I originally wrote this for my wife in the event that something catastrophic happens to me. I’ve decided to abstract some of the content and post it after some nudging from friends.
Note that this is still very much a work-in-progress. You’ll see redacted areas marked as “xxxx” or “REDACTED”.
May 19, 2020
Let’s hope you never have to refer to this document but just in case, here is how I view money,
investing, and how our finances are distributed. I don’t expect you to follow everything here since it’s a bit complicated so take note of the last section which is what to do if something goes wrong.
What to do if something goes wrong
***TO FILL OUT***
Assets vs. Liabilities
M1, M2, M3
Rich vs. Wealth
Bulls vs. Bears
The Greeks (Alpha, Beta, Theta)
What are asset classes? Assets are effectively a place for us to store our money. By definition, they are “a useful or valuable thing, person, or quality”.
Here is a breakdown of the assets that we’re leveraging as well as a description of each.
- ETFs (Electronically Traded Funds) – These are large funds that invest across tons of different stocks (thousands of companies).
- Stocks – Individual stocks of companies that we are shareholders of
- We do this through exchanges (eg. Nasdaq) or privately (our own companies or as angel investors)
- Bonds – These are fixed-income assets that represent loans we’ve made to a borrower (usually a government or corporation)
- Currencies – This is literally just cash in a specific currency (USD, GBP, etc.)
- Precious Metals – Gold, silver, etc.
- Cryptocurrencies – Digital currencies (notably Bitcoin)
- Real Estate – Single-family or multi-family housing investments
- Humans – While it sounds degrading to call a human an “asset”, there are individuals who just have a knack for making money where we have a symbiotic relationship
Let’s go through each.
We currently really only own ETFs through our 401k(s). The reason for this is that 401k(s) are illiquid assets in that in order for us to pull money from them, we have to take ~20% early withdrawal penalty. As such, we need something super hands-off and “autonomous”. This means that we own ETFs that focus on broad market investments (across lots of industries). Currently, we own ETFs focused largely on income generation (dividends) in relatively boring stocks that generate consistent growth. This is a more defensible position. I actually hate 401k(s) because we cannot manage them directly. Generally speaking, our active investments dramatically outperform the yearly gains in our 401k(s) – ranging from 2:1 to 10:1. The reason we do them is 1) it’s a pre-tax investment and 2) when matched by an employer, it’s free money.
I really don’t touch this account at all and rarely, if ever, swap out the ETFs that we hold our money in.
The money we have stored here is currently in 2 accounts:
We own a reasonable amount of different stocks. The way I’ve set up this investment class is to focus 80% of the capital allocated here on income-producing stocks (through dividends). At the time of this writing, this 80% allocation is producing around 6% or higher dividend yield per year (before growth). The remaining 20% is “growth” stocks. You can think of these as speculative, high-growth stocks that will experience high volatility. Over a 30 year horizon, this portfolio will likely balance out somewhere around 50/50 distribution due to the growth stocks outperforming the dividend stocks. The growth stocks generally don’t produce a dividend.
Selling any of these stocks will trigger long term capital gains. Dividends are currently capped at a 22% tax rate – much lower than our standard 33-38% income tax. This is one of the reasons I’m adamant about huge investments into this account is that the income produced is at a much lower tax rate.
Our dividend portion of stock ownership is on something called a DRIP – Dividend Reinvestment Program. Every dividend payout we receive is immediately distributed back into our portfolio which creates a compounding effect.
This is a fairly actively managed account where I’m constantly looking at new companies to add to the portfolio. I’m also expanding and shrinking the percentage of capital allocated to each company depending on the actions they take (earnings, product strategy, corporate strategy, global environments).
We also have active management trading accounts with REDACTED.
Bonds are generally considered to be a “safe” investment in that governments and high-quality corporations will always pay their bills. We currently don’t hold any bonds outside of our ETFs. Why? Because I think the whole bond market is going to collapse. I’m sure outsiders will call me an idiot or conspiracy theorist.
