We Study Billionaires - The Investor’s Podcast Network - TIP 103 : Life Inc. - Running your home finances like a business w/ Doug McCormick

Starting point is 00:00:00 We study billionaires, and this is episode 103 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Stig Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your host for The Investors Podcast, and as usual, I'm accompanied by my co-host, Stig Broderson, out in Seoul, South Korea. And we also have a very special guest with us today. And his name is Doug McCormick. And for anybody that doesn't know, Doug, Doug comes with just a wealth of information for us. And we're going to take the episode in a different direction than what we normally do. Stig and I get a lot of email traffic from people. And one of the things that we have been getting a lot of traffic. on is to focus an episode really kind of towards the individual who has a job, who's working

Starting point is 00:01:08 your normal nine to five kind of job, and how they can go about investing and how they can go about thinking of their employment, how they can maybe translate some of the assets that they're buying, and just kind of that mindset of your ordinary investor out there. And on our 100th episode, we were cold calling some of the people in our audience, and we talked to an individual named Chris. And I had brought up the idea of Chris reading a book called Family Incorporated. And I told him that I have a good friend. His name is Doug McCormick, who wrote the book. And I felt that it was just a perfect fit for the question that he was asking us and for what he was really trying to go through in his current position in his life, which he was

Starting point is 00:01:49 an English teacher. And a lot of the ideas that Doug talks about in this book is exactly what he was trying to understand. So we decided to bring Doug on the show, and we're going to talk about this idea that is all through Doug's book and kind of the main theme of what he was writing about. So that's what we're going to be talking about in this episode. And so Doug is here with us. And Doug, we just want to thank you for taking time out of your very busy day to talk with us about some of the ideas in your book. And we're also going to talk about some other things that I think are going to be interesting for the audience as well. Thanks very much for having me. I think financial literacy is a huge challenge and opportunity.

Starting point is 00:02:25 you need today, so happy to talk about it. So just to give the folks listening a little bit of a background on Doug, so Doug went to West Point and he majored in economics. Doug was the first captain whenever he was at West Point and he's smirking. And for anybody who doesn't know what that means, the entire West Point is run by one cadet. The general's in charge of the school, select one cadet, and he runs the entire school. He's in charge of all 4,000 students that go there. and it's a very, very difficult thing to be selected for, and it's very honorable and only one person

Starting point is 00:02:59 out of the school per year gets selected for this. So Doug was the first captain at West Point. And then later on, he went to Harvard and he got his MBA. And then he worked for a company called Thayer Capital Partners. And then he was the founder of his own company, which is HCI Equity. And he's the current managing partner at HCI Equity. So that's a little bit of a background on Doug. And so our show is going to be broken down into three different segments. We're going to talk about Doug's experience, his family, his background, because he has a very interesting discussion in his book. He also has some interesting things going on there, which we're going to talk about that I think is going to really raise some eyebrows for some folks. Then we're going to talk a little bit about

Starting point is 00:03:39 Doug's book, Family Incorporated. And then we're going to also talk about some of his opinions on the current market conditions and trends and things like that. So a lot of stuff to discuss. So Doug, what a pleasure to have you on the show. I apologize. for going on and on about yourself. I can see you're a little uncomfortable with me. Yeah, I'm worried I'm not going to live up to that intro, but I'll do my best. So I want to start off the show a little bit differently, and let's talk about this time at West Point, because this is such an, it's rare for even me as a grad to really kind of sit down and talk to a guy who was a former first captain.

Starting point is 00:04:15 And I think this really doesn't even have to do with investing. I just really want to talk to you about what did you learn at such a young age? And they say that, you know, when you're talking about leadership, the best leadership that you can ever experience is leading your peers because that's like hurting cats. Because no one has to listen to you. They're just like, you know, you really have to muster up some real leadership in order to lead your peers. And so what was it like leading a thousand of your peers and then 3,000 underclassmen at such a young age? What was the big thing that you learned out of that experience at such a young age? I would say humility.

Starting point is 00:04:52 To your point, I think leadership amongst peers is a very sensitive skill. And it requires a lot of flexibility. And I think people in that environment, they have to want to follow you and they have to want to be on the team. And to do that, you've got to be a good communicator, but also be humble and have them do it out of loyalty and out of respect for the shared mission. Awesome. Fantastic. Anything else that you would say that was taken? way or something that was unique that happened to you or a good story or anything?

