Rich Habits Podcast - Q&A: Am I Behind Financially?, Robotics Investments, and the “Buy, Borrow, Die” Strategy

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Starting point is 00:00:28 Hey, everyone, and welcome back to the Rich Habits podcast question and answer edition on a super special Friday episode. How exciting is this? Q&A on a Friday that even rhymes. I like it. Hope you guys are excited for this quick little switchup. We decided to put our Rich Habits Radar episode yesterday on a Thursday, switch it up with the Q&A episode now here on a Friday. But the format and everything about it is exactly the same. Still answering your questions, the questions we get via Instagram.

Starting point is 00:00:58 at Rich Habits Podcast or email at Rich Habitspodcast at gmail.com. And Robert, we've got some really good questions on this episode. We're going to be talking about tons of different things like close end funds. We'll be talking about the buy, borrow, die strategy. We'll be talking about the different high earner tax optimization stuff. We got some good stuff, Roland. But yeah, we've got a ton of great questions here, teed up for today's episode. But Austin, before we get into the questions and the episode, remember today, very special day for

Starting point is 00:01:28 everyone. We have the public AI agent webinar. We've been talking about this thing for two, three weeks. We've had hundreds and hundreds of people join up, super excited about this. So what does this mean? We're going to have public Steven Sykes on the webinar with us. We're going to be building these AI agents live just so you guys can see how to do it because we want everyone that follows along with us to really be able to get involved with these AI agents on public.com and understand how to use them for their benefits. So I'm really, really excited about this one. 100%. We'll also be walking through public's most compelling pre-built agent strategies, things like repositioning around Fed rate decisions, smart dividend reinvesting, goals-based trimming of your own portfolio. We'll talk about what these AI agents can't do for your portfolio, which is like not that many things, but it's good to understand what they're capable of and what they're not capable of. And finally, as Robert

Starting point is 00:02:24 had mentioned, Stephen Sykes, the chief operating officer at public.com, will be on with us live where we're going to put Stephen on the spot, call you all up on stage and figure out how Stephen can legit build one of these AI agents for your portfolio and show you exactly how to do it for your specific needs. This is less of a webinar, more of a workshop, Robert. We're just going to be going through the motion, getting it all figured out with Stephen in public. It's going to be a blast. So be sure to come later today at noon Eastern time. Link in the show notes below. And if you miss the webinar, that's okay. There's going to be a completely free replay. You just click the play button, I think it's going to be right on your screen on

Starting point is 00:03:03 Crowdcast. You can watch, read the comment section, see everything right there. So definitely check it out regardless. If you can join us live or not, it's all going to be right there. And no excuses. This is a free webinar. Free. You can learn how to build and understand these AI agents right away in this webinar, free of charge. We're not going to sell you anything. We're just so excited to do it. That said, got to give a shout out to public.com, the investing platform for those who take it seriously, because on public, you can build a multi-asset portfolio of stocks, bonds, options, cryptocurrency, and now generated assets which allow you to turn any idea into an investable index using AI. And it all starts with your prompt from renewable energy companies

Starting point is 00:03:46 with high free cash flow to semiconductor suppliers growing revenue over 20% year over year. You can literally type any prompt and put the AI to work. It screens thousands of stocks builds a one-of-a-kind index and even let you back-tested against the S&P 500, all with just a few clicks. Generated assets are like ETFs, but with infinite possibilities. They're completely customizable. They're based on your thesis, not someone else's. So go to public.com slash rich habits and transfer your portfolio.

Starting point is 00:04:14 That's public.com slash rich habits. Paid for by public investing and full disclosure in the podcast description. So our first question comes from Jess G via email. That's rich habits podcast at gmail.com. She says, my name is Jess. I'm 28 years old and I'm a huge fan of the show. Let me tell you, having an emergency fund saved my butt last year. I was unemployed for two months and my car broke down.

Starting point is 00:04:38 I didn't have to go into any debt because I had that emergency fund. So thank you so much for drilling that into my head. Now I have my emergency fund built back up to $5,000 and my only debt is this used car. I owe about $22,000 on it. The interest rate is at 8%. but I will be able to refinance it to about 5.5% very soon. I have $6,000 in a brokerage account, $14,500 in my Roth IRA, $26,500 in a traditional IRA from an old employer, plus $1,600 in a new employer 401K. All my stocks are the ones you guys talk about,

Starting point is 00:05:13 the big index funds in ETFs. I'd like to buy a house in the next two to five years and hopefully house hack, but I feel behind my investing journey. I'd love to be a homeowner eventually, but I'm not sure if I'm heading in the right direction. I make $55,500 a year and my biggest bills are rent at $13.40 a month and my car payment at $3.80. Can you please offer me some guidance as to how I can purchase my first home in the next two to five years starting for my current situation? Robert, we normally don't do these like, what do you think about my situation type questions? But I think this one is really good because Jess sounds like the average listener out there. Hey, I've got this a little bit of an emergency fund.