Here’s my take: we have had interest rates so low for so long that every corporation and government has taken on an insane amount of debt in the name of “growth”. Most corporations have used this debt to reduce the amount of stock available to public markets (called a stock buyback). This means that the less something is available, the higher the price tends to go. However, if that something can’t pay its bills then it’s worth noting. Same goes for municipalities who have built massive government buildings, created huge government programs, etc. The only way they can recoup that cost is through increased revenues or higher taxes. Both have large costs.
I view the bond market as riskier than most other asset classes right now, hence why we’re currently avoiding this. This may change in the future but for right now: fuck that. It’s a house of cards and it’s not like you can repossess entire cities for failure for payment. (Well, maybe you can but I don’t know if it’s been tried…yet)
Cash is king. Cash enables immediate action and leverage in opportunities. It’s always good to have cash on hand. I know that we’ve been in the hilarious situation of being super cash poor but very asset rich. I think this will change over time but for right now, this still holds true. Interest rates are very low, which means borrowing cash is extremely cheap. Therefore, it makes sense to deploy capital and go somewhat leveraged.
Don’t go super cash-heavy but don’t be cash poor. Have 3-4 months of cash in the bank and call it the “Opportunity Fund” instead of the emergency fund. We’re blessed in that we have enough liquid assets that we can create emergency funds on the fly whereas the broad population cannot.
Also, do not fuck with currency trading, and don’t let anyone take our money and do that. It’s black magic.
I call this out in the Cryptocurrency section but it’s worth noting that I currently have lots of fear around holding the USD or any currency that trades heavily tied to it. In general, I’m bullish that America will do the right thing in the long run but we’re experiencing some incredibly concerning and liberal fiscal policies that make me worry about the long term value of the USD. High inflation comes to mind.
Right now, we don’t own any precious metals. However, we should start buying more physical gold. Precious metals act as a hedge against dumb shit that government does with its currency – such as print an insane amount of it. Printing high amounts of currency will create inflation which makes the currency less valuable. Gold is very hard to mine and, as such, the scarcity of it makes it valuable.
A valuable term to know here is fiat currency. A fiat currency is a currency that is backed by a government. The value of this currency is based on the trustworthiness of that government. The important thing to note about fiat currencies is that you can create an unlimited amount of it. Basic supply-demand economics states that the higher the supply of something, the cheaper it becomes. It’s like buying a new car and watching the value plummet the moment you drive it off the lot. Since gold is scarce, hard to obtain, and relatively globally accepted, it is valuable. Buy more of it just in case of a zombie apocalypse.
This is the newest asset class to emerge in a very long time. I won’t go into details around how this whole world works because it’s complicated. However, the one cryptocurrency that we will continue to invest in will be Bitcoin. Bitcoin has a hard limit of how many “coins” can be generated and is completely distributed so that not one person or entity can create new rules surrounding it. This makes it the truest form of currency – apart from the fact that it is entirely digital. The other key advantage of Bitcoin is that it is entirely peer-to-peer. This means that there is no government oversight and never will be. This largely protects it from politicians, governments, taxation, corruption, etc. Tread carefully on the taxation part. Now, it’s not a panacea but it’s worth owning moving forward. In the sci-fi future that we’re heading towards, this will be one of the constants.
We currently hold our cryptocurrencies on a physical Ledger wallet. This will require a passphrase and combination of words, both of which I’ll store separately from this document.
This Twitter thread sums up why we are buying alternative currencies:
I’m sure it comes as no surprise to you that this is on the list. This is super important for this one quote:
“Land. They’re not making more of it!” (this only holds up if we’re a single planet species so tread carefully in the future)
Land is finite. Additionally, humans will always need a place to live (at least for the foreseeable future). Generally speaking, regulations make it difficult to create real estate which is what makes real estate prices go up. As prices go up, it becomes more difficult to obtain which creates a natural barrier to entry.
We have xxxx rental property today. We will continue to be buying more – specifically multifamily units. We’ll be selling xxxx to the existing tenants or in the general market. Those profits will be rolled directly into more investments via a method called 1031 exchange. We are shooting for an 8-10% cash-on-cash return with a combined ROI of 20-26% on rentals.