Starting point is 00:05:21 I think, you know, honestly, it's a lot less about my experience as First Captain and more about my experience is surviving with a four-year marathon, if you will, like every other cadet. I often say, you know, West Point is a undergrad in life. And so for me, it was really a formative experience. I think, you know, the first thing I would say is it's designed so that everybody fails. And I think because of that, you learn to embrace failure as a learning opportunity and you learn to kind of get back up, dutch yourself off and work harder. You know, there's a saying here,

Starting point is 00:05:49 I'm sure you've heard it, cooperate and graduate. And I think West Point, more than almost any other undergraduate institution, forces people to learn to work together in very stressful environments to achieve success. And I'm not sure if I learned this one in school or as a junior officer,

Starting point is 00:06:05 I think maybe a little bit of both, but I'm a big fan today, and I know it influences the way I think about business. It's the old saying, you know, a mediocre plan, well executed, is much better than a perfect plan with mediocre execution. And so I think West Point, by design, we're somewhat practitioners, we're doers, and I've taken away that experience as well, I think.

Starting point is 00:06:26 So, Doc, I know that you have strong family values, both personally and in terms of personal finance. And there's this story that I absolutely love about your dad helping you out to pick your very first stock, it's seven. Could you tell me if there is a common theme to what you learn from your parents? and then to what you teach your own kids about maximizing your family's wealth. So he bought my brother and I our first stock at 8-7. Another example that is he took me and my brother on a sabbatical while he was teaching,

Starting point is 00:06:55 and he told us that a cross-country trip, we could each buy one stock of some company that we encountered on our journey. We toured a gold mine out west called Home State Gold Mining Company. This is 1977, and I walked out of the gold mine, and I said, Dad, I want to own gold mine stock. And it was really interesting for me because, you know, I could understand that a stock wasn't a piece of paper, but it was a company, it was assets, it was people, it was a product.

Starting point is 00:07:18 And so he really helped me, you know, kind of cut through the intimidating factor about investing and realize that this is, you know, part of everyday life. So I want to talk about gold miner stocks really fast since you brought that up. You know, the thing that kind of surprised me with this most recent movement from December 2015 kind of to where we're at right now, we've seen gold jump in the commodity price by about 30% somewhere around there. But the thing that I found really surprising is during that time, you saw a lot of the gold miners jump 100% on that commodity movement. And that's something that, you know, I think is actually a pretty common theme when you see gold and miners type stocks

Starting point is 00:08:00 following the commodity itself, how they can jump that much. And that's something that I kind of learned just in this past year that I probably should have known before that, but something that I did learn. And I wanted to highlight to the audience that sometimes when you get those big movements on the minor side of the house, you actually see it move quite a bit. And I do want to highlight that George Soros, billionaire George Soros, had an option that he had put on kind of early at that time frame right before the gold pop. And now I recently read that he is completely out of that position, the Barracks gold miner position. I guess he's completely out of that position right now, which I find really interesting because you've got all these gold bugs really kind of hitting gold really hard

Starting point is 00:08:37 right now with where the Fed's at. So I just wanted to highlight that from, you know, our motto of the show as we study billionaires. I wouldn't kind of highlight that while we had the opportunity. All right. So, Doug, something really interesting, I think, about your background is the depth of investing knowledge that runs in your family. So this is really going to surprise a lot of people in our audience. They're going to love this one. So, for example, your brother is currently the president at Bridgewater Associates and the former Undersecretary of the Treasury. And so my question to you is when I think about your expertise in acquisitions and mergers and your brother's background of working for one of the smartest macro thinkers in the entire world, which is billionaire Ray Dalio,

Starting point is 00:09:20 I would imagine there's some really, really interesting conversations during holiday get-togethers. And so I'm curious what the most hotly debated or number one investing topic is when the two of you get together and you start talking. Is it the 30-year bond bubble? Is it the dollar denominated debt foreign dollar reserves. I mean, just pour it on us. We're dying to know. Yes. We're so busy with kids and family when we get together for our limited time. It ends up usually being too much of that and not enough of just good quality time between the two of us. I haven't said that, you know, I think a couple things are interesting about our experiences. First of all, I'm so proud of Dave. He's just done amazing things, you know, both in service