Starting point is 00:05:56 I've come into some recent tragedy with some unemployment and my car breaking down, right? Like just turmoil. Life's a roller coaster, but I'm still chugging along and I'm still making goals and I'm still knocking them out one by one here. So, Jess, here's what I love about your situation. You've got a ton of money invested. You've got $6,000 in a brokerage account, $14,000 in a Roth IRAs, that's $20,000 total. another 26,000 in a traditional IRAs. Now we're at $46,000 and another $1,600. So call it about $50,000, depending on what the stock market's doing, invested into these retirement plus

Starting point is 00:06:34 bridge account, which I love. And at 50,000, at 28 years old, is a ton of money to have invested, considering a lot of people don't start investing until they're 30s. So congratulations on doing so well here. Robert, what's your take, though, on house hacking and how could Jess begin to set her current situation up where she's continually investing while also setting money aside over the next two, three, four, five years? So she'll have a down payment on a duplex, triplex, or quadplex? Maybe walk through some solutions for that. Well, first, I want to say, Jess, you are not behind on your journey. You are miles and miles ahead of most people that are 28 years old in the market today. We spread this message everywhere to get people to invest early and often, and you've already done that.

Starting point is 00:07:23 You've laid the groundwork. You have the traditional brokerage account. You have the emergency fund. You have all of the tools to build wealth and you said house hack. You're not saying you want to buy the dream home. You want to get in the real estate game through house hacking. So here's what I would do. You're halfway there for building your base.

Starting point is 00:07:42 And you say you want to get a home in the next two, three years. I think by then your base will be built. It's up and running. You've got that $100,000 saved and invested. But along the way, what I would do is start earmarking money towards that purchase to house hack. So I would start plugging away and putting aside some money every single month of this money you're investing into a traditional brokerage account on public.com. Get that. That's your house fund.

Starting point is 00:08:08 That is your house hacking fund. You're going to buy that duplex or triplex. That's what I would do. And do that for the next two or three years. so you've got this money building and working towards that house while you sleep. What would I do for house hacking? I would research now so you can make sure you cover all the criteria for the Fannie Mae 5% down mortgage. It's a tremendous product.

Starting point is 00:08:30 You can borrow up to $1.3 million and up to four doors and just read up on it because I think if you get ahead of this, that would be the move for you to take the least amount out of that $100,000 saved and invested that we always talk about. to make sure people have their base built. That is how I would do this, but you are crushing it. You're so far ahead of the curve. I would not worry about feeling like you're behind because you've got all your bases covered. And look at this.

Starting point is 00:08:57 You went through some hardships and immediately went right back to the playbook and built that emergency fund back up and you have everything else in your favor. I think it's a great breakdown. I'm kind of looking at this budget, right? 55,500 a year working in the landscape industry. Your biggest expenses are that rent at 13.

Starting point is 00:09:14 in your car payment at 380. I would argue that with an honest budget and an extra maybe five to 10 hours a week of side hustle time, so call it an hour to two hours a day here, Monday through Friday, you could probably boost your monthly earnings by anywhere between $500 and maybe $750. And that money specifically can then go be invested into these index funds and ETFs we talk about in your taxable brokerage account on public and do that every month for the next two, four, five years like Robert's alluding to, and that now turns into tens of thousands of dollars over the coming years. That money is then that down payment Robert is alluding to. I think it all comes together very well here. Without sacrificing money, you're already putting into these retirement

Starting point is 00:10:01 accounts. Because again, you've done a really good job of getting about $50,000 invested here at the age of 28 years old. I think that's incredible work. We don't want to slow that down. More money you can get in these retirement accounts, more money you can get invested toward your future. The best, better. So when it comes to finding money for a down payment, I would love to see you, whatever that side hustle might be. We've got a whole episode dedicated to side hustles. Go figure out how to earn $300, $400, $400, $600 a month extra by working a couple hours extra maybe every day, maybe doing some weekend work, whatever's going on. I think it's totally doable, especially Jess, if you're as hungry as you sound like you are here to go out and house hack and figure out the situation.

Starting point is 00:10:42 And if you do decide to relocate to Florida, make sure you settle on one of those tertiary markets, if it's just a random market where there is a ton of growth that's happening all around Florida. And you want to find yourself in a market where there's a ton of opportunities moving forward, whether you stay in the landscaping industry or not because you just want to be where the money is and the jobs are. So our next question comes from Sam S. Sam says, hi, rich habits. I've been listening since the early days. and I just wanted to say thanks for all the work you put into the podcast. It's become one of my favorite weekly listens, and I've learned a lot from the both of you.

Starting point is 00:11:17 I was hoping you could spend some time discussing closed-end funds, specifically the pros and cons of owning them as part of a long-term portfolio. The reason I ask is I've been researching a closed-end fund called B-O-T, which provides public investors exposure to several private robotics companies and physical AI companies. The concept is really interesting to me because it seems like one of the few ways, is everyday investors can gain access to privately held companies before they go public. I'd love to hear thoughts on something like BOT. How do you evaluate a close-end fund like this?

