 income is hard to defer and you can do things when you’re self-employed or when you have a company or when you have stock gains or investment gains, real estate, those kinds of things. But I think wages, I think you’re pretty much stuck with.

Welcome everybody. This is Buck Joffrey with the Wealth Formula Podcast coming to you from Montecito, California today. Before we begin, I wanna remind you that there is a website associated with this podcast called wealth formula.com. Go check it out. And, uh, one of the things on there that I wanna draw your attention to is the, uh, accredited investor club, otherwise just known as.

Investor club. Uh, this is where if you qualify as an accredit investor, basically that is not something you apply for, but you either are or you are not. If you make $300,000 per year or more filing, uh, jointly, or you have a million dollars of net worth outside of your personal residence, you are an accredited investor, you just didn’t know it, and, uh, who doesn’t want to join a club.

So go to wealth formula.com, join investor club. Now today’s, uh, podcast is going to be a conversation with a tax attorney. And, uh, while I’m not a tax professional myself, I do want to drill down on something that we touched on in this conversation briefly, but probably should go into a little bit more because I think it’s so relevant for this audience.

And it’s called the short term rental loophole. You may have heard me talking about this before, but you know, if I were a hiring W2 wage earner. This would be really at the top of my list to implement, and I know many of you are already using it. I’ve, I’ve talked to some of you who have used it after, during me talk about, which are good for you.

Um, the short term rental loophole is, it’s really one of those quirks in the tax code that most people don’t even know exists. Uh, but once you do, uh, it can be a pretty significant game changer for you and here’s why. Okay. So if you’re a W2 wage earner, usually when you buy a rental property, all that good tax benefit, a lot of it depreciation, uh, depreciation losses in particular, they can’t be offset by your W2 income.

They’re considered passive and they get stuck in that bucket. But short-term rentals, we’re talking, you know, the Airbnbs VRBO, whatever. They work differently if, if the average stay is seven days or less, and you can, uh, show that you material materially participate. The IRS doesn’t classify it as passive.

It becomes an active business, and that means the paper losses you generate can offset your ordinary income even from your day job. Now, normally you would need real estate professional status to get that benefit. This is one of those situations where you don’t, so let’s walk through how it works. And by the way, you know, I keep calling a loophole.

This is, this is black and white tax law. This is, you know, they call it the loophole. I don’t even know why people call it the loophole, but the reality is that it’s not it. You follow this law. It is black and white in the code, but here’s how it works. Okay? You buy a residential property. Usually, you know, uh, you get depreciation, right?

The IRS requires you to depreciate the structure on paper, the wall, the roof, the foundation, and typically that’s over 27 and a half years. So on a million dollar property, that’s about $36,000 a year. It’s, uh, you know, it’s, it’s, it’s real money. It’s a, but it’s a little bit of a slow drip and. You know, normally on investment property, you can’t use that as a W2 wage earner anyway.

Now let’s get back to that 27 and a half years in a million, uh, dollar thing. So there’s something called a cost segregation study that we’ve talked about again on this show that changes that. And so instead of treating the property as one block of concrete and wood, a cost segregation study basically carves out the parts that don’t last.

For 27 years. And namely, those are things like furniture, carpet, appliances, cabinets, even ceiling fans. Those are considered personal property and are depreciated typically over five years. In other words, you can depreciate them much faster. Now that’s where bonus depreciation comes in. The, you know, the Trump uh, uh, laws now are allowed that five year.

Uh, the stuff that’s depreciated over the five years to be taken all at once in the first year. So here’s the example. I think maybe that’ll help to put all this together. So you buy a million dollar short-term rental, and typically, of course, you’re gonna finance that. And let’s say it’s a 70% loan to value type situation.

So you’re putting down 30%, you’re putting down $300,000 cash, you borrow $700,000. Now a cost segregation study. My experience, having done it many, many times shows approximately 30% of the property, roughly $300,000 in this case as personal property. Okay? That’s not gonna be the same every time, but I, it seems to come out to about that amount frequently.

So thanks to bonus depreciation, that $300,000 that you put down is a down payment. You deduct that entire $300,000 immediately from your taxable income. Again, let’s repeat that a little bit so it’s very clear. You put down 30% to acquire this million dollar property. The cost segregation comes out in such a way that you basically get $300,000 of depreciation.

So effectively you’re writing it all off. I mean, it’s, it’s magical. Okay? $300,000 cash, you get $300,000 pay per loss in the same year. So in practical terms, again, you just deducted your entire down payment against your taxable income, and this is what real estate professionals do all the time and why you often hear that they end up having almost zero tax liability at all.

In this case though, with this so-called loophole. It works for you as a W2 wage earner. And for that reason, I think it’s one of the most powerful tools out there for high paid professionals. And I will say, I think it’s grossly underutilized. I think a lot of people don’t even know about it. Now, remember, the biggest expense for most people in the is the amount of tax they pay, you know, and that is definitely the case for apec, you know, for W2 wage earners, it may not be for for real estate professionals, but it is for W2 wage earners.

What this strategy is allowing you to do is to use money that you’d otherwise pay the IRS to build a cash flowing asset for yourself. Anyway, I wanted to drill down on that because I think it’s really a really powerful tool. I think people should consider it. Now, for today’s show, we’re gonna talk to a tax attorney who is going to give us a.

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Visit Wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to Show Everyone Today. My guest on Wealth Formula podcast is Robert Wood. He’s a managing partner at Wood, LLP in San Francisco, one of the nation’s leading tax attorneys. He’s widely known for his expertise in legal settlements.

MA tax planning, capital gains Strategy and qualified Small business stock. He’s the author of the Standard Text on the Taxation of Damage Awards and Settlements, and his commentary is regularly featured in orbs and other national outlets. Robert, welcome to the program. Thank you. Nice to, nice to be here.

Well, let’s just start right off the bat. You know, this, uh, audience has an unusual number of high income W2 wage earners. That, uh, of course W2 earners feel like it’s an immovable wall. So let’s just start with some things here. What are some overlooked but fully legal strategies they can use today to meaningfully reduce, uh, tax burden?

I would say I’m, I’m more effective typically at, and I, and I think in general with Wade Earners, um. There’s not a lot, at least in my opinion, that you, you can do legitimately. I mean, obviously wages are taxed as wages withholding is, is taken out. Um, if you live in California as I do, um, the, the, uh, state, uh, income tax burden.

On top of the federal is, is high. So I would say it’s, it’s not the answer that your audience wants to hear, but I would say in general, um, W2 income is, you know, is hard to defer and, you know, you can, you can do things when you’re self-employed or when you have a company or when you have, uh, stock gains or investment gains, real estate, those kinds of things.

But I think wages, I think you’re pretty much stuck with, in my view. Yeah, I mean, one of the things that comes to mind for me, um, in this space and would love to get your thoughts on, is the, uh, short-term rentals. Um, people who are, um, you know, buying short-term rentals, as long as they’re, they’re W2 wage earners, they can often get the, uh, they can do the cost segregation analysis, take bonus depreciation, and as long as they’re, you know, actively participating in that short-term rental, they can.

Offset that, uh, potentially against, uh, that, that income, can’t they? I think finding a, uh, you know, rather than somebody like me, a tax lawyer, I think finding a good accountant who is, uh, savvy and well-versed in, you know, in those rules, uh, I think is important. I mean, I do see, or I have seen historically.

People who don’t do it right, you know, who claim whether it’s short term or you know, longer, more traditional, uh, rental real estate activities, you know, who end up in, in trouble, uh, or, you know, auditing, audited, and having, uh, deductions denied. But I mean, you’re right. That’s a fertile ground for I think for people to, you know, to have something.

Against which, um, you know, to offset some of their, their income. And it’s, you know, the idea of course with real estate is, which I, I know is something you’re, uh, experienced in, is, yeah, we, the value grows over time, depreciation, deductions, those kinds of things. It’s how Donald Trump became wealthy, I believe.

Sure, sure, sure. So, um, you know, the o the other OP option is to, you know, essentially. Structure income through businesses and you know, for someone who doesn’t own a business today, again, say it’s a doctor, you probably get a lot of tech executives who make a bunch of money. What are some of the ways that they could potentially legitimately structure, you know, structure businesses, um, structure things in their, you know, to create businesses that they don’t even know there’s an opportunity potentially.

Yeah, I mean, it’s sort of tough to talk in a generic way about those issues. I mean, and maybe it’s the, you know, the luxury of having, um, at least for, for me, um, a sort of a busy practice where people tend to bring me specific things, uh, specific. Well, maybe you could give us an example that you’ve seen. I mean that just as a, just as an idea.

Oh, sure. An example of things that I’ve seen people bringing something to me. Um, yeah. Yeah. Well, I mean, the most, and I guess you, you, uh, sort of said it in the introduction. The thing I see, you know, every day of the week, uh, really probably half of my work, I would suppose on a percentage basis, um, would be people who are settling some kind of a dispute.

Uh, they’re either paying money or receiving money, um, in the, you know, tax characterization questions is what, you know, what are they receiving. How can that money be optimized from a tax viewpoint? So, I mean, that’s not everyone, certainly who’s a listener, because hopefully you don’t have any disputes.

But, um, you know, in today’s world, people have employment disputes. They have accident disputes. They have disputes. I, I see a lot of founder disputes. Um, uh, you know, where people are exiting a company or in a dispute over, you know, who’s entitled to what share of the profits in a business. Those kinds of things.

And they’re invariably tax opportunities, uh, there and, you know, a lot of, a lot of pitfalls. Um, but I mean, as to things like I wanna start a business, I mean, there are always choice of entity questions. Uh, should it be a disregarded entity, A, a single member LLC, which typically is taxed directly to the owner.

An S corp, a C corp, uh, you know, you think about qualified small business, stock rules, all of those sorts of things are good to think about. Yeah. At the, you know, from the get go and, and later on as well. So let’s talk about that. ’cause I know that’s a big part of what you write about is qualified small business stock.

Um. A lot of people probably have not heard of this concept at all. Can you break down what it actually is and, and you know, who might qualify for this kind of thing outta business owners? Uh, sure. The rules are highly technical, so it’s a little difficult to summarize, but I guess the, the headline, which will be alluring to people, I think the headline is really for the past couple of decades, and I, I suppose you could say this is.

You know, in large part, uh, Silicon Valley has been the beneficiary, but, uh, Silicon Valley is sort of all over the country now, in a sense. Um, if you have a, a stock that’s qualified small business stock, which is a defined term, it’s gotta be a C corporation. So shares in an S corporation or an LLC don’t qualify.

Uh, and a C corporation is a regular old, um, you know, traditional. Corporation that, uh, you know, doesn’t file any tax elections and pays its tax and then distributes money to shareholders. Uh, but essentially if you sell your stock and you’ve met the various tests, including generally a five year holding period for the stock, you can exclude up to $10 million of your gain.

So that means, I mean, you, if you sell stock in Amazon and you’re lucky enough to have a $10 million gain. You can, you know, you pay tax, of course you pay tax at capital gain rates, but you still pay tax. Uh, in contrast, if it’s, uh, stock in a company that’s qualified as a small business, um, then up to $10 million is tax free, I guess notably, and it’s in the news in the last few months, notably that $10 million was just raised.

By the big tax bill, the so-called beautiful tax bill, um, to 15 million. Again, you gotta meet some tests and I mean, there are various articles online, including by me that sort of run through the tests, but getting a tax-free chunk of money, you know, is, is, is uh, you know, can be a, an enormous benefit, which is why people try to qualify.

So can, can we drill down on that a little bit? Uh, in terms of like, what, okay, so this is a small business and is it investments into a small business or could it also be your own small business that you are essentially converting into stock ownership? How, how does that work? There’s a list of things that no matter what you do, do not qualify.

Those are generally service businesses, um, such as, you know, being a doctor, a lawyer, a dentist, uh, an accountant. Things of that sort. Service businesses don’t qualify. Again, it’s gotta be Es uh, C Corp stock. It’s gotta be original issuance. So if you start a company, a buck and I buy shares from you, and then I, you know, build it up, let’s say, and it sell it for a lot of money, that doesn’t qualify because I bought the stock from you.

It has to be issued by the company. Um. So, but I mean, it, it could be a company, you could be a company founder and start, uh, and, and start the company and essentially build it up and be selling, uh, either entirely or in large part your own, you know, your own stock in your own company and that, you know, what’s small, I guess means different, uh, different things to different people.

Um, the traditionally for, again, for many years, decades. The rule was the company had to be worth $50 million or less. That doesn’t sound very small. Uh, but in today’s world, or even a couple of decades ago, uh, it was easy with, um, you know, with venture funding and that sort of thing, to have a company be worth a lot more than $50 million, uh, in assets.

Um, and, and that’s not when you later sell, that’s when the stock was issued. So now along with that. Increase from 10 to 15 million. Now that, uh, that 50 million number went up to 75. So, I mean, the main thing is if you’re starting a business or you are operating a business and you’re looking at selling, it’s good to talk to a tax person about, you know, in starting, what should you do?

What are your plans? What’s the sort of likely off ramp? Is it gonna be generational and build up in your family for decades? Or are you trying to build it up and take it public, sell it off to a bigger competitor? Those kinds of things are all relevant. I guess one question I would have on that is, um, if you, if somebody already has a business and it’s a, you know, qualifies otherwise, but they didn’t start it, uh, thinking that, uh, you know, they were gonna use a qualified small business stock and it’s come to the point where they’re thinking about selling.

Is it there, is there a way to convert it? Uh, to C corp and, and then utilize this kind of thing, or not so much? It, it depends. It depends on, you know, what you’ve got and, um, sort of how long the off-ramp might be. And also, um, you know, what you own. For example, uh, one that, that would work, this is maybe the easiest example would be if you have a single member LLC, which you know for, and these are very common in my experience, so it’s your entity.

Sometimes people are confused about how that’s taxed. Typically, it’s simply passes through and is taxed on your own individual tax return. But, but you, you know, you own all of it or you own your spouse. And then you say, well wait a minute. I wanna incorporate and I might be, you know, selling in five years, even though you own the business now and have already built it up, uh, you can form a corporation, essentially trade your LLC membership interest in for stock and still qualify for a qualified small business.

So, I mean, once again, if for someone who’s got on a business they’re starting, or a business that’s underway. They may want to sell. Um, it’s good to get some, some tax advice about what’s possible. Yeah. Let’s talk about capital gains, um, something you’ve written quite a bit about. So average investor selling stocks or real estate, what are the most effective ways to really minimize capital gains exposure?

I mean, without stepping into IRS Gray Zones, again, there is renewed talk of opportunity zones. Those were, those came back. It’s essentially, you know, taking your, um, it’s oversimplified, but essentially, you know, taking your proceeds and putting it into something that wa is a tax advantaged investment as a way of, of, uh, avoiding, uh, paying a capital gain tax.

You, you probably, or listeners may not like this, um, this approach, but I, as a tax lawyer in California, I’ve seen an awful lot of people who are most bothered by California taxes. And if they have a big gain, let’s say. Um, they are about to sell, um, you know, their cash of a large amount of, of crypto, uh, that’s highly appreciated, for example.

Or they’re about to settle a, you know, a, a career sort of lawsuit and get a bunch of proceeds, or they’re about, you know, they’ve been lucky enough and they have huge amounts of stock, which, which by the way could be. Fully taxable sales or could be qualified small business stock. So they might be escap escaping federal tax on the ladder, but not California.

California at one time had a qualified small business rule for, uh, capital gain on, on stocks, but, uh, that’s been, that was repealed, um, a long time ago. So I, I do see people fairly regularly who are. Before they trigger a big gain, want to look at moving out of California? Yeah. Or, or gift, uh, potentially gifting to, uh, uh, like a non guarantor trust.

Yep. Oh, you know, a non guarantor trust outside of, of California, like a Nevada trust or something like that. Right. Y yeah, that, I mean, courtesy of the, the governor, um, uh, and, and state legislature in California. Um, that is, it was about a year ago. I, as I remember, um, the sort of the non-California trusts, um, is sort of a no-fly area now.

That is it. It did work for years. Aggressive people would put something in a, um, uh, in a non-California trust of a, of a certain type. Basically that gain would not be subject to California tax. Um, but as I say, that’s, I think that loophole has been closed. And I would also say, I mean, I’m certainly not, uh, you know, saying that moving is an easy step for a, at least in my experience, for someone who is young, doesn’t have a lot of assets, you know, may not own a home in California.

Maybe, you know, more mobile than somebody like my age is, um, I mean, it can be a fairly easy thing to do. In contrast for somebody who has a lot of assets in California, has family. Um, it’s, it’s a, it’s a much bigger task and you know, you don’t wanna be unrealistic about it and then end up in trouble with the franchise tax board.

Sure, sure. Um, you did mention legal settlements and windfalls. Um, just, just kind of going in on that, let’s say somebody’s got a settlement and, you know, for half million dollars or something like that, what are the things they need to be thinking about in, in that situation? Everyone is, is different. I, I guess it’s, it’s a very repetitive area for me, and yet I’m always.

Are continually, um, surprised at the variations in, in legal disputes. And so it’s important to sort of first and foremost ask sort of what the, what the dispute is about. Um, but there’s a lot of press, uh, the last, I don’t know, five, five years, or actually seven years since 2018. About the tax treatment of legal fees.

So I think, and, and many, not all, but most probably people who are, uh, in some kind of a legal dispute and they’re the plaintiff, uh, trying to receive money from somebody else. Most people on that context are using a contingent fee lawyer. So probably the first tax consideration with legal settlement is, is the plaintiff gonna pay tax on the legal fees?

And that’s a, I guess for, even for sophisticated people, it’s a little hard, I think, to comprehend this rule. But there’s a US Supreme Court tax case that basically says, uh, if you use a contention, fee lawyer, doesn’t matter how you divvy up the payments or how the, uh, lawyer is paid, even if the lawyer is paid directly by the adverse party of the defense.

You as the plaintiff will be treated as receiving the money and then paying your lawyer. So just to use a, you know, simple example. If it’s a a million and a half dollar settlement, uh, $500,000 a third goes to the lawyer. So the client usually in that circumstance, ends up seeing the million dollars, you know, and it doesn’t see the other 500,000.

But for tax purposes, it’s, it’s pretty clear. Uh, the, the clients in that example will usually get a 10 99 for the million five. And so, you know, the question is, can the client always deduct the 500,000? Always would be overstated, but the answer is usually yes. There’s not a problem. There’s a bunch of kinds of cases, employment being the best example, where it’s unequivocal the client, you know, deducts it.

But I’d say, and if you, you know, if you gross those numbers up by a big amount, um. You know, and say it’s a $20 million case or something, uh, and the legal fees are correspondingly higher. I mean, that’s, I’d say always a big concern. Probably the first concern that people have. Yeah. Interesting. Um, just moving away a little bit with, uh, charitable planning, um, what structures, um, have you seen.

That you think are legitimate? Like, you know, you hear about donor advised funds, charitable lead trusts. Um, maybe tell us a little bit about those and you know, what your thoughts are. Yeah, I mean, and number one, the, the two that you just mentioned are perfectly legitimate. Um, I mean, I think, I think some people may have the impression, uh, that sort of a charitable donation doesn’t involve.

Uh, actually benefiting charity and that it’s, you know, some kind of a tax write off without a cost. That of course isn’t true. I mean, the things like the donor advised fund and charitable lead trusts and other things, creating your own private foundation, um, I mean, these are all, uh, involve tax write offs, uh, a tax deduction, but you’re still, you know, you’re still spending money, you’re giving money to, to somebody else.

So, um, but I mean all, all of these. Things. I think when you look at the amount of someone’s income, their age, their family, I mean, some people, um, you know, older or wealthier people, um, may, uh, you know, may want to be. Helping their kids with sort of a, kind of a full employment to be running a charitable organization.

Uh, and there are rules about related parties and, you know, what’s arms length, but there’s, you know, there’s nothing illegal about doing that. And it can be, you know, doing, uh, doing good works at the, at the same time. But I’d say, you know, with, in the tax world in general, if something is. Totally free and the government pays for it and it doesn’t cost you anything.

I’d, I’d, I’d be weary of those things. Uh, because, you know, sometimes people end up with, uh, with tax problems because they got lured into something by a, by a promoter. Yeah. What types of things are you seeing out there that are making you weary? I’m just curious. People probably. You know, clients probably run things by you all the time.

Yeah, I mean, uh, I, I, I don’t, I don’t see as many, um, I guess fortunately as I used to, but, but you’re right. I, I mean, I do see, uh, things that are being, um, you know, essentially products that are being promoted. I’m sure you, you’re aware, I mean, there, there have been various, I guess you could call them tax shelter eras where.

Um, essentially very sophisticated, sometimes intentionally, complex structures were put in place, frequently involving partnerships where you’d be investing in something and just to use a kind of crazy numbers, um, from that era. And you, you know, you put in a hundred dollars, but you’ve got, uh, you know, you’ve got a thousand dollars worth of tax deduction right away.

Mm-hmm. Like conservation easements, for example. Yeah. And actually, yeah, I mean, so it’s, it’s not that you, that everything you know of that sort you should run the other direction from, but you definitely, you know, before you sign on the dotted the line or write a check, you definitely should get some independent advice from somebody who’s not, you know, basically selling or marketing it.

Um, I probably nine out of 10 of those kinds of things that I look at, um, I I end up saying, look, I wouldn’t do it and here’s why. Uh, but that doesn’t mean everyone you know, is, uh, gonna be conservative or gonna, you know, is gonna follow that advice. You mentioned conservation easements, and that’s a, that’s a great topic.

Um, I mean, the IRS is, it’s not that you, you know, that this tax, um. Deduction is, you know, is illegal. The idea is that you, you know, the basic idea is that you have an investment as a, as an owner or part owner of, of, uh, of land. And you essentially are, you know, not building a building on it, but you’re agreeing.

You’re not gonna build a building on it, or it’s gonna stay open space or something. Um, I mean, there’s been a lot of tax law on those subjects for, for many decades. Uh, and I, you know, I’ve seen them and, and done them, um, successfully. However, there’s a big industry of syndicated ones that are, uh, highly aggressive.

The IRS has made it really clear they don’t like them, so I think, I think it’s more important these days for people to be sort of careful buyers if they’re gonna go down that road. Another area that, um, I’ve seen and makes a lot of sense in many ways, but has become very much scrutinized by the irs is the area where business owners, self insurers, the, the so-called captive insurance, uh, type, uh, situations.

Tell us a little bit about that. Where I haven’t heard, uh, and I think captives were also always on the IS dirty dozen list or whatever, but yeah. There, there’s legitimate tax law there, uh, um, that people are trying to take advantage of. What are the things that make a captive much more likely to be, um, legitimate than not legitimate?

Yeah, I’d say I’m, I, and I mean, I’m certainly familiar with, um, you know, the topic and you’re, you know, you’re quite right that the IRS has not liked, you know, uh, a captive insurance. Um. Structures or products for, you know, for years, um, decades even. Um, you mentioned the IRS Dirty Dozen list. I mean, that’s a good thing to mention in the sense that, you know, if you are in conservation easements is, is on it as well.

If you are doing something that’s on this dirty so-called dirty dozen list, I mean the, the name of that list should tell, um, your audience right away. It’s something the IRS. You know, has identified in kind of a systemic way as a problem. It doesn’t mean you can’t go down that road, but it should tell you that you, you know, you may be buying yourself a dispute and do you wanna do that or is there something else that you can do that might be on the dirty dozen list five years from now?

But it isn’t now. Um, but I mean, the, the captive insurance idea, just, um. In essence is you’re a business owner. You know, you’re paying, let’s say a hundred thousand dollars a year to, um, uh, you know, Lloyd’s of London or more Allstate or somebody for insurance of, of, of various types. And what if you took that a hundred thousand dollars and essentially self-insured and plug, you know, plowed that money every year into your own kind of insurance company?

Um. And then the idea is hopefully if you don’t have claims that money is building up on a tax deferred basis. ’cause you know you’re deducting the a hundred thousand dollars, you’d pay to a third party insurance company every year on your taxes and you can deduct the payment you’re essentially making to your own insurance company.

Again, I’m oversimplifying, but that’s the basic, basic idea. And the IRS was seeing, um, a lot of people who end up with quite a large stash of money and, you know, which is why they target it and try to make sure that people are complying with the rules. Got it. Um, you know, if, if you’re, I mean, just, I wanna make sure we have some just takeaways you’re.

When you’re talking to, um, say a, you know, high paid physician or lawyer and, you know, you talked about service industries, which makes it di difficult, and they are W2, and they come to you and say, well, okay, maybe I don’t have, maybe I don’t have a lot of things I can do now, but if you or me, what are some of the things that you would think about in the future in order for me to not only, you know.

To save taxes legitimately. What sort of framework would you give somebody to think about? Yeah, I mean, I think, uh, again, I um, I may not be the best person to, uh, given what I’ve, what I’ve said to uh, talk about things you can do as a wage earner. ’cause it’s really, um. You know, I, I obviously, you know, ev everyone knows, I suppose from, from, uh, you know, the news that you, um, some years ago, and there were all the stories about the, you know, CEOs who were taking $1 of pay, and of course that’s because they want equity instead.

That’s clearly a better deal. Um, so that the big pay packages that Elon Musk, uh, were, you know, on a much smaller scale, equity, getting equity is, is always better than regular pay, but most of us don’t have those, those choices. So, but I think you hit it. Uh, hit the nail on the head when you asked about real estate, you asked about, you know, other businesses, retirement funds.

Of course, if you’re a W2 earner. You have whatever it is that the company provides, typically, whether that’s 401k or or something else. Uh, but you, you know, you don’t have earnings from something else. It’s really, you know, is there a side business? Is there a real estate activity? Um, those kinds of things would be.

A way to build up wealth more than, uh, you know, wealth with lower taxes more than W2 earnings would be, you know, when we’re talking about retirement accounts, people, you, you read, uh, I read about, uh, people talking about backdoor rots or mega backdoor Roths. Can you explain what that is and, and how they work?

Uh, I, I, I’m not, I’m not, I’m not sure that I can, I mean, uh, there was a lot of press over, uh, I think it was Peter Thiel. Um, about, you know, having a, a Roth, uh, IRA that was worth, I don’t know, hundreds of millions, or may, maybe it was billions. I don’t remember. Um, I mean, most, a, a Roth, um, IRA is essentially where, you know, taxes has been paid.

So unlike, you know, when, when the money goes in. So unlike a regular IRA, uh, which is more like a traditional retirement account, or 401k money goes in. It’s a tax deduction or non-taxable when it goes in, but then when it comes out, it’s taxed. So I think, I mean, there are strategies, um, it’s sort of not my area of practice, but there are strategies about, um, you know, when to convert, uh, you know, how to optimize, uh, the size.

I, I think after the Peter Teal press, if I recall correctly, there was an effort made to limit the size of. Roth IRAs, I don’t think that passed. Um, mm-hmm. So, but I mean, it, it’s another area, um, where, you know, someone with investments could look at, um, you know, building up wealth, any tax laws that you think may change and fundamentally, you know, that people should have a radar out right now.

That, that could, um, that they should be thinking about and potentially planning for. I mean, I’m not an estate planner, um, uh, but there’s always discussion about, um, you know, about, uh, the estate tax laws and, and, and ways, again, for people of, of, uh, large wealth, um, how to, you know, pass assets to their kids without, you know, without a gift or estate tax.

Um, you know, the idea of in real estate is, uh, another prime example there, the idea of trying to, you know, pass things to, uh, the kids when the value is low and it’s expected to appreciate, I mean, I’ve seen this done with crypto too. The idea is, um, rather than using up, uh, a big chunk of your unified credit.

Against gift and estate taxes. Um, if you can use a small piece of it and have the asset grow in value. Um, I mean, I think, I think that’s the kind of thing that, that, um, you know, families think about. But, but as they say, what I tend to see, um, uh, which is why I am on some of these topics, uh, you know, I, I rarely see them, but what I tend to see is somewhat targeted tax questions like.

I have this building and here, you know, here are my choices about selling what, you know, what, what, what’s the best? Or, I’m starting this company, or I started this company five years ago. Here’s the size. Now what are my choices? Uh, if I, if I were to sell, uh, or. Again, the, the, the lawsuit, um, you know, over, over my interest in a company that I co-founded.

You know, how do I, how do I optimize that? How do I, how do I solve? Or what’s the least amount of tax I can legitimately pay on a sexual harassment or some other kind of, um, you know, employee discrimination case or a case with large punitive damages. Punitive damages, no matter what kind of case, are always taxable.

So I, I see a lot of those, which I know are somewhat unique. Um, yeah. But there are a lot of lawsuits out there, so I guess I see a lot. Yeah, sure, sure. Well, if someone has an issue like that, uh, how, how do they get ahold of you, Robert? Uh, yeah, I mean, my, my website is, uh, wood lp.com and my. Email address [email protected], and my phone number is on my website and it’s, uh, 4 1 5 8 3 4 0 1 1 3.

I’m old fashioned. I still answer my own phone, but, um, but yeah, I’m pretty easy to reach, um, for anybody who has questions or whom I might be able to help. Great. Thanks so much for being on the show today. Thank you. Nice, nice meeting you. You make a lot of money but are still worried about retirement.

Maybe you didn’t start earning until your thirties. Now you’re trying to catch up. Meanwhile, you’ve got a mortgage, a private school to pay for, and you feel like you’re getting further and further behind. A good news. If you need to catch up on retirement, check out a program put off by some of the oldest and most prestigious life insurance companies in the world.

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Check it out for yourself by going to wealth formula banking.com. Welcome back to the show. Hope you enjoyed it. Uh, of course some of this stuff was maybe not relevant to all of you, but I do wanna bring you back. If you get one thing from the show and one thing only, let’s talk about that, uh, short-term rental loophole.

Again, talk to your CPA about it. Look it up, you know, put it into chat, GPT or something like that. You know, get all the codes, bring it to your CPA. There’s no reason why they should say this won’t work. Now, there is certain qualifications. That you have, you have to make sure that you’re materially involved with that short term rental and such.

But listen, uh, there’s a lot of people doing it here, and, uh, there’s no reason you can’t. So anyway, that’s it for me. This week on Wealth Formula Podcast. This is Buck Joffrey signing off.

Bitcoin is definitely volatile. If you told me it was going to go down by 50 percent next year, I would hesitantly believe you.

However, there is no way you can convince me that Bitcoin will not hit $500,000 at some point within the next five years.

Think about what’s happening: ETFs are everywhere, treasury companies are holding Bitcoin, there are rumors of central banks buying it, and even an American Bitcoin reserve. It is an asset that will go up. But it may go down before that, and that is unnerving.

You should not put money into Bitcoin unless you commit to not touching it for 5–10 years.

But then you face another problem—Bitcoin is like gold. Unlike apartment buildings, there is no rent, no cashflow. Other coins like Ethereum and Solana have mechanisms called staking that allow for yield. Bitcoin does not. Its beauty is that there are not a lot of moving parts. It’s a vault of security, and that’s pretty much it. Again, just like gold.

There have been companies like BlockFi and Celsius—which are, indeed, traditional finance companies—that lost people’s Bitcoin when they went insolvent.

But now there may be a way to get yield from Bitcoin while keeping it in your custody.

That’s what we talk about on this week’s Wealth Formula Podcast, in addition to covering recent news and making predictions about Bitcoin’s price.

Transcript

Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].

 When you’re time locking your Bitcoin, it’s fully self custodial, so you’re never giving up those keys at any point, and that’s what’s so critical.

Welcome everybody. This is Buck Joffrey, the Wealth Formula podcast. Coming to you from Montecito, California today. Before we begin, I wanna remind you there is a website associated with this podcast. It is called wealth formula.com. Lots of resources there, including the opportunity to join our accredited investor club.

Uh, take the opportunity if you, um, are, you know, if you do make over $300,000 per year and, um. And, uh, have a net worth over a million dollars outside of your personal residence to join the club. It’s free to join and it basically just allows you to see deal flow. That’s pretty much it. That deal flow is not seen outside of, uh, the network because, uh, it’s private.

Private placements you’ve probably heard of. Right? So anyway, go to wealth formula.com, sign up for investor Club today we’re gonna talk. About Bitcoin. Again, I know a lot of you still probably are seeing on the sidelines with this lately. The, uh, the price of Bitcoin has been extremely volatile. Well, it’s not volatile compared to what it historically has been, but it’s been volatile.

But listen, I will say this, um, if you told me Bitcoin was going down by 50% next year. I would hesitantly believe you. Okay. But there is no way that you can convince me that Bitcoin will not at some point be worth $500,000 per Bitcoin at some point within the next five years. I mean, that could happen in two years, and then you could end up coming back.

To a hundred thousand dollars. But I, I’m, I’m convinced that it ends up there. I mean, think about what’s happening. ETFs everywhere, treasury companies holding Bitcoin, rumors of central banks buying it. An American Bitcoin reserve is on the table. It’s already exists. It’s just are they gonna actively buy it or they just going to confiscate it and hold it.

Um, now that being said, you know. The volatility is a real thing. And so what I, I think is really important is that you should not put money into Bitcoin unless you commit to it for five to 10 years. Just buy it and forget it. Don’t look at the price. Don’t look at the price. I mean, what I will say is, you know, say a couple years down the line, if all of a sudden you’re hearing people talking about how Bitcoin went crazy and it’s, you know, worth a million bucks or something like that, then yeah, it out sell it.

But. You know, volatility is a real thing here. It is not, uh, something you want for money that you need tomorrow. Okay? Now with that Bitcoin, you face one other problem. It’s kind of, see Bitcoin is kinda like gold, right? Unlike apartment buildings and stuff that we do in a credit investor club or investor club, there’s no cash flow, right?

Um, other coins like Ethereum of in Solana do have mechanisms. Are called staking that allow for yield, but Bitcoin does not because in fact, it’s, it’s beauty in, in many ways, in the way it’s designed is there’s not a lot of moving parts. It’s a vault of security and that’s pretty much it. Right. And that’s why it’s like gold.

I know some of you’re thinking, oh yeah. Well there are some ways, uh, the, you know, you can get yield. There are companies, and you’re right. Whereas companies like Block Fi and Celsius. Um, for traditional finance companies, I think BFI is out of business, I think Celsius as well, basically because when Bitcoin went, uh, way down, they basically, uh, you know, the, the companies folded and a lot of people lost Bitcoin in those situations.

In fact, with bfi, um. I, yeah, long story, but I lost, I lost a decent chunk there too when that happened. Now, in those cases with these, you know, centralized, uh, traditional finance companies offering yield on Bitcoin, the big thing here was that they actually had custody of your Bitcoin. If you have custody of your Bitcoin, you can’t lose your Bitcoin.

Right? That’s, uh, that’s a really important part of this whole Bitcoin ecosystem. And as it turns out, there may actually be a, a way to get yield from Bitcoin while keeping it in your own custody, keeping it in your own wallet or whatever, right. Um, that’s what we’re gonna talk about this week on Wealth Formula Podcast.

’cause we have a guy who’s, uh, creating that entire ecosystem. This is an, uh, og uh, rich Rines. He’s a OG Bitcoin guy. And, uh, a lot of interesting stuff we talk about. So we talk about, um, initially the yield thing, which I think is important. A really useful thing, but then we go on to talk a lot about, you know, the other issues around Bitcoin right now.

Again, if you are, uh, not involved with Bitcoin, I think it’s important, you know, whether or not you buy it to be in the know, learn about this stuff. Um, and, um, this is a good way to do that. So when we come back, rich Rines wealth Formula banking is an ingenious concept powered by whole life insurance, but instead of acting just as a safety net, the strategy supercharges your investments.

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Turbocharge your investments. Visit Wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show everyone. Today my guest on Wealth Formula podcast is Rich RINs. He’s a Bitcoin OG from the class of 2013 and one of the key architects behind the core blockchain. Uh, rich previously led the Money Movement engineering team at Coinbase, uh, helping to FCI facilitate over 1 trillion.