Starting point is 00:10:02 to the country, but also in his current position. And Dave has a decade of experiences thinking about big macro movements and kind of, you know, calling whether the tides rising or not. And my experience is very different. You know, I'm kind of a stock picker, if you will. I'm a micro guy, bottoms up. You know, to a certain extent, our skills are somewhat different and perhaps complimentary. You know, Dave's calling the rising tides and I'm trying to pick the fast boats, if you will. And so to a certain extent, we're coming at the same situations with different perspectives. You know, I think the thing that we spend the most time is really kind of a form of entrepreneurship. So we talk a lot at this point about how can we use our skills,

Starting point is 00:10:42 our knowledge, our expertise, our relationships to deploy our capital in interesting ways. As you know, it's a very competitive market and almost everything looks expensive. We can talk about that later. And so I'm a big believer in trying to figure out ways to combine capital with unique insights that give you an angle. And so we've done a lot of things together where we're back in an entrepreneur, in many cases, is another West Point alum that we know and trust, or in a few cases, we've done some real estate things or areas where in some cases we're just trying to get an education. So we've made an investment in a cybersecurity business that's private. We think highly of the person, but we also think it's a great way to just get a perspective

Starting point is 00:11:19 on a really interesting industry. So I want to talk to you a little bit. You briefly mentioned real estate. And this is, I think, a really, really interesting conversation as we look to the next 10 to 20 years just because of where interest rates are at. And, you know, you go back to 1980, 1981 when interest rates kind of peaked out. And I mean, if you've been in the real estate business from that time till now, it's been an amazing place to be. I mean, you couldn't be in a better place just because as interest rates go down, that's a just really advantageous place to be

Starting point is 00:11:53 from a capital appreciation position on the real estate that you own. So I guess my question for you would be this is as we look to the next 10, 20, 30 years and the potential for interest rates to kind of reverse themselves in this 35-year bond bull market maybe inverting and start to swing maybe the other way. Do you think that it's going to be a really difficult time for people in the real estate market because of the impact that interest rates would have going in the opposite direction. Yeah, I personally think it's a really tough trade. So, you know, I think as you look at asset class returns over the last 35 years across the board, I think in my own mind, I believe you've got to acknowledge that there's been a really strong tailwind associated with, you know, kind of decreasing

Starting point is 00:12:42 interest rates, driving cap rates across all asset classes. And if you're in a leveraged asset, obviously that turns out really well. And on a go forward basis, you know, I think it's pretty tough to assume certainly any kind of returns like historic returns. And if I'm going to be in real estate, it's in a real estate situation where I'm very happy with the yield and not the price appreciation. And I think those situations are probably few and far between, but I think that's how I try to play it if I was. I don't think you're going to see cap rates. It's almost mathematically impossible. See cap rates gets much better in my mind. Yeah. No, I think that you have a really strong point there about the yield is where you're maybe focusing your attention opposed to the appreciation

Starting point is 00:13:19 and the market price. That's a really good point. So, Doc, let's transition into your book. In a book, talk about the struggle you had coming out of the army and deciding to return Harvard. The cost to go to Harvard is extremely expensive, but you use this as a great discussion because you talk about the idea of your time and labor being viewed as a family asset. Could you elaborate a bit more than that and also give us the main theme of your book, Family Inc. Sure. So the full title is Family Inc.

Starting point is 00:13:48 Using business principles to maximize your family's wealth. And I think it's a really interesting framework. Essentially, what we're saying is that a person or family can look at itself as a business and employ business principles to make informed decisions. And essentially, the game of life, if you will, is simply converting labor assets into financial assets. So when it comes time to retire, you can use those financial assets to satisfy your consumption. And I wrote the book that way because I always struggled personally with trying to figure

Starting point is 00:14:19 out ways to combine disparate pieces of advice. So I got investment advice from one place. I got advice on education and career from another. And for me, this model of viewing myself as a family kind of provides a guiding compass, if you will, in terms of how to think about all those tradeoffs and how those choices fit together. So investments in education, career, impact your insurance needs, impact your investment profile, et cetera.

Starting point is 00:14:46 And I also think it's interesting because there's been a lot of thinking on this topic in business. So I use the point about how I struggle to Harvard. and I think it's a really interesting example of how the book looks at the world a little bit differently than most people do. So I entered into school pretty much with no assets. I was fortunate enough to be eligible for loans. And so over the course of two years, I exited school with debts well in excess of $100,000. So the traditional view of the world would look at that balance sheet and suggest that my net worth had gone down by $100,000.

Starting point is 00:15:17 The way Family Inc. looks at that same circumstance is it says that you've got to look at all your assets, including your labor. And so that 100,000 investment, I believe, dramatically increased my wealth given the opportunities that I was able to tap into because of that experience. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history.

