Afford Anything - [I] Why Young Investors Focus on the Wrong Things [GREATEST HITS]

Starting point is 00:00:00 Merry Christmas Eve. It is Wednesday, December 24th, Christmas Eve. We are running a five-day special for the five letters of F-Double I.R.E. We kicked off on Monday with the letter F financial psychology by airing an interview with the behavioral finance guide, Dr. Daniel Crosby, and we followed it up on Tuesday with the first letter I increasing your income with Jeff Wetzler on The Art of Negotiating. Today, Wednesday, Christmas Eve, we are airing an interview with Nick Majuli from Of Dollars and Data in honor of that second letter I investing. Now, all of the interviews that we are airing this week come from our greatest hits vault. Nick's been on the show multiple times. Today's episode originally aired on April 13, 2022. Nick is a Stanford educated data scientist who has written multiple books on the data behind how to build wealth. And I am thrilled to share it with you

Starting point is 00:01:04 to commemorate the letter I investing. Enjoy. Hi, Nick. How you doing, Paula? I'm great. How are you? Doing good. Nick, one mistake that you have publicly talked about was that when you were in your 20s,

Starting point is 00:01:21 you made the mistake of prioritizing your investments. And that sounds counterintuitive to everyone who's listening. Can you describe what you did? and why it was erroneous in hindsight. Yeah, so when I first got out of college, you know, I started reading a lot of investment books. I was like, I'm going to get this right. I knew my asset allocation. I really obsessed over it, kind of.

Starting point is 00:01:41 I was like, oh, do I need to have 10% in bonds or 5% or 15? Maybe I'm not taking off risk. All these concept that you read about in theory and now you're going to seeing it play out. Now you actually have money on the line, right, versus just reading about it in college, right? So started earning just a little bit of money, you know, started saving and all that. And I spent so much time, I had spreadsheets, I had net worth projections, all these crazy things I had. And I didn't realize, like, spending all this time on this thing, which was kind of cool in its own right. But like, at the same time, I was going out my friends in San

Starting point is 00:02:08 Francisco and just parting all night. And I'd easily spend $100. And so like, let's say, for example, when I first started, like after, you know, maybe a month or a couple months, I had probably $1,000 in my 401k, right? Let's say I could get a 10% return on that 401k, right? So in a year, I could probably earn about $100, right, investment returns, assuming I just kept a thousand. So in one year's investment returns, I was blowing in one night like with my friends just going out, like just regularly. And so what I realized, I only, I didn't realize it then. I didn't realize much later, probably five, six years later. Like, why was I obsessing over my investment so much when like what I really should have been focusing on was like either my spending

Starting point is 00:02:44 or like, how could I raise my income? How could I improve my career? Things like that. And so when I say I made a mistake, I don't think I made like a major flaw, but I just, I could have been more optimal. I could have said, you know what? It doesn't really matter what my investments are doing right now because I don't have that much money yet. And for a lot of young people, that's going to be true. And I know people like, hey, I got $500. Like, where do I put it? I just saved it.

Starting point is 00:03:02 And like, it's good to be thinking about that and be like, that's a positive, you know, you kind of want to think about investment. It's good that you're even thinking about it. At the same time, like, I think it's going to be more impactful for a lot of young people to focus on their career and see kind of how they can get their earning power higher over time because that's going to allow you to save, oh, 500. No, now you're going to be saving. Oh, I can save $5,000.

Starting point is 00:03:20 Right. That's going to be far more impactful for you than what you do in the short run. And don't get me wrong. I know about compounding and doing all that. Trust me, I know that matters when you start earlier, not telling people not to get invested. Of course, I would never say that. At the same time, though, don't obsess over it. Just put it in something. Don't worry about if the mix is perfectly right. Just kind of get started and focus on, like, where you're spending your time. And as you get older and actually have more money invested, then you can start worrying about, like, what's the precise asset allocation? That's where it starts to matter. Right. So the thing that people overlook is that your contributions are the single biggest determinant of your success. especially early on. I mean, later, of course, like, later it's definitely going to matter like what your investment returns are. You know, one of the best stories. So this is going back to something Morgan Housel said is like, if you took Warren Buffett and you gave him the same returns from age 30 to where he is today or, you know, wherever he wrote the article a couple

Starting point is 00:04:07 years ago, he's like the reason he got to where he stayed because at age 30 he had like a couple million bucks with him. So this was back in like the 60s or something. The same returns, he gets to like 60, 70 billion or whatever he had at the time, right? But let's say he only had like 100,000. He had like, you know, $10,000 at age 30. Like, you don't have a billion dollars at age 70 years. It's like that initial, having that initial mass of money was much more important for Warren Buffett in the long run than his investment returns. So they both matter, but like having that initial set of money is going to matter a lot more. Right. But I'll make the devil's advocate argument here, and this actually is something that came out of your book,

Starting point is 00:04:40 you also make the point that if you ask people, if they would want to trade places with Warren Buffett today, with Warren Buffett being 87 years old, right? If you could have all of the wealth of Warren Buffett, but also the age of Warren Buffett, a lot of people would say no. A lot of people intuitively understand that time is their most important asset and would not choose to be 87 or 88 or however old he is, even if it meant having all of his wealth. And so the fact that you were blowing 100 bucks a night going out in San Francisco, those are cherished memories in your life. Those are experiences. And we know that experiences spending money on experiences derives a certain level of happiness.

Starting point is 00:05:22 So would that not be a laudable form of spending? Oh, of course. When I was making this argument about me not behaving optimally, I was not saying I shouldn't have been going out with my friends. And that's not kind of the takeaway I want people to have. I'm sorry if that's kind of what I was leading for. The takeaway was I shouldn't have been spending so much time looking at my investments. And there's a couple of hours I might have been looking at a spreadsheet every week.