I’ve laid out a rental property strategy with Jeff that we’re following. It’s very aggressive but will create a high level of independence. Real estate generally goes hand in hand with being financially leveraged so take this approach to invest in it:
- Buy, in cash, properties at under market value
- Rehab them into a desirable state
- Rent out the property
- Refinance it with conventional lending for between 65-75% LTV (loan to value)
- This allows you to get it appraised at a higher rate
- This allows you to cash out the equity in the property
- This allows you to get a lower monthly payment on the property, creating passive cash flow
Jeff will know what to do here. We’re striving to acquire 1-4 properties per year for about 20 years.
Last but not least: invest in humans. Don’t take this in a degrading way. The reality is that we can’t be good at everything and so we must offload responsibilities to those who are better than we are. In this case, it can be a symbiotic relationship.
The prime example here is Jeff. Jeff and his family are obviously one of our best friends. Both of them have a great knack for creating money. However, for them to create money, they also need money. We have money to spare money which is where it becomes symbiotic.
Find more of these people and give them money to not only help them expand but also to generate returns for us. Ravi and Willy are other options as well in their own respective ways. Don’t overextend to invest in them but make it part of the strategy.
Before we get into our broad investment thesis, you need to understand how I look at money. The way I view money is that it is nothing more than a tool. More than that, money is especially interesting because it is a tool that can morph to solve many different problems. As an example, a hammer can really only hammer something. Money, on the other hand, can be a hammer, screwdriver, nuke, vehicle, keyboard, whatever. The key takeaway is that it is amorphous depending on the application or objective you’re pursuing.
Another item worth calling out is generally how I view wealth building as a whole. What I’ve been working to build for us is an engine. The way an engine works is that there is a crankshaft that is linked to all the pistons within each of the cylinders. When gas is combusted in the cylinder, it turns the crankshaft. The more cylinders and fuel, the more power that comes out of the engine.
For us, each piston and cylinder is an asset class. One piston may be gold, another real estate, another bitcoin, and another stocks. Not all are created equal (I’ll go into this later) but each serves a purpose as part of the broader mission: create multi-generational wealth that is reliable, predictable, and infinitely scalable. The fuel? Cash. The more cash we inject into a cylinder, the more wealth it generates for us.
There are many schools of thought on how to invest. A conservative approach will say to diversify across a broad range of assets in order to reduce risk exposure from one asset class failing. The more aggressive investment strategy is by concentrating capital into specific bets with the hopes of massive payouts.
My philosophy is that it’s both – depending on the environment. The key is knowing when to make adjustments. Being rigid to environmental changes is the antithesis of building wealth.
So, with that all of that being said, here is our investment thesis and strategy. I’m attempting to compress this down as much as possible but it’s going to be challenging.
First, we distribute our cash into a wide range of assets that serve a purpose. There is not a correct percentage of distribution but note that this is fluid with the broad market environment. Each investment into one asset class is counter balanced (or even hedged) as a protection for volatility. For example, when we purchase speculative growth stocks, we may also purchase treasury bonds.
As of writing this, our total wealth by asset class breakdown looks like this:
- 19% cash
- About to deploy most of this
- 15% 401k(s)
- Steady growth that is pre-tax
- 6% dividend + speculative stocks
- Steady growth with passive cash flow
- 50% real estate
- Steady + lump sum growth with tax efficiency
- .5% cryptocurrency
- Simultaneous hedge & speculation; likely increasing this to approximately 6-10%
- 8% active trading
- Liquid management for bull and bear markets
- 0% precious physical metals
- We’ll be increasing this to approximately 3-5%
When we first met seven years ago, I lived in a spare bedroom of my Mom’s house. We were both broke. At our lowest point, we lived in that 100sqft room with 2 dogs, ~$430 to our name, and I posted a W2 of around $8,000 that year. We didn’t start getting serious about money until about 4 years ago. Since then, we’ve achieved just over seven figures in net worth. This is a long term game. Trust the process.