Dollars in value transfers and now serves as founding contributor to Core Dow, uh, which is, uh, building a scalable self custodial yield layer for Bitcoin. He’s also the CEO of Element wallet. Which integrate stable coins, encrypted messaging into core ecosystems. Uh, rich brings deep experience in both traditional finance mechanisms, uh, and mechanics, and, uh, blockchain innovation as well, making him perfect person to talk to about how Bitcoin is evolving into a yield bearing asset class.

Uh, rich, thanks for joining the show. Thanks for having me. Really excited to chat here today. So let’s start, uh, with the big picture when we talk about, um. You know, staking in crypto. My, my audience, uh, I think, you know, some people, I would say probably half are pretty crypto savvy by now ’cause I’ve been talking about it since 2017 as well.

However, um, let’s talk about staking and, you know, what does that actually mean and, and why has it been easy for some coins like Ethereum, Solana, but not really. So for Bick Bitcoin. Happy to, happy to unpack there. There’s quite, quite a bit to unpack there. Um. So I think we take one step back and we kind of think about the origins of, of crypto, right?

You, you had Bitcoin, which first came under the scene in 2008, 2009, and it was based on proof of work, right? And proof of work is solving cryptographic puzzles. When you solve those puzzles, you help secure the network. And we’re all kind of familiar roughly with, with how Bitcoin works, energy, scarce, finite currency and, and you know, that was rhetoric genesis of this whole, of this whole movement.

Somewhere, let’s call it 2017, 2018 ish, you started to see a, a shift from people looking at proof of work and something. It’s scalability limitations primarily because you do get a security benefit of proof of work that you do not get the same way with proof of stake. You get a different mechanism, but which is still secure, but not as secure.

And there was this desire to move to a new, um, a new mechanism. And you saw Vitalik a lot of the folks in the Ethereum community really pushing this even earlier. We saw the first wave of, you know, proof of stake change really come to market in the 2017 cycle. And with that, um, and with that change, you now have a different mechanism for security.

And instead of solving cryptographic puzzles to go produce blocks and secure the network, you have weighted governance, ba or weighted voting based on the amount of tokens that you have. Sometimes that also faction and governance, sometimes it does not. That’s actually how you secure the network and you have a large amount of the underlying crypto.

And what was uh, solved during that time period was the classic nothing at stake problem you usually credited with J and team over at Cosmos, but there’s variety, different people that have their own, you know, kind of solution to that problem. But that was really the advent. So you have to kinda look at the history to then think about where, where things move throughout modern times.

Salon and some other chains. You have started through stake and you got other groups like Ethereum that started proof for work and then migrate proof sake at at some later point. But it’s a critical design as, as part of the consensus layer of these protocols. Neither is necessarily better or worse than the others.

There are just different trade-offs. One of the big advantages though, of proof of stake in this case is that you have. Mechanic in which by holding the token and staking it to help secure the network, you receive some economic benefit in the term of staking rewards, which makes these assets productive in a different way.

And if we think about, you know, Ethereum, defi, and its trajectory over the last, you know, five plus years. Dia proof of stake and, you know, yield bearing tokens, uh, et cetera, really is what brought, you know, the, the full blown defi summer wave. So I can go as in detail as you want to, or, or keep it high level.

Well, I, I wanna kind of, um. Drill down a little bit on, on the mechanics of, of staking, because to describe for people, I, you know, I, again, a number of the folks listening have done it, but probably more than half have not. So, and if you could explain sort of what you’re doing in theory there that actually creates yield and how that yield and where that yield is coming from.

Ew, it’s gonna vary based on system, right? But talking about like, just generic in terms of, of proof of stake. You are getting paid by the network to help secure the network. Because if we think about how these networks have their voting power in terms of the right to go create blocks, it is looked at it typically as the weighted average of the, you know, amount of validators in the ecosystem that are part of that, you know, block producing set.

There’s different, you know, um, different paths, whether it’s delegated group stake, approved stake. But in general, those that stake or delegate are helping to secure the network and they receive emissions from the network to go do so. Some blockchains are finite supply, some are infinites. Those, you know, emissions might tail off forever into the future, but you’re getting paid for work that you’re doing to help secure the network.

Where does the payment come from, ultimately? Meaning like are those tokens or coins, are those created by the network to pay or are they coming from some transaction fees? I’m asking in part because I’m wondering if there’s an inflationary element to this also depends on the On the system. Yeah. But if you think about Bitcoin, right?

Right. Bitcoin has block rewards and emissions and they also have transaction fees. Right? Both of which come back to the, the miners. In this case, in most proof of stake systems, you have emissions and transaction fees, both of which that come back to the stakers in this case. They may or may not be involved in block production ’cause those roles are typically separated in these systems versus them being combined in the uh, in the Bitcoin nomenclature.

Many of the proof of stake systems are inflationary, but it is not a system tenet that you must have. The theory there is very similar to Bitcoin in that. As time goes on, you need the transaction fees to overwhelm the emissions for these systems to, to be sustainable at, at, you know, over the long run. If you’ll, let’s, let’s talk a little bit about sort of the, I guess, the limitation with Bitcoin.

Um, if, if you would, again, just trying to maybe create a little bit of an example for people. Obviously we are not proof of stake, we’re proof of work. Maybe kind of just explain, um, you know, if you can sort of just give an analogy on exactly what that is and then the limitation there. What, why there’s a limitation of, of creating yield.

So I think Bitcoin’s simplicity is a feature, uh, not a bug. Um, to be very clear, um, what we’ve, what we’ve, you know, collectively built in, in Bitcoin over the last, you know, 15 years is. A institutional grade settlement layer for digital gold. And I think that in of itself is very different than what originally Satoshi wanted to create with its peer-to-peer money system.

But it actually stumbled upon a very large use case that actually meets a very critical need for this trustless settlement of, you know, quite large scale today. And I think the importance of Bitcoin will only continue to grow over the, the decades to come. And with that, uh, you know, becoming digital gold, there were a bunch of trade-offs that were made when Bitcoin was designed.

So it’s deliberately slow. It’s not programmable. It has very limited expressivity, but that’s one of the reasons Bitcoin has been able to remain so secure for so long, right? It has a very limited attack surface area. And all of those are very great reasons of why, you know, Bitcoin is this, you know, perfect digital gold on top of its finite scarcity, very easy under on it, easy to understand monetary policy, et cetera.

But it does limit the ways that you can go put your Bitcoin to work. And, you know, the, the phrase that I’ve used, you know, in many times is Bitcoin’s been kinda a pet rock for the last 15 years, but an amazing investment. And, you know, something that I’ve been very proud to, to be a part of for, for a very long time.

And the genesis of core was really around, okay, we have this, you know, perfect digital gold. If I want to go do something with my Bitcoin, how do I go do it in a trust minimized way. Allow this Bitcoin to go get used in this decentralized world of applications, whether they be simple yield or whether they be much more robust.

Uh, you know, Turing complete applications. That was really the, the idea of, okay, let’s go, you know, build this layer. And there were really kind of two components that that core created. One is its Bitcoin app Store, so it allows you to build decentralized applications on top of Bitcoin, full expressivity of what you could do and, and you know, any.

You know, full smart contract platform. And the other side, it’s a Bitcoin yield layer. So if you wanna passively earn on your Bitcoin, or you wanna build more complicated yield products on top of Bitcoin, you can now do that, uh, with the core ecosystem. And that was a massive unlock because for all of the, you know, rapid growth that we’ve seen in Ethereum ecosystem over the last five years in particular, we helped or, or we’re helping to actively usher in that wave.

On Bitcoin by making it this yield producing asset for the first time and then allowing for, you know, these different range of, of applications and use cases. It’s no longer in either or. It’s a both dex core. Describe what core is exactly. I know you, you just mentioned it with the, you know, this ability to build, uh, build apps.

But let, let’s, let’s back up sort of like, it’s a, is this sort of a second layer, like an L two layer on top of Bitcoin debt? I mean, where, where does the yield come from in this situation for people who are using it? Yeah. So let me unpack what what core is in more detail. Um, so, so Core is an L one. It’s more technically known as a Bitcoin side chain.

We would argue that there are, are no Bitcoin L twos today. I think maybe as time goes on, maybe we will get to more true trustless L twos, but as of now, nothing fits that definition. It’s the best that you can do is have an L one that’s secured by Bitcoin core has over 90% of the Bitcoin hash securing it.

So we’re easily kind of number one in, in terms of most of those metrics. And we do welcome new technological advancements that will allow, you know, potential lts or even to get to full, you know, Bitcoin security as, as time goes on. And the kind of two real kind of key components to the core ecosystem to go to that next level of detail.

One is, it’s a full L one blockchain that is EVM compatible, which means any application that you can build in Ethereum, you can build on top of core while being secured by Bitcoin, right? It gives you that. Additional layer that that is, you know, also important in this case. And the other kinda critical distinction there is our ecosystem is, is Bitcoin based, right?

So poor is the gas token, but the decentralized protocols borrow lending per trading, you name it. Those are all Bitcoin denominator, right? So the idea here is we to put their Bitcoin to work, not just being a substitute for Ethereum defi. And we do see some different easy behaviors in terms of Bitcoin holders versus Ethereum holders.

On the other side, it’s that Bitcoin yield layer. So as we talked a little bit about proof of work, improved stake. In proof of work only the miners are the ones that receive those transaction fees in the block rewards. So what Core does is it allows you not only to stake your core tokens, but you can also delegate hash, and that’s where that 90 plus percent of the Bitcoin hash comes in.

But you can also stake your Bitcoin so you can time lock your Bitcoin and earn yield and transaction fees from the core blockchain for doing. How those two kind of come into place is now as a Bitcoin holder, you can also earn by holding your Bitcoin, helping you secure the core chain versus just being a core holder who’s helping you secure the chain, right?

So you have these multiple ingredients in the soup of how core is secure, and we reward these different, our consensus participants for the divide. They bring in the network in order to participate. Is there, is this like a, uh, like a decentralized app, or is this a, you know, internet site? Like where, where do you access core from?

So core is the blockchain, right? So you communicate over classic RPCs, but all of that is, you know, connected on the, on the intranet fundamentally. But the way to think about accessing it is you can access it through your favorite hardware wallet. You can access it through browser wallets, through a variety of different applications.

And critically, you can also access it through Bitcoin wallets, right? So how our mechanism works is if you wanna just stay on the yield side and you just want to, you know, earn yield in your Bitcoin, you can time lock it. So the idea is that you probably encumber those funds for some period of time, and then in doing so, you’re helping to secure our blockchain and you receive the block awards for doing so.

And that’s one, uh, participant. We see a lot of institutions do that. High net worth individuals, general bitcoin holders, you name it. But the demand for Bitcoin yield is the most popular, you know, asked in, in all of crypto more than anything else. If you wanna take the next step and you want to, you know, bridge, swap, wrap, et cetera, and come over into our ecosystem, you can do that in your, your favorite EVM wallet, right?

So you have the ability to fully engage in cores, defi, ecosystem using, you know, kind the law of your choice. One that you’ve been, you know, probably familiar with for, for several years. We view these different participants on a continuum. So there’s some Bitcoiners that we can just offer education to today.

They’re not ready to do anything with their Bitcoin yet, and that’s totally fine. There’s a large group of folks that wants to go earn passive yield in their Bitcoin, and that’s where staking comes in. If they want to earn higher yields, but they’re not ready to fully wrap, swap over, et cetera, they can dual stake, so you can earn higher yields by staking both core and.

Then finally, if you wanna come over to the full Bitcoin defi ecosystem, you can do so. There’s 150 plus applications with which you can go participate. So it’s really about bringing people from one end of that spectrum over to the other end as time goes on. Got it. So, you know, again, have a num number of people who definitely own Bitcoin.

’cause we’ve been talking about it since 2017. In some cases, very large sums of, uh, Bitcoin and. So I know a lot of people keep this stuff in cold wallets. Maybe it’s a ledger wallet or something like that. Is there going to be something built into the ledger wallets that will let you sort of just link with core at that point?

So we have full ledger support for core staking, uh, a bulk Bitcoin and core, and it’s frequently done in clear signing as well. This was done with the partnership between the two groups. So Bitcoin is not, again, the mo not the most programmer friendly. So what this does, it demystifies it, it lets you know exactly the different parameters that you’re putting in there.

So with that ledger grade security and, you know, legibility that you would want from your har your hardware wallet of choice. That was a big announcement. I think we put that out there August of this year. So it’s fairly new, but it was a, a big one to, to get out there. Something like 20 to 30% of the world’s Bitcoin is all held on ledger wallets.

So now all of that is, you know, very easy, uh, easy and accessible for, you know, any Bitcoin holder out there to go keep their Bitcoin in cold storage and go or knee on it. And this is probably a good, you know, zoom in on the yield mechanism itself. So when you’re time locking your Bitcoin, you are, it’s fully self custodial, so you’re never giving up those keys at any point.

And that’s what’s so critical. If we think about how people have earned yield on Bitcoin, historically it’s come up through counterparty risk, right? Whether it’s block Fi, Genesis, Celsius, you name it. It would send your Bitcoin somewhere, wrap your Bitcoin somewhere, whatever. And then you may get your Bitcoin plus yield back in the future.

And historically that’s been a bad endeavor. Not always, but historically it has. So it’s critical years. You retain that, uh, that Bitcoin the entire time that UTXL lives in your wallet. So there’s no situation there unless you lose your private key, right? Which is something that no one can protect you from, where you then, you know, lose access to that Bitcoin.

So it’s the highest grade trust assumption that you can have, meaning that you have to trust actually no one, right? So there is no better trust assumption in doing so, and what that does is by maintaining that, again, you can see it in your wallet. All that is very clear and and easy to understand. The yield is coming from securing core’s ecosystem.

There’s no lending, borrowing or anything else going on under the hood because again, we don’t have access to the underlying Bitcoin to do something like that. Even if we wanted to, which we don’t. What kind of yields are, are you get people getting on, uh, on core? I am sure. It depends on whether your, you know, your level of participation, the amount of Bitcoin you have, whether you have core tokens, that kind of thing.

But give us an idea. So you can participate, um, to your point at any point along that, that spectrum. So if you just think, uh, if you just think Bitcoin, you earn a lower rate, it’s like 10 to 20 ish bips. And the idea there is it really pays for your assets under custody fees at, at a major custodian. And the idea behind that is like the minimum attractive yield, if you will.

But what we try to get people to do is to do what’s referred to as dual staking, which is staking both core and Bitcoin in increasing amounts. And the idea there is that we want you to participate in multiple facets of our ecosystem, right? We don’t want you to just participate on one side because critically what we’re trying to do is make core the second asset that Bitcoiners care about, right?

We want this to be the gas token. Of putting your Bitcoin to work. So we want you to participate on both of these sides. And now if we think about the roughly 650 million of Bitcoin that staked on core, more than 40, 50% of that now is actually people participating on both sides. So we still have a lot of work left to be done there, but it’s awesome to see this convergence and that’s a convergence that no other Bitcoin project has been able to find so far.

Where that ultimately is, is the name of the game, right? It’s so hard to convince Bitcoiners to go use a new product or service that’s not Bitcoin. So you have to crawl, walk, run. You have to have incentivization to go make that happen. And then finally the, the math and the underlying mechanism, you know, ultimately needs to make sense.

Can’t be points or yield farming or anything like that. It has to be something that’s sustainable and durable. If you do participate in some of those other things, what’s the potential, you know, oh, sorry. What is the potential yield? I, I’m asking mostly just ’cause I just know that there’s a lot of people in this audience sitting on Bitcoin and saying, well, maybe I can get some yield, but maybe not for 20 bits.

But yeah, no, sorry, I realized that totally for, uh, forgot the million dollar question. Yeah. Um, so if you stake the, uh, max amount of core and Bitcoin, you can earn about 5% in new Bitcoin. So it’s actually very hot. Um, and that’s, it’s on this gradual scale, right? So we want you to do is start with either, you know, small amount of core, no amount of core, work your way up into that top bucket.

And then as you get there, you’re delivering the max value in terms of security and benefit to the core ecosystem. And this system rewards you with a very attractive API, you know, how much is core right now and how much, uh, you know, and just in terms of somebody being able to get 5%, like how much core would they need to buy?

So I can’t really talk about price for, for a number of, oh, uh, a number of reasons. Okay. Yeah. I get, I get it. Sure, sure. Yeah. All, all the calculations are, are easily, um, easily available on, on our docs. But the way to think about it is we have these buckets, so there’s different amounts of core that is required for, for each Bitcoin.

And I think how, how I tend to think about these in a acceptable way to discuss on this podcast is really in terms of like LTVs, where. Lowest LTV is like roughly like 3% of the Bitcoin position. The highest LTV is roughly like 10% of the Bitcoin position. So they’re very attainable amounts of, of core in order to go, uh, acquire to go earn that, that yield.

Yeah. Got it. Got it. Um, you know, let, let’s kind of backtrack a little bit. Like in terms of, you know, there are lending, um, you’ve talked about some of the historical ways people have. Have gotten yield or, you know, abused lending, uh, for such a, an asset that is so secure. Um, maybe volatile, but certainly secure.

It, it seems like interest rates are often so high in terms of borrowing. Um, and then, you know, on the other end. Yield is generally so low. Why is that? Why is that? I mean, it is just, I’m just curious. I mean, in terms of being able to, usually when I’m thinking of the example of block fi, which unfortunately I used at some point years ago, fortunately.

And, um, yeah. And, um, and there, you know, you, the yield wasn’t great, but if you borrowed it was actually really high rate. And I’m thinking in the meantime, when things, when things went to hell, they just liquidated. Massively just liquidated people outta their positions very quickly. So the risk to them was pretty low.

So, so what is the, what is the idea behind that? You know, high interest rates, that kind of thing, just because they can, just because there’s not enough competition, is that basically it? So it’s a multifaceted market, and this is, you know, one, one of the things that we’re ultimately trying to solve here with core’s, um, staking rate.

Is you should have to go beat the staking rate on any lending and borrowing agreement. ’cause that should be your benchmark. And you should have to probably do some sort of a multiple on that because this is, you’re able to go do this with no counterparty risk, right? So if you’re actually taking on counterparty risk, okay, what is that worth?

Right? It’s probably not worth 5%, maybe it’s 10%, maybe it’s 15% right? But this should actually create a material benchmark that that people can use, and we think that’s a net good for the overall financialization of bitcoin. In terms of your question of like, how does this, you know, kind of market come into, come into place?

There’s all sorts of Bitcoin lending and you know, all or not created equal. Some have, you know, very credible counterparties and are fully collateralized. Others are totally uncollateralized and there’s a whole spectrum there. In general, people don’t like to lend out their Bitcoin and if they are lending out their Bitcoin, it needs to be at an attractive rate for them with which they can underwrite.

You know, potentially not having that Bitcoin come back and that, you know, back in 2021, et cetera. Before we had a lot of these blowouts. The market clearing rate for that was a lot different than it’s. I think that is really, you know, an important metric. The other thing that we see a lot of people do is lateralize their Bitcoin to go do stables or other sorts of like low grade farming, et cetera.

So you just have a lot of competitive pieces there that, that are hard to fully quantify, but you just have these market forces that are, you know, fairly inefficient and you know, very few real players in these markets. It says. Yeah. Yeah. Um, let’s talk about, um, you know, we, we’ve talked about core so far.

I mean, what are the real risks? Um, I’ve, I’ve had, I’ve had friends who were, you know, defi, I think maybe like wrapping Bitcoin. And I got no one, one guy lost like $4 million of Bitcoin. And uh, you know, obviously we don’t have those issues because you just mentioned there’s, uh, not an issue of.

Counterparty risk here. Can you talk about what the potential risks are? Is there a risk to the network risk? I mean, can you say that it’s pretty much zero risk, so I, I never say anything is zero risk because Right, right. You know that, that, that’s just not something I like to do. The risk in this case is that core explodes or something else, which extremely unlikely, and you just don’t receive your rewards.

Right. That’s the max loss that you could have in this case, is that. There was like essentially, uh, some core that you could have claimed and you didn’t claim. And then, you know, there was some, you know, categorical issue or catastrophic issue, but that’s a, the highest grade assumption that you can have, right?

You can’t, there’s no case in the system where you do not wind up with the full Bitcoin position, which is ultimately what everyone is trying to protect in this case. And that’s very different than wrapping, swapping, bridging, et cetera, where now you have counterparty risk. Counterparty risk you need to be compensated for, whether it’s smart, contract risk, bridge risk, you name it.

But those are material. And it’s not to say those are bad options, it’s just whatever you are doing, you need to be fairly compensated with which for doing so. And now that you have this way to go do this, um, safely with core. You just need to, you know, kind of price out those other risks appropriately.

And I think there are great markets out there, particularly in core’s ecosystem, where you can go wrap your Bitcoin and go deploy it, but you just have to kind of know what you’re getting into. And how we tend to kind of address all yield questions in general is like if you don’t understand the yield, you are yield.

You have to fully underwrite any protocol that you wanna get involved with, whether it’s core or otherwise. And only when you get comfortable with it should you deploy. But. The best starting area of all Bitcoin yield is deploying core or, uh, deploying your Bitcoin on a, you know, ledger wallet, uh, in core’s Bitcoin staking because you just can’t get anything more secure than that.

It’s a great kind of crawl, walk, run into more advanced tactics of strategies. I mean, I’m curious on like detraction you’ve gotten, um, again, there are companies out there, institutional institutions that are out there that have a bunch of Bitcoin earning no yield. Michael Sailor goes out there, all of a sudden gets 5% on his own Bitcoin, uh, through strategy, uh, that that could seriously change, uh, his own business model.

Uh, do you see those kinds of, are, are you seeing any traction with those big players for Core yet or too early? So, one, there was an education problem in this market generally, and we spent, you know, the last several years helping to educate folks. The new digital asset treasuries or DA meta has actually been very useful to us because what many people have solved in these debts so far is how do I go get assets into the vehicle?

Uh, how do I grow the assets? And not everyone is Michael Sailor and even Sailor has had issues with financial engineering recently. I think it’s very solvable, but in general, you can only financial engineer so far, and then you need to look at additional sources of yield and the benefits that that can bring you.

That’s what we’re seeing is a lot of experimentation, mostly privately, but seen publicly from some of these larger Bitcoin treasuries because everyone wants yield in their Bitcoin. So then it comes down to what’s the best source of yield that I can do and that winds up being core. And if you look at many of these vehicles, they’ve got just very specific covenants, um, that go into the assets that they have and what they can do with those assets.

Almost all are restricted from lending and doing that sort of stuff. So when you, you need yield, that is counterparty list. And that’s where, you know, we, we really shine. And I think that’ll be a very large narrative that you’ll hear way more about over the coming quarters, where that’s really the next competitive battleground for these large Bitcoin corporates.

Bitcoin treasuries, where now you need to go earn that passive yield on your Bitcoin. And I think net net is just the next wave of financialization, right? Like if, you know, as a, as a Bitcoin for a long time, I resisted this. I think we’re at the stage where Bitcoin is a nationally important asset and globally important asset, and now we need to go find ways to go earn more of it and to grow larger and larger Bitcoin balance sheets.

What’s your take on what’s going on in the markets right now? I’m just curious. Just wanna shift a little bit. Obviously you’ve been in this space for an awfully long time and I actually, I was kind of, I should have asked you a little bit about that. 2013, like, you know. How in the world, what, what were you looking at in 2013 that made you think about, you know, getting into Bitcoin, you know, but, um, well, let’s just start with that.

I mean, I should have asked you at the beginning, but I mean, you’ve been in it for a long time. What did you see in this and did it, did it, is this what you thought it would be? You know, so I originally heard about Bitcoin. I wanna say it’s 2010 or 2011. Um, we actually had a college professor that was teaching us all about computer security, introduced us to the Byzantine General’s problem.

I was like, wow, this is a fascinating problem. He is like, oh, this guy’s sakamoto, you know, or group people invented this solution and, you know, it powers this technological Bitcoin. And I didn’t understand at the time, wasn’t interested and like, didn’t, didn’t really fully understand it ’cause I didn’t take the time to really consider the economics behind it and the, the change that this could bring into the world.

By 2013, I reconnected with Bitcoin and that was when the moment clicked. Where I was like, oh, it’s not just the solution to a tech problem, it’s actually an alternatives traditional financial system. It’s a non sovereign store of value. And the implications of that became clear to me of, okay, if this thing succeeds, it will totally re you know, reimagine the, the world around us.

And hopefully we’ll be able to get to a spot where we can change the banking system and hopefully, you know, solve the fiat monetary crisis. Like there’s just so many of these. Globally important shifts and I was, you know, hooked like, and I also had studied in college, both economics and uh, databasing, which is essentially what Bitcoin is.

So it was like a perfect kind of match of a young and, and really interested person in the underlying product. And then kinda having the right, the right skills. By 2017 I was like, this is what I want to do for the rest of my career. And you know, kind of the rest is history. But yeah, it was kind of a perfect aligning of interests.

And you think about like 2013, and I actually, I was listening to an interview, somebody who was interviewing Dan Moorehead, uh, the Pantera Capital, and he was, you know, Bitcoin class of 2013 as well. And obviously, you know, he was, he was already, he already had a lot of money, but he, he was, uh, I guess he was convinced on, um, you know, he got really into Bitcoin and, and tried to try to try to buy $2 million of Bitcoin.

And the problem was he couldn’t figure out how, because there was nowhere to. Like everywhere he looked, it was like a $75 limit or a $300 limit. And that was like his biggest problem. Like you don’t have that issue anymore. And then there’s the issue of, you know, having all of the technical skills that you needed back in 2013.

You know, everything’s pretty easy right now, even for, you know, a guy like me, um, I mean, yeah, hardware, wallets and all that. They sound intimidating to people sometimes when they haven’t used them. These are just not very difficult things. Right. Um, I’m just curious in terms of like your vision, did you, did you kind of see this world?

I mean, I’m just sort of, I mean, I’m just, just curious in terms of what you thought was gonna happen versus what has happened so far. Definitely got it wrong, um, at the time, uh, yeah, back in, you know, the, the early days, um, we were all focused on Bitcoin’s money. And I, I, I think there was a lot of hope at that point, and I get a lot of very expensive coffees from that time period where we, we, we thought that it was gonna be used for day-to-day commerce and like that’s how we were all gonna pay each other and, and I think there was a lot of interest and excitement around that at that time.

And I think that was the original vision, just to be totally clear. And I think. We’ve mostly failed at that, but we again, have created this digital goal that has now come into reality as this perfect digital settlement layer and is only gonna grow in importance. And I think, yes, we never got fully the medium of exchange from store value, but that’s nothing to be shy about.

It’s worth, you know, two plus trillion today is easily gonna overtake the mark cap of gold in the next 10 years, and likely will be the most valuable asset in the world for, you know, probably forever at this point. And it was just a very different like view, you think There’s a lot of the companies that were spinning up around that time.

It was Bitcoin, remittances, Bitcoin, like there was a lot of technology that was based around that. And then in reality exchanges and uh, custodians kinda wound up being the, the two killer use cases in terms of the product companies and then you got wallets, et cetera. But, but that was really kind of the difference in what we thought was gonna happen versus what really happened.

Yeah. And, and you know, it’s, it’s funny ’cause um, there’s still some high profile. Bitcoin guys who still talk about, you know, Jack Dorsey for example, right? Jack Dorsey, founder of Twitter, which is now X, but he’s still in the camp, that if you’re not using Bitcoin as payments, then it’s a failure. And what’s your argument against that?

So, and I gave a, a, a longer, more in depth, um, discussion of, of my thoughts on like kind of the zealotry and the usefulness of that. Bitcoin’s early days versus where we are today on, on Breed Loves podcast about a month ago. Um, but good to tune in, kind of check out my, my longer thoughts on that. But in general, I, I just don’t believe in that.

I think this idea of Zealotry is now outlived a lot of its usefulness. I think it was very important in Bitcoin’s early days of you need to will something into existence for it to become true. And when it was just, you know. Few thousands of people, or tens of thousands of people around the globe that cared about Bitcoin versus now where it’s, you know, um, hundreds of billions of dollars in ETFs around the world and corporates and everything else.

It’s just totally different version of, you know, what each individual can do to, to shape Bitcoin, which is both pro and a con, if you will, for a variety of reasons. But I think the idea that it’s only useful as payments is just an outdated relic of a previous understanding. I think that’s what, if you think about who remains relevant in Bitcoin, as time goes on, it’s usually because they adapt their views over time.

They don’t get lost in, you know, something overly specific. And I think what we stumbled upon as an industry was stable coins. And that was really like 2014, 2015, remember correctly the first deployment on Omni. Um, but in general, like we realized that the killer use case for blockchains for payments is just a better dollar.

And yeah, it’s not what we want ’em as Bitcoiners, but. It actually achieves a lot of what we wanted. Right. It’s not totally centralized, not like, but okay, that’s fine. You don’t use gold for payments either. So the idea is you now have this ability to have these things work symbiotically with one another, and that value prop to, you know, billions people around the world to be able to have frictionless, fast, cheap payments that are hopefully uncensorable.

Not always, but there are other options for it to be uncensorable, if you will. Those are still huge wins that I think are very true to the ethos of what everyone was trying to deep back then. But I think it’s all about expanding your aperture and also kind of coming to terms with, with reality, if we were all stuck in our 2015 vision of the world, we would never have grown.

Right. As an industry. And it just really important to keep updating your priors. Yeah. Yeah. It’s interesting. I mean, it feels like now. Even, even Wall Street has accepted this as digital gold, right? And it, it is pretty remarkable. I, I, I’m, I’m, I would say I’m class of 2017 here. Even from then, it’s just what a difference, uh, when, when you look at it.

Um, one, a quick question about, um, your thoughts on these, uh, Bitcoin treasury companies. Um, specifically, you know, let’s look at, uh, MicroStrategy strategy, Michael Seller’s company. Um. You’re buying a lot of Bitcoin. Do you see fundamentally any, any problem or some concerns to the B Bitcoin ecosystem when you have one company potentially owning 5% of the Bitcoin supply at some point?

I don’t personally, there’s a, there’s a lot of conservation around this with the ETFs as well, and just like this, you know, corporatization of, of Bitcoin generally, or even just the centralization of bitcoin. And overall I think it’s good to have, you know, essentially price and sensitive buyers of these assets to help continue to bring Bitcoin forward.

And I think sailors proved time and time again, he is willing to continue to back up the truck and, you know, buy large and larger amounts of Bitcoin and I think is one of the major responsible parties alongside of these ETFs of a lot of the pricing that we’ve seen since early 2024. Bitcoin. And I think the positive pieces of that are, these are also one-way black holes of Bitcoin, right?

Like ETF’s a little different. You have the in out flow, but at least in terms of these corporates, these are a black hole, right? Like sailor’s not selling these Bitcoin anytime soon. And that’s a win, right? It’s a permanent capital vehicle for Bitcoin and these actually spurred this entire craze of all these other folks also going to leverage and acquire more Bitcoin, which I think is net net positive.

Some of these people will mess it up. I’m not really as worried about the debt spiral or the death spiral of a lot of these vehicles. I think if they wind up trading below nav for a large period of time, sale will just buy them. He’s essentially, you know, using dollars that are valued more than a dollar to go buy things valued less than a dollar.

That’s a great trade and I think you’ll see people do that. Um, at size. My only fear of this whole kind of corporatization of Bitcoin thing is related to the miners. I think the miners are very cost sensitive in terms of their means of production. I think over time there is a world which I hope we do not see, which is the only miners that can run their business profitably are governments.

These corporates who essentially do it at a loss or governments right, where you’re willing to do non-economic things to help subsidize the network. That kills a little bit of the centralization of of Bitcoin story, but I think it’s a solvable problem. Should we get there? That’s my, my only concern with it.

But I think on the net positive, you know, net, net trade off scale if you will, these are overwhelmingly positive for Bitcoin. What do you think of this idea of, you know, the, of the cycles and, you know, we had to having, we have, you know, had a little bit of a runup. If you look historically, you know, the high part of the cycle is, is coming now pretty much.

Right. Um. Are those types of cycles and 80% retreats a thing of the past. When you have that, that level of buying pressure from a guy like sailor, institutions, governments, what’s your, what’s your feeling on this? So I think the general shape of the cycles is very different than what it was previous. Like just your buyers and the structural demand is, is so different than what it was in say, 2013, 2017.

And my views on this have been, you know, pretty in influenced pretty heavily by Michael Turpen. And, um, he and I have spent a bunch of time together chat about these sorts of things. He’s also the author of the Bitcoin Supercycle book. So we’ve, we’ve gone into detail on this, you know, many a time. I think the idea of like 80% drawdowns in Bitcoin at this point are pretty much over.

Um, I think you’ll have severe drawdowns, but I think the idea of like 80% or something like that is, is very much in the past. And then you also have just these, not buyers, I mean buyers last resort to some degree in terms of these, these treasuries. But I also think you have essentially nation state puts on some of these treasuries, right?

So like there’s just so much demand for Bitcoin that I just can’t see that same massive drawdown happening. Do we hit the same peaks or is the volatility dampened? That’s a great question. I think in this cycle in particular, it’s probably a more elongated cycle. Like I, I don’t know that we’ll see, you know, the crazy, you know, blow off top in October that, you know, so many are expecting.

But I think we do have several macro pieces working in our favor here. Global liquidity’s increasing. You’ve got rate cuts, you’ve got. Just a bunch of structural shifts in, you know, kind of overall macro forces that I think will be very positive towards the end of Q4 and then through Q1 of next year. So I think we’ve, there’s some amount of cycl, uh, cyclic behavior that I think is unavoidable in any asset, but I think this one is, is probably right, shifted, if you will, there.

Um, Bitcoin obviously year over year is doing well. Um, but it’s, it has been remarkably stable. In the last, you know, few months here, it’s almost uncharacteristic like, you know, there’s such little volatility. It’s almost like it’s less volatile than the stock market. And, um, you know, some people, I, I’ve been in the Twitter or X space talk about this being the influence of quote unquote paper Bitcoin, right?

Sort of this trading of derivatives and that kind of thing. What do you think is going on there? I mean, listen, it is kind of silly to look at like the amount of how much bitcoin’s gone up in a year and say that it’s not doing anything right. But on the other hand, you just look at how much is being bought.

Just from players that we know versus how much is created in a week versus how, you know, and, and you just wonder why is this price not just continuously going up? Any thoughts on that? This paper, Bitcoin conspiracy, that kind of thing? So I’m firmly and like, and I’ve heard people talk like paper, Bitcoin, summer, and, you know, kind, kind of a few things along that.

Um, I don’t believe that, uh, at all, just to be clear, I think it’s. You’re now a multi-trillion dollar asset to go move this thing. You need serious capital flows, right? It’s, it’s not like Bitcoin’s 10 grand anymore. It’s very different. So like you, you need just a very different, you know, orders of magnitude different in terms of buying to go continue to move this.

I think there’s also like an, another piece that’s worthwhile, or worthwhile to dig into is. The way the buyers come on is very different than the way the sellers sell, at least as we’ve seen over the last few months. And you see your MicroStrategy, meta, planet, Nakamoto, you name it, they’re trying to buy Bitcoin without moving the price, right?

Because they are trying to minimize the slippage that they incur. Well, if you look at the hyper liquid whale or some of these other folks who are trying to. Sell their Bitcoin and as fast a poss a, a fast, you know, and evenly inefficient way as possible to go rotate into Ether, Solana or something else.

They are not doing that right. They’re doing the exact opposite behavior where they’re trying to cause price impact, whether it’s to buy it back lower or to do something else, may or may not be manipulation. You know, you, you know, your, your mileage may vary there, but I think that is a very stark contrast of trying to understand these flows.

Because if you’re trying to be very inefficient, you can move the price significantly more, even, uh, with as liquid as Bitcoin is, than if you are not trying to do so. And I think those market dynamics are, are important to understand. Another big kind of, you know, important thing to unpack here is you’ve got a lot of people that have made a tremendous amount of Bitcoin over the last, a tremendous amount of money in Bitcoin over the last 15 years.