Starting point is 00:05:45 I could have been learning a new skill or doing it. something else. Yeah, it's not that my spending was the issue, is that my, where my focus on income was not the issue, right? It's like what I was doing with my time, like, instead of focusing on the investments, I should have been focusing on, you know, how can I grow my income? That's kind of the thing I think would have been better. It's not like, oh my gosh, I never should hang out with friends. It's just, I'm trying to show the absurdity of it because I went out basically every weekend. And so because of that, like, you can see like, you know, I could have skipped one weekend, yes, but like, it's not about that. It's more about, like,

Starting point is 00:06:13 thinking about, like, where are you spending your time. So you bring up this example of Warren Buffett. I think that's why it's such a useful example because you, you intuitively understand you wouldn't trade places with Buffett today because, like, yeah, you don't have as much time now. And Warren Buffett sounds like, would Warren Buffett give up half his fortune to be like 30 or 35 today? He would give up all of it. He'd probably go into debt. I'd actually argue he would go into massive amounts of debt to be 35 today. Like he would probably say, give me a million bucks in debt. I don't care. Like he could get out of it. I'm pretty sure. Like imagine you take his connections too. So he just saw his brain, but he gets to go back in time and like, not back in time, but he gets

Starting point is 00:06:47 to go, you know, maybe 35 again, I think he would go into debt. And I think a lot of people who are like that would do the same. Yeah. And so all of that leads to one of the first rules that you introduce, which is to think about if your savings exceeds your investment income or not, can you talk about the distinction between that in terms of how the people who are listening to this should be thinking about what they should be focusing on? Yeah. So kind of going back to me, like where I should have been spending my time when it was in my early 20s, I kind of came up with something called the save invest continuum and basically all you need to know about like everyone's on this continuum and it's a question of like you know where you are kind of based on two numbers right

Starting point is 00:07:25 and they're all relative to your life so the first number is like how much could you save in the next year like reasonably so let's say you can save 500 bucks a month you do that for 12 months that's $6,000 so that's number one six grand right that's how much you could save and then how much can your money earn you in the next year so let's say you have $20,000 invested you're going to get let's say a 5% return, your expected 5% return, like in an average year. Okay, so that's $1,000. So that's your second number. Your expected return is $1,000.

Starting point is 00:07:54 So now compare those two, which one's bigger? The $6,000 expected savings or the $1,000 expected investment return. And in this case, because the $6,000 is bigger, you need to spend more time focusing on how you get and how you can raise your savings and then put that into investment so you get your investment income up over time. You know, when I was starting this whole thing, like, you know, in my early 20s, my expected investment income was, as I said, like $100 or something, maybe $500, or whatever, it was small, right?

Starting point is 00:08:20 In a given year, it was very, very small. And that's with a 10% return. So I was actually pretty liberal with the return. But my expected savings was much higher. I could probably save a couple thousand dollars in a year, right? So a couple thousand versus $100, it's not even close. I should have been focusing much more on what I was doing, how I was raising my income to save more money.

Starting point is 00:08:37 And that's what you need to do. Because over time, you're going to see this flip, right? There's like the same invest continuum. There's also a phrase I use to kind of represent this. say savings for the poor, investing is for the rich. Now, when I say poor, I don't mean that in absolute terms. I always mean this in relative terms. And I mean this relative to yourself. Like, if you do this properly, if you're in your early 20s, you start saving money, investing, your wealth starts to grow, you will be relatively richer in your future than you were when

Starting point is 00:09:01 you started. It doesn't mean you're going to be in the 1% or you're a billionaire. It doesn't mean any of that. It doesn't mean you're in abject poverty. If you're living in San Francisco is a 22 year old college grad, like, no, that's not what I'm getting at. It's about the relative difference. And so when I say that is like, you're going to see over time in future years, if you do this right, like when you're older, you can lose more money in a year from your investment returns than you could ever expect to save. Like if there's a bad year in the market, like there's nothing you could do to like make up for that. Like let's say you have a $10 million investment portfolio hypothetically is a really extreme case, right? A 10% drop is a million

Starting point is 00:09:34 dollars. Like how are you going to save a million dollars after tax in a year? It's not possible for most people unless you have a very, very high paying job. For most people, let's say you could, even if you could save $100,000, which is a lot of money, that's still 10x more. You know, taking a 10% drop, that's not that outrageous. Like those things happen pretty often. I think when you think of it that way, you start to realize like, oh my gosh, no wonder. Like your investments don't really matter as much when you have very little invested, but as you kind of have a lot more invested, that's all that matters because it can have a bigger impact on your wealth than anything you do personally. So that's kind of what's happening. Over time, you should see that transition.

Starting point is 00:10:07 So early on, like, I'm at a point now where I'm kind of in the middle where I kind of have to focus on both. I can't just focus on one another, but I've been working for 10 years. So I should expect something like that around this 10 to 20 year mark. You should start to see that happen. And so what does it mean to focus on both for the people who are listening who also find themselves in the middle? And they hypothetically can save $6,000 a year and their investments will return around $6,000 a year, right? They find themselves right at that midpoint. What should they do in order to focus on both? You just got to get educated in both. In terms of the saving stuff, you got to be like, what can I do to, you know, improve my career, do things I care about, whatever that is, there's that piece.