Starting point is 00:11:50 What are the biggest risk or drawbacks that investors should be aware of, especially when it comes to premiums or discounts to NAV, liquidity in the valuation of private holdings? And more broadly, do you think close-in funds deserve a place in a long-term investment portfolio? Thanks again for everything you do and keep up the great work. Robert, before we answer this question, I want to make sure everyone's on the same page about something. In this question, Sam said, the concept is really interesting to me because it seems like one of the few ways

Starting point is 00:12:13 everyday investors can gain access to privately held companies before they go public. False. The Rich Habits Network also allows people to do that. Every single month, we're investing into privately held companies, and we've actually invested into four robotics and embodied AI companies privately, directly through the Rich Habits Network that are held inside of this bot, BOT, ETF. So if you're looking to gain exposure to privately help, companies across all different types of sectors, join the Rich Habits Network, make your first

Starting point is 00:12:45 angel investment, learn more about the different opportunities we've had in the past. We're always introducing new cool opportunities in the future from seed to pre-IPO opportunities. So go check out the Rich Habits Network. We're still offering a seven-day free trial. You have seven days to watch the eight hours of video coursework, to join a live stream, to ask some questions, to review past investment opportunities before you actually make a decision. If you want to stick around and pay to $77 a month. That said, Robert, let's jump into now answering this question. So I think the first place to start is kind of defining what closed end funds are and how they're different from things like ETFs. So the simplest way to think about them is unlike an ETF where

Starting point is 00:13:26 shares can generally be created or what they call redeemed to keep the market price close to the value of the underlying holdings, a closed end fund has a fixed pool of shares that trade on the open market. That means the stock price can trade above or below the fund's net asset value or nav. Net asset value can be thought of as the true, like, intrinsic value of the underlying holdings. Right. So when closed end funds list on the markets, they have a true, like, I think for BOT that listed like $9 or $10 a share, like that was like the true intrinsic value of its holdings compared to the number of shares that were, you know, created upon its inception. BOT is an interesting example like you kind of were alluding to here because Robo Strategy

Starting point is 00:14:16 describes the fund as a way for public market investors to gain exposure to private and public robotics and embodied AI companies, which I think is one of the hardest types of secular growth trends for public investors to gain exposure to. Again, assuming that they weren't inside the rich habits network when we invested inaptronic in figure in standard. and all these other companies years ago. So the way I would evaluate a closed end fund is I'd ask myself questions like this. First, what are the actual holdings?

Starting point is 00:14:45 Are they holding public stock in a company like an ETF? Or are they owning private stock in a privately held company? Is that an SPV? Is it a single layer? Is it a double layer? Like, understand the intricacies of the actual holdings. Second, what percentage is private versus public? Because if a lot of it is private, then it's up to you to figure out what is the true

Starting point is 00:15:06 intrinsic value of that private company. For example, figure AI raised at a $39 billion valuation a year, year and a half ago, whatever it was. Yeah, but a lot has changed with that company since that year, year and a half. So is the intrinsic value now with figure 50 billion, 100 billion, 200 billion, 15 billion, right? Who knows? It's up to you as the investor to figure out what is the intrinsic value of these privately held companies. The opposite of public, when it's a publicly held company or a company holding that is clearly you can see an investor is going to pay you $22 a share for it, very different than having to kind of back into your own math there. Third, and this is probably the most important in Robert's eyes, the fee structure.

Starting point is 00:15:47 How are the fees actually working here with the BOT closed end fund? I'll let Robert dig into fee structures and how things can be different for closed end funds here soon. And then, in my opinion, the last thing that I'd really want to dive deep on as a investor is, is it trading at a premium or a discount to a. its market net asset value, right? Like, what is that net asset value truly worth right now whenever you take in the progress of a standard bots or a figure or an optronic or whatever on the secondary markets and translate that into its holdings? And how does that all come to get? Do you think it's overvalued? Do you think it's undervalued? I think BOT right now is trading around

Starting point is 00:16:24 35 or 40 bucks a share, which is a lot higher than its original net asset value of like nine or 10 bucks, right? But does that mean its underlying holdings are now, you know, more valuable? Like, I don't know. It's up to you as the investor to figure that out. So I know that was kind of long-winded, but I think these are really, really important to understand. So you don't find yourself piling in to a closed-end fund that might be way over net asset value and you just get crushed on the back end because you don't know how to evaluate these types of investment instruments. I think you did a great job. And long-winded in this instance is really important because so many people, they see the sexy headlines of getting into these closed-end funds and getting in pre-IPO and all of that,

Starting point is 00:17:06 but they don't understand the net asset value, this NAV term we see all the time. And they might not even understand how much they're paying above that. And so I think it's really important for people to understand. You need to know what you're paying to get into that investment. Because if you're paying way too much, and then you have these secondary market commissions, you have the expense ratio. And in these terms in these closed end funds, sometimes the expense ratio can be 1.5 to 2%. So when you add all of that up, you might be paying such a huge premium in a closed end fund that you're missing out on any of the upside that you would have gotten if you just waited for the IPO. So just make sure you understand all of it. It's like anything else. If there's a lot of these terms you don't understand,