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Starting point is 00:19:39 All right, back to the show. And, Doug, how do you estimate that and clear the outcome of an education, say, at Howard? They're very different from one person to the other. But how do you value, say, the monetary value of an education? So, first of all, let's talk about how to value lifetime labor. It's really simply a product of how old am I today? How old do I believe I will be when I retire and what is some ongoing income assumption throughout your career? Now, what I can tell you is when you do that math, it's absolutely going to be wrong.

Starting point is 00:20:12 I think the value in it is less about whether it's right or wrong and more about that you're viewing your career as a long-term asset that requires investment and you can think about payback periods in an appropriate time. For example, I mean, I think the discussion around education and whether it's a good investment or not, I personally think is ludicrous. I don't think people are appropriately evaluating the time horizon under which you're likely to recoup that investment. And the second thing, you know, I look at income distributions. And what it says to me is that the labor market is somewhat inefficient because, you know, some people come out of school

Starting point is 00:20:48 and can generate significant income where others can't. I believe that's a product of capabilities and choices, not so much whether education is a good investment or not. And I think a really important part to that is also the degree that you're actually spending that money on. Because, I mean, everyone's heard the story of the person who spends $200,000 and gets a degree that's only going to increase their annual income by $500 a year. Those degrees are totally out there. And I think that it's an important caveat to add in there that I completely agree with what you're saying. But I think that you have to add in that last point of if you're spending that large sum of money to get that degree, it has to be something that's going to add to that future cash flow as you're looking at it.

Starting point is 00:21:30 Totally agree. So in the book, there's a couple different charts that I think are really informative, but one is a distribution around the top highest curriculums in terms of what the compensation is, post-graduation in the bottom 10. And what you see is there's tremendous disparity, like degrees that are STEM-focused, you know, in many cases yield a multiples higher income immediately after college than degrees that are more liberal arts focused. The other thing I think is really important is you've got to be committed to pursue a career that uses education is a key element to it. And so, you know, I think the worst investment you can make is go to school, spend the money and deploy labor unproductively, if you will, not to take advantage of it

Starting point is 00:22:11 when you get out. So you're absolutely right. I would say it this way. With the right person with the aptitude and the interest, I think education is still a tremendous investment. Yeah, I love that point. And I also want to say, like, as a professor, I see I have some sort of like two different type of student. Like one student would come in to get the piece of paper where it says someone's so degree and then the other person actually come to university to learn. And sometimes it's like, why is it that you, I know I'm sounding like a grumpy old man we're saying this, but why do you come here if it's not to learn? But to some people, it's actually just a question of getting that piece of paper that can get them access to something else. And I think now that you're

Starting point is 00:22:49 spending so on so many years here, why not get 100% out of it? Yeah, I really think this is an interesting kind of national debate where we're doing our young people a disservice because I don't think we're adequately arming, you know, high school graduates with good tools and frameworks to think about likely the most significant investment they're going to make. And if it's not the most significant investment, it's probably the most influential choice they will make about financial security. And I think we're underweighting kind of the economic consequences of some of those decisions. In your book, Doug, you talk about three major risks that could occur for the family. And the first one's inflation.

Starting point is 00:23:26 The next one is shortfall risk. And the other one is financial asset impairment. When I look at these three, the most interesting one for me personally is really this inflation discussion. And when we look at the U.S. market and many global markets, inflation has been decreasing for 35 years. Do you see this trend continuing into the future? And I know this is a really ridiculously hard question.

Starting point is 00:23:48 But what are the critical variables that we really need to be aware of and what do we need to be watching for for that trend to maybe change. I've heard some people say that they're really kind of looking at the velocity of money whenever that starts picking up that you're going to maybe see inflation go with it and maybe a rapid way. But I'm curious to hear your thoughts. What are those critical things that you're looking at that maybe would cue you onto that? Yeah, I think the first comment would be a little bit of a caveat, which is I think anyone that projects this kind of topic with tremendous certainty, you should view with tremendous skepticism. So having said that, what I can say with certainty is there's no way this trend that we've experienced over the last 35 years can continue.