You’re now seeing people that have hit some of their price targets that they never thought Bitcoin was going to get to that are now unloading huge amounts of supply, right? Like we saw Galaxy do a sale for like 8 billion over the summer. Like you’re seeing size move in and out, and that has to get absorbed because revenue buyers to sell, right?

Like that. That is how these markets were. And that also has to get absorbed into the system. So you’re seeing Bitcoin, you know, shift from more OG hands to maybe newer hands, newer institutions. And I think that’s healthy. And eventually you’ll get to some new libria and low volatility situations, breed high volatility situations.

Right? And I think where more or less gearing up for, for something like that. Tell us what you think’s next. And when you say that, when you say the low volatil vol, low volatility is growing a five volatility, so I, it’s probably an unfavorable take at, uh, at, at this point, but I’m still in the camp that I think we see close to, if not 200 K Bitcoin by the end of the year.

Um, I’ve been saying this all year, so again, you know, there, there, there’s only so much time left. I think there’s been a more than people would anticipate in terms of like OG selling and then also these, you know, kind of rotations in a deliberate fashion out of Bitcoin. And I think we’re gearing up based on, you know, that stopping to some degree as well of these, some of these more macro pieces starting to work in Bitcoin’s favor.

And I think we’ve already seen gold really break out and Bitcoin hasn’t, you know, caught up to it at least recently. And I think that’s a catch up trade when we made. Yeah. What’s your, uh, what do you, what do you think happens in the next three to five years? Three to five years is hard on a 10 year time horizon.

I’m very confident Bitcoin will be a million dollars or more. Three to five years is really hard because there’s just so much macro that goes into that. Like I feel very confident, you know, in the next two to three years that we easily hit like, you know, two 50. Beyond that, it’s, it’s really hard In between there, there’s so many political pieces that get involved in there.

It’s really hard. Yeah. But on the tenure, I’m, you know, very confident. Yeah. Yeah. It’s a tricky one because especially right now, we have the benefit of having a very pro bitcoin, uh, cryptocurrency presidency in IT, administration and all that, which is really helping. But gosh, I mean, who knows, two or three years from now, we could get somebody who trying to cut.

Cut the legs off. So it’s tricky. But, um, anyway, I, I do appreciate all your thoughts here today, rich. It’s been, uh, good having you again. Just, uh, for our people who are interested in Core, what’s the easiest way for them to learn more? Easiest way to learn more, check out Core down.org or x.com. Still weird to say.

X uh, x.com/cordal under org. Tons of amazing materials there, um, and tons of interesting, you know, a ma community spaces, webinars, you name it. Million different ways to learn about core and then also to get involved, whether it’s in Discord as an ambassador, community member, you name it. There’s millions of core to shoes, uh, around the world, and we’re always welcoming, you know, more folks that want to get involved.

Cool. Thanks so much for joining us. Awesome chat soon. Thanks. You make a lot of money, but are still worried about retirement. Maybe you didn’t start earning until your thirties and now you’re trying to catch up and meanwhile you’ve got a mortgage and private school to pay for and you feel like you’re getting farther and farther behind.

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That’s good news, right? We’re talking about potentially getting yield from Bitcoin in our own custody. May not be a lot of yield, but, um, but it’s, you know, better than, better than just kind of letting it sit and, uh, cold storage doing nothing for the next five to 10 years, um, which I think is probably the smartest thing to do in general.

Um, but if you’re, if you’re, you know, if you want yield and keep custody and you, you know, you’re willing to. Kind of check out what Rich is doing. It’s a, it’s an interesting opportunity anyway. Um, last thing I’ll just say, if you, you know, if you’ve not done so, make sure that you actively try to learn about Bitcoin, because again, if you are sitting on the sidelines, you’re hearing about this Bitcoin things, I don’t want to be a part of it.

Whatever. Do that at your own risk because, you know, um, I think if you look at the next five years, I, I can’t. Think of an asset that I’m more sure is going to be higher than it is today. That’s it for me. This week on Wealth Formula Podcast, this is Buck Joffrey signing out.

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Most people picture investing as a game of chess. Everything is visible on the board, the rules are clear, and if you’re sharp enough, you can see ten moves ahead. But markets don’t work like that. They shift in real time—rates change, policies flip, black swan events crash the party. That’s why I think investing looks a lot more like poker.

In poker, you never know all the cards. You play with incomplete information, and even the best players lose hands. What separates them isn’t luck—it’s process. Over time, making slightly better decisions than everyone else compounds into big wins. That’s the same discipline great investors use. They don’t wait for certainty—it never comes. They weigh probabilities, manage risk, and swing hard when the odds line up.

Risk isn’t the enemy. Fold every hand and you’ll bleed out. To win, you’ve got to put chips in the pot—wisely. Wealthy investors do the same. They protect the downside, but when they see an asymmetric bet—small risk, huge upside—they lean in. That’s what early Bitcoin adopters did. That’s what smart money did in real estate after 2008.

And just like poker, investing is about knowing when to quit. Ego and sunk costs can trap you in bad hands, but the pros know when to fold and move their chips to a better table.

In the end, both games reward patience, discipline, and emotional control. You don’t need to win every hand. You just need to stay in the game long enough for compounding to do its work. The amateurs play for excitement. The pros play for longevity.

That’s the mindset you need as an investor and the reason I interviewed a former professional poker player on this week’s Wealth Formula Podcast!

Transcript

Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].

  One of the things that we feel like when we decide to make a bet on a thesis and we’re thinking about, well, wait, what, what if it’s like this? Or what if it’s like this or whatever, is that we, we do have this sense that we get caught in those decisions, right? That we start something and that, uh, it’s very hard for us to get out of that position.

Welcome everybody. This is Buck Joffrey with the Wealth Formula Podcast. Coming to you from Montecito, California. Before we begin today, I wanna remind you that there is a website associated with this podcast called wealth formula.com. Lots of resources there, including the ability to sign up for our accredited investor club.

Now, of course, that is a, uh, also known as a investor club and, um, basically you sign up there. And, uh, you get onboarded and you get an opportunity to see private deal flow that you will not see anywhere else. So go check that out. Wealth formula.com. Topic of today’s show’s a little different. Um, it’s, uh, a little bit more, uh, about the cognitive side of.

Of, uh, investing. So, you know, most people picture investing as sort of a game of chess, right? Everything is visible on the board. The rules are clear, and if you’re sharp enough, you can see 10 moves ahead. But in reality, the markets don’t really work like that. They shift in real time. You know, you got rate changes, policy flips, black swan events, all these things can crash to party.

Uh, and that’s why I think investing actually looks a lot more like poker and poker. You know, you never know all the cards you play with incomplete information. And guess what? Even the best players lose hand, you do lose in investing. That’s something you have to understand. Now, over time, making slightly better decisions than everyone else compounds into big wins.

And that’s what makes a, you know, difference between like professional investors and people who lose money in the market. That’s the same discipline. Great investors use. They don’t wait for certainty because the reality is it never comes. They weigh probabilities, manage risk, and they swing hard when the odds line up, right?

So the thing to understand is that risk isn’t the enemy, right? In poker, if you fold every hand, you’re gonna, you’re gonna bleed out. You know, you’ve gotta have ships in the pot, you know, wisely. Of course. Wealthy investors do the same. They protect their downside, but when they see an asymmetric be a small risk, huge upside, they lean into it and you know.

That’s what, for example, we, we’ve talked about it before, but you know, people who, uh, you know, bought Bitcoin early and had conviction and stuff, like that’s what they did. And that’s what the smart money did in, in real estate after 2008. They knew that they had a reset point, and even though things looked dim and grim, but all of a sudden they saw rates coming down.

Um, they saw quantitative easing. They knew that a huge amount of liquidity was coming into. Space and they killed it for the next, you know, decade and a half. I mean, similarly, right now, like I think, um, I’ve been saying before, I, I think rates are coming down because of the Trump takeover of the Fed, because of, uh, job market that’s weakening because of ai, all these things.

But you know, just like poker investing is about knowing when to quit as well. Ego sunk cost and. Trap you in bad hands. But the pros know, uh, when to fold, move their chips onto a better table, right? Uh, in the end, chess, you know, or poker, they, they both are gonna do one thing. They’re gonna reward patient’s discipline and emotional control and understand you don’t need to win every hand.

And if you do, you don’t panic and stop playing. You just need to stay in the game long enough for compounding to do its work. Um, you know, the amateurs, they do it for excitement. The pros, they play for longevity and obviously investors were trying to make, uh, make some money. So that’s the mindset you need to have as an investor.

And the reason I interview a former professional poker player on this week’s. Wealth Formula Podcast. Hope you enjoy it. We’ll have that interview right after these messages. Wealth Formula banking is an ingenious concept powered by whole life insurance, but instead of acting just as a safety net, the strategy supercharges your investments.

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Turbocharge your investments. Visit Wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show we went today. My guest on Wealth Formula podcast is Annie Duke. She’s a world-class professional poker player, winning millions at the table by mastering strategy, risk and human behavior.

Since retiring from poker, she’s become one of the foremost experts on decision science. Uh, she’s the bestselling author of Thinking and Bets and Quit, as she now advises investors, founders, and executives on how to make smarter decisions when the stakes are high and the information is imperfect. Annie, welcome to the show.

Thank you for having me. So you, um, uh, obvious a very interesting, uh, background. You went from a professional, uh. Poker champion to a decision strategist, essentially. So tell us, I mean, yeah, what parallels do you see between high stakes poker and the decisions, say every day investors face in in today’s markets?

Yeah, so first of all, I actually went from cognitive science to poker, back to cognitive science. Oh, okay. Well, a loopy loop. Um, okay, got it. All good. So here’s actually the interesting thing. So, um. Particularly when you’re thinking about things like investing, there’s, part of economics is a field called game theory.

And game theory is the study of decision making under uncertainty. Um, and the uncertainty derives for over time is the other thing. So, uh, so we can think about it as making decisions to invest limited resources, right, in situations where, uh, luck can affect the outcome. Um, and where, uh, you don’t know all there is to be known and know, you know, very little in comparison to all there is to be known for most of the decisions that you’re making.

And then, and then the over time piece has to do with, um, for most types of decisions, and this is particularly true in, uh, investing. The decision we you make now could affect de de decisions to come. So you could think about like in negotiations, right? Like when I’m negotiating with someone, it’s really different.

If it’s a one-off, it’s the only time I’m ever gonna negotiate. Against them versus if it’s gonna be a repeated negotiation. Right. Okay. So a guy named John von Norman, along with Oscar Morgan Stern, wrote a book long time ago called The Theory of Games, which was really kind of defining this as a field, um, and something that we ought to be thinking about and studying.

He was actually the mentor of John Nash, very famous economist, schizophrenia, um, who was the subject of a beautiful mind. And John Nash’s, um, uh, Nobel Laureate Nobel Prize was actually in game theory. That’s what he was studying. Um, okay. So what does that all have to do with the question that you asked, which is what are the parallels with poker?

Jon Van Neuman was actually thinking about game theory and trying to figure out sort of like the mathematic, how you would mathematically model this problem. He actually used poker as. That he, for the model of the way that he thought about it. So, um, he was actually asked by Jacob Broski, who’s a colleague of his, um, you know, oh, you know, I read the theory of games and it’s really interesting what you’re talking about, but I don’t understand why you didn’t use chess as the model.

The sort of thinking like chess is the game. And Van Neuman, I’m paraphrasing here, basically said chess, chess isn’t a game. It’s a calculation. Poker is a game. And what he was pointing out is that in chess there’s. You know, a much more, you know, smaller influence of luck. And the other thing is you can see all the pieces on the board, right?

So that it doesn’t, it doesn’t have these same components, right? So that’s really where you can see this sort of model of poker, not just for investing. Really for any kind of decision you make, and it’s like you’re making decisions where luck has a very strong effect on the outcome. You have to invest limited resources in these choices with very little information.

I certainly can’t see my opponent’s cards. Um, and how a hand turns out is not necessarily going to be per. Is not perfectly correlated in the short run with what the quality is of the decision that I made. Like was I mathematically correct to be making that decision? Because you can get like a bad deal of the cards, for example, right?

So, uh, it’s very, very much like an investing in, in that way. So it creates a really good model for understanding all decision making, but it particularly maps really nicely onto finance. Yeah. And I guess thinking in, in bets, uh, you, I guess you argue that good decisions aren’t outcomes, but you know, they’re about the process, right?

It’s, it’s more about the process. So that’s kind of what you’re getting. How do you suggest investors then evaluate whether they’re making smart choices, um, when the short term results may look bad? So, okay, so first of all, let me just sort of be clear about what I mean by an outcome. So obviously, like in the long run.

The outcome is gonna be very good signal for what the quality of a decision is not on one investment. I mean, across like many, many, many different investments. It’s kind of like if I flip a coin once, it doesn’t tell me very much, but if I flip a coin 10,000 times, then obviously the outcome of those 10,000 flips is gonna tell me a lot.

Right? So I’m, I’m really talking about sort of what’s happening, uh, with a small sample size, like, you know, one stock that you might buy. Um, or like in the short run, right? So where, where you don’t have enough time to sort of realize, uh, the expected val value and overcome whatever the volatility is, right?

So, IJI just wanna be clear about that. So one of the really biggest mistakes that we make is decision makers, is that we connect the outcome, we get to the quality of the decision. In the short run, like the short term outcome. So you, you buy something and the next thing you know it’s down 10% and you think I made, I made a really bad decision.

That kind of thing. Or it’s up and you think, oh yeah, great decision. Yeah, yeah, yeah. Right, right, right. Um, and there’s some, there’s some differences, um, with that. So I’m gonna have a tendency to do that, which is called resulting, uh, much more when I’m thinking about. Other people’s investing. When I’m thinking about my own and things go poorly, um, I’m gonna tend to say, oh, I got unlucky.

Which is bad because maybe you made a bad decision. And when I win, I’m gonna have a tendency to attribute that to my own decision making. This is called self-serving bias, which is also bad because maybe you made a bad decision. People have won on many investments where their thesis was ridiculous, right?

So the question is like, how do you actually overcome that problem? And it’s hard, uh, but it’s worth the work. Um, and it’s a little bit of a long answer, so I’ll just start the conversation and then we can go from there. Yeah, I mean, I guess the question is, you know, what kind of tools for decision science can really help people in this, these kinds of scenarios.

So I would ca, I would put tools into two categories, right? So, so one thing is that you have to start really making explicit. What it is that for you, the, those qualitative judgements that are, that are driving the decision, right? Not just the data, but like how are you interpreting the data? What do you believe to be true of the future that’s causing you to, to make this decision?

So, um, that’s number one. And we, we actually leave quite a bit of that implicit, believe it or not. Um, number two is you have to start to think about what are the tools that are. Not only gonna help me to be better at making the decision at the time that I’m making it right, and there’s all sorts of things that you can do that can be helpful with that, but also are gonna help me then to be able to actually close the feedback loop in the way that I want to, right?

Which is to, to close the feedback loop back to decision quality and not just sort of rely on how it turned out, which is bad. Figure out what I’m good at and what I’m bad at so that I can start to improve. Then also, and this is really important to start to develop a tool set that allows you post-decision to be more rational in the way that you react to new information.

And it turns out that even people who are really good. That initiative to, uh, decision to start something like, to invest in something are very bad at the decisions that, that they make after they invest. In other words, what do you do as you learn new information? Are you actually being, uh, reactive to that in a, in a rational way?

Are you reacting to that sanely? Um, and it turns out the answer is mostly no. Uh, we’re pretty bad at those decisions, so you have to actually sort of develop a whole toolkit to help you with that piece as well. Yeah. So in, in, uh, quit, uh, you make the case that knowing when to walk away is as important as persistence.

So how should investors think about quitting, uh, an investment or business venture without feeling like they’ve failed? So, I would actually argue that knowing when to walk away is more important than persistence for the reason that, um, we tend to be persisters. So it’s just kind of what our default position is, is to stick with stuff.

Number one and number two, you’re gonna stick with a lot fewer things than you’re gonna walk away from. So if that’s the case, if the majority of your decisions are gonna be walk away decisions and we tend to be persisters, then figuring out how to good at that, get good at that walking away thing is gonna be really important.

So why is it that we tend to be persisters? Well, there’s like a whole bunch of cognitive biases that. Really influence big. It’s kind of like a big pile on that makes you wanna stick with stuff. And this is a particularly big problem, um, in anything, but you can really see it in investing. So what happens is that we start something and then as soon as we start it, we have a few things.

One is we start to accumulate what are called sump costs. This is time, effort, money, attention that you have put into something. So you can think about it. If I buy an equity at 50 and it’s trading at 40, I’m down 10. Right? So that’s, that’s money that’s now gone. Um, you could also think about it as like, uh, if I start a race from like running a marathon, I just started putting effort into it.

Like I’ve done training. Sunk cost. Uh, I, um, you know, so I’ve been training for months and then I start running and I’m like part of the way through the race and like that all becomes stuff, you know, sunk cost. And so we have this tendency, whether it’s like running a marathon or you hear this with people who are in jobs that they don’t like, why are you still in there?

’cause then I, I, I don’t wanna have wasted all the time and effort and training and all this stuff that I’ve put into it. So it’s thing time, effort, and money that you’ve invested in the past. It’s now affecting your decision whether to continue in a way that it shouldn’t. So in reality, yeah, okay, you bought the equity at 50, now it’s trading at 40.

Um, we have this tendency to say, well, if I sell it now, I’ll lose $40. But it’s like, okay, but you already lost that. Would you buy that today? And if the is no, you shouldn’t sell it. But what sunk cost is it causes us to keep at it. Even if we wouldn’t buy it today. And that’s where you’ll hear people say things like, well now it’s really cheap, or It’s too cheap to sell.

So some cost is a big one. Another big one is, um, called the endowment effect, which just means that once you own something, you value it more. And if you don’t own it, and obviously you own the things that you invest in, uh, which is bad. And then there’s all these identity things, which goes to what you’re saying about how do you not feel like a failure, right?

When we make a decision, um, that becomes woven into our identity, right? We’ve decided that this is a good thing to do, it’s a good thing to buy. Um, and if we then all of a sudden say, no, wait, right? I think I should stop. What is the like that, that’s an kind of an attack on our identity. We sort of don’t see ourselves as consistent.

We think we made a mistake. We view it as failure because we’re quitting the thing. Like not only do we feel like, well, maybe, you know, my thesis was wrong, but maybe you lost money. Right? And that doesn’t feel good. And all of those things feel like a failure. And that’s true. Like investing or like, uh, if I start, uh, developing a product, if I stop it, does that mean that I’m a failure?

If I, you know, uh, if I’m doing a project and I stop it, does it mean I’m a failure? If I start a job and I quit, does that mean I’m a failure does, right? That kind of all wraps into it. So the question is like, if all these things are working against us, how do we actually start to say, well now we have to get really good at this?

Because the fact is that when you’re making decisions. As I said before, it’s like you’re non omniscient. You, you know, very little in comparison to all there is to be known, which means that you’re gonna learn a whole lot of stuff after the fact. Some of that times that stuff is gonna be like, wow, this is turning out really well.

Sometimes that stuff is gonna be like, Ooh, I wish I had known then what I known now, and I know we’ve all had that feeling. And when we have that feeling. We should walk away, but all these things make it so that we don’t. So how do we help that? The, one of the main ways that you can help that is to develop a set of kill criteria.

What are kill criteria? They are, um, basically you can think about it as like benchmarks where if you hit that benchmark, you are saying that’s a signal that things aren’t going my way and I ought to walk away. I should go. So let’s think about like, what’s the simplest form of a kill criteria? The simplest form of a kill criteria is a stop-loss.

So if I, if I can say I’m gonna buy this stock at 50, if it’s trading at 40, I have to sell. That’s the simplest form. Now, you know, like for a retail investor, absolutely. Like have at it. I think stop-losses are great. Um, but they’re pretty brute force, right? Because we know that even if the stock is now trading at 40, that your thesis could still be correct.

Um, and so when you’re brute forcing it, it’s definitely helpful if you have a tendency to, not to quit, but we’d like to get beyond that. Now. That’s something that I used in poker a lot, right? Because in poker, uh. When you’re playing in a game, it’s not always obvious. The reason that you’re losing it could be that you’re losing ’cause you’ve gotten very unlucky.

But it could also be that you’re not playing well. And I know I’m gonna be biased to think it’s because I got unlucky. So then I just put in a stop loss because it makes me get up from the table in situations where I’m gonna be a bad judge of why I’m winning or losing. So I did actually use that quite a bit in poker, and I think it’s very good in particular for retail investors to have stop losses in place.

What is actually even better to do than that is to be very explicit, not just about what your thesis is, but to imagine, well, let’s imagine that it’s X time from now, and I look back and I realize that my thesis wasn’t right. In other words, to think really explicitly about, well, what exactly does your thesis imply about what you think is gonna unfold in the future?

Then use that to say, okay, what are these early signals that are gonna tell me that the future isn’t unfolding? As my thesis is saying, thesis are probabilistic. Right? You’re saying, uh, it’s got a high enough probability that this is gonna occur. That I think that the price of this whatever asset class it is, that you’re, um, involved in, that the market doesn’t quite have this.

Right. Because I, I think the probability is high enough. I ought to be buying this, but it’s probabilistic, so it might be wrong, right? And also things just might change in the future. So write down what those things are in a very explicit way, and then have attached to that a pre-commitment as to what action you would take if you saw that.

So let me give you an example. Um, for example, from, if you like, a different type of thesis or like what we might do with like a value investor or something like that. So let’s just start with a simple thesis. Let’s imagine that my investment depends on a prediction that interest rates are gonna rise in the next six months.

So let’s just imagine that’s the case, right? Um, what I can do there is say what could occur in the future that would tell me that the interest rate environment isn’t actually what I was hoping for, and I ought to exit the investment. So it could be. If I see interest rates go down more than 25 Bs as an example, right?

Then in that case, maybe I have to sell as an example. Um, it could be things that actually drive interest rates, right? So, um, it could be that if I see some early signals that I think the Fed is gonna lower interest rates that can get out of the investment, right? Which might have to do with like how inflationary is the environment, is there a softening job market?

For example like that. So I can, I can see, I can start to think about what are the things that I might see in the future that would tell me that this core piece of my thesis that has to do with what’s happening with interest rates is, you know, now the probability is too low. Or maybe I’m actually observing them going down.

So like that’s one thing that you can do. Another thing we do is like with value investors, where you have a long hold bias, um, you get a lot of like short term overreaction to earnings. Reports, right? So what we do is we say, let’s get a lower bound and an upper bound within which the earnings report we’re, we’re gonna be pretty tolerant of it ’cause we’re not gonna think it changes anything.

And we decide that in advance because when you’re actually reacting to it in the moment, you’re not gonna be, that’s when you’re gonna be the least rational about it. So in advance we say, okay, this is what they’re projecting. Here’s the, the variance around that that we’re gonna tolerate. Then we know if earnings are above that range, that we have an action plan for that, which is probably gonna be to buy more, right?

It’s gonna be like, yay, we’re really happy. Um, and if earnings are below that, then there’s a whole bunch of things that we have to do, one of which might be sell, but a lot of it is to just look at other things that might be driving that, what’s happening in the actual environment is the environment re, you know, recessionary or so on and so forth, right?

We, we’ve already planned out what we’re gonna do in those, in those cases. So this kind of mental time travel where at some time, way in earlier you’re saying, if I observe these things occurring in the future, then I’m going to do these things. Right. You’re, you’re committing to that. Those, if thens actually really increases the chance that you’re gonna behave rationally when you see those signals in a way that you don’t.

If you allow that to happen without the pre pre-planning, and I’m sure that you’ve felt this yourself, you know, it’s like you get thesis creep, you know, all of a sudden no, well that’s not why I bought it. Or now it’s really cheap. Or these kinds of things that get people stuck in investments where from the outside looking in, you can see it’s very clear that they ought to be selling, uh, but they don’t because it’s really hard to make those decisions on the fly.

Yeah. You know, when you were talking about interest rates and, and such. It was got me thinking sort of about sort of the macro environment we’re in right now. And, and it’s interesting when I think about my own belief based on sort of what kind of some of the things you referenced, the job market and, and, um, essential political forces and the Trump administration going to the Fed.

And my own personal thesis is that interest rates are going down. And that they’re gonna figure out how to, you know, make the bond markets come down as well, maybe through quantitative easing, et cetera. So that’s like my thesis. Right. It’s interesting. Um, the, on the other hand, there’s this force of what happened with the markets, like, you know, in 21, 22, 23, where we took a beating in real estate, right?

And so you have this. I, I guess what I’m trying to get at is it’s hard sometimes to erase memory and fear and look rationally at the moment ahead of us and say, okay, so if I’m a rational investor and if this is what I truly believe, then maybe I should be buying right now instead of being worried about what happened in 22 and 23.

’cause that’s the past. I mean, how do you approach that? Uh, you know. How do you suggest approaching that for people? Yeah, so that’s a hard one. Um, so first of all, the past is actually important to understand, right? Because looking back at the past as an example is gonna tell you that, well, corrections are pretty common, right?

They’re not that odd. You know, it’s kind of interesting ’cause when people talk about 2008. They’ll often say like, oh, it was a Black Swan event. And I’m like, yeah, okay. There’s been like three, 2000 eights in like the last 20 years. Like how Black Swan is this, right? Yeah. Yeah. So I’m not saying that you shouldn’t, you shouldn’t look at the past, right?

But what you wanna do when you’re, when you’re looking at the past, um, I say, well, first of all, generally things go back to equilibrium, right? So if things seem really out of whack, they probably are. That doesn’t mean that you can time it in any. Don’t, please, I’m not telling you that. I’m just saying that you should probably say like, okay, there’s gonna be some sort of correction.

I don’t exactly know when it’s gonna happen, but it’s probably gonna happen. Um, and you know, and we’ve seen that several times where we get a big correction, so that can just sort of help you to understand like, okay, it goes up and then it corrects and then it, you know, but then when it corrects also it’s not gonna stay there, it will go back up like the markets recover.

Um, so that kind of stuff is actually really important when you’re looking back at, say, what you’re talking about like 2022 in terms of. It’s really important to understand and try to get a good look at what were the causal drivers of what happened then, and do tho those causal drivers also apply today.

So one of the things that we wanna understand is that things that happen don’t just happen by magic. There’s a cause of those things happening. And we wanna understand what those causes are so that we can figure out should I use that as a model for what’s going on today or not? And sometimes the answer is partly but partly not.

And then you have to interpolate, like you have to figure out how to blend that information. Like this is the same, but this is different. How do I think about what the influence of those different pieces might be on what the pricing might be? And that’s just part of good forecasting, right? Is to understand what those causal drivers are.

So that’s just kind of like that. What are we doing in terms of how do we use the past, right? Because we definitely wanna use it. We just wanna make sure that we’re thinking broad strokes, just in terms of there are corrections and then rebounds, and then that kind of stuff. But also just. Understanding that you can’t just say, oh, I’m scared because 2022 happened.

You have to say, well, wait. What were the underlying causes of 2022? Do do those things exist today? Um, and that also can help you predict that something like 2022 might happen when other people don’t see it, if you’re really thinking that way. So that’s number one. Number two is, um, when you have these quitting plans in place, it makes it a lot easier to go ahead and do it even if you’re scared, because it makes it less scary.

One of the things that we feel like when we decide to make a bet on a thesis, um, and we’re thinking about, well, wait, what, what if it’s like this? Or what if it’s like this or whatever is that we, we do have this sense that we get caught in those decisions, right? That we start something and that, uh, it’s very hard for us to get out of that position.

Yeah. The spec espec, especially if you’re not just dealing with stocks in a liquid market, right. If you’re dealing with, you know. Anything outside of just something that you can just sell on Schwab in 30 seconds. It’s, it’s a completely different animal. Well, even if, that’s the interesting thing. Even if you can sell it on Schwab in 30 seconds, you won’t.

So we, we do kind of sense that. So when we have these quitting plans in place ahead of time, um, then. It makes it easier for us to not be afraid to start it because we actually have plans in place, uh, to know that we’re gonna stop it earlier than we otherwise would’ve because we’re gonna be paying more attention when we’re in an illiquid market.

It doesn’t mean that you can’t quit because you can hedge. So one of the things that you can do is say, I can get into this, and if things start to look kind of bad. What would I then do to, to hedge that position? And so you can already have that in place. Then we could actually take that concept to de-risk now and say, well, what I should really do is I’m thinking about the probability of those two different worlds that might occur.

Right? A 2022 world, and then the world that you’re thinking is gonna happen, right? And say, what do I think the probability of those two things is? Right? And if you understand the probability combined with the payouts. Then you could actually do both things at once. That’s a really nice thing about financial markets.

And you could, let’s imagine that you think it’s, you know, more probable with an appropriate payoff, uh, what your thesis is, right? You can invest in that, but also put the hedge on at before, right? And you can say, I’m gonna do that. I’m gonna do it probability weighted, um, and have the hedge on. And then you still have quitting plans, which is, you’re gonna start to understand, as I see the world unfold.

What are the signals that would tell me to start reducing the hedge? What are the signals that would tell me to start increasing the hedge? Right? And then that makes it all a lot less scary because you’re already planning for that divergence that might occur in the future away from your thesis, but you’re also planning for the world starting to conform to your thesis as you learn new information.

So, um, the, the interesting thing is that like the decisions in the other direction are pretty hard too when you start making money on something and trying to figure out when to get out. Um, so the, this is the wonderful thing about kill criteria is that works for both. Yeah. Right. So, um, one of the things that happens on the winning side, uh, is that we actually tend to sell things too early.

And, uh, so why is that happening? So, uh, so we got these sort of opposing actions, right? If I’m losing, I will sell too late, and if I’m winning, I’ll sell too early. So this is actually goes way back to 1979, a very seminal paper from Daniel Kahneman and Amos Dki. It became one of the really key parts of, uh, something called prospect theory, um, which is what Daniel Kahneman won a Nobel Prize for.

So this is sort of the central thing that they found in their studies. They gave people the chance to take a loss or gamble, in other words, to, to continue in it with something or take a win or gamble. Um, so. Uh, so let’s, let me put this into concrete terms. So let’s imagine that you’ve won. I tell you, I’ll either, you can either take a hundred dollars, I’ll give you a hundred dollars, or you can flip a coin double or nothing.

Now, the expected value of those two things is the same. If I give you a hundred dollars, your expected value is a hundred dollars. If you flip a coin double or nothing, you’re gonna win 200 or zero each of those. Half the time the expected value is a hundred dollars. So there, and from that sense, from an expected value sense, they’re exactly the same.

The only difference is that one carries volatility with it and the other one doesn’t. So one is aho gain and one has volatility. So when you present people with that choice, they’re all like, what are you nuts? Give me the a hundred dollars. Why would I flip for it? Just gimme the a hundred bucks. But when you say, okay, you have to give me a hundred dollars.

You can flip double or nothing. Again, in both cases, the expected value is negative a hundred. It’s just one has gamble and the other doesn’t. Right? So when you say that to people, they’re like, oh, let’s flip. Okay. So that’s interesting. So what they wanna do when they’re in the gains is bring the volatility to zero.

Just give me my money. They just wanna get it. And when they’re in the losses, they wanna take the gamble, they wanna keep going. Now what’s interesting about that is that they’ll do it even when the expected value isn’t the same. So if I say to you, okay, I’m gonna give you a hundred dollars, or we can flip a coin and you can win 180, sorry.

Or you can win 220 or zero, now you’re making $10, right? That’s 10% return, right? So I say take the hundred. Let’s flip two 20 or zero. People still say no, even though the second bet is now more valuable, I can get a hundred, you know, I’m making, I’m making $10 on that. Right? On the losing side, let’s say that I say to you, okay, you can give me a hundred dollars, or we’ll flip it negative two 20 or zero.

That costs you $10 more, and you’ll say, let’s flip. So people will pay, they’ll give me $10 to take the money off the table when they’re winning, and they’ll give me $10 to keep the money on the table when they’re losing, right? So what is going on here, right? So this goes to this problem of people wanting to take the money when you have a gain on paper.

People want to realize that being. So what that means is that even when the expected value says no, you should stay, you should keep your money in this thing. They don’t want to because as long as they have the bet on they, they could lose the gains that are unrealized gains, they could lose those back and they don’t wanna do it.

That feels really awful to them. So they wanna get that money off the table super fast, and that’s what causes people to take wins off the table faster than they ought to. And on the flip side, when you have losses on paper, you wanna keep them on paper because as long as they’re on paper, you have a chance to get back to even.

And you want, you wanna keep that chance going even when the expected value is against you. Okay? So the kill criteria are helping you with that second problem, right? Which is, if you have losses on paper, just take them off the table so that you can take that capital and put it to use. It’s something that you’re gonna actually win at.

And don’t worry about the fact that you’re realizing those losses, because you don’t wanna keep that gamble on because you’re losing to it, right? So the kill criteria helping you with that, but they’re also helping you with the other problem. So, remember I said. With, at the value investor that I work with, we have a band.

Here’s the lower bound and upper bound for say, earnings. Um, within which you’re, you don’t care, okay? So that tops stops you from taking the wins off the table. And then if it goes above that band, we already know what we’re gonna do, right? So in some cases, right, if it goes above that band, there might be rebalancing that happens.

That has to do with portfolio dynamics and not with taking wins off the table. That’s a different reason. But we know, and it’s often gonna mean putting on more risk, right? It’s gonna mean things are more favorable than you thought or whatever. And if it goes below, um, you know, depending on what else is happening, we’ll take the money off the table.

So the nice thing about kill criteria is that they work in both directions. So they’ll actually make you be more rational about those decisions. About when do you keep the gamble on versus when do you take the money off the table. Let’s do a little exercise, if you don’t mind. Okay. And, um, because the, um, it makes me think about, so I, um, you know, I started talking on this show about my conviction of, uh, on Bitcoin in 2017.

And some people were smarter than me and actually went and bought a whole bunch of Bitcoin when it was very, you know, very inexpensive. And I, I have some, but. I have some people who are sitting on a lot of gains, a lot of gains, and there’s this question that kind of comes up for them now as we’re sort of hitting in.

We’ve got a hundred thousand dollars Bitcoin people buying this stuff when it was maybe four or $5,000. Right. Uh, they’re sitting on millions of dollars of gains and we’ve seen volatility in Bitcoin in the past. There’s an big, you know, we’re also seeing like a lot of. Information in terms of the institutionalization of this stuff, the, um, the, um, you know, nation states starting to adopt it and that kind of thing.

Now, somebody was sitting with those kinds of gains. Give me sort of a, and I, I’m not saying, telling you, asking you when to sell, but rather how do, how should someone approach this situation if they’ve got, you know, enormous gains and, but they still think they’re bullish. How would you suggest somebody start looking at that as a framework?

Well, first of all, I would wanna understand, I would hope that they had been explicit in some way about what their thesis was for why they bought it. Because what can happen, and I’m not saying this is true of the people that you’re talking about, is that the reason that you bought it is different than the reason it’s winning, right?

So I would wanna know, look, when you bought it at four or 5,000. Like, what was the reason? Were you buying it because you thought it would be disco correlated with the market? ’cause it’s not right? Would you? Well, well, does that, well, does that matter if, if you Well, if it does, it does. In the sense of, in that particular case, if my thesis was wrong, what I wanna say is, okay, I got lucky.

So now, so now I, I need to actually not just hold it because I have it, because maybe I actually don’t understand this asset class. Okay. So I might have a tendency, for example, in that situation to sell it, which just cleans the cognitive slate and then reexamine it once I’ve sold it. See, the problem is like doing the analysis when you actually hold the asset is gonna be actually kind of hard.

So I would wanna understand, do I understand this asset class? That would be really important. Okay. So as an example, we know that one of the drivers of what’s happening in crypto right now has to do with the specific attitudes and actions of the current administration. I’m guessing if you bought it in 2000 at at 4,000 or whatever, that wasn’t on your Bingo card.