Starting point is 00:10:43 On the investment side, you do have to care about your asset allocation. You have to care about, you know, timing decisions and like, what are you doing? Are you making timing decisions or not, etc. Right. The thing is, when you're very young, it doesn't really matter as much what you're doing with your money on the investment side. But as you get very old, that's all that matters. Like, I think if you retire, you have no income. You have no way to save, right? Right. Or maybe you have social security or something. But once you have very little savings, then all that matters is the market. And so you have to really think about. that a little bit more and kind of understand what you're doing tax things. There's all these things

Starting point is 00:11:12 there's taxable consequences and I'm not trying to get into all of that right now, but you can understand how like your tax consequences of your investments probably matter a lot more when you're 65 than when you're 25, right? So thinking about those things is what's important. So people in the middle just, I mean, there's no easy answer. It's the toughest part. It's like the middle, middle life is the toughest part of life in general, but let alone because like for on a financial perspective, because you have to care about everything. You can't have to care about everything. You can't just focus on one or the other. Right. And if you are in that, space where you find, regardless of your age, you find that you've amassed a large enough

Starting point is 00:11:43 portfolio that your investment returns are greater than any amount that you could reasonably save in a given year. Could that be the new definition of retirement? The only problem with that is it doesn't take into account your spending. Let's say I could save $1,000 in a year, but I could get $10,000 from my investment portfolio. If I'm spending $20,000 a year, then you can see like that's a problem, right? So it doesn't solve that. The whole point of the saving invest continuum is figuring out where to focus. That's the point of that. It's just like, where should I spend my time, right? Everything kind of goes back to time eventually. It's your most important asset because we just talked about that. But figuring out where you spend that time is one

Starting point is 00:12:18 thing. But yeah, whether that's, I don't know if you can consider retirement, you need to take into account your spending, right? And if you start to spend more, you can save less, but then is your investment income enough to offset that, right? And when it is, it's good. But if it's not, you got to saving, you know, until you get there. Right. Yeah. I know, I guess in my head, I'm imagining fairly large numbers, and I'm imagining, you know, if a person gets to that point where your expected investment returns are dwarf, anything that you could reasonably save, I mean, oftentimes I hear my audience say, how do I know when? And that could be one of many signals that might indicate a certain level of when. Yes, of course. Yeah, well, I think there's the crossover rule.

Starting point is 00:12:58 That's a great one. Vicki Robin, she talks about that in your money or her life, and she's just like, once your expected investment returns surpass your expected spending over a given period, then you're kind of at your crossover point where your investments basically can pay for your lifestyle, right? Of course, if there's a market crash or something that's not always true, there's a little bit of de-risking you have to do, but you could imagine there's some people out there that are at that point. That's a decent proxy is once your investment returns exceed your spending.

Starting point is 00:13:24 Right. Let's talk a little bit more. So you talk both about how to improve your savings rate and savings by that definition is your income minus your spending, right? So it's not necessarily frugality. It's increasing the gap between what you earn and what you spend. One of the things that you talk about is the 2X rule. Can you describe that? When I'm talking about the 2X rule, I think there's a lot of stuff in the personal finance space where a lot of people are guilted into, you know, you have to, oh, you don't buy your coffee, you're paying away a million dollars. You've heard, I mean, you've heard a lot of these

Starting point is 00:13:57 things. You know, you should reuse your dental floss or make your own laundry. So I've heard it I'm like, is this the new thing that they're pushing, right? And so I know I've read your work, Paul. I know you're against a lot of this guilt stuff. You can't afford this. You can't afford that. I understand you're all against that stuff as well. And so for me, I think I am trying to come up with different ways that people, different tricks people can use to kind of get them out of that guilt.

Starting point is 00:14:18 There's this spending guilt that's out there. And so one of the tricks I use, if I'm ever splorging, it's not for something like when I go to buy eggs or something, I don't care about that, right? But like, if I'm splurging, like, if I want to take myself out, go out for a nice dinner, buy myself a nice pair of shoes or something. something, right? Whatever it is, if I ever spend a large amount of money, let's say I'm going to spend $300, $400, 400 bucks, whatever it is, I make sure to take the same amount of money and I either invest it, right? So let's say, so if I'm going to buy a $300 pair of shoes, like a nice pair of dress shoes, I will take another $300. So 2x my original purchase price and I will invest it in something or I can donate it. There's different ways you can do this to kind of get

Starting point is 00:14:54 rid of the guilt. So you don't feel guilty about buying the shoes because you're like also investing for your future or you're also helping a good cause or something like that. So I think this rule is really effective, not only from like an, you know, affordability perspective, because if you can save two X for it, then you can obviously afford the first X, so to speak. Right. But also it really eliminates spending guilt in a lot of ways. And I think that a lot of the personal finance issues out there are, you know, issues that are in people's heads and they get, oh, should I not spend this? And they're very frugal and there's nothing wrong with being frugal. But there are times on, hey, you want to support it on yourself a little. It's okay. And this is a way to kind of,

Starting point is 00:15:25 you know, allow yourself to do that. You also talk about the importance of saving roughly half of your future raises. But there's actually a more complex formula that you walk through. Can you walk us through this? To be honest with you, there isn't actually like a hard formula because it's, I had to simulate a bunch of data and then I basically solved all the answers. I don't know. There's no form. I can say, give me X and I'll give you Y. It doesn't, it's not a simple mathematical formula because you're, you're basically taking someone who's like in a steady state, hey, I'm saving X dollars per year. I'm making it to my retirement goal. They're on basically a path. They're on this like equilibrium, perfect world where you get the same investment return every year, you're saving

Starting point is 00:16:04 X dollars every year, you're moving to this path, right? So you can just imagine like someone's in a perfect equilibrium state, they're going to hit their retirement, they're going to spend four percent of your retirement, et cetera, and everything's perfect. Obviously, this is not realistic, but just go with it for now. Right. Now let's say there's a positive shock to the system. And when I say positive shock, I just mean you get a raise, you get a bonus, right? So what should you do to make sure you still land at the same equilibrium, right? So you're saying, if I got a raise or a bonus, then that's only good, right? Because if I save the entire raise, then I can just retire earlier.

Starting point is 00:16:33 That's one option. But what if you want to spend a little bit of the raise? Like, you know, if you spend all of the raise, the problem is you're actually going to retire later. It's very counterintuitive. How is that possible? How of me spending all of my raise means I'm going to retire later? Well, assuming you want to spend the same amount of money over time, right?