Starting point is 00:24:26 I think it's basically mathematically impossible unless you believe we're going to be in a deflationary environment, which I think is very unlikely. I would say I think the risk is not symmetrical. You know, if inflation is a little bit under expectations, I think it's going to be very modest. And if we're surprised, I think you could be surprised meaningfully, you know, with greater inflation, which is going to really be problematic across, you know, all asset classes when you think about valuation. So the consequences of that are significant. You know, I think my own view of the world is I don't see any impetus for near-term inflation. And so call that kind of the next several years.

Starting point is 00:24:59 And I'm looking at kind of two things. One is the labor markets. You know, I think it seems to me like the dynamics of the labor marks have changed transparency of wages, international trade, and what technology is doing to the demand for various types of labor, I think is really kind of compressed wage growth in a way that's going to dampen inflation. In terms of the overall economy, it feels to me like a lot of historic engines of growth, China, Brazil, India, have structural problems and are not posting the same kind of growth numbers that I think have spread inflation throughout the globe. And so I see a lot of kind of capacity

Starting point is 00:25:38 in a slow growth economic environment that will keep inflation kind of in check here for the next several years. I do think, think it's quite possible we're going to see a new normal and that historic inflation rates of you know, two, two and a half percent may be higher than we see on a go forward basis. You know, the last thing I would say is just to tie it back a little bit to kind of the Family Inc. perspective, I think this is a really interesting topic. It's the hardest risk to kind of insure against, if you will. I think fortunately the family, most families are relatively well insulated against some of this risk because we have our labor assets. We have our Social Security

Starting point is 00:26:15 assets. I view both of those as kind of, you know, inflation indexed annuities, if you will. And so where it really presents challenge, I think, is for retirees when they've exhausted their labor, and they just have less degrees of freedom to manage an inflationary environment. You know, I think that that's your last point there is something that, I mean, I just look at my own parents and others out there that are retired. And they're trying to go and get yield anywhere. And I just don't know where in the world you can find it. And so for people that are retired and not able to really rely on their labor anymore, as you were discussing, what in the world are these people to do? And when you look at the action of central banks and it just seems like, hey, let's just keep doing QE and QE until something breaks.

Starting point is 00:27:03 I don't even know what in the world is a person that's with an investing media platform. What in the world do we possibly tell these people to invest in without enormous downside risk and that they can get anything reasonable on a return? I mean, just a couple percent. Like, what do we say? Well, I think answer one is not a good one, but I think it requires incremental cushion in terms of how you think about your financial planning. You know, I believe that it's kind of you're picking the least bad alternative, which I still believe to be equities. And for me, I think equities in many cases, you could look at it as a bond. with an unstated return.

Starting point is 00:27:41 You know, you still have fundamental underlying cash flows that are ultimately going to drive kind of a long-term, you know, kind of yield, if you will, but you're going to have to manage your kind of yield or your consumption with an equity-rich portfolio that you are harvesting, you know, various assets. And the last thing I would say, which I think is good news is I think in many cases, retirees underestimate their duration. And so even if you retire at 65, if you've got Social Security and you've got a nest egg that you plan to deplete, you know, call it over the next 25 years, you still do have

Starting point is 00:28:13 duration on your side, and I think you can, you know, suffer through a little bit of volatility to generate the right consumption yield. So you talked about equities before, and I think acreages is also one of the hot topics that we have here on the podcast. And one question I'd like to address is, where do you see that we can get a decent yield in acreages, Mark Rod? Now, are you looking at American equities? Are you looking at various sectors?

Starting point is 00:28:38 or are you looking abroad? Where are you looking? Because Preston and I have a hard time finding it. We're pretty big bears. Yeah, I know you see a smile on that, but we have very negative people. Right now, right now we are. Yeah, so I guess the first thing I would say is I think I'm bullish only because I keep pushing the view that we all have very long-term time horizons.

Starting point is 00:29:01 And if I had to, you know, have tremendous conviction about returns in a one, two, three, four-year time horizon, I'd have a lot less of it. I'm very attuned to kind of valuations and pricing in the private markets. And when it comes to the public market stuff, I'm much more of a broadly diversify, you know, U.S. emerging markets, developed Europe and, you know, kind of cover my bets, if you will. You know, I think you can make a pretty good case that the various markets are appropriately valued. I mean, I think Europe looks cheap, but I think there are lots of issues with it. So I think you brought up a really interesting point for our audience to understand where you're talking about the difference between private markets

Starting point is 00:29:35 in public markets. And I think that, and this is my guess, I'm obviously not dialed into private markets even remotely to the level that you are, Doug. But I would think that the cap rates for real estate and kind of the discount rates that you're getting in the private market are much, much better than what you're seeing in the public market just because of the amount of participants and the amount of competing interest of bidding up different prices. So was that a true statement?

