This Is How My Mentor Set Up My Wealth Ep 362

In the episode, the host shares wealth management advice from his mentor who sold a company for $3 billion, focusing on investment strategies for entrepreneurs. He discusses the importance of understanding the only two actions possible with money—buying or lending—and emphasizes risk reduction through prioritizing capital stack position, transparency, and liquidity. The host outlines four investment considerations: yield, appreciation, tax advantages, and capital preservation, stressing the latter as a defensive strategy echoed by successful investors like Charlie Munger and Warren Buffett. He then details his personal wealth allocation across three buckets: passive index funds, multifamily real estate for tax benefits, and cash or speculative investments for opportunistic deals. The approach aims to preserve wealth while allowing for opportunistic growth, reflecting a balanced strategy between active business engagement and passive investment management.

• Speaker A discusses the advice received from a mentor who sold his company for $3 billion.
• The advice includes how to set up wealth and investment as an entrepreneur.
• Speaker A intends to share components of the wealth setup explained by the mentor.

My mentor sold his company for $3 billion, and I asked him, how should I set up my wealth? This quote introduces the context of the discussion, indicating that Speaker A is seeking financial advice from a highly successful individual.

• According to the mentor, money can either be spent on purchases or lent to earn interest.
• Understanding these two uses is crucial for making informed financial decisions.

There's only two things that you can do with your money. You can either buy stuff with it or you can lend it to people and get interest on it. This quote summarizes the mentor's basic principle of money usage, which serves as a foundation for wealth management strategies.

• To decrease risk in lending, it is important to be at the top of the capital stack (cap stack).
• Being a preferred creditor or having preferred stock ensures priority in repayment.
• Transparency provides clear access to financial information, reducing risk.
• Liquidity allows for quick conversion of assets into cash, lowering risk.

The first is that we make sure that you are the top of the cap stack. This quote highlights the importance of being a preferred lender or investor to minimize risk.

So that's what kind of reporting do you have? What kind of relationship do you have? How clearly do you have access to the books? Speaker A emphasizes the need for transparency in financial dealings to reduce risk.

Is liquidity. And that means that you can get in and out of a position very easily or very quickly, or you can translate one asset into money and back into it very quickly. Here, Speaker A defines liquidity and explains its role in reducing investment risk.

• There are four key aspects to consider for investments: yield, appreciation, equity growth, and cash flow.
• Yield refers to the regular income an investment generates, such as rent from real estate.
• Appreciation is the increase in value of an asset over time, often relying on the greater fool theory.
• Speaker A distinguishes between assets that provide cash flow and those that are hoped to appreciate in value.

There's four pieces to what you need to look at for all your investments. The first is, what is the yield? Speaker A begins to list the critical factors to evaluate when considering investments.

And that's appreciation. So you have equity growth. This quote differentiates between yield (ongoing income) and appreciation (increase in value) as investment considerations.

• Investments are chosen with the expectation of an increase in value.
• The potential appreciation is a key factor in making investment decisions.

"r whatever, those would be things that we're hoping that increase in value."

This quote emphasizes the fundamental goal of investing, which is to select assets that are expected to rise in value over time.

• The tax structure of an investment can significantly impact its attractiveness.
• Investments with better tax treatment based on laws are preferred.
• It's important to consider how to structure investments for better tax treatment.

"And what I mean by that is if you have two different investments and one of them has a better tax structure based on laws, then that would be a better investment."

The quote highlights the importance of understanding and utilizing tax laws to maximize investment returns.

• Preservation of capital is crucial, especially for high-net-worth individuals.
• Wealthy investors prioritize the return of capital over the return on capital.
• A defensive strategy is common among successful investors.
• Avoiding losses is a primary concern, as one poor decision can negate a lifetime of good decisions.

"They are far more concerned with making sure that they keep their money than that they grow the money."

This statement underscores the principle that safeguarding existing capital is more important than seeking high returns for seasoned investors.

• The speaker's investment approach involves setting up buckets of wealth.
• Acquisition.com is the portfolio company where their companies are held.
• The portfolio is designed to generate positive cash flow.
• The investment is divided into three buckets, with indexes being the first and comprising 50% of the wealth.
• Indexes are chosen for their passivity and long-term bullish outlook on the economy.

"So the first is I have acquisition.com. Which is our portfolio company. That's what all of our companies sit in, all right?"

The quote introduces the structure of the speaker's investment vehicle, acquisition.com, which houses their portfolio companies.

• Indexes are a passive investment choice.
• They allow investors to allocate money efficiently and benefit from long-term economic growth.
• The speaker advocates for index investments due to their simplicity and potential for capital preservation.

"I don't have to worry about Coca Cola and how it's going to run. I'm not on their board meetings. I'm not giving them insight, right? I let Uncle Warren do that for me."

This quote illustrates the passive nature of index investments, where investors do not need to be actively involved in the management of the companies within the index.

• Diversification across different asset types can mitigate time delays in capital allocation.
• Real estate investment, specifically, has inherent time delays due to the process of finding, reviewing, and securing deals.
• The speed of capital allocation can influence returns, though rushing decisions can lead to mistakes.