Starting point is 00:16:48 You want to have some sort of like lifestyle. Maintenance. Yeah, maintenance, exactly, you know, over time. Assuming that's true. If you're spending this raise, you know, you weren't spending that money. in the past, but now you are, that means you have to save more to keep spending in that level in retirement. So there's only two ways you either spend your raise. And as soon as you hit retirement, you drop your lifestyle back to what it was before the raise, right? Let's say you have another

Starting point is 00:17:10 10 grand a year to spend, right? And you spend that, I don't know, on, I'm just making something. Let's say you buy a jacuzzi every year for $10,000. Just buy a new jacuzzi every year. That's just part of your lifestyle, right? And then once you hit retirement, you can't do that anymore. The jacuzzi's gone. You have to go back to however you live before jacuzzi time, right? You could do that. But let's say you want to keep doing it. that jacuzi stuff forever, then you're going to have to find a way to like, you're going to have to work longer or something like that. So I think that there's no real formula for it. Generally, I find that as long as you save at least half of your raises, you will be fine. Like for most

Starting point is 00:17:43 savings rates, as long as you save at least half, if not more, then you can stay kind of, you can keep your spending pretty constant over time. Like, you can even allow your spending to go up because, remember, if you save half, that means you're spending the other half by definition. I think it's a cool way to think about this because so many people in personal finance space just say, hey, like, no, you should save every dollar of your raise. And of course, if you're far behind, you're not even close to reaching a retirement goal, you should do that. But at the same time, like, this is a way of like, okay, maybe you're on some path and now you need to know, like, okay, what should I do now? And so I've used data and I've kind of like simulated the thought experiment to see what would happen in all these cases. And so basically, I find that, yeah, if you're saving a lot of money already, you should save at least 50, percent of your raise. And if you're not saving a lot, you should save roughly at least 50 percent of your raise. So I think it works well with it. Just by chance, it kind of, I don't know what the right words here, but the answer of 50 percent, just kind of, it was around that answer. It's not, there's no perfect end. You'll see, I have a table of like, if you're saving 30 percent, you need to save

Starting point is 00:18:41 X percent in a raise. If it's 30 percent you knew, I sort of give you what the, you know, I break it out in the in the book of the exact figures, but I said like 50 percent is like a rough round answer where it needs to be. And it fits well with the two X rule. So I can kind of reuse the rule, right? So it's easier to remember. I think that's the. I think that's the main takeaway there. You doesn't have to be exact or everything. Just kind of think about, like, you know, halves for me and the other half for future me, right? That's kind of the simplest way to think about it. If people do that, they'll be far better off. And it allows for some lifestyle creep. I think lifestyle creep's okay. And I think just saying, oh, you can't have any lifestyle

Starting point is 00:19:10 creep that's terrible. Like, what's the point of working so hard if you can't enjoy at least a little bit of it? So I'm saying enjoy half of it. And I've solved it. I've shown mathematically you can do this instead of guilt tripping people into like not spending any of their races or enjoying, you know, celebrating. Right. Now, a lot of raises are essentially inflationary increases. You know, if inflation is 3% and your raise is also 3% or maybe 4%, then the raise is functionally a cost of living increase. Does this apply to only the portion of your raise that is in excess of that inflationary increase? Yes, of course. Yeah, of course, that's true. Yeah. So obviously, I don't know if I mentioned that

Starting point is 00:19:48 specifically, but yeah, we were talking, everything was supposed to be real returns, like inflation adjusted returns, because yes, if we were talking about, yes, inflation's going up. every year. If inflation's 8% and you've got a 7% raise, you can't go spend half of that 7% raise. You're actually now, and you're actually spending that. Your real income has gone down. Yeah. So, of course, this would be real raise, any sort of real inflation-adjusted raises, of course. Reality says the odds are stacked against us to think our U.S. men's national team can ever raise the world's biggest trophy. You're the first soccer team to beat them at football.

Starting point is 00:20:25 never but here's the thing about us refusing to accept reality it's kind of our thing being unrealistic that's not a flaw it's a force it's fuel because if you want to be great and make history never chase reality join us soccer insiders today be part of the journey Given our earlier conversation about the fact that your contributions are the single biggest determinant of the success of your portfolio and the growth of your net worth, many people who are listening to this want to increase their contributions and need to increase their income in order to do so. However, there are a variety of ways that people can increase their income and those options come with their own advantages and disadvantages. Can you enumerate some of

Starting point is 00:21:20 these options and the pros and cons of each? Yeah. So when I discuss this in the book, how we can increase your income, I have five different, or technically there's six different ways. Well, the six is kind of a surprise we'll get into at the end. But there's like five different ways. I think people can increase their income. Some of these are, you know, main hustle things as they say in terms of your core job. And some are, you know, side hustles or other things you can do on the side, whether it's freelancing and stuff like that. that. So I'm going to kind of talk about each one of those. So the first one I talk about is like selling your time or expertise. The thing about selling your time, like you can go and, you know, work for someone else, have a part time job. You know, you're an expert in a specific thing and you can maybe tutor someone, teach someone something. Those are easy ways to kind of do that. The pros, obviously they're easy. There's low startup cost of doing that. There's even like, you know, stuff like Instacart and all sorts of stuff now where you can just sign up quickly and start doing something for someone else. The con is like your time's limited. It's not really going to skis. scale in the same way, right, as something like selling a product, which we'll get into

Starting point is 00:22:16 in a second here. What strikes me as I hear you talk about this is that this applies both to gig economy work, Instacart, driving for Uber, as well as for more specialized work like freelance or consulting. In either case, there are low barriers to entry, low barriers to getting started, low startup costs, but it's not scalable. Exactly. the alternative instead of just say okay well I don't just want to sell my time I want to sell something that's not completely linked to my time and that's with my second thing is well if you you could sell a skill or service right so that's still going to be obviously linked to your time if you have a certain skill for doing something or you have a service you provide to someone it if you get better at that thing you can still charge the same price and if you can just lower the amount of time it takes you can just you can just you can just you can or even developing photos or Photoshop is an example of that where that's you can just you can just