Starting point is 00:30:04 Are you seeing that the yields that you're getting on the private side is much better than public markets? Yeah, I believe that to be the case. So if you look at historic returns and alternative assets like private equity, they have been some of the best amongst all the various potential asset classes. Candidly, I think success breeds mediocrity. And so what we're seeing over the course of the last 10 years is a tremendous growth in the asset class. We're seeing it mature. We're seeing it become more efficient. Having said that on a relative basis, I still think it's much less efficient than public markets. for sure. 20 years ago, the private markets, you could make money because you could buy right. In the last 10 years, you could buy reasonably well, but you could finance with significant leverage, and so you could drive equity returns. And the reason I think that is because we've got a tremendous number of owners, families, who at this point, this has become a disproportionate amount of their wealth. They've created some significant wealth and have a very different risk

Starting point is 00:31:00 profile than an investor like me. So I think to a certain extent, we're buying businesses that have been managed like an annuity, and we're figuring out a way to manage them like a growth equity play because we're pursuing growth through acquisition, through organic investments, or through management arbitrage. I'm just super interested in this whole concept by private equity. And what I hear you're saying is that you see more interesting options in the private than in the public markets right now. And when I'm looking like all over North America, I see with all the baby boomers retiring,

Starting point is 00:31:33 that with your company, HCEI, equity partners, you must see a lot of interesting value picks for corporations with no succession plan in place. And, well, first of all, would you agree with that thesis? And could you secondly talk about what type of opportunities

Starting point is 00:31:48 that you see out there? And Doug, I want to piggyback on Stig's comment because my question's kind of related to the same thing that he has. When you're seeing these companies that you kind of say are coupon-like, if you will, do you see that these families are just kind of like sucking the blood out of it and it's maybe poorly managed and it's just kind of this thing that's just droning on because it kind of resembles

Starting point is 00:32:11 this Carl Icon book that we're reading right now where he kind of goes in and he can see tons of value in it but he can see that the management really just doesn't know how to take it to the next level or tap into the resources and the asset value that's currently existing on the balance sheet? Yeah, I think first of all, you know, interesting analogy between ICON and private equity in general. is a control element. So all the things that we're doing, we're generally buying more than 50% of the business, which comes with the ability to influence trajectory on a go forward basis. So I think, you know, that's a key element. I do think we are buying at valuations that are less than the public markets, but I would argue maybe appropriately so. In many cases, these businesses don't have

Starting point is 00:32:51 the same management depth. They're much smaller. They have an earning stream that's more volatile. But again, where I think the real big opportunity is the ability to add value. And I don't view it as, the owners kind of sucking the lifeblood out of the business, but it's a different risk profile and a different capital base. And so, you know, if you think about just forced succession, well, first of all, what I love about the business is there are reasons that someone may want to sell you the business that are unrelated to the fact that it may be the right time to maximize value, right? There's a natural reason that they need to do succession planning. They need to diversify assets for the family. So I think that creates an interesting dynamic. And then the second is, you know,

Starting point is 00:33:30 you make different investment decisions if this represents 90% of your wealth versus if this is a small percentage. So one of the things that we do with most of our investors is encourage them to invest a little bit. So we get them liquid on 90% of the value. They put 10% back in with us. They go along for the ride. And if things go well, we've got somebody who's very knowledgeable about the business that has a chance to, you know, triple work with droop with their money on the reinvest. Awesome. That sounds like fun. It's a powerful model when it works well, but it's sloppy and it's never easy and, you know, success is never straight line, that's for sure. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are

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Starting point is 00:37:40 What are your thoughts on the current market? I know it's probably very different from company to company, but where do you see the private equity market right now in the US? Should you hold on to these annuities as the yield that you can get almost nowhere. It's more a game of optimizing and resell it. So just between the two and then perhaps you can briefly touch upon the IPO thing. But how do you see that?

Starting point is 00:38:04 I think the first thing is I think in general, the value out of private equity is being able to proactively manage it. And once you've done whatever to create value, whether it be additional consolidation, you know, improving the management team, growing organically, I think in this market environment, you should be actively thinking about liquidity. because could it get better? Yeah, but again, I think it's asymmetric. It's likely to get worse than it does get better. So I think, you know, if you don't have specific value that you think you can bring to the table, it's a good time to be returning equity. The second question relates to kind of sources of exit. You know, there are three, basically. You're selling to a strategic, you're selling to another sponsor, you're taking the business public.