Second, and most importantly, our investment thesis is based on similar principles found in scale-free networks. Everything has an interaction point with each other and has influencing characteristics over each other (although not equal in influence). To simplify, you can think of each asset class as a “hub” within a network and their “nodes” are the specific investments we have. An example is real estate as a hub and a node being a rental.
When externalities change the characteristic of that hub, it influences the rest of the network. For example, lower interest rates on mortgages pushes us to have less cash on hand because cash is cheap to borrow from the banks.
The real benefit of thinking in a scale-free network manner is that it allows us to much more fluidly respond to environment changes – or attacks. In normal systems, when the entire network is attacked, they fail much faster. One central principle to our investment thesis is that it’s impossible to attack all of the asset classes we invest in at the same time. An example of this is that it is fundamentally impossible to “attack” real estate and Bitcoin at the same time in the same way. This provides some degree of fault tolerance that doesn’t dramatically expose us.
Third, investing needs to be viewed as a natural ebb and flow of capital concentration in a single asset class to diversification among many asset classes. This entirely depends on the macro environment which is why you see me spend so much time reading about local and global economies.
To understand what is likely to impact our assets, it is imperative to understand history. History provides us a map and humans are incredibly predictable given that we’re governed largely by emotions. Much like in chess, patterns and chess pieces are laid out far in advance which is what dictates the game dynamics.
What is most important to understand about my thinking here is not history for the sake of memorizing the facts. It’s to understand the sequence of events leading up to macro shift. Think of this as history’s “friction coefficient”. The higher the friction between two converging entities or principles, the more explosive the reaction. Understanding what led up to major events allows me to look at present day to find parallels and opportunities (present and future).
Fourth, I look to invest in both boring but constant assets as well as inevitable technological shifts.
Examples of boring assets may be real estate/land and insurance. They’re not making any more land (at least on this planet). It also happens to be boring because the price inches forward each year. With insurance, humans will always be idiots and do dumb shit. There won’t be a time where insurance of all types is not needed. (Fun fact, there is terrorist and pandemic insurance that you can purchase.)
Examples of inevitable technological shifts are areas such as Artificial Intelligence (AI), genetic engineering/immunology, internet, and energy. AI has capabilities that no human possess and will ultimately displace a lot of jobs, making it valuable. Genetic engineering and immunology will inevitably be the way of the future to replace broad spectrum drugs, human deficiencies, and more. Internet today is generally provided to the masses via cable (expensive, limited in dimensional space, etc.). In the future, technologies such as Starlink will blanket the globe with internet. I believe this will cause a massive shift in how and where humans live (this dictates some real estate investment theories). Dominate energy shifts generally take about 50 years to be completed. Shifts happening right now are oil to natural gas. We may experience a rapid shift towards electricity (solar + central mega battery storage + home battery storage).
Here is a list of areas of investment that I’m thinking about:
- Quantum computing – not only those who are researching it but also the materials required to perform quantum computing. Specifically, He3 and He4 because they’re part of a highly regulated industry and only a handful of companies are authorized to distribute them. Quantum computing will change everything for humans so we should be betting on them.
- Electricity production and storage – Energy transitions typically take about 50 years to become the dominate player. I believe the next wave is going to be solar and batteries. Tesla is a leading force here but careful about their accounting practices. I’m also exploring other up and coming companies making strides in this field.
- Genetics & Immunology (B/T-Cell) – I’m extremely confident that genetics, specifically the genetic immunology field, is going to be massive in the future. Buying biotech stocks is akin to gamlbing though so my recommendation is to not fuck with this field unless you are deep into the research. It takes real time to read through the clinical trial reports, understanding how the trials were constructed, understand the drug pharmacology, etc. Obviously you know a good portion of this since you’re a doctor but it’s worth calling out that it takes a lot of research. I’m very confident that the HLA genes, B/T-cell immunology, and Crispr (in 10-20 years) will yield incredible advances. For now, I’m waiting patiently for more promising results to come to fruition.