Starting point is 00:23:10 a skill you're selling, you can sell that and they have no idea how much time you take to do it, right? And they're not explicitly paying you for the time, right? So that's something where you can get higher pay. You can build a brand around it, about a marketable skill or something. The con, I guess, is like it just takes time to develop a skill. Like skills are not easy to develop. There's a lot of things out there where you can make money and just when you're just selling your time, you don't need to have too much skill. But then there's things out there where you need to spend that time to either develop a skill or develop expertise or something. And that's also not going to scale too greatly for most things, like if you're just selling a skill or service, there are some ways

Starting point is 00:23:42 it can scale, but generally, you know, if you need to, you know, do 10 Photoshop things, you have to distill some times. So still, they're very similar one and two, but I think there's a slight distinction there. Right, right. And it seems to me that in order to stand out from the crowd, you would need some sort of niche differentiation. Yes, exactly. And so you have to find that's where brand building comes in, right? I think that's an important point to bring up. The next thing you can do is just teach people. And I think like teaching people, whether they're doing it online or in person, if you can do like an in-person courses are harder, but now there's so many different online courses that I've seen people build courses and either do cohort-based

Starting point is 00:24:15 or they do ones where they just record themselves in a video and they teach people or even even think of YouTube is kind of like a teaching platform. And that's very scalable, right? I mean, you can have millions of people watching you on YouTube, right, if you're teaching about something, right, versus if you're just doing it in person or something like that. The problem is there's lots of competition because it's so lucrative and can be so lucrative. There's a lot of people on YouTube. There's a lot of people in these teaching platforms. So once again, it's about branding. How do you stand out? How do you attract students? It's going to be an ongoing battle to do this, right? To keep getting people to come in. So how do you kind of

Starting point is 00:24:44 create a referral network? So that's another way of thinking about it. Another way you can increase your income. The fourth thing is selling a product. So if you create a product, you know, that's obviously very scalable. Because if you can create a product in a way that's, you can create a lot of them or even, especially a digital product can be very scalable. Like, I just write for, I write a digital book once and I can sell it in infinite times in theory, right? The other issue is there's lots of upfront investment there and a lot of marketing, right, to do something like to sell a product. There are pros and cons to each one of these things. There's like, those are all those first four, basically all like kind of side hustle gig economy

Starting point is 00:25:17 things. Yeah. Would it be accurate to say based on what I've heard you just described, would it be accurate to say that there is an inverse relationship between scalability and startup cost? There can be in a lot of cases, right? Like maybe there's some like Goldilocks zone or some magical outlier out there. But generally, like, if you're selling a product, like, the only way you sell a product that people like, it's really good, it's generally has to be, like, pretty good. You have to have some deep skill or expertise in creating that product or something. It's not going to just come to you out of nowhere, right?

Starting point is 00:25:43 So the only one I'm doing on this list right now is I'm selling a book, right? And it's like, and I did that by writing online for five years about investing and reading so much in investing and doing this stuff. So it took five years of work to even get to something that I could actually, you know, create and send out there, right? So it takes time and you have to do it. I wasn't really being compensated for until like 2020 started running some side ads on my website. So I started to get some compensation for that. But for three years, it was free.

Starting point is 00:26:08 It was nothing for no ads, nothing on there. And so I just, I was just working for nothing, basically, just doing because I loved it. Right. So that's an example of like, you have to put out, there's a long runway, but then, you know, maybe you can pay off one day. Who knows, right? And then the last thing I want to say is climbing the corporate ladder. I know a lot of people talk about, oh, you know, you got to start your own thing. You got to be your own business owner, or this and that. But I think for a lot of people, just being a professional, a corporate professional, there's nothing wrong with that. There's nothing wrong with a nine to five. And there's a lot of people that do well in that environment. And there's a lot of people that you can build

Starting point is 00:26:39 a lot of wealth there. There's a lot of millionaires that are doing nine to five. It's not about like, oh my gosh, I have to run my own business and all this and all that because it's not necessary, right? There's a lot of people that can do that. And so the pro of working in a corporate environment is you're going to gain skills and experience. You're going to work with lots of people. There's going to be a lot more exposure for you versus you're trying to do something on your own, right? And there's less risk around your income growth because generally, you know, most over time, a lot of positions, you know, you'll get promoted, your income goes up and we've seen that this is true generally. You look in the data and this is true for most people in these kind

Starting point is 00:27:09 of corporate environments, it generally goes up. And then obviously does level off at some point, but for a lot of people, it does keep going up into, you know, from your 20s, 30s into your 40s even. The only problem is you don't control what you're doing. You don't really control your time in the same way, right? So that's something to think about, right? It's the downside. But yeah, and the last thing, so that's the main hustle, the last way to raise your income number. number six is buy more income producing assets. Think like an owner. You know, that's really the best way to raise your income because going back to what we said with the save invest continuum, you're taking money out of savings. You're taking your savings and you're investing it.