Starting point is 00:17:51 do the research, AI is your friend. So you can understand that you're actually getting a good deal on this rather than just paying for the sexy headline in a secondary market. And also what you added Austin is people can join the Rich Habits Network, get access to all of this, and the deals are flushed out. It's not through all of these person next to a person next to a person because we're doing this in the Rich Habits Network every single month giving people access to the same companies, but in a way where they have the knowledge and comfort of knowing we've flushed out what is right and wrong and what is a good investment? Yeah, I'm just looking at the Robo Strategy portfolio. And yeah, Robert, we invested into figure, optronics, standard bots, and path robotics. And so did

Starting point is 00:18:37 Robo Strategy. So, you know, you could have invested in these companies directly through us, or you can buy, you know, an overvalued closed end fund, the BOT, ETF here, which, by the way, I just looked up the fee structure on it, two and a half percent annual fee structure just to own it. So it's important. It's important to understand this. Again, it was long-winded, but you all need to understand as these instruments begin to become more available to people. If it's a BOT, if it's a V-C-X, if it's a insert, other closed-end, open-end, whatever fund here, Evergreen Fund, Cashmere Fund, right? There's a ton of different things that exist out there. As they become more and more prevalent, you have to do your homework on them and you have to understand exactly what you're getting involved in. And if you don't understand golden rule number one with investors, Don't invest in anything that you do not understand entirely front to back, like the back of your hand. Yeah, great take, Austin. And I think that's the most important key of why this podcast exists. We are here to help people from all walks of life, from all levels of financial freedom,

Starting point is 00:19:40 or just getting started as an investor, because we want to break down these terms and these processes in investing to help everyone know that we all have blind spots. and the more knowledge you have, the better off you're going to be in making solid choices. Because as soon as people get moving and they get a little bit of money, yes, we want you to use these tools. Yes, as you get build more wealth, we want you to understand all the advantages you can get from some of these tools. But we also don't want people to get so fancy and do these things in a way that it might set them back versus actually help them long term. We've got a ton of complex stuff, though, and we're happy to answer it. Next question coming from Russ P.

Starting point is 00:20:20 Russ P says, Hey, Robert Nosson, I don't hear you guys talk about pledged asset lines or security-backed lines of credit very often, but they've been an absolute game changer for my wealth management.

Starting point is 00:20:29 We always hear about how billionaires use the buy, borrow, die strategy to avoid capital gains taxes, but with modern brokerages offering highly competitive, low-cost margin, and line of credit rates around 4% right now,

Starting point is 00:20:43 this strategy is completely accessible to everyday millionaires. I recently used a pledged asset line to purchase a vacation home. The closing process took almost no time compared to a traditional mortgage, and the rate I locked in was more than 200 basis points lower than the standard mortgage rate. To manage the risk of a market drop or a sudden margin call, I follow a strict set of personal guardrails. Number one is I never let the loan balance exceed 25% of my non-tax advantage investable assets, aka bridge account. Number two, I only use the debt for major

Starting point is 00:21:16 physical assets like real estate that I could easily refinance into a traditional loan or sell off if interest rates spikes or the market corrected. What are your thoughts on using strategic, low loan-to-value leverage and a taxable portfolio for major purchases instead of traditional financing? Is this a brilliant way to optimize cash flow and stay fully invested? Or do you think the downside risk of a market correction makes it too dangerous for us non-billionaires? Robert, this is a great question for you to answer. I love this for us and you have spelled it out perfectly. You've covered all the bases in a way where people that are listening and following along can understand what this buy, borrow dime means, but not get themselves in trouble. So let's go

Starting point is 00:21:58 the bad side. So many people go, wow, I have this portfolio of $200,000 on public.com or e-trade. I'm going to go borrow against it and do what the billionaires do. But the problem is they go borrow 70, 75 percent. I think most of them are around 70 percent of your portfolio. They borrow all of it. then there's a market correction of 25, 30%, they get a margin call and they don't have the funds. But the way you laid this out of keeping that balance at 25% of the total value of the portfolio is magical. I'd even be okay with going to 50% because you're right. When you have millions of dollars or even hundreds of thousands of dollars invested and you can borrow against that without it being a taxable event without selling that equity, it is a magic.

Starting point is 00:22:45 magical way to build wealth as long as you know what you're doing and you stay within those personal guardrails because again people think margin in these loans and all of this is free money it is definitely not free money and very dangerous if you don't stick with it and you constantly it's kind of like when people get a line of credit and they're always maxing it out those are the same people that generally carry credit card debt so i think as long as you handle it responsibly and you do this buy, borrow, die strategy with these pledged asset lines of credit, I think it's a fantastic way to help you build wealth and get liquidity without selling your equities. Yeah, I just want to double down on your framework here, Russ, as to how smart it is.