So let’s imagine this world, and I’m not saying this, I’m, I’m not trying to give anybody investing advice, but let’s imagine a world where you said, I’m gonna buy Bitcoin because I think it’s going to be, uh, a good hedge against general market chaos. Um, and it’s gonna be, uh, disco, un disco correlated with like, uh, uh, interest rate.

Fluctuations. So let’s just imagine that that was your thing. So you were basically saying, this is gonna be good because I’m gonna hold equities, I have treasuries, I have, you know, all these different asset classes, and this is a different asset class that’s gonna work in a way that it’s gonna be a good addition to the portfolio because it won’t be really super correlated with the rest of the portfolio.

So let’s just imagine that that was your thesis. Well, does, does that feel like that thesis is correct? I mean, you know, again, not a Bitcoin expert, but I don’t think so. I think it tends to, I think as the market goes, Bitcoin tends to go Yeah, a little bit. A little bit, right? So if that were the case, I might, the, I, I would’ve set some band around correlation, right?

And a lower bound and an upper bound for how correlated is it is with other things. Um, because if that’s my thesis, and then if I’m actually not living in that band and it turns out to be more highly correlated, then I would, I would have a tendency to wanna sell it. And if it were, uh, less correlated, I might actually want more of it, right?

So I would actually be thinking that way. So let me just start with that. If it turns out that your thesis is wrong and that it’s one for different reasons, it doesn’t mean that you can’t have the asset. It just means that you need to do fresh work. One of the best ways to do fresh work is to sell it, right?

And so in my opinion, and again, this is just my opinion, that fresh cognitive slate is generally worth what worth whatever the transaction fee is, right? Like you, you should, I, I would gen generally say I would be willing to pay that transaction fee in order to create a clean cognitive slate so that now I can approach this.

Fresh ’cause I would wanna approach it fresh. So now let’s imagine that you approach it fresh, um, and you can do this and still hold the asset. I think it’s harder to do, but you can is to say, to really try to understand why is it doing well now, and then you have to make a bunch of forecasts, right? And this might include some kill criteria, which is, well, if those are the causal drivers of why it’s doing now, what do I think the probability is that that’s gonna change in the future?

Maybe I wanna then hedge against that, right? I might wanna say like, I wanna set up a hedge in case those things are occurring. And I certainly would wanna say, I would wanna go through the exercise of say, let’s imagine that there’s a, a change in the administration. Um, you know, so it’s 2028 and things are different.

Um, and Bitcoin has cratered. Why do I think that is? Or even don’t say the administration, just say it’s. Five years from now and Bitcoin has cratered why? And actually really run through that exercise of imagining why it is that this asset has cratered, right? And in there might be, there’s an administration change that isn’t as friendly to crypto or whatever, right?

That might be in there. So now having done that, you can say, okay, in those different worlds, what would I do? For each of those different worlds, like the, the things that I’m imagining might be occurring that would cause, cause, um, Bitcoin to crater looking back, I realized there were early signals that the world was gonna head in that direction.

What are they? And for any of those signals say what you’re gonna do about it, then I’m much more comfortable. Right? Then I’m like, okay, you’ve thought through this. Now you can do the other thing, which is imagine it’s five years from now and Bitcoin has quadrupled. Right. Why do I think that is what’s occurred in the world that’s caused that to happen?

What would I do in those different worlds? Looking back, I realized there were early signals that Bitcoin was gonna quadruple. What were they, when I see those signals, how am I gonna react to those things? Right? So I would want you to do that as well. That’s a particularly powerful thing to do if you have more than one person do it independently of each other, right?

Right. So you have, it’s called a pre-mortem is imagine the bad world, uh, a. Uh, a backcast is imagining the good world. It’s also called a pre parade. Um, and if you can have more than one person do that independently and then sort of compare notes that gets you to the best place and that, that gives you an action plan.

Last thing though, is that, um, everybody needs to decide for themselves what the value of the present day cash is, right? Versus the, you know, whatever the expected value of the bed is. Um, given risk. And so what I don’t want people to do is say, well, I’m positive expectancy, so I’m gonna keep the ba the bet on if there, for whatever reason in your own life, uh, there is a certain amount of value to getting some of that money off the table.

And sometimes to be honest, it’s just the pain of the swings is too much. So. I think people sort of have to decide that for themselves. Like I, I’m not somebody who says like, if those swings are too painful for you, and that what that generally means is that you don’t have enough financial cushion in terms of what sort of liquid or available to you.

Um, that what’s happening on a day-to-day basis with Bitcoin matters too much for what your. Net p and l, you know what your p and l is? I, I, I’m, I don’t mind people taking money off the table in that situation to get themselves in a situation where those daily swings don’t matter as much to them, and they can actually be more rational about the asset that they own.

Yeah. Interesting. Yeah. Annie, uh, thanks so much for being on the show today. The, the books again are thinking in bats and quit. How can we learn more about what you do? Well, you can read those books, which would be great. Um, I’m on lots of podcasts like this. And then the other thing is I would love for people to check out maven.com.

Um, maven.com is an online platform. It’s creators direct to consumers where you can take classes. I happen to teach on there. I’m actually teaching a cohort at the minute, and I do about three cohorts a year. Um, it’s, uh, spans over three weeks. It’s two sessions a week plus one office hour. Uh, and I teach sort of soup to nuts effective decision making on that platform.

It’s cohort driven. There’s an alumni group that still meets, and I’ve had lots and lots and lots of investors. Um, in that class, um, investors, uh, I think are naturally sort of attracted to what I do. Um, and so lot the, it’s one of the main groups of people that ends up in that class, but it’s maven.com and, um, I have a cohort running right now, but, um, you know, as soon as I finish a cohort, I open a new one that would start, you know, in a few months from then.

And so if people wanna check that out, that would be great. Um, and then the last thing is, um, I actually have a nonprofit that I co-founded. Called the Alliance for Decision Education. And what we’re trying to do is take some of these lessons, the kinds of stuff that we’ve talked about, uh, that I teach to adults, you know, that cognitive scientists and decision scientists really think about in the adult world and say, really what’s more important to teach to kids than decision making?

Seems like it’s more important than trigonometry. Um, and what we’re trying to do is bring decision education into every K through 12 classroom as an educational movement. And so I would love for people to check out the alliance. Yeah. Fantastic. Thanks so much for being on the show. Thank you so much for having me.

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Check it out for yourself by going to wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show everyone. Hope you enjoyed it again. Yeah, really fascinating thing I think to think about, um, investing, uh, in this sort of more framework sort of way, right? Like, I think the thing that I, I like about what she’s talking about specifically are stop losses.

Um, you know, in certain situations I’ve had even, you know, with my own. Situation with real estate and that kind of thing. I’ve, I’ve had some situations where I had to sell early, uh, and take losses and, um, just know that, you know, you’ve stopped a hemorrhage or whatever and you’ve moved on other things.

You know, I think a wise man once said, you know, bury your losses quickly. Right. Uh, that’s an important thing to think about, especially when we’re moving into a high liquidity market from where we are right now. And, uh, you know, I, I think look at all the data in front of you, figure out what you’re gonna do.

Come up with a framework and stick to it. Um, well stick to it as long as you don’t have better information coming in, uh, in the meantime. Anyway, that’s it for me this week on Wealth Formula Podcast. This is Buck Joffrey, signing off.

If you look at the wealthiest people in the world, they almost always get there through business ownership or real estate. The only real exceptions are athletes and entertainers—and let’s be honest, that’s not a realistic path for most of us.

We talk about real estate a lot here and through deal flow in our investor club. But today I want to focus more on business ownership.

One way in is to start a business from scratch. I’ve done that a few times—sometimes it worked out really well, other times it was a total disaster. That’s the reality of startups. They require a certain wiring, an appetite for risk, and the ability to move forward without much of a safety net. It’s harder to do when you’re 52, have three kids heading to college and alimony to pay.

Another option is to buy an existing business. The advantage here is that you’re stepping into something that has already worked, which gives you confidence in the viability of the business. But it’s not without risks. Some businesses depend heavily on key people or relationships that don’t transfer, and the ones that truly run themselves tend to be very expensive and often out of reach.

The third option is franchising. It’s not risk-free either, but it does give you a roadmap. If you’re the type who can follow a proven system, your chances of success go way up. You’re not starting from scratch—you’re plugging into a model that’s already been tested and supported. For people who don’t necessarily have the renegade startup personality but want more than just a paycheck and index funds, franchising can be a great fit.

We’ve talked about franchises before, but this week’s episode brings a fresh perspective from someone focusing on non-food franchises. I think you’ll find it really interesting.

Transcript

Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].

 We’ve seen so many real estate investors saying, where’s another tax advantaged alternative investment that I could participate in? More and more of them are migrating over to franchising. So that’s been a huge trend I would say.

Welcome everybody. This is Buck Joffrey with the Wealth Formula Podcast. Coming to you from Montecito, California. And, uh, before I begin, I wanna remind you that there is something called wealth formula.com. It is the home base of the Wealth Formula Podcast. So if you want to, uh, go check that out, check out the resources.

One of the things you can do there is sign up for the, uh, credit investor club, AKA investor club. See, uh, opportunities gill flow that you might not otherwise see because they are private. As we get here later in the year, more and more opportunities particularly for, uh, potential tax mitigation, lots of real estate, uh, some other, uh, real asset funds that I think you may want to, you may wanna learn about.

So go to wealth formula.com, sign up and um, get onboarded. This is a little building a little bit on, uh, last week, uh, when we talked about, you know, how the wealthiest people in the world. Typically, unless you’re like an entertainer or a professional athlete or whatever, uh, you’re typically going to get there through business ownership or real estate.

Right? Of course, we talk about real estate here a lot and we have a lot of opportunities coming through on, um, on uh, investor club. But you know, today I wanna focus more on that whole business ownership concept because I think it’s something that probably more people could be involved with. Um, you know, but if you do wanna be in business, so there are a few different options, right?

So one is to start a business from scratch. I’ve done that a few times and I’ll tell you sometimes it’s worked out really, really well. And other times it was a total disaster. But that’s a reality of startups. Um, they require certain. Wiring too. I mean an appetite for risk and the ability to kind of move forward without much, much of a safety net.

By the way, speaking of safety net, it’s much harder to do when you’re 52 and I have three kids heading to college in alimony to pay, by the way, ask me how I know that. Anyway, another option if you’re interested in a world of business, is to buy an existing business. The advantage here is that you’re.

Stepping into something that already has worked, which gives you confidence in the viability of that business, right? I mean, it’s a little bit, uh, if something’s been around for a few years, for 10 years, well that’s a pretty good chance you could keep it going. But it’s not without risk because some businesses depend heavily and key people or relationships, uh, relationships that might not transfer.

And then there are, you know, businesses that can truly run themselves out there too. Those are great to buy. The only problem is they tend to be very, very expensive and out of the reach for people. So the third option, um, and I’m sure there are others too, but the third option I’m gonna talk about, again, we’ve talked about it before, it’s franchising, right?

It’s not risk free either, but it does give you a roadmap, you know, if you’re the type who can follow a proven system. Your chances of success go way up. Right. So, and this is actually an interesting thing ’cause I, I think about the types of people who listen to the show and a lot of, a lot of you are highly successful students.

So a franchise is kind of a interesting way to look at, you know, business because then you’re basically studying what other people have already done and you’re mastering it and you’re already really good at that. You’re not starting from scratch, you’re plugging into a model that’s already. Been tested and supported.

So, you know, for people who don’t necessarily have that, you know, have the renegade startup personality, but wanna. Want more than just a paycheck in index funds, franchising can potentially be a really great fit. And again, like we talked about before, if you get into this world, I mean, there’s people who own tons of franchises who end up becoming really rich.

Um, just because, you know, they can sell like a bunch of them and, uh, you know, and stack ’em up and, and get ’em going. Uh, but again, we’ve talked about franchises before. Uh, I just wanted to make sure this is sort of, again, on your radar as an option. Uh, so this week’s episode is kind of bringing a, a perspective from a, a guy who’s an expert in non-food franchises, and we’ll have that, uh, interview right after these messages.

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It’s a refined strategy used by some of the wealthiest families in history, and it uses century old rock solid insurance companies as its backbone. Turbocharge your investments. Visit Wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show, everyone. Today. My guest on Wealth Formula podcast is Jon Ostenson , uh, CEO of Fran Bridge Consulting, and one of the nation’s, uh, top experts in non-food franchising.

He’s a former franchise president of Fortune 500 Executive, and now a bestselling author and consultant who helps investors build semi passive income through scalable businesses. Welcome to the show, Jon. Hey, buck, excited to be here. Yeah. And uh, uh, apparently Jon is a listener of the show too, so that’s, uh, that’s helpful.

He kind of knows what we’re we’re about and what we talk about in the show, so that’s, that’s great. Um, Jon, uh, you’ve been a, I guess a Fortune 500 executive of franchise President, uh, and now you run your own consulting firm. Uh, how did that journey bring you to, uh, you know, focus specifically on non-food franchising?

You know, buck, I like so many others, you know, when they hear the F word franchise, you know, immediately thought fast food. And uh, and I spent many years in the corporate world, had a great run, but franchising was not on my radar ’cause I didn’t want anything to do with food. And uh, really it was when I had the opportunity about eight or nine years ago to step in as president of Shelf Genie franchise system that I realized, hey, there’s a whole world of franchising outside of fast food.

And um, you know, I really fell in love. With the franchise model through that experience and just saw how all these diverse backgrounds could come together under a shared system of support and become successful business owners. Long story short, ended up becoming a franchisee myself of a number of different brands, still am today.

And, um, started my consulting practice about six years ago to help others get plugged in. And, and I’ll start by saying, we’ve got nothing against the food guys. We, we need them. But, uh, in my humble belief, there’s simply easier ways to make money. And I’m happy to go into the reasons why. Yeah, why don’t, why don’t you kind of tell us a little bit about that?

I mean, I mean, just the differences and you talk specifically about sort of specializing this non, uh, food world. I mean, what. What’s the big difference there? Yeah. You know what? You can do really well with food if you’re in with one of the big brands. But, you know, oftentimes if you get in with a smaller one, it is just, there’s just a little more risk associated with it.

Um, you know, consumer whims oftentimes change, you know, I, I joke the frozen yogurt was big until it wasn’t. Right. And so that’s a piece of it, but you’re really making a big CapEx investment in most cases. You know, it’s, those are not cheap to get into. And then once you’re in it, you’ve got, you know, long operating hours.

A lot of hourly employees, uh, oftentimes the margins aren’t that good. So, uh, when you, you know, put that side by side with some of the opportunities that we go deep in things like home and property services, health and wellness businesses, uh, B2B services, you know, businesses that cater to kids or to pets or to seniors, you know.

I’d say the general theme out there is understandable, cash flowing businesses, that’s what people are gravitating towards. And you know, food just has a lot of moving parts and a lot more complexity. So most people that we work with say, Hey, we want nothing to do with food, but we wanna go deep on these other ones.

You know, I wanna start, I wanna ask you some very practical questions because I think, you know, we, as you know, we’ve discussed franchises on the show. Uh. Few times. Um, and I think people are still kind of, a lot of people are interested, but, you know, they kind of want to know a little bit of the nuts and bolts, you know.

Can you give us a little bit of a sense for, you know, when we talk about non-food f franchises, you mentioned they’re, they might be a little bit less expensive to get into, uh, than food franchises. You know, what, what kind of investments are we talking about? I mean, for someone who’s. Um, you know, high paid professional, obviously you’ve, you’ve got some capital, but you also don’t wanna spend all your, of your investible capital in one year on a franchise because inherently, I mean, it is a business.

Uh, it may have a higher likelihood of succeeding than a pure startup, but it’s still, there’s still possibilities of failure. So, so, you know, what are we talking about in terms of, uh, startup costs for. Your typical non-food franchise that people can expect. Yeah. You know, and some of these non-food categories aren’t cheap, right?

I mean, we just had clients that bought 10 trampoline parks at $3 million each year. You do have some large ones. I’d say probably 75 to 80% of those that we work with. When you look at the franchise fee and the startup cost and several months of working capital, all built in your investment range is oftentimes in the.

I’d say two or $300,000 ballpark in most cases. Um, you know, if it’s more of a larger customer facing retail play, then it might be a little bit larger, four or 500,000. But a lot of our clients are gravitating towards more service-based businesses. You know, where you can get in, maybe get multiple territories for that two or 300,000 mark.

Some people are using all cash to fund it. Most are using SBA loans where you put in 20%, you know, fund the other 80%. Banks obviously prefer lending to franchises. Um, some are using a retirement rollover. It’s what’s called the Robs program, ROBS, where you can roll over and you have to purchase the business as a C corp or set it up as a C corporation, purchase it with a retirement plan.

You can pay yourself a salary, somebody’s that in conjunction with sba. There are a lot of ways to make it happen, but no, you’re exactly right. I mean, business ownership. There’s a reason why you can make. Inherently larger returns, it’s because you’re also putting in a little more effort and there is risk associated with it.

Right? Um, franchising does de-risk it in a lot of ways. You look at the sheer numbers, but end of the day it does take effort and. I always tell people if it was easy, everyone would be doing it right. Um, but it’s obviously something the government incentivizes. They want you creating new companies, new jobs, and so there’s a big tax play with it as well.

Um, but yeah, no, it’s, it’s not easy. And, and when you talk about tax play, you’re just mostly talking about like bonus depreciation, that kind of thing, or? Yeah, if it’s heavy, heavy CapEx business, certainly section 1 79 and the whole bonus side, uh, with the new tax bill that gets extended. But, um, no, it’s, it’s things like, I mean, for me, I, I pay my kids in the business now.

They’re all elementary age, but I’ll put ’em in my ads, they’ll ship my books out, that sort of thing. I then take some of that, roll it into a Roth IRA for each of them. The other part I pay. Back for private school tuition and I’m paying stuff, you know, there are things you could do if I get a tax write off for the business.

Um, you know, certainly all the home office and travel expenses, you know, can be justified as write off. So there’s just a lot of things that as a high paid W2, you don’t have access to in the tax. Tax code. Yeah, yeah. Um, do you think. Uh, you know, obviously when you go, when you look, you know, I’ve, I’ve sort of looked through franchises in the past.

Um, not too seriously, but just to kind of get a sense. But is it your sense that the more safer, the more stable, the better likely to hit? Franchises generally tend to be more expensive. Not necessarily. No, I think it’s it. A lot of it comes down to the model. How much equipment is needed, whether you need a retail storefront, how many employees.

No, I’d say the franchise fee, what you’re actually paying the franchisor is pretty consistent across the board. Um, you know, franchising is like every other industry out there in that you’ve got good players and you’ve got ones that are not as strong, ones that don’t provide as good of support. And that’s where we come in to try to help identify the, the strong ones.

But, um, no, it really is similar. You know, franchising’s not right for everyone. You know, there are. People that we work with that I have to explain, you’re too entrepreneurial. You wanna put your thumbprints all over it, it’s not a good move for you. Um, but if you have some degree of humility and you recognize you’re not always the smartest guy in the room, um, you know, I think it, it truly is a better path than business ownership for most people.

So, um, but again, it’s not right for everyone. Not everyone’s cut out to be a business owner. Um, we see all types. You mentioned, uh, SBA financing, but these kinds of things too. There is. When we talk about cost, there’s sort of the upfront cost, but a lot of times it takes a year or two years to get something up and running.

Right. So how do you, how do people deal with that? ’cause they’ve got a lot of, you know, they’re carrying a lot of costs for a long time. Mm-hmm. I’ve had multiple conversations on that topic already this morning, and everyone’s situation is different. Um, but I, I, I always want people to go in eyes wide open.

You know, we have a whole discovery process where they can really ask questions, learn more, talk to existing franchisees in the system, hear about their ramp up, what that was like with their profitability. Looks like. Certainly the franchisor has their financial representation, but always tell our clients, let’s go conservative and assume it does take longer to.

To get to the break even point to that point of, you know, I call it the oxygen of profitability, where you have that monthly p and l that’s in the black. Um, so no, it it, a lot of models, you know, you may not hit that profitable month until month six or month ninth, uh, the ninth month or even a year into it, depending on the business.

Yeah. There are some that, and sometimes it’s, uh, and, and then sometimes it might just take a year to even set it up. Right. I mean that, that pretty. Typical to go from soup to nuts and starting in about a year, you know, from your first call with the franchisor. I’d say the process usually takes about two months, uh, to, you know, get to that point of signing the franchise agreement.

From there, if it’s a retail business, then it is going to take site selection and build out, which takes time. Typically it’s not a full year, but sometimes it can be. Um, oftentimes if it’s a service-based business, which at least half of those that we work with are getting into, and I’m happy to give examples.

If it’s a service-based business, you can be up and running oftentimes two or three months later. So it does condense the, the time period. Um, you know, so we’ve, we’re talking about this in the context of Yeah. Maybe diversification also, uh, you know, in the context of saying. There’s, you know, this is an earning opportunity.

I know we we’re calling it semi passive. Um, but in order to do that, you have to justify that with the type of returns you’re gonna get. And I know you can’t really give projections in general, but how should people think about this in terms of, you know, if they’re getting. 8% in real estate. And you know, right now the stock market people, I mean, are getting a lot more there.

Obviously that’s a volatile situation. It always is. How, how do you justify this to somebody who’s, that’s what they, they typically do. Yeah. You know, the juice has to be worth a squeeze, right? For the e effort that’s being put in. Absolutely. And, and I personally invest in real estate directly and through syndications and energy funds and private credit.

I’m an all of the above guy myself, and, and a lot of our clients are too. Uh, we like the role that business ownership does play in the portfolio. That being said, most franchises will market themselves as, you know, you can be an owner operator running the business day to day, or you could be semi-passive.

Some call it semi-absentee, some call it executive model. The idea there is that you put a manager in place, day one to run the business. Now, my preference is to call it semi involved because I think that’s a better term for it because you’re not gonna outsource the running of your business entirely.

Right? And if you don’t have the right person in that seat, you’re gonna find yourself leaning in until you do. So if. Countless case studies we have of clients who are running the business as executive model, but they usually weren’t on day one entirely. It takes a little while till they get to that point, they can really pull themselves back.

So I always wanna give that, uh, upfront disclosure, but no, from a return standpoint, I mean, some of these property services franchises as an example, you, you’re all an investment. Call it 200,000 in round numbers. A lot of these businesses can then return a hundred, I’m sorry, a million dollars in revenue, oftentimes at a 15 to 20% bottom line margin, sometimes even north of that.

So let’s just call it 20% for round numbers. That’s a $200,000. Payback. Maybe it’s year two. You know, it’s not necessarily year one, but I mean, you’d call that a hundred percent return on your invested capital. Now again, you’re putting in effort, that’s why you get, you know, an outsized return. But it’s interesting.

I mean, that would be a hundred percent. Um, and you’re building an asset that you’re gonna be able to sell one day as well. So when a lot of times people are looking to leave their W2 jobs to run a business and they say, well, I’m making. 400,000 in the corporate world. I can only make, you know, two 50 here as a business center.

But then when they start layering the tax benefits they get and the fact that they’re building an asset that they’re gonna be able to sell one day, it starts to justify it. Yeah, yeah. Um, let’s talk a little bit about, you know, what it looks like. I mean, we, again, just a review. What does it look like to be, uh, somebody who owns a franchise?

You know, you, so you go into one of these, you sign your franchisor agreement, you’re going to essentially, uh, you know, probably for, you know, at least six months, you’re gonna be like getting something up and running. Right? A lot of times people will be hiring managers and stuff like that at that point.

What is the, what’s the typical route? Like what, what do you see like people doing, you know, just put putting people into the shoes of somebody who’s going into this process? What does it look like? Yeah, so first off, at the very beginning, I encourage people to date around to have conversations with multiple brands.

I mean, we usually have our clients evaluate a dozen opportunities that are available in their area. That’s where the magic starts happening. You start to prioritize the characteristics you like in the business or don’t like, and compare and contrast. Um, they’ll usually pick three or four to talk with.

So again, once they through that process, they decide on one to move forward with, um, you know, they sign the paperwork. Alright, what happens next? Typically, the franchisor has almost like a checklist of things that they’re doing on your behalf and things that you need to do in the months leading up to that launch of the business.

Um, and again, it depends on the type of business, but part of that would be training. You’ll, you’ll probably do some online training. You’ll probably get with a franchisor and in person for a period of time at their home office. Maybe that’s a week. Uh, you know, you’re able to talk to other franchisees in their system.

It’s kind of this built in Mastermind where you’re exchanging best practices, learning from each other. Hey, where did you find your people? Hey, how are you compensating them and incentivizing them? And so. If you’re able to take the franchisor’s job profile and then kinda layer in some real world experience from other franchisees to go out and find that team, um, you know, and I’d say start doing some secret shopping too.

You know, get to know the competition. How are you gonna differentiate in the market, um, along with the franchisor’s training. So, you know. If it were getting really brass tacks here, let’s say it’s a service-based business, you would then run some sample appointments with friends and family, get your feet wet, uh, get used to it, and then, um, or have your team do that and then, you know, start launching to the market.

But the franchise order’s gonna be running a lot of that opening marketing that’s gonna make the phones ring, draw people in. Usually it’s kind of a. Franchisors handling a lot of the digital marketing and if there’s any print, that sort of thing. And then you’re handling a little bit more of the organic, you know, maybe that’s doing some networking, getting involved in the Chamber of Commerce, getting word out there locally on social media post.

Um, so it’s a combination of the two. Um, you know, but the franchisors there for support and I think the, oftentimes it does get overlooked that community of other franchisees. It’s cliche to say, but you’re in, in business for yourself, not by yourself. There’s a group of people that are living the same thing day in, day out, and so you really are learning from each other.

And the more you lean into that, I think it fast tracks your success. Can, is there ways to find out likes, I mean this is, uh, I, I’m assuming all under NDA, but data in terms of which franchises? Um, I think, I think the big thing that most. That anybody who’s gonna get into this is like, okay, I’m gonna put a bunch of money into this and then it’s gonna fail and I don’t want that to happen.

Of course, there’s no guarantees to that. However, is there data to show in any given franchisor if they, uh, you know, what their track record is in terms of, you know, they’ve started, uh, a hundred of these and 98 of them did well, or 75% did well, or something like that. Uh, is that data available? Every franchise system has what’s called an FDD Franchise Disclosure document.

It gets updated every year. Typically in the April, may time period, they’ll come out with a new one and release it. And you know, they have audited financials in there. You know, they’ve gotta cross their ts, dot their i’s, I mean, there’s a lot of legal liability if they don’t do it right. So, you know, it’s full disclosure.

They’re 23 sections within it. There’s what’s called the item seven, where, where it’s your all in investment range broken out. Your item 19 is where they break out the financials, historical financials of franchisees. Now, it would be great if everyone did it in the exact same format. They don’t. And so, um, you know, usually you, you get good information from the item 19.

It’s, it’s audited. Typically, you still have some questions after you review it. A franchise order typically does not have their p and l of all their franchisees locations. So they’ll show the corporate p and l to show how the model is set. But then they’ll show the revenue of all their franchisees. And so you kind of extract that proforma on your end as well as getting talk to other franchisees in the system.

But no, to your point, there’s a section in, uh, the FDD where they do talk about any openings they had, any closures that they had. They list the contact information for all the franchisees. And so again, you have historical information, but also resources that you can reach out to to learn more. How about.

You mentioned, obviously you have an asset that you can sell. What if you’re looking to buy an asset, like buy instead of a skip the startup process? I mean, how does that work? If somebody’s like, yeah, I like the idea of this, but I want to skip the, you know, startup thing, and maybe I’ll get a little bit less return.

But that, that, that creates a lot more potential stability. How does, how does somebody do that? So, within the franchising lane, we do handle resales, uh, franchises. It’s a small percentage of what we do, and here’s why. It’s not that there’s not demand out there for the resales, but there’s lack of supply.

So what happens is franchisee decides they wanna sell their business. The most likely buyer is another franchisee within that system. It’s what I call internal m and a. They’re going to get first rights, essentially. And, um, that’s a way for other franchisees to expand. So oftentimes those good deals, if it’s a good one, it never hits the open market.

The only ones that hit the open market are ones where maybe someone bought and never did much with the business, right? So there’s nothing to buy. And so as a result, we just don’t have a lot of supply, uh, for that. But, uh, internal and m and a is really common. But it’s interesting, there’s so many thought leaders out there today talking about buying existing businesses, you know, buy and build and um, you know, and that can be a great proposition.

However, here’s what I see from where I sit. I have people reaching out every day saying, Hey, we’ve been looking for existing businesses for four years, five years. We hired an analyst full-time to go find businesses for us. Due diligence didn’t shake out. Someone else outbid us. I continue to hear the same through lines over and over again.

All of that time they could have spent building a business. Right? And so it, it just takes a lot of time to find that right business. And even once you find it, there’s inherent risk to it. You’re assuming everything on paper is gonna continue as is. But whenever you inherit someone else’s team and culture.

You’re gonna lose some key employees or key customers, it’s almost inevitable. And here you paid a premium for that business. So it’s interesting. I had conversations with a couple of past clients this past this past week who bought franchises with us two years, three years ago, and are now returning for their next round, their next purchase, to build off of what they’ve already started.

So again, they didn’t spend all this time looking. Instead, they got in the game, started building knowing one, that’s not the only thing they’re ever gonna do, but let’s start it with a good foundation that we can always build off of. By acquiring other franchisees, by starting our own business, by buying another business, but they kind of buy some time while building.

Yeah. Um, what, you know, uh, the one thing I was gonna ask you is that, you know, uh, you’ve sort of got your finger on the pulse of, of what things seem to be working, whatnot. What, what, uh, sectors of non-food franchising are showing the most promise right now? Yeah. You know, I just finished speaking at a private equity conference the other day where the feedback was, you know, the private equity firms were saying it’s sexy to have a franchise in their portfolio.

Now. They, they love the model. Most of them are gravitating towards things like home and property services, sometimes non-sexy, non trendy businesses, things that AI is not gonna replace. Maybe ai, AI will enhance how you do something versus the low bar competition in, in a given niche. Um, there’s just so many niches in home and property services that people oftentimes overlook that they love.

And some of the businesses I’m invested in, I’ve got. I have an asphalt paving and line striping franchise. You know that parking lots. I’ve got another one that provides temporary walls around renovation projects and construction sites. Kinda like an equipment rental type business, you know, B2B. I’ve got another one that, um, you know, provides custom shelving, uh, you know, in your kitchens and pantries.

And then I have one in the health and wellness arena that provides custom orthotics. So 3D printed orthotics for people. So I would say property services has probably been the number one, um, out there in the market for diverse backgrounds. We have lawyers and doctors and corporate executives with no experience in the space, but saying, Hey, I see an opportunity.

I’m gonna follow the playbook that the franchise order provides and go down that path. Um, health and wellness is big. The theme is what are people gonna spend on regardless of the economy? And so it’s everything from kids, youth, soccer and tutoring to, uh, tech grooming to in-home senior care. There are a couple in the senior space that we really like outside of in-home care, where you don’t have to have a large team.

It’s more of. Consultative type positions. Like you’re the expert in your community on all the senior facilities. You’re a placement consultant or a senior fitness where they bring you in. Uh, you know, you have a team of trainers that goes around to different facilities and, and trains and, and, you know, helps with stretching and exercise programs.

So there’s just all these different niches that you wouldn’t think about it unless you saw him. Uh, yeah. Right in front of you. Uh, and you, you know what I like about what you just said too is I always tell people like it’s. I’m, I’m a former cosmetic surgeon. Right. And people get, I’ve had people go through franchising and stuff like that, and they start looking at, you know, these beauty businesses and stuff like that or whatever, because they sound a little bit more sexy.

And then my, my impulse is always to be like, boring. Please keep it boring. Because it’s like you don’t want something that is just people can cut outta their lives as second the economy. Um, goes south or, you know, that they just don’t need, and that there’s enormous competition in. Um, is that, I mean, it, those are the kinds of things that you’re looking at when you’re, you know, when you’re focusing on what to do.

Yeah. It, I joke that non-sexy is the new sexy when it comes to business ownership. It, it really is. And that’s what people are looking for. We work with a lot of doctors and physicians and dentists and, um, you know, they, they wanna do something that stretches them intellectually and they love that, you know, idea of, you know, being a business owner and franchising is just a perfect fit for a lot of them.

Um, but most of them are not, not looking to stay within health. They say, we’re passionate about this, but we wanna do something different. They’ll get into a restoration business or a gutter business or things that aren’t going outta style. So that is a very common. Thread exactly what you brought up, that we want a business that’s going to do well regardless of the economy.

Yeah, yeah. How, um, tell me a little bit about what, you know, today’s macro trends, how that’s affecting everything. We’ve got tariffs, we’ve got high interest rates that might start ticking down, but who knows? We’re looking at a labor market that. Looks kind of very suspicious for recession, uh, recessionary ai or at least, you know, a contraction in, in, in job, the job markets.

And then as you mentioned, ai. So what are the macro trends that you think about when it comes to this kind of thing? How do they affect, you know, some of the decision making? I’d say in the industries that we focus in, tariffs haven’t had as big of a play interest rates have, and where I’ve seen interest rates play out, we’ve seen clients do as many SBA loans as ever.

It hasn’t really affected that. And of course, that’s tax deductible interest. Where we’ve seen interest rates is real estate investing. Obviously, the real estate market has slowed down. There aren’t that many great deals to be had. We all know, uh, the, the macro story there. We’ve seen so many real estate investors.

Saying, where’s another tax advantaged alternative investment that I could participate in? More and more of them are migrating over to franchising, so that’s been a huge trend I would say. Another thing on the labor market. I mean, the Wall Street Journal has an article at least every two days, if not every day, on AI displacing jobs and how these big companies are, you know, broadcasting and proud of how much they’re, how they’re doing more with less headcount.

Right? And so where I sit, it’s on the ground in all these communities, all across America. I’m hearing the same thing. I have so many mid-level and upper level clients, they. You have a background in technology or they’ve been in consulting and so many of them are gravitating and saying, Hey, we know our days are numbered.

Or you know, all of a sudden we’re having to manage a team twice the size without any increase in pay. We’re having to do more with less. I had a client today that said, Hey, I’ve got a great technology background. I’ve been doing technology recruiting forever. I don’t wanna learn the whole AI space. AI space.

That’s a different ball game for a younger man. So. It is interesting. You see these through lines and a lot of them are saying, I don’t want to go work for another firm. I’m ready for a pivot. The P word pivot, and they’re coming our way. So I’d say that’s the other big trend that we’re seeing people looking to make that jump.

Yeah. I’m, I’m surprised the SBA loans are, are still, as you know, that they’re hot as they, I mean obviously they’re very favorable in terms of loan to value or I’m sorry, they’re, yeah, they’re loan to value, but. Interest rates, man, I was, I mean, I was looking at acquiring a business not too long ago and I was just like, the sb you know, interest is so high.

I mean, all in all, when I was looking at it, it was gonna be close to like 10%. And um, yeah, I’m surprised that doesn’t make people. You know, think twice. Yeah. I, I’d say first it probably did, but really I think we’ve become used to it. Yeah. And maybe we’ve become numb to it. So 10%, you’re exactly right.

That’s what we’re seeing out there as well. You know, again, that’s tax deductible. I keep going back to that, but that kind of nets you down to call it six or 7%. Right. In most cases you can pay that loan back early once you’re cash flowing. So it’s temporary in theory. Um, you know, but people like the idea of leveraging.

And, and again, a lot of those real estate investors are used to leveraging. Yeah, yeah, yeah. Of course. Great. What, uh, uh, what else have I not asked you that do you think would be useful for this audience? Yeah, you know, I think we hit on a, you know, the macro trends, a little bit about the financials. Um, you know, what I found is it just gets people excited when they start looking at real opportunities, you know?

Yeah. Like I said, most of our clients will look at a dozen or so businesses. We’ll share with them, uh, you know, the top ones in their market. Nine times outta 10, they end up purchasing something in an industry that was never on their radar. So I think, again, going back to, there’s so many niches out there, and the challenge is if you start Googling, you’re gonna see a top 50 list or a top 100 list of franchises.