Starting point is 00:27:38 And that's going to raise your income and raise your income. And that's the ultimate goal. All of these ways of raising your income should be funneled into income producing assets, which do it for you, right? So that's the ultimate goal eventually. So I think that's kind of a good way to think about it is like all of these things you're doing to raise your income. The point is to get that money invested so that it keeps paying you. You don't have to keep working for it. Right. So, yeah, essentially what you're doing is selling your time as a stepping stone to allowing your money to make money for you. Exactly. You're taking your human capital and converting it into financial capital. And that's kind of how I like to think about it. It's almost

Starting point is 00:28:09 like you're rebuilding yourself as a financial asset equivalent. And of course, this is very weird to say things like this, but like you're basically saying like, hey, I only have so many, so many hours I'm going to be able to work the rest of my life. You can think of your human capital is like always a dwindling asset, not because you can't learn new skills, but you just, you're going to run out of time eventually, right? So over time, you know, in theory, your time's going down. So while that's happening, while your human capital is decreasing, you need to offset that by increasing your financial capital. So it's paying you even when you can't work anymore. Right. That's kind of the idea. Right. So let's talk about owning income producing assets because you make a

Starting point is 00:28:42 distinction, as do I, as I've said many times to this audience, that any asset earns money in one of two ways, either through capital appreciation or and or through the dividend or income stream that it pays off. But there are certain assets that only earn or lose money via capital appreciation, and those are speculative, the ones that don't have any kind of income stream attached to them. And I see that you, like me, tend to not prioritize those more speculative assets as much. Can you talk about how you came to that decision? And from there, lead us into a conversation about specifically the income producing assets? As you mentioned, like, you said there's two ways.

Starting point is 00:29:26 There's basically like there's price changes and how people feel about prices. That's one thing. What people think something's worth. And then there's something which a lot of people might call fundamentals or earnings or income. There's different ways of discussing that. And those things, I think, are more weighted in some sense of reality, right? And so the example I like to give, you know, imagine there's this factory they're selling

Starting point is 00:29:47 for, you know, a million dollars. But you know this factory is producing. you know, half a million dollars of profit every year, right? And so it's like, wow, that's a great, like, why wouldn't I, two X earnings? That's incredible. It's incredibly. The pricing is great, right? So it's like, you can say it's worth 10 million or one million or whatever. No matter what, that anchors the earnings. The earnings exist. They're real and they're paying off half a million dollars a year. That's real. So whether the price is jumping up and down around that, there's always this anchor, which is fundamentals. Now compare that to gold or Bitcoin or art or

Starting point is 00:30:16 wine, and there's not the same thing. The only reason the price of those things change is based on attitudes and perceptions of those things. Now, of course, I'm not saying that income producing assets, people can't feel differently. For example, you know, factories could go out of fashion for some reason. Oh, I don't want to own a factory. They're too, whatever, dirty or this. We can make something up, right? Let's say investors just decide to give up on factories. And guess what? The price of that factory goes from 10 million to 1 million. Now it seems like a bargain. But at the end of the day, if it's still producing that half a million dollars a year in profit, that's something real that people can touch. It's really. It's going to pay you out no matter what.

Starting point is 00:30:49 It's not just based on the whims of the market, right, so to speak. I'm not saying you should never own gold or never own crypto or never own art or wine. I own all of those things. I don't own gold. I own crypto and art. I've dabbled in wine and thought about other things like that. But mostly I just try to keep that like 10 to maybe 15% of my portfolio, all of those non-income producing assets. So I say 85 to 90% of your portfolio should be in, you know, income producing assets. So that's things like stocks, small businesses, real estate investment properties, reads, all these. There's a bunch of different things I talk about in the book. If you want to invest in royalties or something, that's, that's another one you can do.

Starting point is 00:31:27 And I just do that because there's income streams associated with them, right? Bonds, all these things have income streams. And so for me, it's really just about like finding something that has some anchor to reality and paying me versus like I have to do it completely based on the price action. I'm not saying you can't make money doing that. Like the entire crypto space made money completely on price action. I'm not saying there's no fundamentals or no use case there, but the use case isn't always necessarily linked to cash flows. There are exceptions to that. There are times where you can take your crypto coins and stake them and earn money because you're providing liquidity and all this. I don't want to get into all the super crypto things. And there are ways of

Starting point is 00:32:02 turning these non-income producing assets into income producing assets, but that's not their main use case, right? There are uses for these things. I'm not saying they're not useful. I'm just saying they don't necessarily provide a cash flow. And that is the thing that I have to have. I feel more secure owning income producing assets. And I think most people will feel more secure owning income producing assets over the long haul. Yeah, you want to dabble in those things? I don't care. I just think just keep it to a smaller percentage of your portfolio. You know, I've looked at the date on a lot of stuff. Even when I ran a simulator where I was trying to figure out what's the optimal portfolio when Bitcoin first did this big run up in 2017.

Starting point is 00:32:38 And it said it was like, and remember, this is like the perfect solution. It was like if we went back from like 2010 to 2017 or something, it was like the best thing you could have done was like 55% stocks like 40% or 43% U.S. bonds and like 2% Bitcoin or something. So it was in there, but it was just like very small because of how risky it was or something. I just thinking about that. I think that's kind of the philosophy I like to use. And I don't think there's any right mix of this. I just think when you're investing, you've got.

Starting point is 00:33:04 to have income producing assets. You said you keep your own portfolio about 10 to 15 percent speculative and the rest are income producing assets. How much weight do you give individual stocks within that 85% of your portfolio that is comprised of income producing assets? So right now I'm actually only like 10% with like art and crypto right now. Probably 10% of my net worth is in those two. It might even be less than that if I think about it.

Starting point is 00:33:42 It might be like 8%. But of all of my assets, I have 1% individual stocks. In the book, and this is the funniest part. So in chapter 12, I say do not buy individual stocks. And I still stay by that statement. I did buy both the stocks. I'm not going to say the names. I've said them in other podcasts and stuff.