Starting point is 00:23:30 If you're using a guardrail, maybe you're someone listening right now and you've got half a million dollars in a brokerage account. That's the hard part, Robert, because it's like Russ's framework is very clear. I only use the debt for major physical assets like real estate. state that I can easily refinance into a traditional loan or sell off if interest rates spike or the market corrects. I want to talk about that for a second because this 4% interest rate you're getting and the way he was able to do this for everyone that's like I still don't understand. Russ probably has a couple million dollars in a taxable brokerage account. In that couple million dollars,

Starting point is 00:24:01 he can easily borrow against using a margin. So what does that mean? A little bit of debt. So let's say, you know, Russ has got, I don't know, $4 million sitting in his public account. And you can go borrow at 4% interest on, you know, up to 70 or 75% of your portfolio's value. And that interest, you can do interest only, pay it back, whatever that way. And so what Russ did is Russ goes, okay, I want to go buy a million dollar vacation home. I've got $4 million over here. Do I want to sell a million dollars of stock, realize a capital gain, pay taxes on that? And then from what's left, use that money to go buy my house in cash, or go through a mortgage

Starting point is 00:24:42 process, down payment, still sell it, have to go through closing, all this stuff. No, Russ said, listen, I've got $4 million. I'm going to go borrow a million of that from my portfolio. So what happens there is your portfolio custodian, let's say public, is going to say, okay, you want to borrow a million dollars. We'll hold on to this million dollars of VOO or S&P 500 or Microsoft or whatever you got going on here. We'll give you a million dollars cash. And so now Russ's loan to value ratio, 1 million of 4 million is 25%. Never let the loan balance exceed 25% of my non-tax advantage investable assets. And then he used that million dollars instead of going through the financing of getting a mortgage and having to apply and go through all the clock.

Starting point is 00:25:23 He just took that million of cash at 4% interest instead of a 6.5% interest that probably exists right now for 30-year mortgages. Use that million dollars of cash to go buy his vacation home. And yes, he still owes a million dollars, but he owes it to himself at a lower interest rate. rate than if he went out and got an actual mortgage. The mistake people make, and I want to be very clear about this, is again, that number two call out you had, Rouse is you only use this debt for major physical assets that can easily be refinanced in traditional loan, or you can sell if the interest rate spike. Interest rate spike. What does that mean? These four to four and a half percent interest rates you'll see right now by borrowing against your portfolio are directly tied to the federal

Starting point is 00:26:04 funds rate. So if the Federal Reserve, like Bank of America, was foolishly, forecasting by the end of the year is going to raise interest rates by three separate times, then our friend Russ here, his interest rate on his $1 million margin, hypothetically, would go up. He'd have a higher monthly payment because his interest rate is a float. It moves up and down. And so that's with all margin debt. That's with all margin debt.

Starting point is 00:26:27 So it's a variable interest rate. It's floating. It moves. So just know that when it compare, you know, to a mortgage. It's fixed. Right. So just understand some of these intricacies. And the last thing I'll say,

Starting point is 00:26:38 here. What you want to avoid in this situation is using that million dollars to fund your lifestyle or any amount of money to fund your lifestyle. This is not for, because what you're doing is you're essentially saying, I'm going to borrow this money, but the goal of course is to pay it back. You want that stock in your portfolio. You want that stock in your nest egg. Yeah, you still have it, but you can't exactly do anything with it until you pay back your loan. And so yes, the stock's trending up into the right. And yes, like, you still have it. It's still earning and still paying and doing all that fun stuff. But this is not just like free money. And I think that's the mistake people make is they're like, oh, Robin Hood or public is offering me 100,000 of

Starting point is 00:27:18 margin against my half a million dollar portfolio. It's going a great vacation. Come on, honey. And let's go have fun. Like, no, that's not what this is. You have to pay the money back. And if you don't, the broker sells the stock on your behalf, no matter the price, then uses the collateral of the stock to pay back the loan. And if that's a taxable event, it is. Or in other cases, It can be a loss, and that's where people really get in trouble, Roberts. Maybe explain as we wrap up this question, how people can be over leveraged in these instances, market corrects, sell for a loss, and now it's a financial disaster. Yeah, for everyday people, let's say you just pass millionaire status or maybe you're at

Starting point is 00:27:56 $2, $3 million in net worth, and this sounds fun. It is a great tool to build wealth and help you get this cash freed up to buy other assets. But the problem is, is you should never borrow so much that if there's a 30 or 40% correction in the markets in your portfolio, that you have that concentrated collateral that can cause your account to get cooked. Like Austin said, they can come in, do a margin call, sell it off at any price to get their money back. So just be careful because if it's under collateralized and this happens to you, you don't want to be going backwards while trying to get a little bit fancy to go forward. I do this. I do it all the time. I've done it for many, many years, but you just have to have those guardrails, like Russ said, to keep you in line so you're not borrowing more than you should against your assets.

Starting point is 00:28:47 Now, our next question comes from Lindsay W. Lindsay says, hey Robert Nostin, I love the show. I'm in my mid-50s currently sitting in the highest federal tax bracket. I'm looking for ways to optimize my tax bill. I'm looking into AQR's Delphi Plus Fund, which is highly talked about right now for high earners. Unlike traditional direct indexing or standard long short funds that harvest losses to offset capital gains, Delphi Plus aggressively uses swap structures and high gross leverage to manufacture ordinary losses that can supposedly be used to offset W2 and earned business income. I'm considering allocating a small, tactical piece of my portfolio here, less than 10% of my total net worth. Given the high fees, typically a hedge fund model of 2% annually with 20% performance, and the immense structural leverage involved, what are your thoughts on this strategy? Is the tax alpha worth the complexity, or do you think the aggressive use of derivatives to offset ordinary income runs too much of a structural gotcha risk with the IRS down the road?