Companies are paying to be on that list. And so it’s just so much noise out there. And so that’s where we come in and you know, I think, you know, our model bucket’s entirely free to work with us. We get a referral fee from the brands. That’s passed on to our clients. It’s very much like a real estate broker and, um, yeah, we love helping.

So no, I think you did a great job of kind of hitting on all the main topics that I would’ve mentioned. Yeah. How do we get in touch with you? Come out to our website, fran bridge consulting.com, FRAN bridge consulting.com. We’d also love to share a free copy of our book, Non-Food Franchising can be a great resource, uh, to read through.

So just share your email address out there and we’ll send you links to the book, uh, to download. And, uh, if you’d like to take a next step and book a call, we’d be happy to chat. Fantastic c Jon, thanks so much for being on Wealth Formula Podcast today. Enjoyed it. Thanks, bud. You make a lot of money, but are still worried about retirement.

Maybe you didn’t start earning until your thirties and now you’re trying to catch up and meanwhile you’ve got a mortgage and private school to pay for and you feel like you’re getting farther and farther behind. Good news. If you need to catch up on retirement, check out a program put out by some of the oldest and most prestigious life insurance companies in the world.

It’s called Wealth Accelerator can help you amplify your returns quickly, protect your money from creditors, and provide financial protection to your family if something happens to you. The concepts here are used by some of the wealthiest families in the world, and there’s no reason why they can’t be used by you.

Check it out for yourself by going to wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show everyone. Hope you enjoyed it. And, uh, again, uh, you know, I think the moral of the story here in the last, you know, episode or two is that you know, if you want a different life, you have to do things differently.

If you want a different level of wealth, you can’t do what you’re doing now. Figure out you know, what it is that you want in your life, and then look at where you’re at now and see if you can draw a straight line. If you can’t draw a straight line, then you gotta figure out. Well, what do I gotta do so that at least I have a trajectory to even have a chance of getting to where I want?

That is the moral of the story. And that is it for me. This week on Wealth Formula Podcast. This is Buck Joffrey signing off.

If there’s one thing that separates the truly wealthy from everyone else, it’s their relationship with risk.

Not blind risk. I’m talking about conviction — the ability to see an opportunity before everyone else does, to lean into it while others are frozen, and to hold through the storm until the payoff is undeniable.

The extreme example is Bitcoin. In 2012, when it was trading for less than the price of a cup of coffee, most people laughed it off as internet monopoly money. But a handful of people had conviction. 

They understood the asymmetric nature of the bet — the downside was capped at the small amount they put in, while the upside was exponential. Those early adopters didn’t just make returns; many became billionaires.

Of course, most people hadn’t even heard of Bitcoin in 2012, so that might not have even been an option for you. So let’s take another example that you almost certainly did live through.

Real estate after the Great Recession in 2008 was radioactive. Nobody wanted to touch it. Yet those who bought when fear was at its peak ended up riding one of the longest real estate bull markets in U.S. history. 

Data from the National Association of Realtors shows that home prices more than doubled from 2012 to 2022 in many markets. Imagine the rewards of being on the buy side in 2012.

I’ve said it before and I’ll say it again: I believe we are in a similar scenario with real estate right now as we head into a descending rate environment following a real estate bloodbath. 

Properties are severely discounted, and values are almost certain to go up as rates fall. But you have to see the big picture and not be scared. That’s not easy to do when everyone else is. 

Real estate moguls and business owners are the ones most likely to take their wealth to the next level. Real estate is accessible to you — and so is business ownership. 

Look at the Forbes billionaire list and you’ll see a pattern: nearly 70% of the world’s wealthiest people are business founders or owners. They didn’t get rich clipping coupons from the S&P 500. 

They got there by creating or buying businesses that became valuable, saleable assets. The risk was obvious: most startups fail. But the payoff for the ones that succeed dwarfs anything you’ll ever get in your brokerage account.

Now, the reality is that most high-paid professionals never play in this arena. They’re comfortable and don’t want to rock the boat. Some call it the “golden handcuffs” — you make enough money to feel comfortable, but that same comfort prevents you from ever taking risk. And you know what? That’s totally fine.

Just know that doing your 9-to-5 and investing into your 401(k) is not going to create life-changing money. If all you’re looking for is life-sustaining money, keep doing what you’re doing.

But ask yourself this question: What’s the life you dream about? If it’s the life you already have, then congratulations. If not, are you on a trajectory that even makes it possible to get there? If not, you’ve got to change course.

My guest this week on Wealth Formula Podcast has done a great deal of research on the wealthy and has written a book based on what he has learned.

Transcript

Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].

 An s and p 500 index fund would’ve outperformed like, you know, 75% of active managers. These are people who, it’s their job, they’re paid and compensated to try and beat the market, and they can’t.

Welcome everybody. This is Buck Joffrey with the Wealth Formula Podcast, coming to you from Montecito, California. And, uh, before we begin today, wanna remind you. There is a website associated with this podcast. It’s called wealth formula.com. Go check it out. There’s lots of resources there for you, uh, including, uh, a chance to join our credit investor group.

Our credit investor group is exactly what it sounds like. It’s a investor club and uh, it’s basically an opportunity to see deal flow where you might not otherwise see. I do think it’s, uh, you know, uh, following, uh, Richard Duncan’s, uh, podcast last week. I think it is something that you really ought to be thinking about.

We, I mean, even, even Richard, who generally is pretty negative about, uh, the economy and, and that kind of thing really sees a big boom, uh, and sort of a takeover of the Trump, uh. Take over the Fed by the Trump administration. Forcing rates to go down. Descending rate environment means increasing asset prices.

That’s just what it is. And if the Trump administration does what it wants, you’re gonna see rates going down, asset prices going up, liquidity going up, dollar going down. What that means is asset prices skyrocket. Dollar falls. I mean, listen, if you’re not buying real estate, fine. I don’t buy real estate here.

If you’re in our credit investor club, you know, we we’re continuously, uh, going after these distressed assets. Um, and, uh, but they may not be your cup of tea. Maybe go buy something yourself, you know, buy some stocks or buy some, uh, buy your own, uh, real estate, uh, whatever, whatever works. But I do think that.

Again, I’m not trying to give you financial advice. This is commentary. My commentary is this, is that I think the playbook that the Trump administration is trying to follow is pretty clear. Now it’s possible they, they’re unable to do it, but I doubt it. I mean, they’re gonna fire their way to controlling the Fed and if they can fire their way to controlling the Fed, they can control the Fed interest rates and they can control the bond market through quantitative easing.

So, anyway, just a reminder on that. I just feel like people need to wake up on this one. Okay. Let’s talk about today’s show. It’s, you know, it’s about, it’s a little different. It’s about wealth, right? So, um, I wanna talk about generally the idea of, you know, building substantial wealth and, and what does that even mean?

Right? Well, I would just say this, it’s the, it’s life changing, right? So that’s gonna be different for different people if you. Are going from, uh, you know, $50,000 a year job and all of a sudden you’ve got a million bucks. That’s life changing, right? So, uh, if you make a million dollars a year and you know, all of a sudden you’ve got, uh, eight figures of wealth, um, that it, that can be life changing, right?

Um, or going from, you know, eight to nine figures or whatever. These are life changing things. That’s what I’m talking about. You know, if there’s one thing. That separates those sort of truly wealthy from everyone else. It’s a relationship with risk that is different. Now, I’m not talking about blind risk, I’m talking about conviction.

The ability to see an opportunity before everyone else does, you know, to lean on it while others are frozen and to hold through the storm until the payoff is undeniable. Okay, so the extreme example. We’ve been talking a lot about Bitcoin lately, right? So in 2012, Bitcoin was, uh, trading for less than the price cup of coffee.

And I think it’s, uh, as of this, um, I’m recording this a little earlier than it’s being released, but it’s at about 117. I think Q4 is gonna be huge. So who knows? By the time, uh, by the time this comes out, it could be greater than 117,000. It could be a lot less, who knows? But anyway. Hell of a lot more than a cup of coffee.

Let’s just put it that way. Okay? But guess what? People laughed it off. They were laughing at this stuff. Even through 2017 when I first kind of got into this world myself in the bitcoin world, people were laughing. They thought it was a joke. They called it buffet, called it rat poison. Blah, rat, rat poison squared.

It wasn’t just even rat. But guess what? There was a bunch of people, not a bunch, but there were, there was handful of people who had crazy conviction, these Bitcoiners, right? And even, uh, you know, they started off, maybe they had a few hundred bucks or a few thousand bucks they put into it. The next thing you know, they saw that grow into like, you know, six figures.

And then they still didn’t sell. Then they saw it had their money go into the seven figures and they still didn’t sell, and some of these folks even became billionaires. It’s crazy. Crazy. What kind of conviction that takes. I mean, I don’t think, man, I don’t think I’d have that kind of conviction. If I saw, if I saw a hundred acts, I think I would kind of probably bail, to be honest.

So maybe I’m, you know, I’m not wired to become a billionaire, so who knows? Um. Got many zeroes to go before I could, uh, call myself that Anyway, so, uh, of course, you know, most people and, and myself, I think maybe I heard about 2000 Bitcoin in 2012, but. I think I was mostly hearing Peter Schiff bash it or something like that.

So then I completely went the other way. But you know, most people hadn’t heard of it then. So it probably really wasn’t realistic for that to, to use that as an example of conviction, because if you’d never even heard of something, then it’s hard to have conviction about it. So let’s take something that’s, well, I know, I know pretty much all of you have recollection of, and that is a great recession of 2008.

And guess what? Real estate was radioactive. In fact, I mean, kind of almost like now, right? Like where, you know, there was this bloodbath and all of a sudden nobody wanted to, you know, people were, people were all over it and then nobody wanted to touch it. Yet those, uh, who bought when the fear was at its peak.

Ended up rioting one of the longest real estate bull markets in US history, which really only ended like, you know, 20 22, 20 23. But it, there was a crash. There was a big crash. Now, data from the National Association of Realtors show that home prices, uh, more than double from 2012 to 2022 and many markets.

Now imagine the rewards of being on the buy side in 2012. If you had that kind of. Conviction. I’ve said it before and I’ll say it again. I actually think we’re in a very similar scenario with real estate right now as we head into this. You know what, you know what I keep calling this descending rate environment with this, uh, uh, Trump takeover of the Fed.

I mean, it’s the same kind of thing. Maybe it’s not quite as extreme as what you saw in 2008, 2009. That’s, that’s kind of crazy times, right? But, but you’re seeing a similar thing where you had this, you know, bloodbath and then now people are kind of. Skittish about getting back in. They don’t know if it’s a good time.

And at the same time, you know, assets are being sold at, uh, you know, 30, 40% discounts compared to just a couple of years ago. You know, the prices are reset. They’re making sense at the current interest rates. And then what happens? Interest rates go down. Cap rates compress, boom. We’re off to the races, right?

But you have to see the big picture and not be scared. And that’s not easy to do when everyone else is. I get it. But just remember, real estate moguls, business owners are the ones that really, I mean, look at the NFL owners, right? They’re either big real estate moguls or they’re business owners. That’s basically it.

Um, you know, real estate obviously is accessible too, but so is business ownership. And if you look at business ownership, the Forbes Billionaire List, you’ll see, you know, nearly 70% of the world’s wealthiest people are business founders or owners. So they didn’t get rich with the stocks, bonds, and mutual funds, and the s and p 500.

By the way, I’ve changed my tone on stocks. I am not a hater. Okay? I’m not a hater. I’m just saying, you know, if you want different results, you have to do things differently. These people became billionaires because they were creating or buying businesses, uh, that became valuable. Saleable assets. They, they did the work.

The risk was obvious, right? But the payoff for the ones that succeeded, um, you know, dwarfed anything that you could get just by investing in, like most people do. Now the reality is that most high paid professionals never play in this arena. And the reason for that is not because they’re not smart enough, it’s just that they’re comfortable and don’t wanna rock the boat.

Some call this the golden handcuffs, right? You make enough money to feel comfortable, but that comfort is a little bit, you know, too comfortable, and it prevents you from ever taking risks. And you know what? That’s totally fine. It’s totally fine if you just don’t really care. You know, just, you know, just know that doing your nine to five and investing in your 401k, it’s not gonna create life-changing money.

Nobody ever got rich from investing in a, you know, diversified portfolio of stock sponsor mutual funds. People don’t change their place in the economic hierarchy of this country by doing that. If all you’re looking for is life sustaining money, keep doing what you’re doing, and it’s probably easier if you are not that ambitious.

The only thing I’m asking you to do is to ask yourself the question, you know, what is it that you really want in your life? What is it that you dream about, right? As far as you know, you only got one of them, and if it’s the life you already have and you are totally fine with it, you don’t need. Um, dream any further than just keep doing what you’re doing and you can just listen to this podcast and think we’re a bunch of jokers.

Who are the dreamers out there? Um, but if not, you know, uh, the, the thing you gotta do is you have to look at your trajectory, right? Like, if you’re doing something right now, that, and, and there, there’s no motion or any sort of, uh, direction. If that could possibly get you where you wanna be, then you gotta change course.

Right. Anyway, that’s just a little pep talk for me. My, uh, my guest this week, um, on this week’s podcast, he’s done a lot of research on, on the Wealth. He’s written a book on what he’s learned, and I think it, uh, gives a little bit of backup to what I’m talking about, so we’ll have that right after these messages.

Wealth Formula banking is an ingenious concept powered by whole life insurance, but instead of acting just as a safety net, the strategy supercharges your investments. First, you create a personal financial reservoir that grows at a compounding interest rate much higher than any bank savings account. As your money accumulates, you borrow from your own bank to invest in other cash flowing investments.

Here’s the key, even though you’ve borrowed money at a simple interest rate. Your insurance company keeps paying you compound interest on that money even though you’ve borrowed it. Net result, you make money in two places at the same time. That’s why your investments get supercharged. This isn’t a new technique.

It’s a refined strategy used by some of the wealthiest families in history, and it uses century old rock solid insurance companies as its backbone. Turbocharge your investments. Visit Wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to Show Everyone Today my guest is Nick Maggiulli.

Uh, he is a Chief Operating Officer at WR Hols Wealth Management. He’s also the author of Just Keep Buying and runs the blog of Dollars and Data where he breaks down personal finance and investing using real world evidence. His focus is on what the data actually shows about building and keeping wealth.

And that’s exactly what we’re gonna talk about today. Uh, welcome to show Nick how. Good. Thanks. Having me on. So let’s, uh, let’s start with this. You’ve dug, uh, I guess you’ve dug into, you know, decades of financial market data and from all that work, what are the biggest myths about building wealth that the data, uh, just doesn’t support.

So I think the, the one I’m gonna focus on the most is that cutting your spending is the way to get rich or build a lot of wealth. And for some people that’s definitely true, but it’s the, it’s a very, very small minority, a very small percentage of people where that actually tends to be the case. And if you look at the data, overwhelmingly high wealth is correlated with high income and vice versa.

So it’s very rare that someone has high income and low wealth. Or someone has, uh, low income and high wealth. Right? So those are incredibly rare, and I’ve talked about this a lot, um, in my work over the years. It’s in my new book, the Wealth Flatter, and the second chapter, I just dig deep on income and I can say I basically take wealth and I break it into these six levels.

And then across the levels, within each level, as you kind of move up, the wealth flatter, the amount of income, the median income in each one of those levels just increases, um, pretty significantly as you move up. Mm-hmm. Sure. I mean, certainly I, I mean I’m, you know, I mean, if we’re talking about Starbucks and those kinds of things, uh, for, for high income people, that’s not gonna make a difference.

But, you know, certainly, uh, I mean there, there is probably a little bit of that. Don’t you think? I mean, like, if you take the example of professional athletes and you hear these stories about people making a ton of money and then just blowing through it and all that kind of stuff. Yeah, no, those, those definitely are the exception.

And once again, professional athletes are. You know, like they’re like the exception of the exception of the exception in so many ways. They’re very visible to us, and so they, it feels like they’re very normal. Like these are very normal occurrences, but they’re, they’re definitely not. And that’s, that’s the thing to keep in mind, right?

And so once you actually look at the data, like I think it’s like 95% of people who are, 95% of households that have a income over $200,000 a year have a net worth over $200,000 a year. Now, once again, $200,000 is not a lot of money. Doesn’t mean you’re super wealthy or anything like that. But at the same time, like.

That shows that there’s very, very few people that have an income of that high or higher and are broke. It just, it’s rare. It’s very rare. And that if you know, you probably know someone like that. I know people like that, but they’re incredibly rare. Most people that have a good income aren’t going crazy, and even if they are spending a lot, they still have some access to save.

Yeah. Yeah. Fair enough. Okay, so if someone earns a high income. Is late to the game of investing. What does the evidence say about how much they can realistically catch up? It really depends. I mean, what is high income? How much time do you have? I mean, those are all, there’s all these levers you have, right?

You can really think about building your wealth. You have these different levers, right? You have time. So how much time can you go and, and, and save, right? You have your savings rate. How much can you save, right? And that’s influenced by obviously your spending, but also your income. So the higher your income all else equal, the more you’re gonna save, right?

Assuming you don’t, you know, once again, all else equal, you’re gonna just save more money, right? So you think about the time lever, you think about the savings lever, which is both income and spending, right? And involved. And then you think about your investment returns. So those are the three big kind of things you, you can mess with, right?

And so. And investment returns are probably the hardest one to mess with. It’s really hard to beat the market so. I’m really more of an indexer. Not everyone agrees with that, but that’s kind of my take on that. So that variable solved. And then the other two are like, okay, what can I do on the savings front that’s spending and income.

You have probably the biggest, the most amount of, um, leverage there on those two factors. And then the last one is your time, which obviously if you’ve already, if you spend a couple decades not doing the right things financially, that’s fine. You can’t. Do much about that now it’s already happened. So the one things you gotta focus on are your income and your spending, right?

That’s where, if you think about this in terms of a formula, like that’s where it comes back to it. Like that’s the biggest factor. And the one I try and have people focus on is income given the data. Yeah. Yeah. And how do you help people with income? You have to talk about, okay, what can you do to raise your long-term income?

And I always mean like, okay, what can I do tomorrow? Like there’s side hustles. Things are out there that are great and you can do some of those things. It’s a long journey. I’m talking three to five years, right? At least, right? At least three to five years of what can I start working on to move in that direction.

Does that mean a promotion in my current job? Does that mean starting a side hustle that becomes a business? Does that mean learning a new skill and kind of pivoting to a brand new industry? Right? And so. A lot and we can start getting into this. There’s a lot to discuss in this topic. Um, but it’s the thing I focus on the most because that’s what the data tends to show.

It’s like, Hey, you’re not gonna, you know, clip coupons and make your way to wealth. Like, you can make some wealth doing that, but it’s, it’s not gonna be a lot. The real lever is gonna be when you raise your income so much that you don’t even have to worry about saving money. ’cause there’s just so much coming in that it’s just, it’s easy to save.

That’s what we, that’s the goal I want for, for everyone ideally. Well, let’s, you know, let’s talk about what you, you know, what you like to talk about. So, you know, give us some ideas on, you know, what do you tell people about increasing income? How do you do that? I mean, you’re talking to a group of, you know, individuals here that typically al are already higher income.

Um, generally, you know, professionals generally going to be making over three, $400,000 a year. What, what kind of advice do you have for them? So for those people, I think the, the main thing, if I, if I say how do you increase your income from here? A lot of those people are probably gonna be just high paid professionals.

And there’s just like the limits of how much you can work and how much you can earn day to day. The long-term solution to that is how much can you get equity ownership in this business that’s gonna pay off a higher income, especially over time if the business grows. Right? And so obviously it’s gonna vary based on if you’re like a lawyer, you’re like, oh, I’m getting paid X.

Well, can you get partnership where one day if the firm grows, you have a bigger book of business, now you’re getting paid. Multiple of X, right? It, it’s, it has to come through some form of equity ownership. There are obviously exceptions to this. There are people who are entertainers or athletes or something where you can get these big salary type contracts.

But once again, those are incredibly rare for most white collar professionals. It comes through business ownership and having income, or at least having a business that you’re reinvesting in. And over time you eventually sell and you have a very massive income event. So there’s a lot of different ways of thinking about this problem.

You either. Siphon the income off to yourself every year, or you reinvest in the business so it’s gets bigger and bigger. Then you have an exit of some sort, which is a very large income event. And so if you look at the data, that’s generally what people in, let’s say 10 million plus in net worth. That’s how they get there, right?

Besides the entertainers, the athletes, et cetera. The vast majority of people in the 10 million plus range, and that’s where I call level five on my wealth flatter framework. Those people are entrepreneurs like through and through. And so if we’re talking about, okay, well what can I do to like raise my income?

There’s this framework from, uh, Naval Akan where it talks about leverage. I don’t mean like just borrowing money, like that type of leverage. I mean, there’s different types of leverage and so obviously hiring people in a business where you’re having someone. Do something that earns more value than what you’re paying them, right?

That’s the oldest form of leverage in history, right? It’s like hiring people, having them, that’s one type. Another type is using money, so that’s owning real estate, right? Going and you’re, you’re using someone else’s money, the banks, and you’re borrowing it X percent and hopefully that real estate is returning a higher return than X.

That’s how you, you’re just leveraging the difference in, in the return versus what you’re paying for your money, right? Which is, you know, the interest on the mortgage. So that’s another type of leverage. And then the two new ones basically in the internet economy are content and code. Content is like kind of what you’re doing right now, buck, you’re putting out, we don’t have to have this conversation with the thousands of listeners or tens of thousands of listeners, one by one where we go to their house and we sit down at a convenient time for all of us.

Like this one episode would take like all the rest of our lives just to do. Right. And every time we’d have to have the same conversation hopefully. And you know, so because we can have this once through the internet and distributed networks, right? We can send it out to lots of people at once. And that’s the same thing.

That could be true of writing a book, that could be putting out other types of content, right. There’s all sorts of ways you can do that. You’re selling a product on the internet, that’s another kind of scalable thing that you can do. And then lastly, it’s code, which is also kind of related to, it’s not content exactly, but you’re, you’re creating a software that’s like software as a service.

That’s why this is such a profitable business model, because the marginal cost of the next user’s basically zero. I mean, it’s not exactly zero, but it’s almost zero. Yet you’re giving them a very valuable thing that they’re paying, you know, let’s say thousands of dollars a month for whether you’re doing business to business or.

Even B2C, you can be, you know, getting someone on Netflix, you know, you’re paying 10, 15 bucks a month, but they are just pumping this stuff out and it’s, it’s a very low cost thing to do. The cost really is in the content. That’s a whole separate thing to discuss. But if you just think about this in terms of like code, and what code can do, like there’s, and now with ai, like so many people are like building apps and coming out with different things where like the code can be created for you.

Whether or not that code’s perfect and good, and whether you actually still need to hire developers is a separate conversation. But you can see the point, like, these are scalable, right? It’s like every, the whole idea of leverage is I put in one unit of time and I get out more than what I’m putting in, and now it doesn’t necessarily happen right away, but that’s, that’s the long-term goal, is you need to divorce.

Your time from your earnings. If you’re a lawyer doing billable hours, right? You are getting paid on those billable hours, which is great, but at some point you need to divorce. How much time you put in with the number of amount of revenue coming in, right? So that’s where you hire other people. That’s where you put out content and brings in more clients.

That’s where you, you know, come up with an app or something. I don’t think lawyers would really do something like that, but you can imagine like there’s a lot of different ways where you can use leverage. To divorce your time from how much you’re earning in a given amount of time. I think the moral of the story, and I, you know, you like a lot of different things that you talked about there, but one I think is really important is that as a high income earner, um, who’s not, you know, when we’re talking about, say somebody who’s making half million, 2 million bucks a year.

Um, you’re not gonna earn your way into, uh, being wealthy. That is a really tricky thing. I mean, of course, if you’re making, well, gosh, Kirk Cousins, uh, sitting on the sidelines for Atlanta Falcons yesterday making $50 million a year as a backup quarterback. Um, yeah, those kinds of things, you, of course most of us are not gonna have.

But by the time you’re done with taxes and all that. It’s extremely difficult, and I can’t tell you the number of people that I’ve talked to, just coming through our own investor group that are making a half million, million dollars a year, and they’re in their mid forties, and I ask ’em what their net worth is, and it might be 2 million bucks.

And you know, I mean, that’s a lot of money, but on the other hand, you would just think, well, gosh, how does that happen? Right? Well, think about expenses, think about taxes, et cetera. So for those of, so for, for, for that cohort. It is extraordinarily important to do a num other things in order to get, become wealthier, you know, and, and, and you bring up a lot of those points and, you know, arguably, um, you know, some of the investment decisions that we make, uh, are a big part of that.

Obviously, you’re, if you’re going to be the SMB 500, you’re gonna do fine, but you’re not gonna, you know, you’re not gonna get rich just by doing SMB 500 for the next, you know, 20 years. You’re gonna do fine. You’re not gonna, you’re not gonna get super wealthy, right? You’re not gonna get super wealthy. And so it really comes down to, you know, asymmetric bets and investing or, and or, uh, business creation side hustles.

Although, uh, I guess that’s kind of what you’re describing, but you’re not all that easy to do, you know, but it, but, but you know, that’s another issue entirely. You kind of have to figure out where you fall into that, you know, framework. Yeah, and I think there’s a bigger question here, and so when I talked about, when I wrote the Wealth Flatter, like there’s this idea of, okay, there’s these levels of wealth and what you’re talking about when you say super wealthy is what I call level five and level six.

Level five is 10 million to a hundred million. Level six is a hundred million plus. The, the level I talk about the most, I think, I mean I talk about all of them in the book, but the one I focus on the most is level four, which is one to 10 million. There’s a lot of very successful people in that level.

It’s about, you know, roughly 18% of the United States in terms of households. So there’s like, you know, millions and millions of people, like, you know, 20 million people, 20 million households in that level, if not more, right? So you think about that, there’s a lot of people in that level. They’re doing very well.

There’s also a lot of them. That’s why the Amex lounge is overrun. That’s why people go on vacations and they have to get up at 7:00 AM to go get a a, a pool chair. ’cause like there’s so many people that have making good money, you know, living a good life and everything is I what I call the upper middle class.

And they’re in this exact situation you talk about where someone’s making 500 KA year, that’s incredible money. You’re in the, you know, you’re in the, you know, 1% among households, right? Or actually at least among individuals, maybe not among households. You know, you’re making incredible money, but then after tax, okay, that’s not cut in half.

Exactly. But let’s say you make 300 k and then you have expenses and everything, you can see how, you know, maybe you’re only saving a hundred KA year, which is still great. That’s amazing. But saving a hundred KA year, you can see it’s not gonna move. It helps initially, but it’s not gonna move the needle.

It’s some point, getting past 10 million is very difficult with that. Right, right. What do you mean when you, when you talk about, uh, just keep buying, what, what is that concept? The concept there is the idea that I, I have a mantra for just keep buying, which is the continual purchase of a diverse set of income producing assets.

And so the idea is, if I only had three words to give you on how to build wealth generally, like I don’t, when I, I don’t mean extreme wealth, I don’t mean 10 million plus. So when I say just wealth, I mean get into level four, let’s say one to 10 million. I would tell people just keep buying, right? So if I only had three words I could give you, right?

Just keep purchasing assets over long haul income producing assets. And the specific mantra is the continual purchase of a diverse set of income producing assets. That idea. It disproves market timing. It disprove it shows that you can do this with diversification and you have to do it for a long time.

Right? And so that’s where I kind of, I, my first book was me kind of showing that in depth, right? It was like one specific strategy and I just kind of proved it by looking at every single data set I could find. Different asset classes, all sorts of things to show all this, um, that this is the right way to go.

Then with the wealth ladder, I zoomed out from just that one strategy and I said, Hey, let’s look at the overall framework of wealth and like, hey, that’s a great strategy by itself. But if you wanna get to Extreme Wealth as you say, or um, you know, you need to do something different and that you’re still owning them from producing assets, but you have to control those things.

That’s, that’s the difference between like owning the s and p 500 and owning your own business, right? Like you have a lot more control over your own business. So you can kind of chart your own destiny a bit more than just owning the s and p 500. Now of course, there’s more risk there, right? You could lose everything with your own business.

It’s very unlikely the s and p five hundred’s gonna go to zero, right? Yep. That’s just the way it is. No risk it, no biscuit is what they say. Uh uh. So based on your research, how should, and that should, we don’t need to be giving advice here, but talking about diversification, what does the data show on the optimal mix?

I mean, is it more. There’s a lot of discussion about this, and a lot of times you hear about avoiding concentration risk, but then you have guys like, you know, Warren Buffett and, and, and Charlie Meyer will tell you no, you don’t wanna be just purely, you know, diversified into a million different things.

You find the good things and you invest in those. So what does a data show? I mean, the, if you’re trying to compare like, buffet to the ta, like buffet’s, well, I’m not comparing Buffet, but I think, but I think from, uh, from the standpoint of. The standpoint of, of looking at, you know, I mean, what, what do we know about diversification?

What, what is the data on diversification? I mean, the idea that you should own a basket of diversified securities like that has generally outperformed, you know, trying to. You know, beat the mar. Like, if you look at like just the s and p 500, let’s just use that. You know, you look at, there’s something called the, the Spiva reports, S-P-I-V-A, and over five, 10 year periods like the market s and p 500.

So an s and p 500 index fund would’ve outperformed like, you know, 75% of active managers. These are people who, it’s their job, they are paid in, compensated to try and beat the market. They can’t, only 25% of them can do it over a long period of time. And then the further you go, the the smaller that group gets.

Right? And so 25% is like a three to five year period. You go longer and longer, and the underperformance just starts showing up because of fees, especially like, especially after fees, it gets very difficult. So my whole take with this thing is like. Someone’s like, well, yeah, I’m just gonna buy the good company.

He’s like, yeah, of course. If we could all just buy the stocks and only go up, this would be very easy. I think it’s, it’s easy to seduce yourself that that’s easier than it is. I don’t think it’s easy as people think it is, and we don’t have, we don’t have a good data set on it. ’cause all we have is the winners.

We can talk about the buffets and all the. Successful stock investors. Where’s all the people that said, I’m gonna follow a value approach and then underperformed? They’re not gonna make the news, they’re not gonna make, no one’s gonna write books about them, so you’re not gonna see it. So the truth is, we do not have a data set.

I have not seen a data set of, Hey, here’s 100 value investors. They’re all gonna follow this approach, and we’re putting the line in the sand now and this date, and then let’s just see what happens. Let’s see what happens to those 100 over the next 30 years. There was Warren Buffet and a few of his buddies, and they all did well.

That’s already a weird elite group in some sense. If you know Warren Buffet personally and you’re a value investor, you’re probably already in some sort of elite, you know, group that’s not really representative of like stock pickers as a whole. And so that’s the only, my only pushback. I’m not saying it can’t be done, I do definitely think it can be done, but I think it’s much more difficult than people think it would be.

Like we just got a bunch of kids that. At age seven and said, Hey, these are the best basketball players in the school right now. How many of those kids are gonna make it to the NBA? We don’t know. And maybe, you know, we would’ve had one LeBron James there, and he would’ve made it, but most of the kids wouldn’t have.

And I think that’s the kind of the difference, right? Just because someone shows skill at some point doesn’t mean that they’re gonna necessarily have skill for a very long time. Yeah, no, I, I think the point I’m trying to make is this, is that, you know, you’re, you’re talking about sort of elevating from the different levels on this ladder that you have, right?

And, and that, um, I don’t personally believe that only buying indexes is gonna ever get you there. I don’t think you’re, I don’t think you’re gonna get up that high. I, I think you have to take some level of risk. Now, your form of risk that you’re talking about is through equity and businesses and stuff like that.

Not everybody’s gonna be able to do that. I do think that there is probably a role for things that are a little bit. Uh, a little bit riskier, and that’s where like alternatives come in there. For example, people buying real estate, people, you know, investing in startups. I mean, in, in this kind of space where we have people who can put some amount of money at risk, gives them a real opportunity potentially to see outside gains.

What is your take on that? Um, it’s definitely true and if you look at, you know, as you move up the wealth ladder, you tend to see more ownership of individual stocks, not just like reti, not just stocks and retirement accounts, which is why I think we would think of as like the s and p 500 or an index fund, right?

Um, but overwhelmingly, and you see this even more so. People own businesses, right? And so that’s if I’m like trying to, if I look through each one of these levels, now, once again, this is a, this is a logarithmic scale, so everything’s moving by 10 x, right? Level four is one to 10 million, level five is 10 to a hundred.

Level six is a hundred plus. If you just break up wealth that way and you look like, what, what are the biggest changes from the, for example levels, you know, four to six, what are you seeing? It’s business ownership. Right. So I like Elon Musk probably has 95%. Yeah. But I’m saying like, okay, does that mean that no one’s owning stocks?

No, of course not. Does that mean no one’s owning real estate? Of course not. Right. So those are other, other changes that are happening. I just think of those three between like real estate, you know, buying individual stocks that go up a ton. And business ownership. Business ownership is the one that I think tends to dominate, at least in the data.

And I, no, and I have this in the, I agree with you. There’s no doubt in my mind that if you, if you want to. Sort of become, you know, you want to take it to the next level. You have to own it. You have to own it, own your business. You have to create an asset that you can at some point that you can sell, that can be valued at a certain amount on a multiple.

And people who are high income, W2 wage earners, which is a lot of people in this show, um, they’re just not gonna be able to do that. So that’s what I’m trying to, that’s what I’m trying to get. My head around is like, okay, so what, what practical advice can we have for these, these folks? Right? Yeah. Then the, the thing I would say for them, assuming they’re not gonna go all out on that type of thing, is, you know.

Own a diversified portfolio if you want, you can make these one-off bets in startups, alternative things like that. Of course, some of those are gonna go to zero, like expect that, like that is what happens. You’re gonna have, you know, in 10 investments, one of them may like, you know, three or five x, which is great.

You know, a couple of ’em will probably go to zero and then a couple would just return your money, right? So that’s kind of, at least that’s what the VC on average type stuff happens. It depends what you’re investing in and how much you know, if you have better expertise or things like that. Besides that, I mean, you can think about like, are there other things you can do in terms of income?

Whether that means maybe not, you don’t have to start a whole business, maybe you start a side hustle and you can do on the side, or it’s, there’s different ways of parsing out owning a business, right? Like I technically own a business. I have a full-time job. I’m a COO at a wealth management firm, right?

And so I’ve been there since before we had a billion dollars in assets. Now we’re almost at seven, right? So I’ve seen a lot of changes, you know, just structurally within the org. While I’m doing that, I’m also writing, doing content. It’s not my main thing. You know, it makes some decent money, which is nice, but it’s not like my main thing.

And so I think people can come up with something else that, you know, ends up being beer money or rent money or whatever it is, and that’s still something, you know, or your mortgage payment, whatever you wanna call it, right. So there’s different ways of attacking this problem. And I, I don’t think they all ne need to be home runs to still be helpful.

Like I’m, I would say I’ve hit like two doubles, like I’m hitting a double in in my career and I’m hitting a double in like my content life. And none of them are like home run hits. I’m not like this super, super successful person, but I have two things that are doing pretty good. And so it actually does add up to be quite nice.

So I think that’s another way of looking at it. And that’s kinda what, that’s how I approach it, just because it’s what’s worked for me. I’m not saying that’s gonna work for everyone though. Yeah, yeah. Yeah. Um, let’s talk about sort of the in general economies. Uh, you know, you’ve looked at historical data, I understand, uh, and recessions in recovery.

What lessons can we draw from, you know, some of that history for today’s environment? I think the biggest takeaway is that the market’s gonna price all the stuff in before the headlines do, and so. For example, COVID was getting worse in April, 2020, and the market was already on its way back out. Right?

It’s like the market’s like, oh, well that’s gonna happen, and that, and people just, all that information just hits the market immediately. So you’re gonna be in a, a case where, you know, the market’s already rising. It’s already moving past what the, the, the, the train wreck that’s currently happening, which is such a weird thing to say, but that’s exactly how it works.