Starting point is 00:33:58 I'm not here to pump them or anything like that. I bought two individual stocks. One was a bunch of my friends did. I said, okay, let's do. I put like half a percent of my net worth in it. And then the other one I put like another half percent in. And they're both down very badly at the time of this recording because tech stocks have been destroyed. And so one's down like 70 percent, one's down like 60 percent or something. They're both very down very badly. I recommend you read that chapter and realize like I was right all along about that thing and I never should have done it. However, despite that, I think you can do it

Starting point is 00:34:27 for fun. And so I think having won a couple percent in your portfolio and five percent, even in individual stocks. There's nothing wrong with that. I just think the bulk of people's money shouldn't be in individual stocks because it's very risky, not just the performance piece of it, but also because like, you're not going to know if you're good at it. So if you're really trying to do it as I got like, oh, I'm really good at investing my own money. Look, I bought all these stock picks. I'm so good at it. I think it's really hard to tell if you're actually good at it, if you're just lucky. And you're not going to know for a long time. And by the time you find out, if you find out you're not good, it's not a great look. There's a lot of people who started buying in 2020 and did even

Starting point is 00:34:57 better in 2021 and found out in late 2021 that they're not as good as they thought they were. And so that's a kind of a big wake of call. I think we're starting to see that happen now. See, I try to keep individual stocks I actually in my mind individual stocks are income producing assets but in my mind I try to put

Starting point is 00:35:13 them into the non-income producing assets because it's their speculative in my mind but they definitely are income producing or they're supposed to be. Yeah, yeah. No, I have that same kind of mental grouping where I associate owning individual stocks and owning cryptocurrency in the same mental bucket, even though, you know, cryptocurrency is speculative.

Starting point is 00:35:32 It's more analogous to, I think, a foreign currency exchange. Owning individual stocks, of course, you are owning an income-producing asset. You're taking ownership in a company in a very fundamental way. But given the volatility, given the risk, given the unpredictability of how it's going to go, I'm just like you. I have that same mental bucketing of this is the portion of my portfolio. that is purely for play, playtime, and then this is the portion of my portfolio that's actually strategic.

Starting point is 00:36:06 Yeah, I agree. And I think most people, if they think like that, they'll do fine. I think you just got to, what's the percentage, what's the split you exactly do? And so I think most people, even though there's a lot of people I know that dabbling crypto and stuff like that and they sell like 80% of their money in index funds and stuff. I'm like, that's the way to go. If you're going to do low cost index fund, it's like, yeah, you're messing around 20%, but it won't necessarily be catastrophic if that even all went to zero.

Starting point is 00:36:26 or not. That would still be terrible to lose 20% of your money. But imagine if it's 100% of your money. Now that's really, really scary stuff. Right. Exactly. Let's walk through some of the different income producing assets that a person can invest in and sort of walk through, again, the pros and cons of each. Yeah. So there's stocks, obviously. It's the traditional, my favorite because I think they're very easy to own in trade. There's low maintenance. You don't have to do anything. You just own them and that's it. Generally, pretty good historic returns. The cons is that there's high volatility there. Valuations can change very quickly. That's where I said, like, you know, one day people think all these tech stocks are going to the moon. And next day,

Starting point is 00:37:03 they're like, oh, these things have no earnings. Now they're down 70, 80%. That's what happens in stocks, right? So diversifying is the key there. Can we talk about farmland royalties? I mean, these are the things that we don't hear about very often. Yeah. So obviously, stocks, bonds, investment property, reits. The reeds are just real estate investment trust. You're owning real estate. Someone else is running it for you, obviously. Instead of owning an individual properties, diversified thing. So then there's farmland. That's something I've kind of dabbled in a little bit. The issue with that, so you can own a farmland reet. That's probably the easiest way for most people to do it. However, I don't want to like name any services or stuff out there. You can just

Starting point is 00:37:36 search like farmland investing. You'll find a bunch of ads on Google. You'll find all of those. Those are actually very interesting because they have a lower correlation with traditional financial assets. And they still provide a lot of like they can provide income. There's income you can get in different ways from the sale of the property itself, the yield of what the farm actually produces, right? That's another way you can have income and you'll have distributions paid out over time during certain deals you'll have. So yeah, and because they're not correlated as much, like if the stock market crash doesn't mean that farmland prices are necessarily going to crash, right? And usually they're illiquid. You buy them and you wait a long time to kind of see your money back.

Starting point is 00:38:09 Because of that, it's a different return stream. I think's cool. So that's something to check out a lot. But a lot of those, if you're doing like farmland on those, in those different sites where you can invest in like a crowdfunding platform, they're required to be an accredited investor. So that's going to be like you have to have a million dollars or you have to have $200,000 or more in income for the last two to three years. So the accreditation status thing, small businesses, you guys know what that is. You have to usually find people to do that to be an angel investor or something like that. And then lastly, is like royalties. I mean, I think royalties are interesting. If you search royalty investing, you can find a lot of those firms out there

Starting point is 00:38:40 as well. But I think that's interesting because they're kind of like individual stocks in a way because you're buying, like you have to bet on like, oh, I'm betting on this particular song is going to do well over the next five or ten years or this particular piece of art or something, right? And so a very piece of content is going to do well. It's interesting. So it's kind of like individual stock investing. So I think for most people, you're going to have more money available to kind of get into these.

Starting point is 00:39:03 But it's interesting to me because, like, I don't know if you're just into music or art or something, it's another way to invest and kind of have yourself aligned with that, right? That's another thing to think about. So yeah, so I'd say farmland, check out royalties. The other one, too, is like creating your own products. So this is something where like you have something that becomes an income producing asset for you, right? And so that's kind of related to what we're discussing earlier with discussing how to raise your income, whether you're going to sell your own product.

Starting point is 00:39:25 That can be an income producing asset, right? So thinking about that, if there's something you're really passionate about, creating something that you can sell to people, whether that's digital products, which are now, it's very easy to sell those things on Gumroad or if you're self-publishing a book, you can do that on Amazon, all sorts of different ways, you can do things like this. So those are the big ones that I throw out there. Do you don't have to do all of them, just consider them, just look at them. Say, does this seem right for me? Do the fees seem right? Does this seem right? You go through everything and kind of just see what fits your profile.