Starting point is 00:29:53 Would love to hear your breakdown on the show. Wow. Okay. That's intense. Told you all we were getting into it in this episode. Yeah. So what's happening here? our friend Lindsay is saying, hey, I'm a super high earner, which means I'm in that 37% tax bracket, which means every dollar I make above X, whatever the number is there in the bracket, is 37 cents on the dollar goes to the federal government, which sucks. It's like saying you're working four or five months out of the year completely for free, and the other 60% is what you keep.

Starting point is 00:30:24 40% goes to the government. Not a good time. I understand the frustration. And so Lindsay's over here saying, well, I found some people on Facebook or people online in these forums that are saying that the AQR Delphi Plus fund might be a way for me to save some money on taxes because if I invest a hundred thousand or a million dollars into this fund, I will be able to use a portion of that investment to offset ordinary income as a loss. So I'll have a portion of my investment used to offset my actual income, saving me that 37 cents on a dollar. Now, I saw reports of AQR's Delphi Plus suggest that the fund uses the swaps and the notional principal contract structures to generate those ordinary losses while still trying to produce some positive pre-tax

Starting point is 00:31:12 investment returns. An example of this is in 2023. In a report citing, AQR's presentation, showed that ordinary losses in 2003 equaled 31% of the invested capital. plus 4% short-term capital losses while the fund returned about 12% pre-tax. So what you're saying here is, I invest a million dollars. I'm Lindsay. I invest a million dollars, right? 310,000 of that million, I get to offset against my ordinary income. So I save then 37 cents on the dollar of 310.

Starting point is 00:31:52 So call that about $100,000, $110,000 of tax savings. But my million dollars is now tied up into this, you know, actual fund. I don't know if I'm ever going to get that money out. The fund, though, hypothetically returned 12% on paper and a little bit of short-term capital losses, where that same million dollars, if invested in the S&P 500 in 2020, would have made you a 26.5% return or about 260,000. And then if, you know, and it's liquid, of course. And then if you kept it in the S&P in 2024, it would have made you another 25% return. So on top of the of your existing call that another $300,000. So now we're at about 500 grand. And then another 18% on top of that in 2025. So all in, let's call it a 600 or 650,000 return on your million. Now, again, this is all completely liquid. So I guess what I'm trying to get out here is yes. You can get crazy complicated and try and use these AQR, Delphi, plus this, that, and the other and try and get some tax alpha in the tune of tens of thousands or maybe six, big years of tax savings. But at the cost of what? At the cost of what, Lindsay? Robert, I want you to

Starting point is 00:33:01 talk about your experience with maybe these oil investments you've made over the years. But I think what's really important here is to really dial in at the cost of liquidity. Now, I don't know the specifics around AQR, and I'm sure they've got some stuff online. I could have done a deep dive into this and I could have given you perfect answers here. So this is without everything known for me. but liquidity with these products are scarce in my experience. Annual withdraws and only a percentage of your original investment can be taken out. Yeah, you get some tax alpha, but you also get a really complicated tax return with different K-1s.

Starting point is 00:33:38 And again, fees, performance, 2 and 10, leverage, counterparty exposure. Like, there's a lot of weird stuff happening behind the scenes here. So here's my advice to you. I think before you do this, I would love to see you, taxing out your retirement accounts, doing some charitable planning. Maybe you've got a donor advise fund. You're doing all the business deductions. You're doing your QSBS planning. You're doing real estate depreciation where appropriate. And you're doing your basic tax loss harvesting right now. You're doing all of that. And you've completely maxed out and gone all in on the normal stuff that

Starting point is 00:34:14 everyone does. And if you still are just so upset about your tax situation, then yes, go work with a tax attorney, not a normal CPA, a tax attorney who understands derivatives, that's going to help you understand the K1 treatment, the liquidity terms, the fee drag, the leverage, all that stuff that we were just alluding to. They will be able to give you better perspective on this without knowing all the details here. I certainly can't. But Robert, I want you to take a moment to talk about your experience working with some of these different funds in the past to try and, you know, generate some tax alpha. Yeah, I don't think it's worth it. I've learned the hard way in several instances over the last 20 to 30 years of doing all of these strategies. And you laid it all out

Starting point is 00:34:53 very well. You have high management fees. You have performance fees on top of the management fees. So they're going to get a big chunk of that performance fee. But then you also have you mentioned liquidity or lack there of it. These have long lockup periods generally. I don't know on this particular one without reading all of the fine print. But this long lockup period, which is what I'm going through right now can be the death of your opportunity cost with this money. For instance, 16 years ago, I did a very similar program into an oil drilling rig company, a very large organization, and it was supposed to be a five to six year lockup period. So I put in $250,000 into this. I was very well aware of what I was doing. And now here we are a little over 16 years

Starting point is 00:35:40 later and my money is still tied up. So from an opportunity cost perspective, a long with all the fees along the way, the lockup period and the lack of liquidity is the number one issue. Because as Austin spelled out and showed you with real numbers, just investing that same money in the S&P 500 for the last 16 years would have far outperformed any such product such as this. So I don't like these. I don't like super high fees. I don't like having these long lockup periods. So for me, I would not invest in this unless you're really, really involved with a really good. tax strategist that knows your situation inside and out and you really understand the fine print