- Artificial Intelligence – I work in this field as the head of product so obviously I’m bullish on this field. We’ve made exponential strides in this field and we’ll continue to make that. Specifically, the field of unsupervised learning will be the future. Again, complicated field to invest in and, honestly, most of the leading companies are still private so it will be hard to directly invest in. My recommendation here is to provide seed capital to a VC firm that specializes in this or give one of my tech friends money to get it into the right hands.
- Defensible drug companies – There is always going to be a need for your Johnson & Johnson, Gildeads, AstraZeneca, etcs. In the existing USA healthcare system, they provide an indispensable amount of capital, political strategy, and distribution network that can take unicorn drugs to the masses for massive gains. For example, one of the World Health Organizations “Essential Medicines” is Humira. Humira created nearly $20B profit a year and is owned by AbbVie – a company we invest in and produces dividends. They’re very boring stocks but I also view them as “set it and forget it” assets to purchase.
- High barrier real estate – I’m particularly keen on purchasing real estate in areas that have either natural or regulatory barriers to building. An example of this is Utah where you have the majority of the population in a valley between two large mountain ranges east/west and difficulty building at scale north and south due to geologic barriers (lakes). Another example of this is Colorado where we have an insanely dedicated portion of the population dedicated to never building above 5 stories and have created huge regulatory hurdles to going above that. Investing into these high demand areas with rental properties means we get the benefit of getting passive income from rental but also significant asset appreciation that we can borrow against for additional investments or cash out for lump sum payments.
- Decentralization & Bitcoin – It’s no question that I have contempt for our government – regardless of the administration. No matter if you’re left or right, as long as the federal reserve exists and operates as an independent entity, we are going to have issues with money. Apart from that, the idea of “globalization” has completely fucked the majority of Americans since the 1970’s on many fronts. As such, I think it’s important to invest in an asset class that is not only decentralized to the humans specifically but is also protected against regulatory overtake. Bitcoin provides the highest probability for success here so I’m bullish that this will be a good long term asset to own.
- Communication & content consumption shifts – The main areas that I believe are going to shift here is the infrastructure (literally the internet infrastructure – eg. Wireless) and the mediums of content consumption. On infrastructure, gigabit internet via satellite everywhere is going to completely destroy so many companies – some of which we own (eg. Verizon, AT&T). The key is to watch the trend and once they start to cross the majority threshold, make the investment shift. On content consumption, I’m looking specifically at trends such as the complete decimation of mainstream media (Fox, CNN, etc.) and the huge shift of consumption on fascinating longer form content like podcasts. I believe this trends will continue over the next decade and we’re just seeing the early stages of it. Spotify is a great example of a company starting to make large investments into this area.
**TO EXPAND FURTHER**
With the first principle being more of a breakdown of our asset distribution, the key takeaway is that the remaining 3 principles are the legs of a stool that prop up our investment thesis. They are the foundation for our staggering wealth growth and are inextricably intertwined with each other. They have massive influence on each other in many different capacities. Having competence and understanding in each is key.
The largest player in how we invest is macro-economic indicators and changes. This is the shit that I babble on about that I know you have no clue about or care about but is beyond important.
What I’m going to highlight here, in very brief detail, are the ones that I’m most concerned about over the next 10 years.
China-USA Relations: You know my stance on this but I cannot stress how fundamentally important it is to understand the level of tension between these two countries. It’s imperative that we keep an eye on the following items:
- Import/Export Tariff rates for both countries
- Manufacturing Indexes for both countries
- USA = ISM index
- China = Caixin index
- Currency Spreads
- China relations with our allies (Australia, Great Britain, Germany, Mexico, Canada)
- China’s investment into Suez Canal
- We invested massively into the Panama Canal; China invested massively into Suez Canal
- History repeats itself; watch EU supply chain
- China’s investment strategies into Africa
- China’s efforts in space
- China’s biologic and genetic researcher and development
These are the things that basically control how cheap it is to borrow money. Keeping a close eye on interest rates is extremely important. A basic Google search will help showcase where money is flowing.
You may hear a lot about negative interest rates in the future. What this means is that if a bank holds money, they are effectively penalized for doing so by the government. This is an attempt at pushing for capital to be allocated. This will backfire.