Like real estate prices didn’t bond, I think until. 2012 in the United States after the, after the GFC, the market bottomed in in March oh nine, right? So it’s like the market was already on its way back up and re the real estate thing was still going through. So markets move a different. Different speeds.

I think real estate tends to move slower than the stock market, just in general ’cause of the liquidity issues, right? Like selling houses is not easy, you know, buying and selling an index fund or individual stocks is pretty straightforward. So I think the liquidity, and so you’re gonna see that in crypto.

You’re gonna see that in, in. Inequities, it’s gonna move a lot quicker, and that’s gonna tell you a lot more. So if you’re like, Hey, I’m just gonna see what happens and oh, if the, if things are looking worse, like that doesn’t mean that the market’s gonna get worse. The market could have already priced that in and could already be on its way back up.

And that happens so many times. So I would not say, oh, well the headlines are getting worse. If the market has to get worse, that doesn’t necessarily happen. So that’s the thing I keep in mind here. Yeah. So you’ve done a lot of research. Um, what’s the most surprising thing you’ve found, and I guess.

Something that would have changed personally, how you handle your own finances. Yeah, I think it’s this idea of once you get in, the things that get you into level four, which is one to 10 million, are very different than the things that get you out. And I can just, let’s just do a quick thought experiment.

So we’re gonna just use the, you know, you said someone’s earning 500 KA year. Let’s say they’re saving a hundred thousand after tax and, and expenses, whatever. So let’s say you just hit a million dollars in, in net worth. Let’s just assume it’s all in a portfolio just to make this thought experiment very easy, right?

You’re saving a hundred KA year. Let’s say it’s earning 5% a year after inflation. So I’d say it’s a relatively conservative, not, not too crazy of a return. Right. How long does it take you to get to 10 million, you know, with, you know, start a million, a hundred KA year? 5%. The answer’s 28 years. So that’s 28 years of you earning, let’s say $500,000 a year.

A very good income. Right. And you’re, you know, obviously you have to, you’re sacrificing ’cause you have to save a hundred KA year. So even though you’re, you might be spending a decent amount of money, you’re still saving a hundred k. It’s still, you have to do that for 30 years. That’s after you hit a million.

It could have taken you 10, 15, 20 years to get to a million as it is, right? So you can think, you start doing the math on this, you’re like, wow. Like, yeah, this, this W2 thing. It’s great and all, and you can high paid W twos great, but at some point. It stops moving the needle, right? Like when you have a, when you have a million bucks, a hundred KA year, that’s 10% changing your wealth, right?

A hundred thousand over a million, it’s 10%. By the time you have 5 million bucks, it’s 2%. Like you, you don’t move the needle anymore. And there’s nothing wrong with that. That should happen. But I think the main takeaway, the thing that that spoke to me about this when I’m writing about this, is. Do I keep my foot on the gas or do I kind of relax a little bit and enjoy all the other parts of life that aren’t money?

And I said like, maybe I don’t need to get to 10 million. This is an arbitrary figure anyways. Like I don’t need to be in the, you know, upper class. I can be fine to have an amazing life in the upper middle class. And I think what happens is a lot of people get caught in this level four, like, we’ll call it the no man’s land.

It’s not a bad place to be, but it’s just, you know, you’re making good money, but you’re really like, oh, I want to get to the next level. And like thinking through that. I think you have to realize that maybe that’s not the right decision and maybe the right decision, the rational decision is to say, you know what?

I can take a step back. I don’t need to accumulate another $5 million to live a good life. And I think that is the, that is the big unlock that needs to happen and that I think a lot of people, especially this audience. Probably are not thinking about, ’cause I wasn’t thinking about it. And so that’s what I would say to this audience.

Like, hey, a lot of you’re probably, if you’re in that range, you know, one to 10, especially if you’re like the upper, you know, over five, you probably don’t need to keep accumulating wealth. And I, and, and I think you would’ve to make a very hard sell to prove to me that you do, because I bet you don’t. And that, that just, I, trust me, I work with wealth management clients, like a lot of these people are like, oh, I’m spending.

200 KA year. It’s like you have, using that 3% rule, you’re making 500 K. Like it’s, it’s the math doesn’t math in any way where like you’re never gonna spend down your wealth. There’s just no way this could happen. And yet people keep wanting to accumulate more and I, I don’t know where that comes from.

Yeah. So is there, uh, any data on striking that balance between savings for tomorrow and living today? I don’t know if we have like, good studies on this type of stuff. Yeah, I think it’s just really a question of like. What do you really want and what are the things you’re gonna do to get there? And I think the framework, I really like Sahil Bloom in this book called The Five Types of Wealth, and he talks about all the other types of wealth besides financial I, I obviously focus on financial because I’ve been writing about it for so long.

But he is like, you’re probably chasing more financial wealth, which you’re already like at the 99th percentile on to go and give up health or to give up. Mental health or to give up, you know, relationships, social wealth like or time wealth. You’re maybe you don’t have any time ’cause everything’s being taken up by everything else.

And so what are the trade offs you’re making and are, do, do those make sense? I don’t, I don’t think there’s. Any point in getting to 99th percentile on one metric, and then you’re like in the bottom 25% on everything else, or even on a few metrics, right? I don’t think it’s, it’s worth it to have the, the bottom 25% in, in hell just to have the top 1% in wealth, in financial wealth.

I think it’s a crazy trade off, but I think people do make that trade off all the time and it’s something they’re probably overlooking. Good stuff, man. Uh, well, tell us a little bit about where we can, uh, learn more about your work. So my blogs of dollars in data.com. Um, you can find me on LinkedIn at Nick Maggiulli Instagram, Nick Maggiulli, and yeah, I have my books on Amazon Target anywhere you just search my name, you can find all my stuff.

And, but, and I also, I answer every dm so feel free to DM me on Instagram or LinkedIn and I’m happy to, um, to chat about that. Great. Thanks so much for being on the show. Appreciate you having me on Buck. You make a lot of money, but are still worried about retirement. Maybe you didn’t start earning until your thirties and now you’re trying to catch up and meanwhile you’ve got a mortgage and private school to pay for and you feel like you’re getting farther and farther behind.

Good news. If you need to catch up on retirement, check out a program put out by some of the oldest and most prestigious life insurance companies in the world. It’s called Wealth Accelerator can help you amplify your returns quickly, protect your money from creditors, and provide financial protection to your family if something happens to you.

The concepts here are used by some of the wealthiest families in the world, and there’s no reason why they can’t be used by you. Check it out for yourself by going to wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show everyone. Hope you enjoyed it. Uh, again, I guess the moral of the story is no risk.

It no biscuit, uh, I can’t remember is the name. Uh, that was the, it was a old Atlanta Falcons head coach who said that. I can’t remember. He is like some guy from New Orleans, but very, very true. And, uh, but again, if, if you don’t, um, if you’re not interested in the. The biscuit, then don’t, don’t worry about the, the risk.

Um, but if you want to invest differently, start doing. So. Just a reminder, you can start investing differently by going to wealth formula.com and, and signing up for Investor Club. Uh, and, uh, we’ll see you next week. This is Buck Joffrey signing off.

Something big is happening in Washington right now, and it has the potential to reshape everything you and I do as investors.

A few weeks ago, the Trump administration attempted to remove Fed Governor Lisa Cook, only to have an appeals court block the move on legal grounds. 

At almost the same time, Stephen Miran—one of Trump’s economic advisers—was confirmed by the Senate to the Fed’s Board of Governors by a razor-thin margin. 

On one side, an attempted subtraction. On the other, a confirmed addition. All of this is happening right before a major policy meeting, and it’s not hard to see the writing on the wall.

Trump’s takeover of the Fed is not a question of if—it’s a question of when. Whether it unfolds in a matter of weeks or drags out over the next few months, the direction is set and the outcome is inevitable. 

The endgame is to bring interest rates down and, if necessary, use quantitative easing to drive bond yields even lower. That kind of policy would flood the system with liquidity, and the immediate effect would be a booming economy. Asset prices would rip higher—stocks, real estate, gold, Bitcoin—you name it. If you own assets, you’d feel wealthier almost overnight.

But of course, there’s another side to this coin. A dollar that weakens under the weight of easy money. A gap between the asset-rich and the asset-poor that grows even wider. Rising inequality, rising tensions, and perhaps a long-term cost to the credibility of the U.S. financial system.

So is this takeover of the Fed a good thing? That depends entirely on where you sit. If you’re a wage earner with no meaningful assets, it’s bad news. If you’re an investor, it’s a reminder that ignoring policy shifts like this is done at your own peril. 

The time to prepare is now, not later. Don’t wait for rates to drop before acting. History shows that buying assets in a descending rate environment has been one of the most powerful wealth-creation maneuvers in the United States. 

Think back to 2008. The Fed responded to the financial crisis with unprecedented rate cuts and waves of quantitative easing. What followed was more than a decade of explosive gains in stocks, real estate, and other assets. 

Those who bought while rates were falling built extraordinary wealth. Those who stood on the sidelines missed out.

But don’t take my word. Listen to noted economist Richard Duncan explain the dynamics of this situation in this week’s episode of Wealth Forula Podcast. 

Learn more about Richard Duncan:

richardduncaneconomics.com

Transcript

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By devaluing the dollar by 50% against the end of the mark by 1990, the trade deficit that had come back into balance.

Welcome everybody. This is Buck Joffrey with the Wealth Formula Podcast. Coming to you from Montecito, California. Uh, today before I begin, just a reminder. Go to wealth formula.com. If you haven’t done so and you are an accredited investor, join the Accredited Investor club. Lots of things coming in there in Q4.

Lots of tax mitigation, strategy related investments, that kind of thing take advantage a hundred percent. Bonus depreciation, take advantage of discounted assets and so on. So again, wealth formula.com. Now, uh, let’s talk about today’s show. Interesting one. Um, it’s with, uh, Richard Duncan again. Uh, and, uh, he’s an interesting guy, uh, and I wanted to talk to him because something big is happening in Washington right now, as you know, and it has the potential to reshape everything you and I do as investors.

As you may know, and as I am sure you probably know, a few, a few weeks ago, Trump administration attempted to remove, uh, fed Governor Lisa Cook, only to have appeals. Courts block, uh, and, uh, uh, move block the move on legal grounds. And at almost the same time, Stephen Moran, one of Trump’s economic advisors, was confirmed by the Senate to the Fed’s Board of Governors, uh, and uh, on one side and attempted a subtraction on the other, a confirmed edition.

All of this is happening right before a major policy meeting, which by the time you hear this is going to be. Uh, concluded, which is the, uh, announcement of either a 25 or 50, uh, basis. Point cut. Uh, you tell me because I’m doing this right before that meeting, uh, Trump’s takeover of Fed is, you know, really not a question of if it’s a question of when and how, and.

Whether it unfolds in a matter of weeks or drags out over the few months, uh, the direction is set and the outcome really, in my view, is inevitable. Right? The end game. What is the end game? The end game is to bring interest rates down and if necessary, use quantitative easing to drive bond yields down as well.

And that kind of policy. What would happen? It would basically flood the system with liquidity and immediate effect would be booming. To the economy, right? Asset prices would rip higher stocks, real estate, gold, Bitcoin, you name it. If you own assets, you will feel wealthier overnight. But of course, there’s another side of this coin.

Uh, you know, a dollar that weakens under the weight of easy money, a gap between the asset rich and the asset poor that grows even wider rising inequality, rising tensions, and perhaps the long-term cost of credibility of the US financial system. So the question is. You know what, this whole takeover thing, it sounds, you know, uh, it sounds sneaky, it sounds bad, and especially on the, if you listen to mainstream television, but is it such a bad thing, the takeover of, of the Fed?

That depends entirely where you sit. If you’re a wage earner with no meaningful assets, if you’re poor, it’s bad news. If you’re an investor, it’s a reminder that ignoring policy shifts like this is done at your own peril because the time to prepare is now. Don’t wait for rates to drop before acting.

History shows that buying assets in a descending rate environment has one of the most powerful wealth creation maneuvers in the history of the United States. All you have to do is look back in 2008, the Fed responded to the financial crisis with unprecedented rate, cuts and waves of quantitative easing.

And what followed was more than a decade of explosive gains in stocks, real estate, and other assets, which basically just ended. I mean, gosh, right? So those who bought while rates were falling, built extraordinary wealth, and those who stood on the sidelines missed out. And that is playing out in real time again, in my opinion.

But don’t take my words for it. Listen to Richard Duncan. Uh, he is clearly not a pro. If you’ve listened to him in the past, he calls balls and strikes, and if anything, he’s been sort of not on board with the Trump administration, the plan, but listen to what he has to say about this. We’ll have that interview right after these messages.

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It’s a refined strategy used by some of the wealthiest families in history, and it uses century old rock solid insurance companies as its backbone. Turbocharge your investments. Visit Wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show everyone. Today. My guest on Wealth Formula podcast is Richard Duncan.

He’s been on the show, uh, several times before. He is an economist, an author known for his work on the global financial system and credit dynamics. He’s the creator of Macro Watch, which is an online video newsletter analyzing economic developments and the author of several influential books, including The Dollar Crisis, the Corruption of Capitalism, and The New Depression.

Uh, how you doing there? Uh, Richard. Great buck. Thanks for having me back on. Yeah. Nice to talk to you. You’re in, uh, Thailand, right? That’s right, that’s right. Well, good to, good to uh, uh, connect. It’s a sort of an unusual time. I think my time here is now 6:00 PM and, uh, it’s what, eight 8:00 AM your time. Uh, so it’s, it’s, it’s interesting how, uh, the business ever gets done between those two countries.

But, um, anyway, um. It’s hard during this podcast with the strange hours between gear and there. Yeah, yeah, yeah. Absolutely. Well, let’s talk about some of the things that you’ve been talking about. Uh, first topic, I think, um, that you’ve been sort of, uh, talking about is Will Trump and the Fed. And, um, so you have a video where you asked that question and you say that the, the Fed independence could become, uh, be coming to an end.

Tell us what that really means. Tell us what the background is here. Well, yes. Let me do again with the background. Yeah, because we really are living in extraordinary times as far as developments in the US and the global economy go. President Trump is very serious about remaking the American economy.

When he says, make America great again, he means it. And his plan to do that is to re industrialize the United States and to do that, he has a strategy. There’s a very clear plan. In fact, this plan is laid out very clearly in a paper published by Steven Moran, who is the chairman of the Council of Economic Advisors, and who has just become the next Fed governor.

He’s now a fed governor appointed by, uh, nominated by Trump and approved by the Senate. So in this paper by Stephen Moran, he lays out a, a three step strategy on what Trump. In tends to do what Trump should do, uh, regarding tariffs. And this paper was published in November last year. So the three step strategy is first put very high tariffs on all the United States trading partners.

Second, threaten all of those trading partners, if they retaliate, threaten them, that the United States will no longer defend them militarily. And then the third step is to then convene a meeting of these intimidated allies. And pressure them into devaluing the dollar. Something like we saw at the Plaza Accord.

This would be called the Mar-a-Lago Accord. So, so actually that’s what’s been happening. This has been a very clear blueprint as to what’s going on. We put on the very high tariff step one, we’ve threatened to remove our military protection. If anybody retaliates, that’s step two. Both those things are done, and so now they’re probably working on step three, which is devaluing the dollar.

Hey, hey, can I interrupt you, Richard? In order to devalue the dollar though, isn’t that, isn’t that as much just, um, I, I, I don’t know what, uh, the other nations would. They just relative to ours, they can just go in and step and devalue the dollar, or, I mean, are, don’t, the markets sort of dictate that the markets play a role and we’ll come to that in a moment, but yeah.

In the Plaza Accord. In 1985, the US got Japan and Germany to agree to devalue to allow their currencies to appreciate by about 50% against the dollar. The dollar was devalued by 50% against the yid and the mark in order to try to bring the trade deficit back in the balance. By 1985, the trade deficit was running out of control for the first time.

This worked when by devaluing the dollar by 50% against the end of the mark by 1990, the trade deficits that had come back into balance. And these were more or less brought about by government intervention rather than market forces. Yeah, it’s, um, yeah, I guess the, the mechanics maybe beyond the, the scope of what we’re talking about, but, um, I was just curious on, on how that works.

So, yeah, so what Trump wants to do is to, as I said, re industrialize the United States, but deal. As part of that, he wants to bring down the US trade deficit, bring the trade deficit back into balance, and here is where things become very dangerous. Trade between countries had to balance where the world was on a gold standard, or even the Brett Wood system because under a gold standard, if the country had a big trade deficit with another country, it’d had to pay for that deficit by shipping its gold to the other country.

And gold was money. So if we just stay in that country would run out of gold and stop. They would have to stop buying things from other countries and trade would come back into balance. So as long as the Britain Woods system was in place, the US didn’t have a trade deficit. But soon after Britain Woods broke down in 1971, by the early 1980s, the United States started running a very large trade deficit with other countries with the rest of the world.

And in fact, this trade deficit became so large last year, it was $1.2 trillion. This became the driver of global economic growth. It created a global economic revolution. It ushered in the age of globalization. It allowed the trade surplus countries like China to grow into a superpower. And altogether the, the cumulative US trade deficit since 1980 has been about $17 trillion.

So that’s found $17 trillion off into the global economy who created very rapid global economic growth. And it’s also supported US economic growth because. By buying things from other countries with very low wages like China and Vietnam and now and Bangladesh, that’s very disinflationary. So that drove down inflation rates from the double digits in the early 1980s to very low levels before COVID struck.

And that allowed us interest rates to follow the very low levels, very low interest rates, helped the US economy. In numerous ways, and it also pushed low interest rates, allow asset prices to rise, home prices and stock prices. So that helped the US economy. Low interest rates helped the US economy, and at the same time, the countries with the trade surpluses who were accumulating dollars had to invest those dollars back into the US dollar denominated assets because when they sell things in the US they’re paid in dollars.

They take the dollars back to China or wherever they came from. They’ve gotta do something with the dollars. And what they do with them is they buy treasury bonds or they invest them in the US stock market. And so this massive inflow of foreign capital was the direct result of the trade deficit and the capital inflow pushed up bond prices and that drove down interest rates.

It also pushed up the stock market and created more and more wealth. So now the problem is we have a. Big global economic bubble that has resulted from these trade deficits. You have a big credit bubble around the world. If you bring the US trade deficit back into balance, it’s going to cut off the fuel that has allowed that bubble to form the dollars going off into the world economy as a result of the US trade deficit are the bubble fuel.

If you head off the trade deficit. Dollars stopped going overseas and they also, the capital inflows stopped coming back into the us. So you get in a situation where without the capital inflows in the us, that would mean less foreign buying of US government bonds. So less upward pressure on US bond prices, and that would mean less downward pressure.

Government bond yields. Let me interrupt you again, uh, Richard. Just ’cause um, you know, I think some people, like, you know, we, we get in these conversations and sometimes there’s some basic questions people have and, and one of them, the way you describe the trade deficit when I’m listening to that, it’s like the, the thing that comes to my mind is why do we care if we had a trade deficit, if we were benefiting from it in the first place?

Well, that’s a question for you to pose to President Trump. Well, so the, the idea, his idea then, is it not that the, the issue with the trade, the trade deficit is it’s, it’s, it’s basically robbed us of manufacturing. That’s the main, is that the main driver from President Trump? Yes. And that is, and he is right to point that out.

That is the reason that US manufacturing has been hollowed out since the 1980s. This is left behind the American middle class whose relative wellbeing has stagnated since that time. And those are the people that for President Trump, many of the people who support Trump and President Trump has said he’s going to in this de-industrialization of the United States and re industrialize the United States by putting a place very high tariffs.

So what do you see happening here? Um. Moran gets in there. Okay. Obviously that’s not control of the Fed, but I think one of the, the, another video that you had talked about, the Fed’s final days. So talk a little bit about that, if you would, because, uh, the reason it’s so important for President Trump to take over control of the Fed, which he’s on the verge of doing, is because his policies are are very inflationary.

I putting up high tariffs on all of the goods being imported in the United States. This is going to cause the inflation rate to move higher. And by trying to re industrialize the United States, that will mean more factories will be built in the US or more Americans will be working in those factories.

And this is happening at a time when the administration is also deporting very large numbers of people. So the, we have a labor shortage to start with. In the US the unemployment rate is only 4.3%, which is very near historic loads. So if you do these things in combination, it’s very likely to, the tariff will create the first round effect higher goods prices, and then when you begin re industrializing the country.

So that will create a second round effect of higher wages and higher prices, and this is going to push up the inflation rate. And at the same time, if you’ve had less capital inflow coming in from abroad, that’s also going to put upward pressure on bond prices, making it more difficult to finance The government bonds, low interest rates because there’ll be less foreign capital coming in.

So it’s very important for him to take control over monetary policy. Because if the inflation rate starts to move higher, continues to move high, the low is 2.3%. In April, the fed’s target is 2%, and last month it moved up to 2.9%. So it’s moving higher now and it’s likely continuing moving considerably higher, in my opinion.

Normally, when the inflation rate is moving higher, fed with high, the federal funds rate and push interest rates, higher policy rates. President Trump doesn’t want the interest rates to go higher. In fact, he’s been very clear that he wants interest rates to go much lower. The federal funds rate is currently about 4.33%.

He said he’d like for the federal funds rate to be much closer to 1%. So if he takes control over Federal reserve policy, monetary policy, you can have the Ford FOMC. Vote for considerably lower interest rates on the federal funds rate. And he is very close now to taking over control of the Federal Reserve.

So far, Richard, and, and maybe this just is a function of time, um, inflation ticked up a little bit. It didn’t be seem to be that dramatic ’cause. It’s simply because in your view, tariffs have not been in place long enough. Yes, I think that’s right. The tariffs have not been in place long enough. The many companies stocked up on inventories when they knew that higher tariffs would soon be in place, and they’d been buying down those inventories, but now the inventories are running out and they’re going to either have to choose between taking a hit to their profits and presumably therefore also to their share prices or passing on the higher cost of the imports to.

Consumers and at higher prices and higher inflation, and similarly bond, the bond markets actually have, you know, uh, the bond, the, the tenure’s gone down. Um, talk about what’s going on right now with the bond markets compared to what you think’s going to happen. So this is interesting because last year, the federal funds rate three times in September, November, December.

But from the time the Fed started cutting, the 10 year bond yield has actually moved higher. It’s still higher now than it was in September last year. The 10 year bond yield has been moving lower over the last couple of weeks ago. I think in anticipation, one of the fact that the Fed is now expected to cut the federal funds rate at its FOMC meeting on September 17th, I had 25 basis points.

Also by the realization that once President Trump does have complete control over the fed over US monetary policy, if he’s going to cut, he’s going to instruct the Fed to cut interest rates radically. Right. But, but how does that affect, I mean, how does that affect the bond markets, which you know, are not really under the control of Fed?

Uh, because, I mean, you know what? I was talking, I was referring to something that, that happened recently. Obviously what you were talking about with the fed, uh, fed funds rate going down, the bond market’s going up and, you know, for, for, for regular everyday business people and stuff, a lot of, a lot of the, uh, interest rate that we, that we pay is mortgages, for example, are based on the bond market more than they’re the Fed rate.

So that, that’s a problem. But this time around with the anticipation of the Fed rate being cut. The bond markets actually went down too simultaneously. And maybe because of, maybe because of the fact, this fact, but there was a significant, uh, adjustment to the labor market, uh, to the jobs market news. I think they basically showed in the last few months there was almost, what, almost, almost a million jobs, less than they, they thought I, is that the reason, do you think that the bond market reacted the way it did?

Yes, I do think that is part of the reason why the bond yields are moving lower because of the downward revisions to the J numbers. But before I really answer your question fully, let me explain what is going on with, in terms of the President gaining control over the Federal Reserve. So the Federal Reserve is made up of a Board of Governors, seven governors based in Washington, DC.

And it’s also made up of 12 regional banks. Each regional bank has a president, so they’re 12 presidents of the Federal Reserve Regional Banks. Uh, eight times a year. The Federal Open Market Committee meets to vote on interest rates and also on the size of the Fed’s balance sheet. In other words, quantitative easing or quantitative tightening.

Now, here’s the thing. The seven governors always get to vote at every FOMC meeting, but only five of the regional presidents get to vote at this meeting. So there are 12 votes in total. Five presidents. Of the seven governors. The rules are if there are four Fed governors out of seven, a simple majority, four out of seven, and most Fed governors have the power to fire.

Any or all of their Federal Reserve bank presidents, and they also then have the right to approve the replacements of those then presidents. So what this means is if President Trump can appoint four of the seven Fed Governors, or if he has influence, if they are on his side and do what he wants them to do, then he can.

In theory, fire all the Fed Federal Reserve bank presidents and appoint new ones. And the new ones, they would have five votes on the FOMC at every meeting along with the four governors that support him. So that would give them a nine to three vote in every FOMC meeting. Does he have that kind of, uh, I, I guess I I, in terms of the governors that are on there right now, does he, do we know if they’re generally pro-Trump agenda right now?

I mean, ’cause obviously you’re gonna take, they, it would require them to, to make that maneuver against the presidents. Right? Right. And we do know precisely the most recent meeting, Christopher Waller dissented and also Michelle Bowman dissented. Both of those people are interested in replacing Chairman Howe as chairman of the Federal Reserve when his term expires in May, and they are, we can say on Team Trump, they, so they, the Fed voted to hold interest rates steady, that they dissent it.

They voted to cut the interest rates in Lyme of what President Trump wants to happen. Now more very recently, the President Trump just nominated and the Senate approved. Stephen Moran to be the third Fed governor. So that’s three votes for team Trump and President Trump. Last month fired Lisa Cook and claiming that he was firing her for cause because of fraudulent mortgage applications.

Therefore, if he succeeds in firing her, then he will replace her and with a fourth fed governor, and then he will have four out of seven. Fed governors on Team Trump, and they would then have the right to fire all the federal reserve night presidents or any dare to disagree with Trump’s policy. So once he has four governors on the board, which will happen as soon as he can get rid of Lisa Trump, and he will have complete control over monetary policy.

Now, the reason they said that, bringing this conversation now back to your question about the bond market and bond yields normally. If the Fed were to cut interest rates sharply as the president wants at a time when inflation is moving higher as it is now, and as expected to continue to do this, would cause investors in the bond market to come up very alarmed because they would expect that much lower interest rates, but overheat the US economy and lead to even higher rates of inflation very quickly so they wouldn’t be willing to buy.

US government bonds at current yields because they would expect higher rates of inflation. They would demand higher interest rates on government bonds, and just for example, no one would want to buy a 10 year government bond yielding 4% if the inflation rate is 5%, something more like 7% yield. So here’s why it’s so important for the President Trump to get control over the Fed and over monetary policy.

’cause if he’s first, he wants them to slash the short term interest rates to much lower levels. That would tend to be inflationary and that would tend to push up bond yields. But when the bond yields start to rise, if the president has control over monetary policy, then he can instruct the Fed to launch another round of quantitative easing.

Right. So basically buying up the bond market and driving those, uh, interest rate, ultimately the, the yields down. That’s right. There’s no limit as to how much money that Fed can create so that if instructed to do so by the president, the Fed could begin creating dollars and using those dollars to buy government bonds.

And they could do this until the bond prices rise and the bond yields fall to any level the President desires. And I think this is the scenario that will ultimately play out here. Once President Trump asked all over this, so going back to the, the paper that Moran wrote, okay, so that effectively, that’s kind of the plan, right?

So you bring down the fed rate, uh, by getting control, you do quantitative easing to bring down, uh, bond yields, and that creates a recipe for significant growth because of low interest rates. Business, real estate across the board. So then the theory I, I presume on the, on the Trump side is we do that, we grow at an enormous rate and to hell with inflation at that point.

’cause we’re gonna be growing so fast. Is that kind of the theory then that, that, that you think that they have, uh, on, on the Trump side? I think so, and yes, the inflationary could certainly move significantly higher, but it’s not certain that the government would actually report the actual true inflation numbers because after all, the president has recently fired the, the head of the Bureau of Labor Statistics because he was unhappy with the job numbers that she released a couple months ago.

And so. Government employees are gonna be very reluctant to report any job, any inflation numbers that the present president wouldn’t approve of. So it’s not sure that the government would be reporting the true inflation numbers, but this scenario that we just outlined would create, create an extraordinary economic boom in the us and the much lower interest rates in the quantitative easing would also drive up asset prices, create a stock market.

Boom, make home prices go much higher. All the asset classes gold. Cryptos, everything would move except, and, and, and the dollar would, the dollar would weaken significantly. The dollar would crash. That’s right. And that goes back to the part of the Moran paper you cited where he was talking about essentially, um, you know, even more devaluing it relative to various currencies.

That’s right. This Moran paper had two main parts. Chapter three was about tariffs and the tariff strategy. Chapter four was titled Currencies, and it discussed various strategies to devalue the dollar. One was part of the tariff strategy. We’ve already discussed forcing our partners into a Mar-a-Lago accord and agreeing to a lower dollar.

But he also discussed unilateral approaches to devaluing the dollar. For instance, he said that the Fed could create money and buy foreign currencies. Accumulate foreign currencies and push up the value of the foreign currencies and thereby drive down the value of the dollar. This is essentially what other countries have been doing to the United States for decades, buying up dollars and accumulating foreign exchange reserves and pushing up the value of the dollar.

So this would turn the tables on them. This one approach. He also suggested the United States could impose a, a tax or a user fee on the treasury holdings. Foreign central banks. So rather than pending foreign central banks’ interest on US government bonds, as is their right, he proposed withholding some of that interest was a tax in order to encourage them to sell their treasury bonds and to reduce their dollar holdings, which would drive down the value of the dollar.

So, and he discussed the importance of the correct sequence, tariffs first, and then the currency devaluation second. Because the tariffs give the United States leverage over its trading partners. So we’ve had the tariffs. Now it looks like the dollar devaluation is the next phase. So the net result of this, from what I can tell, would be ultimately, you know, significant, uh, a significant asset bubble, right?

Like significant growth in asset prices. So. Those benefiting would be people who already owned assets. Those, um, you know, you, you have an increase in disparity wealth. Tell, tell me, tell me the big problems that you see with this. Um, you know, with this happening with this, if they get what they want, obviously they think it’s the right thing for the United States.

They think it’s what’s gonna make. America great. Again, my sense is that you don’t believe that. So tell me why many things would happen. The wealthy would become wealthier, but I think the average Americans would also benefit from higher wages. As the reindustrialization of the country takes place, they would receive higher wages and the country would be significantly re industrialized, which would be a very good thing.

We can’t depend on other countries, especially potential. In the, in the next war for our steel and to build our ships and for pharmaceuticals and all the other things, we need much less computer chips. So I think the reindustrialization in the United States is a very good idea. I think it would benefit all Americans.

Of course, the rich always benefit most in in every environment, unless it involves much higher taxes on the rich, but that’s not on the cart. So I think the Reindustrialization would be a good thing. Now the problem is, is that this would probably create such a big economic boom that would last for several years, but ultimately this boom slash credit bubble slash asset price bubble, every boom ultimately pops.

And then few down years down the road, we would probably have a new systemic financial sector crisis. The leverage would become extremely high ultimately. The US private sector would run into difficulties as it did in 2008, and it was unable to repay its mortgage obligations, and then the banks would begin to fail and cascade into a new systemic financial sector crisis.

So that’s the threat that we get a big boom and then we get a big bust that there is hope that. There is a way to avoid that, and that’s one other element of this strategy that we haven’t really discussed or hit on yet. Now, once the President gains complete control over the Fed and complete control over monetary policy and begins using quantitative easing to push down bond yields, it won’t take him very long to realize that he can also use the fed and money creation to fund his US Sovereign Wealth Fund.

As you know, president Trump created a US Sovereign Wealth Fund in February, uh, through an executive order and having the Fed create money and use it. But money to invest in new industries and new technologies on a very aggressive scale should actually induce a technological revolution in the United States that would create a, a productivity miracle and turbocharge US economic growth.

Actually restructuring the economy. If he had his US Sovereign Wealth Fund financed by the Fed on say, a trillion dollar or multi-trillion dollar scale over the coming years, then the US Sovereign Wealth Fund could do things like invest in artificial intelligence, but not only that, in developing energy capacity so that the energy is available to, for the data centers that are necessary to run the ai.

He could invest in things like developing fusion, which could ultimately, in the not too distant future, lead to much lower energy cost and invest in things like quantitative robotics, vedic engineering, biotech nanotech. And by investing in these new industries on an aggressive enough scale, it could create a long lasting economic move fueled by a new technological revolution.

And that can actually see us far a decade or two into the future if cherry down on an aggressive enough scale. So we’re looking at an additional move into state directed capitalism, which we see Trump pursue already through a number of ways, creating the US Sovereign Wealth Fund, taking a 10% equity in Intel, getting other countries to.

Agreed to give the United States money for President Trump to invest in any way he see fit, taking a golden share in the US Steel. All of those areas are clear examples that the president is interested in state directed capitalism. And if done right, this could actually be a very good thing for the United States.

This is what China has been doing for a very long time, and China’s been so successful at it. They are now a very serious threat to US national security. China is a technological superpower, and China is investing through their government war in new industries and technologies in the United States is, and we’re now neck and neck in that race for AI dominance.

Whoever develops artificial general intelligence first or super intelligence is likely to end up ruling the world. And there’s a real chance that’s going to be China. Therefore, we need to take extraordinary measures to make sure that that doesn’t happen. And this is an opportunity for us to do that.

And I believe President Trump may very well take advantage of this opportunity. It seems, this seems to be the direction that we are going. I believe that would be a good thing. All of this sounds very positive to me. Uh, what’s a downside here? I mean, you mentioned, you know, an asset bubble. Ultimately that corrects, but I mean that happens in cycles where there’s booms and busts.

I mean, what should be we be concerned about in this scenario other than a significant loss of the val? Value of the dollar? Of course, there are always many things to worry about. One is increasing income inequality. It won’t be long now before the United States has trillionaires, and we’ve already seen the political power.

That people with hundred, 200, 300, $400 billion can bring to bear on elections if we have even at where we are now. It undermines democracy and creates an oligo, oligopoly, oligarchy, and that is not good for democracy. And this would lead to even greater income inequality for for London. Also, the unprecedented aggressiveness of President Trump’s.

Maneuvers are also consolidating power in the office of president in ways that we’d never seen before that could set precedents, that establish a trend that lead to even greater consolidation of power under the executive branch in years ahead, in ways that might turn out to be very undesirable historically.

Richard, are there examples? Where Central banks have lost their independence, and you know, what we’ve seen happen in those situations. The United States had a central bank before the Fed, and it was ended all together by Andrew Jackson, I believe, in the mid 1830s. In between the mid 1930s and 1913 when the Fed arenas was created, there was no central bank and at that time, the Treasury Department.

Carried out many of the functions that the Fed now carries out. For instance, during the Civil War, and again in the 19, in the 1890s, the Treasury Department created money on large scale and used it to fight the Civil War and for other purposes in the 1890s. So that’s one example of, you could say Auto Atlantic Central Bank, losing independence, but it was destroyed, all gathered and replaced by the Treasury Department.

So, um. From a practical standpoint, fed loses its independence and the net result of what you have kind of laid out for us, ultimately being sort of devaluing of the dollar. It seems to me that when investors, if they believe that to be true, the best way to protect themselves is to own assets. Is that fair?

But yes, that’s fair. That’s right. They can own assets or they can. Sell their dollars and buy yen or buy euros. That’s another way to protect themselves. That is the purest play. If you try to become very clever, then things become quite complicated. If you expect a short dollar devaluation against the yen and the Euro, the purest way of play that is to buy the yen and the Euro.

I don’t think I’ve seen you necessarily talk about this. Um. This other issue that’s been on my mind is that, you know, in terms of artificial intelligence, you’ve, you’ve talked about sort of the, you know, that this is fundamentally gonna change the world. Whoever controls AI, controls the world. One of the things about AI is that it is almost certainly a deflationary technology.