"Portfolio, over my entire career, because let's say I only did real estate, for example. Well, there's a time delay to allocate cash flow in real estate." "And so just from a context or perspective for you, the speed of allocating capital also can increase the returns."

These quotes emphasize the importance of diversification and the impact of time on investment returns. Diversification helps manage the time delays associated with specific investments like real estate, while speed in capital allocation can enhance returns when done judiciously.

• Multifamily real estate is preferred over single-family due to the ability to invest in more units at a time.
• Being designated as a real estate professional allows for significant tax advantages through depreciation.
• Depreciation on real estate can offset regular income, leading to tax savings and increased net worth.

"And the reason we do this, multi specifically, people are like, why don't you do single family home? Because I have to buy, like, two houses a day." "So I'd rather buy 300 units at a time and allocate our capital in that way."

Speaker A explains the strategic choice of multifamily real estate investment over single-family homes due to the efficiency of capital allocation and the scale of investment.

"So let's say I buy a building for $10 million, all right? And let's say I make $10 million this year. I might be able to take an accelerated depreciation of about 40% on this against my income."

This quote details the tax strategy of using accelerated depreciation on multifamily real estate investments to offset taxable income, thereby saving on taxes and increasing net worth.

• Index funds offer the opportunity to take low-interest loans against them.
• Secured loans against index funds can be obtained at approximately 1.5% interest.
• The ability to borrow against index funds at low rates allows for further investment opportunities.

"But when you're looking at indexes, for example, one of the things that's awesome about indexes is that you can actually loan money or get loans on your indexes at about one and a half percent."

Speaker A highlights the benefit of index funds where investors can secure low-interest loans against their investments, providing liquidity and investment capital.

"So let's say I had $10 million here. Then it means that I would be able to take five to $6 million of this and only pay one and a half percent on that."

This quote explains how an investor can leverage their index fund investments to borrow significant capital at a low-interest rate, which can then be used for other investments, such as real estate.

• Efficient use of capital and investment strategy can lead to significant wealth growth.
• The expectation is to earn a return on investment that exceeds the low cost of borrowing.
• Making a return that outweighs the interest expense on borrowed funds is a basic measure of investment success.

"If I can't make $50,000 a year or $75,000 a year. If it's one and a half percent on that money in a year, then I probably suck at investing, and that's okay. But you get the idea here, right?"

Speaker A uses a rhetorical situation to illustrate the expectation that an investor should be able to generate returns that surpass the cost of borrowing, highlighting the importance of investment acumen.

• Discusses a three-bucket investment strategy.
• Emphasizes low-cost, low-risk investment in indexes.
• Suggests having cash on hand for entrepreneurial opportunities.
• Balances between index funds, multifamily real estate, and cash/speculative investments.
• Aims to preserve wealth while still enabling opportunistic growth.

million, then I would make $500,000, and it would cost me $50 to $75,000 per year to carry that money, right? It's a great deal for me, and that is why I like indexes a lot, too, is because it actually allows us to still reinvest in the other things with super, super low cost, low risk money.

The quote illustrates the attractiveness of index funds due to their low cost and low risk, which allows for reinvestment in other ventures.

• Combines cash reserves and speculative investments into one category for simplicity.
• Highlights the importance of having "dry powder" for seizing investment opportunities.
• Describes a recent profitable deal due to having cash available.
• Associates having cash with being entrepreneurial and the ability to fund deals quickly.

Now the third bucket here is cash spec, all right? And technically, cash and spec are different things, but I'm just going to put it here for sake of explanation. And the reason he told me to put this here, he's like, there's always going to be things. He's like, you're entrepreneurial, right? He's like, you're always going to have little deals that come up and you want to have some dry powder, which is the term they use on the sidelines so that you can deploy that opportunistically, right?

The quote explains the concept of maintaining cash reserves for speculative investments, referred to as "dry powder," to take advantage of emerging deals due to the speaker's entrepreneurial nature.

• Distinguishes between wealth preservation and aggressive growth strategies.
• Explains that the majority of net worth is generated through active involvement in companies.
• Emphasizes expertise in niche industries as a means to outperform the market.
• Describes the investment strategy as more focused on preserving wealth than seeking high-risk growth.

And so it's not actually low risk, but it's still the vast majority of your net worth. Which is why we can, quote, beat the market by a big amount. Because we're actively involved in each of these companies. We have niche expertise in these industries, and we know how to grow them at a much, much faster rate than what the market does. But this is much more a preservation of wealth strategy, especially these three buckets here, than a true growth strategy.

The quote emphasizes that while the speaker's investment strategy involves some risk, it is mitigated by their active involvement and expertise in their companies, which allows for substantial market outperformance.

• Stresses the goal of growing the portfolio to a billion dollars in revenue.
• Seeks to reach and assist more entrepreneurs.
• Plans to invest in businesses of entrepreneurs they help.
• Aims to provide value to entrepreneurs through upcoming initiatives.

The reason that I make this video and the reason this channel exists is because we're trying to grow our portfolio to a billion dollars a year in revenue. And the only way we can do that is by reaching more entrepreneurs and helping them out and then hopefully getting the opportunity to invest in their businesses.

The quote outlines the speaker's motivation for creating content, which is to expand their portfolio by engaging with and supporting other entrepreneurs, potentially leading to investment opportunities.