Starting point is 00:36:20 because I don't think there is enough tax alpha there to offset everything else. Last thing I'll add here, this is just more of like my experience figuring out taxes and everything. Maybe Rob, you can talk to this too, which is like if you're a high income earner, any earner, like you are earning money and it shows on your tax return that you made 500, 700, a million dollars of taxable income in 2020. 2025, right, in your instance here, Lindsay. And then you go put a million dollars or two million dollars or five million dollars or whatever into one of these AQR Delphi Plus instruments. And now you've

Starting point is 00:36:56 got a offset your taxable income of $500,000. And you only made $500,000. And so you're like, wow, I pay no taxes. That's great. Yeah, kind of. But now let's say you want to get a loan next year. And the lender looks at your tax return is like, hey, you didn't make any money last year. I'm kind of confused. Like you don't, you don't have a history of earning income. I see that you say you earn a lot, but your tax return says you didn't earn any money last year. You don't earn enough for me and actually lend to you. And so I think this is a mistake some people make. And again, there's a balance. You can go figure out all different ways to, you know, get money. And we just talked about, obviously, portfolio loans and things like that. But whenever you're someone that wants to completely decimate

Starting point is 00:37:34 your taxable income and, oh, I didn't report a profit last year. I didn't make any money. It's like, okay, that's cool from a tax perspective, I suppose. But like now on your tax return, it says that you make $20,000 a year. Good luck doing anything on that. Like, that's not great news, in my opinion, from someone who wants to have access to liquidity and different lines of credit or mortgages or, you know, things of that nature. I want to be able to report that I'm making hundreds of thousands of dollars a year as a high earner because then that offers me a ton of flexibility on, you know, accessible loan options and credit and things like that in the future. If it's, you know, again, mortgage or a business or something else of that nature. So just keep that in mind is like every dollar that you're saved,

Starting point is 00:38:14 saving, you know, you're using to offset your taxable income is like straight up not income that you can say that you made. But there's also a million other ways for people to offset this high wage income. They can invest in opportunity zones. They can invest in short-term rentals. They can use the Augusta rule and rent their house out to their business. They can do bonus depreciation. There's a lot of other structures where you're not giving away such a big piece of the pie just to save on some taxes. So do your research. Join the Rich Habits Network if you haven't already and learn more about this.

Starting point is 00:38:47 But really, really enjoy this question. But I just want to say to everyone else, make sure you're not getting too fancy to where the people building these really giant beautiful towers aren't making more money with your money than you are. So our last question comes from Will on Instagram. Will says, I would love to know, are penny stocks worth investing in? And if so, what are some of the up-and-coming penny stocks I should be investing in? 18 years old and I've been investing since I was 14. Thanks. Okay. Well, well, that cool, man. I'm glad to hear you're investing. I'm glad to hear you're interested in owning equity in businesses. I think that's awesome. I was exactly where you are at your age. The first stock I bought was a penny stock. I think I was like 16 years old. I convinced my parents to open a little brokerage account for me. And me and a bunch of my buddies, I think I was a junior in high school or something, thought that we had figured out the company that was going to make the

Starting point is 00:39:42 CD screens for the new iPhone. And I thought if they would get that contract, they would make a ton of money. Stock price would go up like crazy and we're all going to get rich. So I put in 50 bucks or 100 bucks or whatever it was and I was dead wrong and it essentially went to zero and I lost on my money because that's how penny stocks work. So let's walk through this, Robert. Unlike the name of a penny stock, you think penny stocks trade for one, two, three, four, five cents, right? Just a couple pennies. Penny stocks could trade for several dollars, five, ten, $10, $15, $20. What makes it a penny stock is the size of the company's market capitalization. And so what that essentially means is the value of the stock itself multiplied by total stock

Starting point is 00:40:23 outstanding. So you think like, okay, the market cap of a company could be thought of as the price tag. If someone's super rich like Warren Buffett, he buys companies all the time with Berkshire Halfway, he wants to come in and buy a company, what's the price tag of the company? That's the market capitalization we're alluding to. penny stocks tend to have market capitalizations below a billion, below 500 million, below 250 million. If you're buying or selling any stock in any company below $10 billion of market capitalization, general rule of thumb is to be careful. It's worth less than $10 billion for a reason.

Starting point is 00:40:56 Now, it might not be a bad reason. The company might be early. The company, you know, for example, Robert, Monster Energy was one of the best performing stocks of our generation and it started as a penny stock and it was just a couple of guys making some energy drinks and then people invested into this penny stock and it turned into monster energy is today. It was like, you know, big, good, cool companies start as small companies and I'm not taking that away from that. But what I am saying is a company with a market cap of 200, 400 million dollars, a billion dollars is much more volatile. They have much less revenue than an Apple or a Microsoft.