How much, uh, where does that play a role in, in the economy? How do you, how do you think that’s gonna. Come together the next five years. Well, we’re certainly right that it would be deflationary over the longer run, but it may be inflationary in the short run in terms of driving up energy choices. For instance, the big tech companies now are investing so much in data centers.

I believe I’ve read not long ago that four or five largest US tech companies are investing. Close to $400 billion next year in ai, according to their announcements. That’s more than the European Union spends on its military in total. That just puts this into perspective, and what they require is energy, new energy sources.

The United States doesn’t have enough energy capacity currently to allow these debit data centers to give all of the energy that they need, so we’re likely to see. Energy prices, electricity prices bit higher. We’re also likely to see a great deal of construction, of new types of energy production. Both those things, along with the investment into AI by these big companies, could all push high prices higher.

The near term, and China, for example, has been very clever since 2000. In 2000, the US had about three times as much electricity generating capacity as China does. China has expanded its electricity capacity by eight times since then, and it now has two and a half times as much electricity generating capacity as the United States does.

And according to all reports, they’re developing new nuclear facilities, nuclear power plants very aggressively, whereas the United States has not done that for decades. So we’re really behind the curve in terms of having the. Electricity generating capacity that we need to compete with China and that’s going to have to be ramped up or we’re going to lose this AI war.

And that’s going to put upward pressure on a lot of different choices. You know, you talk a lot about tracking credit. Uh, that’s a big part of the way you see the, uh, financial world. So what are some of the key signals you’re watching right now that could show us where this is headed? I always watch the total credit of the us.

You can say total credit is the flip side of total debt. One person’s credit is another person’s debt. So the easiest way to measure total credit is by measuring total debt. The data is more available, and this means the debt not only of the US government, but also the US households and corporations, Annie Mae and Freddie Mac, and the financial sector.

So the the total credit number. First went through $1 trillion in 1960, not 64, and now it’s something like $150 trillion approaching. I’m sorry, I haven’t looked at the number recently, but it’s just absolutely exploded. Well, sorry. It’s much closer to a hundred trillion dollars last year, so now it’s about $105 trillion moving toward 10 trillion.

So it’s been this critic growth that exploded once dollars ceased to be backed by gold that unleashed the amount of credit that could be created in the US and with the world. And this credit explosion has has fueled economic growth globally. I always say that capitalism, which was driven by saving and investment, has been replaced by what I call creditism.

Our current economic system is driven by credit creation. Consumption. So credit growth is absolutely essential Economic growth, and this explosion of credit is the reason that the world looks the way it does. Now, when I look out my window here in Bangkok, I can see hundreds of skyscrapers that were not there 20 years ago.

And these are the direct result of this new economic system that’s involved an explosion of credit globally, and that’s created an enormous wealth boom. Most recent data for wealth in the United States showed that the total wealth in the United States household wealth, so this is all of the assets of all of the Americans, minus all of their debts.

It increased by $9 trillion during the second quarter alone, and it’s currently, the total number now is $176 trillion of wealth in the United States, $60 trillion. In the last five and half years, it’s up 50% in the last five and a half years. Lemme repeat that. It’s up $59 trillion. Total US government debt is 35, let’s say 35, 30 $7 trillion depending on how you count it, but this is practically enough to pay off all the US government debt twice over.

This is the creation of wealth in just the last five and a half years. So there’s an explosion of wealth. The problem here is that if you compare the level of wealth to the level of income, that gives you a ratio, the wealth to income ratio. So this is household sector wealth, which is now $176 trillion.

If you could compare that to disposable personal income, this ratio is now something like seven 80%, which is much higher than it’s ever been before. The average going back to 1950 has been. Five 80%. Now it’s seven 80%. The only other times it’s become significant. The above its long-term average was during the.com bubble in 2000 and during the property bubble in 2008.

Then it got up to somewhere roughly around 650. So now this wealth to income ratio is way out of line already suggesting that. The problem with this is if income is not high enough. It’s very difficult to support the higher wealth levels ’cause people need to have income in order to be able to pay the interest on their mortgages.

For instance, if home prices are extremely high and income is in rising, but income is flat, it doesn’t take long before people no longer have enough income to be capable of tying the interest on their mortgage debt. And then attend policy correction. Is that, is that a marker of, of, uh, income disparity as well?

Because you’re, you’re measuring the full wealth of the United States versus the, I guess, the average income, right? Or not average, but the income. So, so, so a higher ratio would indicate a higher dis, uh, wealth dis or, um, income disparity. Is that That’s right. And that’s another, that’s another narrative about great income inequality because.

Wealth is more equally sprint and more people have moral income to be able to buy assets and buy them on an affordable and sustainable way. Anything else that you think we ought to know right now about what’s going on with this particular topic? No, I think that’s the big picture. This is truly revolutionary because what we’re talking about is changing the way that the global economy works.

The main driver of the global economy has been the US trade deficit. Now the objective of the tropical administration is to eliminate that trade deficit and to re industrialize the United States. This is a very big experiment and to make this work, the president is pulling out all the stops to take over control over the Fed and US monetary policy.

And if he does, then perhaps he can pull this off in terms of. Using the Fed to invest in the US Sovereign Wealth Fund and stimulating US economic growth, creating a technological revolution, a long lasting economic prosperity. But it’s a very big experiment. There’s real risk, but this global bubble that has developed under criticism could implode with the catastrophic conses.

Yeah. Richard, uh, it’s been a pleasure as always. The, the, um, newsletter, the video newsletter that you do is called Macro Watch. Can you tell us a little bit about that? Yes, thanks. I started Macro Watch 12 years ago. Every couple of weeks I upload a new video discussing something important happening in the global economy, such as we’ve been discussing today, and how less likely to impact asset prices.

These videos tend to be 20 or 30 minutes long and contain 30 to 15 charts that can be downloaded. So if, if your listeners are interested. They can find Macro Watch on my website, which is Richard Duncan economics.com. That’s Richard Duncan economics.com and I’d like to offer them a discount code that will give them a 50% discount.

If they would like to subscribe to Macro Watch, it’s a go to the website and hit the subscribe button. They’ll be prompted to put in a discount coupon code if they’ll use the code formula, they can subscribe at a 50% discount. So I hope they will check that out and at the very least while they’re there, they can sign up for my freed lock.

Fantastic. Richard, it’s always a pleasure. Thank you so much for your time and um, this conversation. Thank you, BAK. I look forward to the next time you make a lot of money, but are still worried about retirement. Maybe you didn’t start earning until you’re thirties and now you’re trying to catch up and meanwhile you’ve got a mortgage and private school to pay for and you feel like you’re getting farther and farther behind.

Good news. If you need to catch up on retirement, check out a program put out by some of the oldest and most prestigious life insurance companies in the world. It’s called Wealth Accelerator can help you amplify your returns quickly, protect your money from creditors, and provide financial protection to your family if something happens to you.

The concepts here are used by some of the wealthiest families in the world, and there’s no reason why they can’t be used by you. Check it out for yourself by going to wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show everyone. Hope you enjoyed it and the moral of the story.

Buy, buy, buy, buy assets, and don’t sit around in cash because as Robert Kiosaki says, savers are losers money. Uh. Dollars are going to, uh, not be worth nearly as much as they are right now in just a matter of few years. So, uh, get off the sidelines. You have a descending rate environment. Do something if you want to join our Credit Investor club, uh, get exposure to some deals there at wealthformula.com.

That’s it for me this week on Wealth Formula Podcast. This is Buck Joffrey signing off.

When we think about investing, our minds usually go straight to stocks, bonds, and real estate. But some of the best opportunities come when you stop thinking of investing as something separate from your everyday life.

What do I mean by this? A lot of the things we buy are treated as expenses when they could be investments. You might wear a watch or jewelry simply because you like them, but you avoid spending too much because it feels frivolous. 

Yet what’s better—paying $250 for a decent watch that will be worthless in 10 years, or $5,000 for a Rolex that could be worth twice as much over the same period?

The same idea applies to cars and even furniture. I have a good friend who lives by this philosophy. For decades, he’s chosen to invest in the finer things rather than the ordinary, and it has become a cornerstone of his personal investment strategy.

It’s about thinking differently—turning what most people see as expenses into assets.

Art falls into that same category. I’m not a huge art guy myself. Sometimes I’ll buy a piece off the street because I’ve never thought of art as an investment. Yet for centuries, people have purchased art for its beauty, cultural value, and emotional impact—and often made a financial killing in the process.

Today, art is recognized as a legitimate asset class—something that not only enriches your life on the wall but also diversifies and strengthens your portfolio.

This week on Wealth Formula Podcast, we’re going to explore how fine art has evolved into an investment category in its own right, and how you might think about incorporating it into your wealth strategy.

Learn more about Philip Hoffman and The Fine Art Group:

www.fineartgroup.com

Transcript

Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].

 If you donate a hundred million dollars of art, you can probably get a tax rebate for the full amount of the donation.

Welcome, everybody. This is Buck Joffrey with the Wealth Formula Podcast. Coming to you from Montecito, California. Uh, today before we begin, I wanna remind you again, there’s, um, a website called wealth formula.com that you should check out. Um, one of the things on there is, uh, the ability to sign up for our accredited investor club now really do, um, suggest you check it out if you are an accredit investor and potentially get onboarded, uh, with our team.

Uh, because as we enter into this fourth quarter here, we have a number of, uh, potentially interesting opportunities, um, that involve significant tax, uh, tax mitigating type investments. Usually using depreciation, whether that’s, uh, related to, you know, apartment buildings, sometimes in commercial aircraft, things like that.

But if you are an accredit investor, I think you should at least get onboarded so that you can check out the opportunities that are out there that are coming your way. This is, of course, a private group, so that. Um, you will not get access to these, uh, opportunities unless you are part of investor clubs.

So go to wealth formula.com and sign up for our credit investor club if you, uh, if you are one. Uh, let’s talk today a little bit about a shift, uh, in thinking. Uh, you know, we, when we think about investing, you know, of course we’re usually going straight to. Whatever it is that we’re typically thinking about, whether that’s real estate, stocks, bonds, whatever.

But some of the best opportunities come when you stop thinking about investing as something separate from your everyday life and you start thinking about the things that are in your everyday life. So what do I mean by all of this? Well, a lot of things, uh, we buy, um, are treated as expenses. When if you kind of shift your mindset a little bit, they could be thought of as investments rather than expenses.

So here’s an example that’s kind of obvious, right? Many of you wear watches, many of you wear jewelry because you liked them, but you might also say to yourself, well, I like them, but I’m not gonna spend that much on it. Otherwise, it’d be frivolous. So. You, maybe you buy a, a nice watch for 250 bucks. Um, but here’s the thing, what happens, uh, with a watch that’s probably 250 bucks that you bought in the mall.

It’s probably gonna be worthless in about 10 years. Now, what if you actually paid like five grand for, you know, a Rolex? I might pay a little bit more than that, but let’s say you paid $5,000 for a Rolex or some other brand that has notoriously increased in value, that’s really hard to get your hands on.

Um, well, in 10 years, that $5,000 Rolex or that $10,000 Rolex or whatever, it, it’s probably gonna be worth more than when you bought it. At some point it will, if you look at the historical numbers on watches, for example, and various types of jewelry. That’s just what happens when you buy the really nice stuff.

The same idea applies to cars. Of course, you know, those of you who are car buffs, you know, that, um, you know, uh, you may, you may not, uh, you may not be looking for the most, uh, reliable whatever car you may be looking for something that you really want to drive that’s, uh, kind of a classic car that you know is gonna go up in value.

But you can even get that in things like furniture. I have a, I have a friend who lives by this philosophy and he’s. You know, for decades, he’s chosen to invest in the finer things, uh, rather than the ordinary, and has become, um, really a cornerstone of his personal investment strategy in some, you know, so it’s really about thinking differently, turning what most people see as expenses into assets.

So, you know, this particular interview we’re gonna do today is about art. Art falls into that same category, you know, especially for those of you who love art. I’m not a huge art guy myself. Okay. Sometimes I’ll buy a piece off the street because I’ve never, um, because I like it, you know? But I’ve never really thought of as an investment, and maybe this is not an area that I love enough to make part of my investments, right?

But some of, some of you will. Um, you know, I mean, for centuries people have purchased art for beauty, cultural value and emotional impact, and then. As a side effect of that, they’ve often made, uh, they’ve made financial killings in the process. So, you know, today, um, art is recognized as a legitimate asset class, something that.

Not only can enrich your life on the wall, but also diversifies and strengthens your portfolio. So that’s what we’re gonna talk about on this week’s, uh, wealth Formula podcast. We’re gonna explore how fine art has evolved into an investment category in its own right and how you might, uh, think about incorporating it into your personal wealth strategy.

We’ll have that interview right after these messages. Wealth Formula banking is an ingenious concept powered by whole life insurance, but instead of acting just as a safety net, the strategy supercharges your investments. First, you create a personal financial reservoir that grows at a compounding interest rate.

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Visit Wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show everyone. Today my guest on Well, formula Podcast is Philip Hoffman. He’s the founder and chairman of the Fine Art Group, a global leader in art investment advisory and finance. Philip spent years as an executive at Christie’s before pioneering the first art investment fund, effectively creating a new asset class for investors.

And today the fine art group oversees more than 20 billion in, um, advised assets across 28 countries. Philip, welcome to program. Lovely to be here. Welcome from Sunny Lee, the Alps. Very nice. It’s, uh, very appropriate, I guess, for the art world to be coming from some nice places like that. Um, well, let’s, let’s get right into it.

Uh, you know, you, you started, uh, uh, at Christie’s, uh, and, uh. Then ended up, um, getting this situation in place where high income professionals can start thinking about, uh, art as an investment. What, tell us the story. What, how, how did that happen? So, I got into the art world completely by accident. I trained at KPM.

And as a CPA and then by accident, got asked to be CFO of Christie’s when I was 27. I was the youngest board director by about 20 years. Uh, I had no interest in joining Christie’s ’cause I thought he was a antiquated company selling, uh, with, with old fashioned people selling Rembrandts a little did I know that there was one and a half thousand staff involved that, um, they were trying to sell Basquiat and.

Picassos and Renoirs and, and, and everything from colored Damons to vintage motorcars. So it was a fascinating business to join when you are 27. And, uh, but I didn’t wanna be CFO, I wanted to actually get my hands dirty and find out what the business is all about. And that was my first exploit, was to meet a client who had bought two pictures, one a can leto for about 50,000 pounds and a.

Monet for around the same amount in 1976, and we went to the warehouse to look at it with my experts, and we recognized both were genuine and both, uh uh, what is it, 30 years later were worth. Between one and a half and 3 million each. So I suddenly tried to work out the maths and worked out, Hey, is this a good investment?

And, uh, it looked like a staggering investment and better than real estate. And then I asked a few more questions of that particular client and he said, oh, I bought a prince by a very famous artist called Domie for about, um, 10 cents a print. And I said, what are they now worth? And this was, uh. 30 years later, 35 years later, worth a thousand dollars a print.

So that’s a good multiple. And I suddenly had the idea that art was more than just fun, that it was investible. Um, the challenge is understanding what is good art, what is bad art, what is risky art? Outed by the art, uh, and I’ll give you some insights as we go. Yeah. Um, I mean, and in those, those, uh, those anecdotes are, are obviously very encouraging for people who are, uh, interested in, in, in investing in stocks.

But when you look at the big picture of art, and I don’t know exactly how you, you come up with these indices per se, but how has art performed historically compared to stocks or real estate? So I would say that art has probably underperformed in general against the s and p 500. So in broad outline, uh, you would be better off buying the s and p 500 as a, as an investment than buying art.

But art has the added plus. That there are in the US significant tax advantages over stocks. So if you look at most of the major families, they have donated their art collections to major museums. And of course there’s a huge tax benefit when you, if you donate a hundred million dollars of art. You can probably get a tax rebate for the full amount of the donation.

Uh, so suddenly not only do you get the return on the art, but you get the tax, uh, refund effectively on your other income as an offset. There are not many countries that offer that attractive term other than the us They’re probably half a dozen countries like that. But, but so in, in the US it’s particularly attractive.

And then if you are clever and you have the right advisors, yes. There are times when you can double your money. You can make, you know, my, my view is you can make 10% per year return if you are clever and well-advised. If you are badly advised or dunno what you’re doing, you could probably lose 10% per year on your investment.

So that’s why, uh. I, I think that art is a particularly niche investment and it’s gotta be well understood and well advised. And the fine group who’ve been in this space for nearly uh, 30 years, and I’ve been in the business 35 years, have advised probably for 50 of the Forbes 500 and, uh, work with some of the top investment banks in the us and that’s because we’ve.

Seen how to do it, and we’ve seen how not to do it. I’ll give you an example. So one of my friends, he rang me up. I was doing a presentation with one of the biggest family offices in America. They said, look, let’s get you on a, on a video with our top family friends. And one of the friends was watching my podcast and I went through the 20 do’s and don’ts of buying art, and he was listening to it and he rang me a couple of weeks later and he said, Philip, your talk resonated with me.

And I said, why is that? He said. I bought a painting by an artist called PORs and I bought it in Los Angeles, um, over in California from a great dealer. And I got it shipped to my house in Georgia, uh, and it had a cost of $250,000. And he said when UPS delivered it, uh, it arrived on my front lawn. I was away for a week’s holiday, so it was left on the front lawn, it rained the rain d um, completely destroyed the crate and destroyed the artwork inside it.

When I rang the gallery and said, Hey, um, once the insurance on this and am I gonna get my money back? They said. You didn’t insure with us, you insured through UPS rang UPS, and they said you only insured the crate and the packaging, so we can reverse you $250, not $250,000. So that client said, Philip, next time round, I need the fine art group to help me get it right.

And. And I, I give you one other story of how to mess it up. Uh, one of my, one of my friends had a a a $1,000,005 Damien Hurst Meds sink Cabinets. It’s a sort of meter and a half long meds sink cabinet with lots of bottles in it, all displayed in random rows. And Damien Hurst that auction for about 1.5 million, about 10 years ago.

And he hung it. He hung it behind his desk in his office and uh, he moved offices and he said to a shipping company, can you get it moved for me? Uh, and they said, yeah, that’ll be $4,000 to move it. And he said, I’m not paying $4,000 to move this 200 yards from my old office to my new office. He said, I’m gonna get Burt, my driver to do it for me.

Of course Bert said, look, I’ll get it done now. And he said, no, no, no. It’s a valuable item. Do it carefully, do it slowly. And, and, and, you know, take your time. He came back from lunch and Bert was standing at the front entrance of the new offices in the Gerkin in London, and he said, uh, governor, the uh. The Damien Hurst medicine cabinet looks better than ever.

And he said, well, it looked pretty amazing in my office before. What do you mean it looked better? He said, come and have a look. And he went up and bur the driver, not only, uh, reorganized every single bottle into sending order, but got rid of the empties, threw them away. So this was not. Damien Hurst medicine cabinet, but bur the driver’s medicine cabinet went from worth one and a half million dollars to about $5.

Uh, luckily they had a photo and they kept it. So the do’s and don’ts of buying and investing are, are, are hundreds of stories of what not to do, and probably 10 lessons of what to do. So, uh, we’ve been talking about some, you know, very expensive art and for, you know. High net worth individuals we’re not necessarily ultra high net worth individuals.

They may be thinking, well, gosh, I’m not gonna, I’m not gonna put a million dollars, um, in one piece of art. And what kind of, you know, that kind of risk. So what are some of the ways that, you know, if you’ve got money, but you don’t have millions to spend on art, what are, what are some of the main ways to invest, uh, uh, without buying, uh, you know, a Picasso outright?

So you can, there are, there are options to buy, uh, but like a horse, you buy a syndicate in pictures and there are one or two vehicles that offer that in the United States. And I warned clients, um, on that front to look at the, uh, the, the critical factor, which is fees, fees and fees. Um, and when you’re buying a stock and you spend, you buy a million dollars of stock or a hundred thousand dollars of stock, the fees are maybe a hundred dollars, $200, $500 when you’re buying art.

Some of these products charge somewhere between, uh. For every a hundred thousand, they’re charging somewhere between 20 and $40,000 in fees over a 10 year period. So stay clear of those, those funds and products that charge huge fees. ’cause you’ll never recover that 20 to 40% cost uplift. Um, now. My recommendation is there are certain artists I think, that are super interesting to buy in the secondary market.

So what I mean by that is buying at auction bought or buying privately artists that are well known that have perhaps come down in price quite considerably. And I could name you 10 or 20 artists. Super interesting right now that were maybe a hundred thousand dollars, $200,000 now down to $60,000 and. I would say those are gonna, we’re gonna see those coming back with a vengeance over the next three to five years.

But there are other artists, so going into a gallery and just sort of picking an artist you like and somebody saying, look, I’ll get you a 20% discount. That’s a meaningless, meaningless thing. I mean, uh, so the key is. Is there art to buy at $10,000 that you can make a big profit on? Probably not. Is there art to buy at a hundred thousand dollars to $200,000?

Definitely, yes. So my, my entry point would be somewhere in the 60 to a hundred thousand dollars level, maybe a bit lower, but not at the $10,000 level, and I would put. If you’ve got good advisors, like the Fine Art Group, they’re probably, they’re probably 10 in 10 or 15 in the world. Remember, there are about 4,000 people who call themselves ARS Advisors.

And, and probably most of those have done about a year, about as much education as you have done. Um, but they just put the label on the back of their envelope saying Art Advisor, because they walked into Sotheby’s and spent a, did a three month course there, or Christie’s or something. But you know what?

What, what somebody like the fine art group brings is a hundred people with average of 20 to 30 years of expertise each. And that type of information is critical in understanding before you buy. So critical in buying art is understanding the fees, understanding the margins. Um, buying an auction is not always the best thing to do because the cost of buying an auction is typically 20 to 30%.

And unless you are buying something that’s deeply discounted where there’s a real opportunity and we think the artist is gonna get much stronger over the next five years, you’re better to buy privately where no one knows what you paid for it. Because everything that’s sold at auction is then publicly available knowledge.

And if I wanna buy, if you buy a. Um, a Picasso work on paper for $50,000 and I see it. You bought it at Christie’s. Uh, everybody will know that you bought it at Christie’s. Everybody know you bought it for $50,000. So anyone who’s buying it off, you would say, Hey, you bought that for $50,000. Why should I pay you $250,000 for it?

You’re joking, I’ll pay you 55,000. Whereas if they dunno what you pay for it privately, uh, they dunno where to stock. Yeah. Um. You know, you mentioned how there’s some art right now that is, um, at a discount. I’m cur, I’m curious how art moves. Does it, does it typically. So moving independently based on what’s in vogue or you know, how do you, how do you determine that something is undervalued and that it will have greater value later?

So there are certain artists that will. Stick around for the next, uh, 150, 200 years. There are certain artists who will stick around for the next 30 years. There are certain artists who will stick around for the next three years, and there are a lot of artists who will stick around for the next three months.

So it’s differentiating. There are probably a million artists that will stick around for three months and there are probably. 2000 artists that will stick around for the next, uh, a hundred years. And then of those 200, of those thousand or 2000 artists, um, there are some on the periphery, but you’ve really gotta focus in and avoid.

Uh, avoid an awful lot of the art world. And then if you look at the long term trend, you’re not gonna make money in general in one year. You, this art is not the market where you buy something for $50,000 and sell it a month later for $65,000. It’s typically you buy it for 50,000, you hold onto it for three, four years, and if you know what you’re doing and you’ve got the right team, you might be selling it for 75 and maybe even a hundred thousand dollars.

You’re never gonna get is really, really rare. It is one in one in 10,000 times you’re gonna get five times your money or 10 times your money. So this sort of theory that you bought something for $10,000, you’re gonna sell it for $150,000. It is extremely rare and very few professionals even then get it right.

So, um, many families have put a sort of 5% of their wealth into art. A, because they enjoy it. B, because they’re well advised, and trust me, lots of people say, well, I bought this, I bought that. There’s always a very smart advisor behind all these big families who said. Who do all the homework and give you the risks, the rewards, the upside, the downside, I, when we do a due Dili for every work of art that we buy for our clients, we do like a 20 page due diligence document.

A bit like analyzing a company. So when you go and buy. If you go and buy a stock, if you put $500,000 into a stock, you’ve done all your homework, you’ve looked at the analyst reports, you’ve looked at the cash flows, you looked at the, uh, what the market reading is and, and, and, and what you think the balance sheet’s like, and you get advice as to help go through it.

When people buy art. 90% of the world who buy art do it in about 25 minutes, right? They go in, they spend a hundred thousand, 200,000, 25 minutes. They like the look of the picture. The dealer tells them it’s 25% discount, that it’s a great deal. Best opportunity for lifetime. The. Boom, the deal’s done. Instead of a hundred thousand, they buy for 75,000.

And then they get annoyed when we come in from the fine art group and say, oh, you could have bought that for $25,000 somewhere else. Um, so we try and do that homework for our clients, give them all the information and give them the. Terrain. So for instance, if the artist is coming up for big shows in museums, that’s a plus.

That’s gonna help the artist succeed if the artist has been bought by major collectors. The right sort of collectors, like. I don’t know. The biggest collector in, in California, the main collector in Paris, the main, the main museums in London or New York, that’s gonna massively help. So if a young artist gets picked up by the Tate in London, or by the Whitney or by the Guggenheim, that’s gonna have a big impact.

And if there’s gonna be a big show of an artist, so let’s say you own an Ed Roche, you bought Ned Rousche from Gian or one of the galleries, uh. A, a, a few years ago, and if you hear that there’s gonna be a big show at, um, the Guggenheim or in, in Abu Dhabi or wherever, that’ll have a big knock on impact on the pricing of that art upwards.

So, so, and sometimes the death of an artist has an impact. So there are about 10 or 20 things that matter. One of the most important is, is it Right? There are a lot of fakes out there. So I see, I see one fake every day. And that’s just distilled down from what my company sees. So we probably look at a few billion dollars of fakes out there.

So there are certain artists that easily faked, certain artists are not. So that’s number one. Number two, buy your art from a reputable place, just because it’s too good to be true. It probably is too good. Too good to be true. Again, it costs you nothing to get, it costs you very little or nick to nothing to get some advice.

Um, but without advice, you’re spreading dangerously. So is it genuine? Is it in original condition? So a lot of pictures have been robbed or been damaged or being in the, in the light and therefore the paint drops off or being. Or had water damage or fire damage, and suddenly the value of that impact can knock a picture from a hundred thousand dollars down to $20,000.

I mean, I saw a picture by a major major artist called Can Leto from the 1740s. It looked fantastic. When you looked at it, it should have been worth 3 million uh dollars. But when you look close up and put an ultraviolet light over it, you realize that most of it had been touched up in the last 20 years, and it was probably worth.

250,000. So 10% of what it, what, what it would be worth if it was in perfect condition. So there are, there’s a checklist of items that you’ve gotta go through. Then you, then, my recommendation is you buy for a reputable gallery or, or get a reputable advisor to help you. Don’t buy at these sort of remote auctions where they tell you this, Andy Warhol will give you a certificate with this, and it’s going at at 20% of what it would make at the big auctions in New York because one of my clients spent a million dollars on 10 works that should have been.

Worth $10 million and they’re all fake. So he bought a million dollars of fakes. So rather than getting a discount of 90%, he lost a hundred percent of his million. Um, so then he brought in the professionals to help advise it. Um, when you think about art in general and, and prices going up and prices going down, do the markets in art as, as a general rule, track other economic cycles, other markets, or do they tend to be, uh, uncorrelated?

So art. Art in general has shown a steady upward trajectory. If you bought the index of the top thousand artists, you’d probably find probably a, a circa 8% compound return. Pretty, pretty reasonable. Um, but that’s over a, you know, you’ve got hold over a 10, 20 year period and that assumes very little transaction costs.

Um, but, uh. Interest rates have a big impact on art. So high right now. Interest rates are, yeah, we’re looking at sort of, uh, the, the, the, the, the bank, the rates are 5% to 10% to borrow money, and that’s probably too high to give a boom to art. So when interest rates were close to zero and people were borrow at two.

That really kicked art off big time. And we think the, when interest rates start coming down, now, maybe that’s not gonna happen in 2025, who knows? Um, but if they start coming down from the four to 5% level down to the two, three, I think we’ll see a. 10 to 20% uplift in the price of art. But so long as interest rates stay heavy, uh, I think art will have a tough time over the next few years.

So you mentioned, um, I guess for somebody who’s already diversified, um, the slice of portfolio that makes sense for art. Can you talk a little bit more about that? Yeah. I would say that if you’ve got, again, good advice. And you’ve got a big enough portfolio. So I would say, you know, really. You need a portfolio of about $5 million, and I would put probably 250 to $500,000 of that into art.

So I’d put five to 10% of your portfolio. Now, if you are richer, let’s say you’ve got a hundred million dollars, I would say you could take 10 to 15% of your portfolio and put into art because there are two. There were two or three aspects. One is. In America, you’ve got a huge tax advantage if you gift it to a museum.

Um, secondly, you’ve got a, um, huge enjoyment factor. You can hang the pictures on your wall, but beware there are, uh, state taxes. If you buy a picture, uh, ad auction, let’s say in. Uh, tax free in Switzerland or in in UK and ship it out to the us. Uh, you’re gonna have to pay, uh, sales tax when you bring it into your state, which could be, you know, six, between zero and 10% so that that has a knock on effect.

And in Europe there are taxes that can go anywhere between five and 20% when you hang it on your wall. So quite a lot of investors put. A high value art into warehouses and they don’t actually hang it on the wall, and sometimes they put a copy on their wall so that they can enjoy it and know that they own it.

Um, the, the negative side of art is that you can’t really split it up. I, if you’ve got three kids and one work of art, it’s rather unfair to say, well, that, that one work of art goes to my eldest son, or my youngest son, and the others get nothing. So quite often what happens is clients with big collections.

Maybe they have 20 pictures worth a hundred thousand dollars each, and then they have one picture worth 2 million because they bought a basia. You know, I had a client who bought a Basia. Uh, 25 years ago for 250,000 today, that’s probably worth 20 million. Um, and that’s disproportionate value to his, to his, um, rest of his art collection.

So what he wants to do is he’s gonna get us to sell that work, um, realize the 25 million, redeploy some of it into, uh, other artworks and give some of that to his kids. So, um. Uh, but my view is that I would allocate at the bottom end 5% at the top end 15%. And if you’re very wealthy, plants in the billions of dollars sometimes put 30% of their wealth into our, because their, their disposable assets are so enormous that are starts taking a major feature.

Um, but I would say don’t buy art below $50,000. And, um, don’t buy art if you are very, very rich, um, you know, stick in the, don’t go much above 10 million or if you are super rich, then there’s the, what I would call the mega game, which is the sort of 80 million, a hundred million dollars plus. So there’s a, there was a big, um.

Middle Eastern country that invested circa uh, $30 billion in art over the last 10 years. And that collection is probably worth 300 million, 300 billion now it’s probably gone up 10 times. ’cause they bought discreetly at the very, very top end of the market. The rarest that the rep. But it’s, uh, it’s not an easy, you know, it’s, it’s, it’s a complicated thing and.

You know, it’s not always about art. You could buy vintage motor colors. You could buy wine, you can buy, um, jewelry. You know, some of our clients collect Cartier jewelry. Again, if you’re gonna buy jewelry. Be careful. A, is it genuine? So you’ve really gotta have the right experts on your side. And B, if you’re gonna buy jewelry, buy signed pieces, buy the big names, car Shave Van Cleef, perhaps graph, um, and, and just avoid the unbranded jewelry.

That looks great because that’s done really badly. And the Cartier pieces from the 1920s and the 1930s and later. Have done incredibly well. So you might have bought a Cartier piece for a hundred thousand 20 years ago. It might be worth. 1 million now. Um, so there are other avenues of buying. Right now.

Wines come down by 20 to 40%. Vintage cars come down by 20 to 40%. Uh, some of them, although some of the Ferrari’s have held their value. Uh, and, um, you know, some of the, some of. Uh, Picassos or Ed Roches, Bridget Riley’s, these big name artists, they’re probably off by 20, 25%. Uh, and that’s why I think now is the best time I’ve seen in the last 25 years to buy art.

If you’ve got, if you are cash and you’ve got the right advisors. So I told. My richest clients, my less rich clients, that now is the time to research, get comfortable, allocate a portfolio, and look at buying art. Because some, even there, there’ve been some artists that were 40,000, they went up to 200,000, real speculative, sort of like penny stocks and they come back down to 40,000.

Uh, so there’s a rollercoaster in the young contemporary, uh, some interesting, some stay away. How liquid are these markets? Obviously, if you are putting in, you know, 10% of your, uh, portfolio, um, the event that you need to get out quickly, I mean, how, how liquid are the markets? You cannot get out quickly.

Okay. So stocks, you can do a sell and get out in 20 minutes. Um, art, my guess is the fastest you could get out is probably a. A month, 30 days, and the slowest is three years. So 30 days to three years. Uh, on average. My instinct is if you buy now, um, you’ve gotta hold for three years, three to four years, and you could probably get out.

There’s a chance right now that you could double your money in a three to five year period because there’s so many great artists that have come off in price and there is an opportunity. Um, but if you have to, if you bought today and you suddenly said, no, I need the cash. I need to get out, you can. You can, there’s gonna be a, a, a discount for, for, for getting, getting out of it.

So anybody who needs that liquidity, don’t put it into art. You’ve gotta put this money aside for three to 10 years and, and, and as look at it like that and don’t look at it as a one year investment. It’s very, very rare that you turn the money around in a year, if ever. So, uh, tell us a little bit more about how your company works and you know, how people could potentially.

Reach out to you and, um, you know, so our company’s called the Fine Art Group, www.fineartgroup.com. I run it for, uh, 26 years. I’ve been in the art market 35 years. Uh, there’s close to a hundred people involved in our business worldwide. So we’ve got offices all over the US and, uh, headquartered in the Rockefeller Center in New York.

Uh, our clients do, our, our clients do five things with us. So some clients inherit collections of art and we help them. We do an audit. So it’s a bit like, uh, you know, your, your, your grandfather dies and they leave you the whole contents of the house, and some of it’s fantastic and some of it’s not very good.

We will come in and do a valuation and then we will tell you. Those 10 pictures are fantastic and the rest is not worth having. We recommend selling that and keeping those 10 and in five years time, those 10 could be worth five times it. So we give you an in insight into what we would do with a collection number one.

That’s a very, very useful service for people who inherit sort of next generation or families that have bought art over the years and, and then suddenly get thinking, what the hell do I do? I’ve gotta downsize my house, or I want to hand over the next generation. What do I do? And we help them gift it, do charity donations, philanthropy.

We do all that. Number two. We lend money against art. So you said is art liquid? Well, we make it liquid because we take, let’s say you’ve put $2 million into art, we’ll lend $1 million against that. And you can borrow that in like, uh, within like. 20 days. So you can say, Philip, I’ve got $2 million of art.

Would you lend me a million dollars in in in three weeks? And I’ll say, yes, we can. And we will. And we could, you could borrow that money for 1, 2, 3 years and that helps pay. Estate taxes, it helps take tax bills, it helps. Let’s say you wanna give some money to the kids or whatever it is. So there’s another avenue.

So our financing is a very, very interesting business, and we have investors who like to invest in that, and that gets a yield for our investors around. 10% net. So it’s a very interesting product for clients who are looking to get a sort of bond yield with a fantastic product where we’ve had no capital losses and uh, a quarterly dividend.

So clients get a two point half percent dividend every quarter and a 10% yield. So that’s quite an interesting money. So that’s something that, uh, that accredited investors can participate in as well. Indeed, indeed. And, and I would say that’s almost sexier right now than, uh, you know, if you, if you’ve got a lower risk appetite, it’s, I would say that’s a very low risk product with a very nice, steady yield.