Supply Chain and Commodities
Keep a close eye on the supply/demand as well as volume of trade rates. Some good indicators of this are:
- Baltic Dry Goods Index
- Historical price of beef + supply chain disruptions (know exactly how food gets to the table), (talk to Willy)
- Current Price of Crude Oil + Gas
- Futures Contract price of crude oil + gas (talk to Willy about this)
Local vs. Country Housing Market
Interest rates have a lot to do with this but understand how many new housing developments are going up, specifically for which housing type and at what permit issuance rate (how backlogged are they?). For Colorado local markets, talk to Chris.
For countrywide, take a look at:
- HMI index
- HPI index (housing price index)
Talk to Jeff. Follow Keith Wasserman and Moses Kagan.
Things to keep an eye on:
- Ukraine and Libya – Lots of proxy wars currently happening there
- Russia – They’re sort of fucked but whatever, just keep in tune with the news there
- Germany – They’re an odd ally.
- Great Britain – They’re slow as fuck to do anything but they removed themselves from the EU so things may change.
- Mexico and Canada – Take notice of any major sentiment changes. Look through the day-to-day pedantic bullshit. Rule of thumb is if we went to war, are we friendly enough that they will support us? Are we expanding our trade terms with them?
- The Middle East – whatever. Hopefully we don’t make the same mistake twice.
- Argentina & Brazil – We do a lot of commerce with them. Keep an eye on relations. Argentina is always in financial turmoil. Brazil is going through alt-right, alt-left political dichotomy struggle. This too shall pass.
- Australia – Good allies. Keep an eye on sentiment.
- Japan & South Korea – Should be all kosher. Note major changes.
- India – Insanely slow-moving politically but take note as they’re economically at war with China and we’re making moves to help.
- 401k Accounts
- Physical Ledger wallet
- Real Estate
We should strive not to be overleveraged. In fact, ideally, we should have $0 debt. That said, I would say that in broad strokes that we shouldn’t go higher than 30% leveraged relative to 3-year moving average income. I say a 3 year historical because our incomes often shift so we don’t want to over-index on one good year.
Stay very low leveraged when interest rates are >5%. Expand out on leverage when <5% but only if what we’re going leveraged on 1) generates at least a 25% one-time ROI or meets at least a 15% monthly spread (spread meaning the difference between what we’re being paid vs. what we owe).
What to do if something goes wrong
Obviously not the topic that I want to talk about but need a strategy for any scenario. The first thing to do is to start the process of collective life insurance. I have no idea how much this will be but it should be between $500k-$1M I believe. I imagine this will take a few months to get going.
Note: you are the 100% beneficiary on every account.
In sequence do the following:
- Get access to all active trading accounts. Sell everything.
- Take that cash and hold on to it.
- Work with Jeff on figuring out our rentals.
- It’s likely we want to either have Jeff manage them full time or liquidate them entirely and plow our money into Jeff’s real estate strategy as a Limited Partner.
- This will give Jeff a ton of capital while providing you consistent long term returns.
- Work with Kate O’Dea (accountant) on tax efficiency program as mass liquidation will create large capital gains exposure.
- With our rentals, do a “Student Loan Cash-Out Refinance”. This will move your student debt directly onto our rentals.
- Don’t pay off the house because it’s a cheap interest rate. Feel free to pay down to more than 80% LTV and then refinance for a smaller monthly rate.
- Do the following with Life Insurance money
- 40% Rentals (work with Jeff)
- 30% into dividend fund + growth (work with Willy; growth should be largely tech)
- 5% into physical gold (get safe and guns from Willy/Jean)
- 5% into cryptocurrency
- 20% cash
I’m sure I’m missing something but the big take away is that if something happens to me, you need to accomplish the following:
- Get as close to debt-free as possible (minus cheap debt)
- Invest in a passive cash-flow generation to retire early (dividends + real estate + humans)
- Invest in long term retirement & hedging (gold + cryptocurrency)
Rule of thumb for all investments and life advice: this too shall pass.