Starting point is 00:39:51 Right. The royalties one was really interesting. I've never heard anybody talk about that before. And you give the example of the song Empire State of Mind by Jayze and Alicia Keys. And someone bought the rights to that for $190,000. The rights to the royalties produced from that song for the next 10 years. And in that example, I mean, yeah, it's absolutely easy to see. You're betting that that song is going to stay popular and relevant.

Starting point is 00:40:17 and you're betting that the royalties that it made last year will be comparable to or improved over the next 10 years. Like, you know, you're essentially betting on the long-term viability of a song. Yeah, of course. And that's one of the things about this. And I have no idea how they probably, there's people out that probably model like the decay of royalty. So in this, in the particular, I'm going to read from the example. So in the year prior before it was sold, that song, Empire State of Mine earned 32,000. thousand seven hundred and thirty three dollars in royalties i'm surprised it was only that much i thought it would

Starting point is 00:40:52 be a lot more well i mean it's one song it's a big song but it's one sign there's so many songs out there right so it's like and they paid a hundred ninety thousand for it if the royalties remain constant for the next 10 years that's an 11.2 percent return you're getting on your money it's as if if i gave a bank 190 thousand dollars and they gave me 32 grand a year for the next 10 years that's an 11 percent return now there's no bank in america that would do that right but maybe the royalties go downside over time so the final return will be smaller but if something were to happen to Jay-Z or Alicia Keys, you know, God forbid, that you'd get way more royalties because people would be listening to that song, you know? And so that's the thing to

Starting point is 00:41:25 think about when you're investing in royalties is like if anything happens to the artist, like that there could be all sorts of stuff that happens for the song or that's good or bad or vice versa. So obviously don't want anything like that, but it's just one of the risks or benefits of royalty investing is to kind of think about how trends change. I mean, if somewhere to get canceled, maybe people stop listening to those songs altogether. That's the other thing. You've got to think about both sides of the equation. Wow. And I guess in, that way there's also some crossover in terms of investing in art. But of course, art is not income producing in royalties are. But with art also, you have that same issue where the popular

Starting point is 00:41:58 sentiment about the artist can influence the perceived value of that piece of art for better or for worse. Of course, that's completely true. And so I actually do invest in some art, but it's like, once again, it's like it's crowdsourced. Well, I can't afford a basket out on my own. I do own one through, you know, a crowdsource platform. You can own non-income producing. there's nothing wrong with that. I just think like you got to just be careful because not everything because you don't know what people are going to feel about pricing. If you just if you happen to sell at a bad time, you're, I mean, during the Great Depression, like there's so many rich people end up selling their houses for, you know, pennies on the dollar because they just needed money and

Starting point is 00:42:32 there's no one that could afford these really expensive things. Like, how many people can afford $10 million paintings? Not many, right? So the people that are buying those things are probably only going to do it in a good market. If the market turns bad, like they're not going to be wanting to spend a lot of money so you could take a real hit on that. So that's, you've got to be careful when you're thinking about those types of things. So that's the only downside of investing in non-income producing asset. Right. But in an inflationary environment where people are more likely to park their money into tangible items, such as jewelry and art and houses, in the types of tangible items that historically have survived periods of high inflation. I mean,

Starting point is 00:43:09 that's sort of the other, I don't want to say market timing component to think about, but the macroeconomic timing component to think about, at least. Of course, yeah, all those things to think about, right? And so when you're talking about inflation investing, I mean, I didn't really get into this in the book as much, but I've written on this on the blog. And it's like, you know, equities generally are the best bet for most people most of the time. You know, REITs are also pretty good. Real estate's pretty good for that.

Starting point is 00:43:32 Home prices, things like that are good. The other thing, if you really think inflation is going to stay high for a very long period of time, then that's, you would, in theory, take out some debt, you know? and why would you take out debt? Because that debt could get inflated away. If the cost is fixed, but the money supply is just deteriorating, you know, over time, then like you're going to be paying back and depreciated paper.

Starting point is 00:43:53 It's one of those things where, I mean, people who did that in like, I'm not saying we're going to have a hyperinflation. It's silly, but any sort of thing, you know, in history where people were literally paying back, you know, they took it a loan to buy a business and then they'd pay it back like a couple months later and it's like I own the, I basically got the business for nothing, right? It's kind of crazy to think that that could happen because the currency depreciation.

Starting point is 00:44:11 so quickly. But yeah, so those are the ways to kind of fight inflation with investing. Excellent. Well, thank you for spending this time with us. Where can people find you if they'd like to know more about you and your work? My website is of dollars and data.com, all one word of dollars and data. Or you can just find me on Twitter. My ad is at dollars and data and my DMs are open. So feel free to send me a message or questions or whatever. I'd be happy to chat with you. Thank you, Nick. Today's episode was brought to you by the letter I. for investing, and it is part of a special five-day series that we are doing every day this week in honor of F-I-I-R-E. In case you missed it on Monday, we played the letter F financial psychology.

Starting point is 00:44:55 We played an interview with a behavioral finance expert. On Tuesday, we played an interview with a negotiation expert that was for the first letter I increasing your income, and you just finished listening to this interview with Nick Majuli on that second letter I investing. tomorrow we will share an episode on real estate and on Friday we're going to share one on entrepreneurship. That's our five-day special every day this week where we pull an episode from the greatest hits vault. An episode that has previously aired on this podcast, but it's been several years. So if you're a newer listener, you might not have heard it. If you're a long-time listener, you heard it many years ago. Thank you so much for being part of the Afford- Anything

Starting point is 00:45:35 community. Merry Christmas Eve and I will meet you. tomorrow as we celebrate the letter R. And we also celebrate Christmas. All of that is tomorrow. I'll meet you there.

Afford Anything - [I] Why Young Investors Focus on the Wrong Things [GREATEST HITS]

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