And we’ve run a business like that for 10 years. What kind of, um, minimum investments are, are those? It, it’s, uh, unfortunately it’s a bit higher, so it’s sort of 500,000 per million dollars. Um, but it’s locked up for three years. So you, you have a three year commitment and you get out, so it’s, it’s, and it’s di you know, so million dollars is yielding about a hundred thousand dollars a year, so it’s very.

Interesting return in this current economic climate and, and we had no credit losses and no, uh, no capital losses. So I like that. Number three is we help clients who’ve got a little bit more money to set up private funds, so the. Let’s say they’re a bit wealthier and they’ve got three to $5 million to invest, we will run a private fund for them.

So we will help them buy, hold, and sell. And that’s, I, I think, very neat. And they can have the art on their wall, they can have it in a warehouse. We can run it tax efficiently. We can run it in the us, we can run it out of warehouses. Uh, in, in, in. Tax free jurisdictions like Delaware, um, and you know, you can borrow the art and hang it on your wall for a time.

You could buy and sell and you can have the top advisors doing that. So that’s an option. Then we help clients, um, buy art as pure advisory. So some clients say, look, I’ve sold my company for $10 million and I bought a house for 2 million, and I wanna put $500,000 of art on the wall. We help clients do that, and that’s a really nice product where clients get advice, they know what they’re doing.

They send us a WhatsApp saying, I’ve just been into this gallery, or this auction, or I’ve been to Sotheby’s or Christie’s. I like something there. What do you think? And within. Anywhere between an hour and 24 hours, we come back to you and say, here’s all our comparables. This is why we’d buy it. This is why we wouldn’t buy it, and we give you advice.

But at the end of the day, you might say, you know what? For $50,000, I love it and I don’t really care what your advice is. I wanna buy it because I love it and it’s not about a financial investment. So that’s the next product. So, so I’ll invest and then we will. We plan to come out with investment funds where people can go.

We used to run Delaware Limited partnerships where people could invest 250,000, $500,000 into a limited partnership with a typical fee of like one and a half and 20 over six, which is like a private equity product, standard product. But most of these, um, types. They’ve, that’s a low end type of game for, from, from what there is in the retail market.

So I just emphasize to clients, there are products out there with fee loads of 20 to 40%. Don’t touch them and do your due diligence. And quite often these documents have 130 pages to read and clients can’t be bothered to read them. And in on page 90 and 120 is where they set out where their 20%, 40% fees are.

So just avoid them like the plague. They’ll come back to haunt you. Um, but so the five products we have in our business are art investing, art financing, either to borrow money or to invest in the borrowing fund. Um. Art, valuation, art, audit, and philanthropy. So helping clients review their collections, sell them so we can sell, save clients a fortune on when they sell on the fees they they pay.

So if you didn’t have our help, you might pay 30 to 40% in fees when you sell. So you might sell a picture, you might sell a collection that you inherited for a million, and you might only get 600,000 after. After transaction fees? Well, with the help of the fine art group that may be down to, uh, instead of 400,000 transaction fees, we might be able to get that down to less than half that, or even less than that.

Um, you know, it can get as low as 5% as opposed to 40%. So that’s a big help and we can help give people an idea of. The current state of the market. You know, is it good time to sell blue dins? Is it a good time to buy white dins? You know, one of the challenges in the jewelry world is these synthetic manufactured dins, and that’s had a big impact on the white dins.

And then, you know. Um, quite often you go to, you travel abroad, have a lovely holiday and you know, like I do, I say to my wife, I’d love to buy you a nice sapphire ring or something. And I, I made that mistake 25 years ago. I was in India. I saw something that looked like it should be worth three to $5,000.

They said, look for you, sir. It’s only a thousand dollars. Well, I found it was a colored stone. So even experts like me. You know, I didn’t take advice at, at that level. I knew I should have, but I took a view of it. It, it gave my wife enormous joy and I’ve never really told her that I messed, messed up. So even the professionals mess up, but it was a thousand dollars, not a million dollars.

Well, very interesting stuff. Uh, Philip, I, uh, appreciate all of your insight into this space and, uh, obviously if, uh, people are interested. They can, uh, check out the website and it sounds like there’s all sorts of different ways to participate. So, uh, thank you. Thank you again for joining us. Thank you for inviting me.

I’d loved it. You make a lot of money, but are still worried about retirement. Maybe you didn’t start earning until your thirties and now you’re trying to catch up and meanwhile you’ve got a mortgage and private school to pay for, and you feel like you’re getting farther and farther behind. Good news. If you need to catch up on retirement, check out a program put out by some of the oldest and most prestigious life insurance companies in the world.

It’s called Wealth Accelerator. It can help you amplify your returns quickly, protect your money from creditors, and provide financial protection to your family if something happens to you. The concepts here are used by some of the wealthiest families in the world, and there’s no reason why they can’t be used by you.

Check it out for yourself by going to wealth formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show everyone. Hope you enjoyed it. Uh, you know, uh, what I try to do on the show ultimately is just try to make, make you think differently. And, um, you know, I mean, again, if we’re talking about art, like, you know, we just did, uh, in this interview, that’s one thing.

Maybe art’s not your thing, maybe, but you, maybe you like watches, maybe you like really nice furniture. I mean, all of this stuff has a niche where you start going out of the. The world of, of, uh, expense into the world of investment. And if you love stuff like that, I mean, hey, why not? Uh, think about, think about buying stuff that goes up in value and enjoying it while it does.

Uh, that’s it for me this week on Wealth Formula Podcast. Uh, this is Buck Joffrey signing off.

We all know technology and geopolitics shape the world, but there’s a quieter, less obvious force that dictates the flow of wealth and opportunity: demographics.

Where people live, where they move, and how populations grow or shrink — these are the currents that ultimately drive economic gravity. That’s why all of the multifamily investments you see through Investor Club focus on areas where there is job creation. Where there is job creation, there is population growth, and people have to live somewhere.

Scale that concept up to a global level, and you start to see why migration, climate, and demographics are the real megatrends of the century.

Take China — decades of the one-child policy have created a demographic cliff. Contrast that with parts of Africa and South Asia, where populations are booming. Add to this the wildcard of AI, which could either amplify the advantages of youthful nations or offset aging ones.

For investors, entrepreneurs, and anyone thinking long term, the key isn’t where the puck is today — it’s where the puck is going. That’s the topic of this week’s Wealth Formula Podcast.

Transcript

Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].

 If a place is attracting young people, it must be doing something right.

Welcome everybody. This is Buck Joffrey with the Wealth Formula Podcast. Coming to you from Montecito, California. Before we begin, I wanna remind you that there is a website associated with this podcast is called wealth formula.com. Go there and uh, check out some of the resources we have, including the opportunity.

To join our accredited investor club. Uh, this is a. A group, uh, for a credit investors to see a potential deal flow that you wouldn’t see otherwise, uh, because they are private, uh, private nature. So the process is easy. If you are an accredit investor, go ahead and sign up and get onboarded. Then basically wait to see what kind of deals are out there and see if you’re interested.

Check it out. Wealth formula.com. Okay, so let’s start. Uh, let’s talk a little bit today about something that’s really important, maybe not appreciated as much. You know, we know that technology and geopolitics shape the world, but there’s a quieter, sort of less obvious force that dictates the flow of wealth and opportunities.

And that is demographics, um, where people live, where they move, and how populations grow or shrink. These are the currents that ultimately drive economic gravity. And that’s why all of the multifamily investment you see through say investor club, uh, focus on areas where there’s job creation. Why? Because where there is job creation, there is population growth.

And guess what? People have to live somewhere, right? So that’s something that you might be familiar with already, but scale that concept up to a global level and you start to see why migration. Climate demographics, they’re really the sort of mega trends of the century. All you have to do is take a look at China, right?

Decades of one child policy have created essentially a demographic cliff for them. And you contrast that with parts of Africa and South Asia where populations are booming. And then you add to this, the wild card of ai, which could either amplify the advantages of youthful nations or, or potentially offset.

Aging ones like China, as we mentioned. So for investors, entrepreneurs, and anyone really thinking long, uh, term, the key isn’t necessarily where the Pak is today, as the Great Gretzky once said. It’s where the puck is going, and that is the topic of this Week’s Wealth Formula podcast, and we will have that for you right after these messages.

Wealth Formula banking is an ingenious concept powered by whole life insurance, but instead of acting just as a safety net, the strategy supercharges your investment. First, you create a personal financial reservoir that grows at a compounding interest rate much higher than any bank savings account. As your money accumulates, you borrow from your own bank to invest in other cash flowing investments.

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It’s a refined strategy used by some of the wealthiest families in history, and it uses century old rock solid insurance companies as its backbone. Turbocharge your investments visit. Wealth Formula banking.com. Again, that’s wealth formula banking.com. Welcome back to the show, everyone. Today I’m joined by Parag, Dr.

Parag Khanna, a globally recognized strategist, bestselling author, and founder of Alpha Geo. His work focuses on some of the most important forces shaping the future of wealth, opportunity, uh, wealth, opportunity, migration, demographics, climate and technology. He’s advised governments, global institutions, and even military leaders on how to navigate a rapidly changing world, and his books, including Move the Future is Asian, have become.

Essential guides for understanding where people capital and power are headed. Uh, welcome to show up Pak, how are you? Thank you. Great. Great to be with you. And, uh, thanks again for coming all the way across, uh, the world from Singapore. Uh, I just got you off your, uh, ice bath and, and tea, so we should be ready to go right now.

Ready to rock? For sure. That is the best way to start the day. So I wanna talk to you about things that, you know, you’re, you’re an expert on. Um, one of the things that you talk about is, uh, migration as an investment signal. So you’ve written that migration is, is a driver of growth, which makes intuitive sense.

So what migration trends should investors be watching closely as signals, uh, for where capital will flow next? Sure. I mean, there’s many reasons to talk about migration and you know, just backing up for a moment, it really is the original globalization. So when we think of globalization as a force for good, a force for prosperity, a force for comparative advantage among nations and so forth, well migration, it all began with a single step.

Now, the reason this is so important today is because not only do we have the mass migrations of today, which can be both. Enriching and also destabilizing. Right? It’s not merely an unadulterated good look at the politics of the United States right now, for example. Yeah, in Europe. Yeah. Migration, turning migration off or on literally has a significant measurable economic impact.

Right now, for example, already economists are debating how. The extent to which cutting off inflows of migrants is going negatively impact GDP as we head into a recession, right? Among other things, right? So will it be wages or is it simply going to choke the innovative capacity? In the productive capacity and just the output of key industries.

Uh, so that’s something to, to dig into in a, uh, for a bit. But the real, one of the big reasons why I wrote the book is because. Unlike the last a hundred plus years where the world population was going like this, right? Quadrupling over the past century. Now we’re reaching a plateau, as you know, and this is why Elon Musk and everyone talks about, yeah, you know, peak humanity and civilizational decline and low fertility rates.

I mean, he’s, he’s late to the game, quite frankly. You know, those of us who work on these issues have been talking about this for a very long time. We’ve also noticed that it’s too late. A lot of people on social media are still kind of saying, let’s get, let’s have more babies, or These rich people have babies, right?

I just need to remind everyone so we’re on the same page. It’s not enough. It’s not nearly enough. There are not enough children. There will never be enough children. You need humanoids in robots or whatever the case may be, to take care of the elderly and the young. At this point, there’s so few young people.

So migration matters because where young people go in particular, take millennials, gen Z, gen Alpha, take everyone between the ages of five and 40. 35 years, or they’re up to 45. So a 40 year block spanning a couple of generations. Everyone today, who’s young, where they go, they vote with their feet, whether they’re moving from California to Texas, right?

You know, LA’s loss is Austin’s gain, or San Francisco Boulder, Colorado’s gain, or you know, Boise Idaho’s gain, right? It’s zero sum when you don’t have population growth, right? My people, I lose. You gain people, you win. So the zero sum nature of demographics and migration is what’s new because up until the present, every place was just having more and more children.

So it’s like, oh, well a million Indians left India, like no big deal. Right? Um, but once, once you stop having population growth, it’s, it’s zero sum. So in other words, why does it matter for investors? It’s three words. Follow the people. If a country, so you know, you and I can sit here and pontificate and we can say, oh, Europe is finished.

Europe is dead. Well, I mean, look, go to Lisbon, go to Berlin. Go to Athens. Yeah. Those places feel dead. No, they’re attracting young people. So it’s not necessarily at a country level. Right. But city by city, place by place. It’s, you can boil down all the complexity of the world. Geographically into this one thing.

If a place is attracting young people there, mu it must be doing something right. So, so in that regard, pro, so who, who are some of the winners and who are some of the losers when it comes to, at the city level? So here’s a place that everyone’s heard of Dubai, right? The United Arab Emirates, right as a country and Dubai as a city.

But there’s multiple Emirates. All of them are doing great, uh, to greater illustrious the UAE as a country. Fun fact, I, I grew up there as a child until the early eighties and um, it had 200,000 people. So it has more than 12 million today. So it’s the, by as a percentage of its own population, it’s grown, uh, by a factor of 60.

So, you know, it’s the fastest growing population in the history of the world. By, by far. Right. So, and it continues to grow and grow and grow. It’s the number one destination for new millionaires. So it’s also relevant in that sense. Ultra high net worth individuals are choosing to ditch Country X and move to the UAE, right?

So it’s, you know, Singapore, where I live right now, uh, it’s another winner, right? It’s very, very selective. It’s not about the total number of population increase, but rather the value add in terms of wealth. Invested in the economy, in real estate, in consumption, in financial services, and so on. So Singapore is also a clear winner since COVID.

You can tell that places like Lisbon, like Berlin, like Bali, right in Indonesia, you know, they call it silicon Bali. Now, it’s not really a hotbed of innovation. It’s just a place for digital nomads to go. But wherever you’re seeing young digital nomads show up and plant roots to the extent that young people plant roots at all.

You know, you’ve got a winning place, and that is a place where you might look to increase your exposure in some way, shape or form. So who, who are the losers that maybe there’s some, uh, I mean probably like Los Angeles or something like that, right? I mean, what. No, you know, I mean, I, I come to LA all the time and I, I get some of the macro dec declines data that people point to, you know, like net population outflow from California and LA is a source of that.

But they may not be fully considering new inflow, you know, new arrivals. They’re not seeing economic diversification, you know, and, and these kinds of things. So I, I’m still okay with, with la, um, as a whole being America’s second biggest city, you know, an enormous GDP. The California turnaround in general, that is kind of, you know, being, um, enacted, uh, right now that that’s underway.

Um, so let’s think more at, if you wanna look at the US for different reasons. Florida is not. Kind of, I don’t wanna say peak, you know, I don’t wanna call the peak, but you’ve seen a significant outflow now, or at least homes being sold because of the climate crisis and other kinds of issues, cost of living issues and so on.

So I think, you know. Florida is gonna be balanced out by other places. Um, so I, I mentioned climate, you know, the Gulf Coast of the US obviously, but let’s look globally, you know, places like Italy, places like Korea, places like Russia that are in just terminal population decline. These are the places where they’re selling.

They used to just sell a single home or a villa for one euro as a gimmick. Now you can buy an entire town, you know, for like a hundred thousand bucks. So there, you know, these places that are in structural population decline are gonna remain in structural population decline. Their entire geographies are gonna be backfilled and sold off to private investors to turn into resorts.

That kind of thing that that’s what’s happening. Almost a remapping of the world in light of these dire demographic changes. So I, I guess the obvious one that comes to mind for me when I think about big players, uh, in the global economy is China and you know, obviously with their. One child, um, laws that they had enacted for, you know, decades.

And then on top of that, there’s, there’s not really any immigration. I mean, what, what’s going on in China? Right, so China actually ha doesn’t technically need immigrants in the sense that you would say, how can the second largest population in the world behind India need immigrants? But it’s not about the number.

In the end, as I mentioned, it’s about the functions in the economy. So when you have what’s known as the 1, 2, 4 population pyramid where a young, young person has to provide for their two parents and their four grandparents, that’s just a big burden on the young, you know, breadwinner, right? Or earner.

Especially at a time of, you know, financial stress because of the cost of living in major Chinese cities. So what they do need though, is more El is more caregivers for the elderly, right? So China is importing people, but specifically, you know, uh, Filipino nurses or Burmese nurses and just young women even, even brides.

Of course they have their gender imbalance because not only the one trial policy, but the male preference, uh, led to an imbalanced gender divide, just like India has as well. So you wind up in a situation where you do need to import certain types of people, like elderly care workers, nurses, and uh, and and so on.

But they, but China is more rapidly automating through robotics. Some of these functions even faster than Japan. So in Japan, you don’t have enough of an acceptance. You have a cultural acceptance of technology, but you don’t have a mass deployment of technology to take care of the elderly at a communal level.

You don’t have telemedicine, right? And these kinds of things as rapidly deployed in Japan as you do in China. So China has a technological sophistication that’s allowing it to kind of, you know, circumvent some of the pain of this demographic adjustment. Interesting. And, and then the other thing that I think you’ve alluded to a couple times, um, I, I really think about quite a bit is the role of robotics and, and artificial intelligence.

Um, which is likely to be probably more rapid and a bigger impact than we. Can imagine right now. How, how do you think of that as I guess somebody who looks at, uh, through your lens? Well, there’s no question that it already has, having that impact and people are debating so much what the magnitude of that impact is.

Um, and that’s because they are looking at one particular industry, one particular country. If we’re gonna talk about this globally, what you really want to create is something of like a matrix where you say, okay. What is the specific technology? What are the sectors that you’re applying it to? In which countries is it deploying at what pace?

And then measure what impact it’s gonna have because that’s how things go in the. Un full, uh, unfold In the real world, there’s a lot of fiction in reality, right? So you can say, oh wow, we’ve got, you know, uh, full, you know, full self-drive vehicles. But okay. In some countries, the regulations, the roads, the uh, and so forth are amenable.

In other places they’re not. Right. In some countries you can afford those cars. In some countries you can’t. So think about the friction in it. So people have said it for a long time. Well, truck drivers, that’s gone, right? But guess what? Humans are still driving trucks so. Maybe instead of teams of two, you have, you have one, you know, or you have different kinds of shifts and so forth.

And these things still play. They play, maybe it’s gonna be, um, you know, long haul rather than short haul or media hall. Right. So, you know, look, you have to really, really splice and dice every sector to see the impact. So lawyers, right. Well, people thought it would hurt, affect blue collar people more than white collar people.

Turns out it’s the lawyer that’s redundant. Right. Or the paralegal that’s redundant. Whereas the plumber. We’re gonna need plumbers for a long time. Right. So I wanna see a robot contort himself to get underneath your bathroom sink and fix the plumbing. Right? Well, ain’t gonna happen. Right? So, so that’s the, the, in terms of robotics.

It’s gonna play out in that very, very jagged, um, non-linear, bumpy way. And of course, those among other things are powered by ai. So you’ve even got software engineers now who are needed, look at the jobs crisis for some of the most highest, best educated young computer scientists, right? So yeah. Never had such a high rate of unemployment.

Among us computer science grads at the same time that America’s finally Amer, you know, we’ve been saying stem, stem, stem, right? And lo and behold, Americans are finally churning away from humanities towards stem. Yeah, they learned the code for no reason at all. And now you can’t get a job in stem. So this is the level, uh, pace and intensity of disruption that, um, that, that we’re facing.

So AI is a key upstream driver of these downstream impacts on fields like robotics, which then impact the labor market. Um, but again, there’s lots of new jobs to be created in. Building more electric vehicles and more, you know, the, the, the key components, you know, you know, the cameras and, and sensors and so forth that those vehicles need.

So the question is, where are those gonna be built and what skills need to build those? And, and, uh, and are we gonna have tariffs on those sectors to encourage those components to be built in the us? So again, the knock on effects ripple through supply chains, um, from every new technology, every new, you know, innovation.

Yeah, the, you call this sort of Asia’s, you know, is Asia’s century. Um, you, you argue that Asia will ultimately sort of dominate the global economy. What sectors or regions in Asia in particular and, and, and, and why? Well, so Asia is obviously a huge, uh, uh, mega region, right? And then that’s sort of, you know, actually the map behind me is, is one of my maps of Asia.

So a lot of people when, when. You say Asia, they think only of East Asia, the Pacific ri, and Greater China and Japan. In reality, there is not a debate among geographers what Asia is. Asia literally reaches the Mediterranean Sea and the Red Sea. Right? So Saudi Arabia, which we think of as the Middle East, is actually west.

Right. So that’s how far West Asia goes into the east. It’s Japan to the south, it’s Indonesia and even Australia. You might say though, Australia, you could say it’s Oceania, but economically it’s very tethered to Asia and to the north it’s Russia. Right. So that’s Asia, right. This sort of, you know, diamond shape, set up powers and everything in between them, such as India, of course.

And Southeast Asia. So Asia has many drivers. Japan is the original Asian economic miracle. Then you have the tiger economies, as they were called in the, in the sixties and seventies, South Korea, Taiwan, Singapore, Hong Kong. Then China itself has become the largest economy in Asia and and the world. And now you have a new wave of Asian growth from another sub region.

Which is, uh, India and Southeast Asia, right? The Ian countries like Indonesia, Thailand, Vietnam, Malaysia, uh, and so on. So you, Asia is vast. Asia’s five and a half billion people. Most human beings on Earth live on this map behind me, quite literally, and that will always be true for the rest of our lives, our children’s lives, our grandchildren’s lives, our great grandchildren’s lives.

Most of the human species, like a substantial majority of the human beings on Earth, live inside this rectangle. They do not live outside of Syria. You in LA are in a great big city, but you are in a small minority of the human species. Yeah. Just so that we understand geographically what we’re talking about.

Yeah. So Asia’s got a long way to grow because it also says most of the world’s young people. Let’s tie it back to our very first topic, right? Most of the world’s young people are also on this map, and if you don’t have young people, you don’t have workers, you don’t have taxpayers, you don’t have innovation, you don’t have growth.

So I’m bullish on Asia, despite all the geopolitical tensions and so forth, because of some of these fundamental demographic facts, economic facts, infrastructure, investment, middle class growth, wealth creation, technology, capital industry. It’s all here. Yeah, I mean, you’ve mentioned a couple areas. I mean, certainly when you, you’re talking about, uh, you know, growth cities, um, you’re talking about Dubai, even Singapore, but there’s also, you know.

A variety of, of other issues that come with a number of these countries, like laws and immigration restrictions and all that. How is that all gonna play out? Do you, do you, do you anticipate some, some changes, uh, to various immigration patterns based on the needs of nation? For sure. You know, when I wrote the book Move I, I.

Almost realized they should have titled it moving because it’s not really a one way ticket. And we’re seeing this in the US obviously right now. Look at all the people that came to the US and have been deported, right? Or, you know, have, uh, their visas canceled even if they were legally in the country. So on over the cancellation of H one B, uh, you know, uh, policy as the Trump is threatening and, and the way Indians, you know, and Indian Americans are being treated right now.

So that’s just one example, but it’s really a, a pinball game. Migration has literally become a pinball game of billions of people, billions of lives. And that was the essence of what I was arguing, is that, you know, you can only. Politics in certain countries, whether it’s Britain or America, or Canada or Germany, uh, or Japan, you know, are gonna have an impact on the directionality, the vectors of migration.

But just remember you squeeze a balloon in one place, it expands somewhere else. So literally, you know, right. Right now we’re having Indians and Chinese think about leaving the United States because they’re not feeling welcome. But right now, the um. Uh, the German foreign minister, the Indian Foreign Minister, I believe is in Germany or, or vice versa, signing a bilateral agreement to expand immigration.

Right? And so one of the things I wrote about in the book was that, um, you’re, you have, you have a, such a fast, the fastest growing student population and professional population in Germany is Indian. You never would’ve imagined this. I, I actually went to high school in Germany. I lived near Hamburg, and I was the only Indian guy, an Indian American, but ethnically Indian guy for like, you know, hundreds of kilometers.

And now I hear Germany all the time, and it’s like Indians everywhere, right? So in, in the, in the blink of an eye, you have new migration vectors forming as people relocate to geographies where they’re welcome geographies of opportunity and so on. So. One of the things as a general statement, we just never had this volume of migration between regions of the world as we have today.

You just get on a plane, you don’t have to take a ship, uh, like the, the Puritans in a land on Ellis Island, like, you know, early 20th century migrants. Um, you literally just get on a plane. Just think about the volumes of people moving. Every single day, but the directions in which they’re moving. So you’ve never had so many Asians in Europe, rather than they’re having America as their default preference.

You’ve never had as many Asians in Central Asia or in East Asia as you do today, as many Africans in Europe, as many Latin Americans in North America, but now some moving back. So again, think of it as a giant pinball game of very thick vectors of migration that are, that are changing direction all the time.

I dunno if you have any views on this, but it, it’s interesting to me that within all of the positive things that come from the immigration in various countries, there’s just like escalating tensions across the world, a lot in Europe, obviously in the us uh, as a reaction to globalization. Well, how, uh, what’s your take on that?

So a couple of things. You know, blaming globalization or scapegoating globalization for domestic policy failures is a worn out or not so worn out, apparently political game, right? Yeah, you can still hear JD Vance and Elon Musk and whoever blame the globalists, right? The globalists get blamed for everything from liberal agendas like high tax and mass migration to being warmongers and wanting to perpetuate the Ukraine war, and so on and so on, right?

So every, everything that’s global and globalists is a convenient bogeyman. To deflect from the fact that the US has not had sufficient trade adjustment assistance, not retrained workers, um, you know, not, not, um, redistributed income. All of these not built enough housing, right? You know, you can blame globalization for everything because globalization doesn’t have a constituency, a voice to defend itself, right?

Um. So, so I want to be clear that just because you hear people talking about the anti-globalization backlash, it doesn’t mean that A, you know, globalization is B, that globalization is actually to blame, or that C bashing globalization will actually make it better, because in reality, globalization always wins.

Globalization, whoever, whoever it is, is sitting there laughing because in the end we always turn back to globalization. Otherwise we wouldn’t be in this world that we’re in of hyperconnectivity, of transportation, of communications, of capital flows, of all of these things. Right? In the end, we always, you know, you and I are old enough to remember the nine 11 terrorist attacks 25 years ago.

Then you had the global financial crisis, then you had Trump. In 2016 and Brexit, then you had COVID, um, and, uh, and so, you know, five or six episodes in just 20, 25 years, and every single one of those episodes, what did the headlines say? It’s the end of globalization, right? Every time. Every time. And it’s always been wrong.

So we need to, if you want to have a serious conversation about this, and now I’m speaking obviously about our politicians and, uh, whether it’s business leaders or or political leaders, they need to get serious about the fact that the world has been remains and will be globalized in many ways. That it is their duty, their responsibility to harness those forces for public domestic benefit, for their constituents, for their citizens.

If they don’t have the capacity to do that, they should be the ones to step aside, not the globalists, quote unquote. Yeah. Interesting. Um, what, you know, obviously a majority, probably 90, certainly 95% of my audience is in the United States. What do you, when you look at the world through your lens again, where do you see the US headed and, you know, what are, what are some possible, uh, impacts of that?

Right. So, you know, uh, it may sound like I’m some kind of, uh, dec declines, but I’m actually very bullish on North America as a continental mega region, and America within that. If you rank the regions or continents of the world by their degree of self-sufficiency, like having enough land, labor, capital, industry, talent, technology, you know.

We natural resources, right? North America ranks number one by far, peace and stability right? As well, which is not to be discounted. So there are not just small but massive structural reasons to be very pro North America and to be continental list. And, and I am, that’s the kind of geopolitical tradition that I have trained in and written about in, in my books and so on.

And Ida potential is very much still there. That by the way, includes, I might add, you know, Greenland as a future member of a North American Union or part, part of the United States. No, no, no. Just part of the North American Union. Right. A or, or. Let’s create a milder term for it. A Federation of North American states, right?

And the United States is a sovereign state. Mexico’s a sovereign state. Canada’s a sovereign state. Greenland’s a sovereign state, uh, but for members of this federation, right? And, and I think that’s effectively what is happening in what will happen. We’re already in that in many ways, right? If you look at the functional reality, again, the trade flows, the supply chains, the capital flows.

Again, fun fact for your listeners. What are the two most busily, trafficked borders of Le legally not, not even illegally, legally traversed borders on the planet Earth? I, I mean, I’m kind of giving it away, right? Right. I think everyone should know. Right. And we need to appreciate the US Canada relationship.

The US Mexico relationship are fundamentally stable, right? These are the two busiest borders on earth by this much, right? And there’s not a third place that is even remotely meaning. And so we need to really, um, you know, kind of, you know, be, be grateful for it. Harness it. So I’m very bullish again on, um, on, on North America and, um, and I think the US is actually gonna sort itself out.

I’m also long on this reindustrialization, you know, industrial renaissance kind of paradigm too. It can be done. There’s no, you know, rule that is so steadfast that can’t be modified. No technology so arcane that we didn’t already invent that we can’t re domesticate. Nothing that we can’t produce cost effectively through technology on shore that we have to get from offshore.

It can all be done. It’s happened with oil and gas and shale energy. It’s happened, it can happen with semiconductors. Um, and, and on and on it goes. Yeah. Um, any particular areas in the US that, I mean, if you narrow in on, uh, geographically, you know, I know you mentioned sort of the sort of peaking of, of Florida, but.

Is there is particular areas within the US that might surprise us in terms of, of, of growth possibilities. Um, it kind of just, yes. I mean, the short answer, yes, it’s the Great Lakes, right? And so this is how I began the, the, the opening chapter of the MO book because when I was writing that book, it was the kind of post-industrial, post global financial crisis tail end of the already.

De industrializing wave that had hit the region and it was on its last legs. And you know, Detroit was bankrupt and so on. Yeah, yeah, yeah. But if you look today, there’s already green shoots of an industrial revival. You know, people are moving in, home, prices have come down, and then you have the climate resilience, right?

So the combination of hitting rock bottom. Attracting, you know, re and revitalizing industries, um, and attracting young people are all, and climate resilience, all of those things favor Michigan, right In the Great Lakes region. Wow. Okay. So, you know, I first wrote this right after the financial crisis. So in 2010, um, I wrote an article titled, where Will You Live in 2050?

So when that came, when that was, um, published, it was like, what Michigan? Are you joking? And I gave all the reasons why. And so then the book move came out a decade later and I used those passages as the opening chapter of the book because it, it really already started to come true. And now in the post COVID.

Landscape as we look at, again, the industrial renaissance in the US and some of these patterns and of course accelerating climate volatility affecting places like Arizona to Florida and so on, you that amplifies and accelerates the Great Lakes, uh, stories. So I’m more bullish than ever on that region.

And, and as Alpha Geo is a software company that does geospatial analysis on these geographies, um. We brought that to life with our data where we kind of correlate every new factory that’s being built, where tax receipts are increasing as people move in. The inflows of people housing, market stabilization, climate resilience, and models, new infrastructure spending.

We put all of that literally physically as pin drops on maps and uh, and again, Michigan is looking good, so, so what kind of growth are they seeing? Um, in Michigan? I, it’s like a shell big surprise to me actually. So, well, it’s not so much the growth rate because that’s gonna be, you know, sort of that’s gonna.

Very significantly potentially year on year. But again, it’s, it’s the reversal of negative trends and it’s the, it’s definitely a marked year on year increase in population, right? And, uh, and, and therefore again, tax receipts, people buying homes, uh, and and so forth. So, um, I guess one more question and, you know, sort of a world shaped reshaped, I guess, by climate migration, demographics.

Do you have a sense of what asset classes you think might win because of some of these, you know, major shifts? Yeah, for sure. I mean, you know, we could, we could run through the whole gamut, but right now we’re in the middle of a major global CapEx boom, right? The investments in, in mobility, transportation, the investments in, um, energy, obviously everything from, from still LNG to, to nuclear and wind and solar and, um, and, and, and hydrogen infusion, right?

And of course, uh, digital. Right. So everything from internet cables to data centers, to AI training models. So you know, the, the, I call it the connectivity asset class that encompasses transport energy communications, right? The overall infra asset classes are all doing well. You have to. Manage your exposure, whether these are privately driven or public, private driven, you know, or backstop kinds of ventures because of the long and CapEx cycle.

But I’m obviously law on infrastructure and that’s been a big theme, you know, in, in, in my work, uh, certain commodities, obviously because climate volatility is accelerating. Geographies of food production are gonna shift. Um, then I’m big on anything that is urbanization when it comes to the top 30, 40 cities in the world that are gonna be the magnets for talent, right?

So that’s gonna be everything like around, um, real estate, but from like a rental, from an asset standpoint, right? So multifamily mixed use. Kinds of developments that are, you know, last mile, very convenient. Have retail medical education, um, you know, multi-generational housing, walkable. Um, all of those kinds of, ask all of those types of functionalities that you would ideally see if you were to start from scratch and design livable communities.

Well guess how many of those exist in the whole world today? Like zero, right? Zero. Yeah. Yeah. Here we are. You know, and this is a great way to wrap it all up. Here we are, 8 billion people, soon to be 9 billion people, but probably peaking around there ish that are moving and relocating ourselves to concentrate in anywhere from 50 to a hundred or more.

I mean, there’s a long tail of smaller cities, right? But the places that people wanna be, where you’re gonna have economic growth and dynamism and resilience and innovation. 50 really important cities. Not forget 200 countries, right? 50 important cities. Where those who can afford to, who are allowed to relocate and move, are gonna migrate to those places, and those cities are gonna thrive economically.

And so you want to be investing in the infrastructure, in the talent, in the skills, in the fixed assets and in the, in the businesses of those people in those places. So yes, you can understand it from the standpoint of asset classes, like I could say, sure, I’m super long on Asian emerging market equities, right?

Um, or, you know, super long on, on digital connectivity, but I’m also long on certain geographies and you just wanna have exposure to those. Yeah, yeah, yeah. Fascinating stuff. Well, uh, tell us a little bit about, uh, alpha Geo. So we’re a geospatial software company, AI powered from top to bottom using AI to downscale very large data sets like climate models and other kinds of market data and put it all together into one map based plane and run scenarios and simulations on how economies are gonna perform so that you can, we can guide investors, especially real estate infrastructure, data centers and so on.

So real estate is a huge area for us. So, as I mentioned before, whether you’re the outliers like Michigan, or whether it’s what neighborhood of Manhattan, uh, or la our models help, uh, you know, corporate investors and real estate investors kind of pinpoint where they wanna locate their assets. So, you know.

Specific Palisades fire tragic, uh, event from last year. Um, where do you wanna avoid fire risk in the future? Where can you buy a home where the insurance premium is not likely to go up as much because of the fire defense measures or the resilience of the location? Proximity to water supply, avoiding drought.

So we calculate all of that and we tried it. Our clients, everyone from high net worth individuals, like n of one or two, you know, I have one property, I have wanna buy two or three, four more properties or the world’s largest sovereigns and pensions are also customers of ours, and they also use the data in the same way.

Fascinating stuff. And again, the, the, the, uh, latest book is It’s Move, right? That’s the name of the book. Yeah. Move in a and that can be, uh, found pretty much everywhere, I assume. Uh, Parag, thanks so much for being on the show today. It’s been a, uh, very interesting conversation. Lovely. Really a pleasure.

Thank you so much. You make a lot of money, but are still worried about retirement. Maybe you didn’t start earning until your thirties and now you’re trying to catch up and meanwhile you’ve got a mortgage and private school to pay for and you feel like you’re getting farther and farther behind. Good news.

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I think, uh, you know, we’ve talked about population demographics, uh, on the show before. Uh, it is, and it, it continues to be a very, very important, uh, variable when it comes to, uh, wealth. And so I think it’s something to pay attention to. As I emphasized before you see this, when we have. Opportunities coming through our investor club, for example.

We often see, uh, you know, we often have deals, for example, in Dallas-Fort Worth, massive growth in Dallas-Fort Worth. And that’s why you have, you know, companies coming in. Uh, you have, uh, you know, lots of new jobs, people moving there because tax, same thing goes for Charlotte or Phoenix or any of these places.

But that’s one of the things you really gotta look at. When you make your investment. So anyway, that’s all I have this week, uh, on Well, formula Podcast. This is Buck Joffrey Signing off.