Starting point is 00:41:35 Sometimes they're not as transparent when it comes to their earnings calls as maybe a Mark Zuckerberg might be. So there's a lot of different things that make penny stocks very, very dangerous. And the reason I say dangerous is because you have to think about the opportunity cost. For every dollar you might be investing into a penny stock is a dollar that's not compounding over years and decades of your life, especially at 18 years old in the S&P 500, the Dow Jones or the NASDAQ 100, right? These are index funds and ETFs that compound at 8, 10, 12% over a long period of time on average. And so if you have $100 and you want to throw it into a bioscience penny stock because they've claimed that they're going to use AI to cure a rare form of cancer, okay, cool. Just be careful knowing that this company likely doesn't have any revenue.

Starting point is 00:42:25 I would argue you're not an expert when it comes to biosciences or cancer drugs. And I'd also argue you're probably better off investing into things you actually understand. So want to bring it back home here, Robert. One, invest in stuff you understand. If you don't understand it, don't invest in it. Two, opportunity cost is important. Every dollar not invested in the S&P, the NASDAQ, the Dow Jones is a dollar that you're losing out on, especially at such a young age, when compounding can really turbocharge

Starting point is 00:42:52 your net worth over a long period of time. Will, I love your spirit, but penny stock trading is gambling. And the Rich Habits podcast is not here to teach people. people gambling. And I'll be honest with you, we love math here. You're more likely if you read or had notes on basic blackjack strategy, you're more likely to be profitable playing blackjack at a casino than you are winning at a penny stock trading strategy. I looked up some numbers for us here today. 78% of frequent penny stock traders lose money and they lose over 90% of their capital within two years. That's crazy, right?

Starting point is 00:43:33 But that's the real math. That is why we don't talk about penny stocks. That's why neither of us trade penny stocks. But I appreciate the fact that at such a young age, you're investing and you're interested in learning how to invest. I look at penny stocks as gambling and not investing. And that's why everything Austin said is the blueprint for you and everyone else listening because there's always going to be a tip from Bill at the Barbershop or a friend that's

Starting point is 00:44:00 at a party telling you what to buy. and usually you have to look at that as gambling and you're probably going to lose your money. So remember that. 78% of all frequent penny stock traders lose money. Keep that in mind and just build a portfolio on all the things we talk about and you'll do just fine. And I think a lot of Will's excitement for penny stocks might come from this notion of like get rich quick. Right. Will's trying to say, hey, I want to make a lot of money as fast as I can. Will, I promise you at 18 years old, there are infinite ways to make a time. ton of money using AI for website development. Fable 5 is I think still out for another couple of days

Starting point is 00:44:37 and then you can buy it more with API stuff. But like there are so many ways, Will, that you can turn 100, 200, $200, $500 of seed money in a business that you start into thousands or tens of thousands over the coming years. If it again is a website design agency with AI or maybe there is something where you want to do home services, you know, pressure washing or pest control, like door to door sale. Like there's so many other different ways that you can actually say, I have $100, $100, $400, $600, $600, $800, $600, in a consistent manner with elbow grease, hard work, and unique skills in perspective. Then I'm going to put $100 bucks into a penny stock and cross my fingers. That's not a strategy. That's gambling. That's hope. Take that $100 and go

Starting point is 00:45:27 deploy it towards something that actually has a outcome of success that will align with your get rich quick excitement because I promise there's a ton of different ways out there. This episode is exactly why the Rich Habits podcast is one of the top financial podcasts in America because we spell it all out and we help people get on track and understand hope is not a strategy and gambling is generally something that's going to lose you money and we're here to teach you solid, tried and true strategies that work decade after decade to help you build wealth so you can live financially free and go do whatever it is you want in life. And that is why I love filming these podcasts every single week. So do I, Robert. And another reminder, if you are someone

Starting point is 00:46:13 that wants to invest into pre-IPO companies or series A, B, C, or D, like we're doing all of the cool investments inside of the Rich Habits Network. I know we talked about the Robo Strategy BOT, E, ETF, we've got exposure to figure, Apptronic, standard bots, and path robotics, all inside of the Rich Habits Network, straight up into those companies at their recent valuations and previous ones. We've got an Apptronic and I think like a billion dollars or something, a billion four maybe, and now it's five and a half. But regardless, we've done these. We're doing it. We'll continue to do it, not just with robotics, but with a ton of other different things. We've got a really interesting nuclear energy company we're doing right now, an open source, open weight, front

Starting point is 00:46:56 tier AI LLM company right now. We've also got a recent aerospace company we're doing. We've got tons of cool stuff that's just join us, hang out, do a deep dive, do your own research, kick the tire, understand what's going on, then make a decision seven days later if you want to stick around or not. But you've got to go check out the Rich Habits Network. There's going to be a link to join us in the show notes below. Seven day free trial. We'll see you there. Everyone, thanks so much for bearing with us on this interesting little Friday Q&A episode. Don't forget, we've got that AI agent webinar coming up in the next couple hours. Or go watch the replay.

Starting point is 00:47:29 It's going to be linked in the show notes below. Everyone, we'll see you on Monday.

Rich Habits Podcast - Q&A: Am I Behind Financially?, Robotics Investments, and the “Buy, Borrow, Die” Strategy

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