Starting point is 00:38:44 I think a preponderance of the lower middle market where I play is likely strategic exit. And we see a real appetite by strategics. who are essentially looking for organizations like ours to package small assets into an integrated larger asset that they can afford to mobilize a big company to buy. So we're buying relatively small businesses, call it five-maintax cash flow, and we're trying to create businesses of 20 or 30 pre-tax cash flow. A strategic can look at that business in a way that they can't look at the three predecessors. And so I think there's just real value in packaging, sub-scale businesses, integrating and positioning those for sale.

Starting point is 00:39:23 So Stig and I are doing a very poor job of talking about the direction we wanted to go, talking about the family ink and everything. All good if you don't mind. All good if you don't mind. We're having too much fun talking to you, Doug. So one of the things I want to highlight and kind of taking it back to your book and some of the resources that you have tied to your book, the thing that I really like is that you provide free tools for people to download off of your site for people to develop their own income statement and balance sheet. and this is so neat. I think this is really awesome. And I just wanted to provide this discussion to our audience so that they're aware of this.

Starting point is 00:39:59 Because one of the things that we've found with people that listen to our show and go to our Buffett's book site is I think the biggest hurdle and the biggest gap is just terminology. Because not everyone's gone to business school. Not everyone has these unique opportunities to be immersed in this stuff and deal with it on an everyday basis. But like you talk about in your book, they're earning profit. They're earning more money than they're just spending. And so what do you do with that? Well, you got to buy financial assets that are going to create more revenue stream for you. But how do you do that if you really don't understand the terminology like a person who's immersed in finance or in the business sector? So

Starting point is 00:40:36 one of the things that we try to tell people is, hey, create your own income statement, create your own balance sheet for yourself. And if you do that, you really start to understand the terminology. And then when you go and look at a multi-billion dollar company, you're going to kind of see it in a similar light the way that you were making your own personal income statements and balance sheets. So you have a tool on your website, and I want to give you the opportunity to talk about this so people can go there and sign up for this. You know, I have a website called family ink.com, and on that site is essentially a chance to build your own income statement and your own balance sheet.

Starting point is 00:41:10 And, you know, to your point, you know, an income statement is simply a budget. And in a budget, you list all your expenses and what's left over at. after your salary, that's savings in company vernacular, that's profits. And then a balance sheet is simply, you know, all your assets on one side, all your liabilities on the other. And the difference between those is your net worth. And so, you know, I think creating the income state and the balance sheet and seeing how those two tie together is very valuable. I'm kind of a critic of very detailed budgets because what I find is people invest a lot of time tracking information that they do nothing with. And so my view is, if I look at an income statement, I see exactly how much I

Starting point is 00:41:50 saved or profited over the course of that period, whether it be a month or a quarter or a year. And if I can compare balance sheets over two time periods, I can see how much my net worth has grown. You know, my balance sheet, unlike most financial balance sheets, forces the user to include your labor value and your social security value. Again, not that you're likely to estimate those perfectly, but it's an important asset that I think you need to take into account as you think about asset allocation and your overall wealth creation. I mentioned that a lot of the tools that businesses use can be employed as you think about your own financial circumstances. And so there are a bunch of analytics to help you think about as your asset allocation right, do you have the

Starting point is 00:42:29 right amount of debt relative to your income? What kind of margin do you have on your earnings so that you can kind of benchmark yourself over time? Okay. So to piggyback on that, One thing we'd love to do here on the podcast is to debunk financial myth. Some episodes it might be stock investing. We talk a lot about billionaires and we also talk about personal finance. But Doug, which financial myth do you think is most costly when planning for a family's financial future? So, you know, there's two that jump to mind. So I'll give you the most costly and then maybe the most common.

Starting point is 00:43:02 So I think the most costly relates to how we think about measuring performance and risk. So, you know, generally people think about asset classes in some combination of risk return, whether it be sharp ratio or something like that. I think many people don't look at the right performance metric in terms of return. I think we should be looking at after tax, after fee, after inflation returns, not nominal returns. Now, that's hard for an advisor to do because they don't know your tax position. They don't know exactly what assets you're holding, but you should be doing it. The second is what's the appropriate measurement of risk? and most of the metrics that you see do everything on an annual basis, it's annual returns,

Starting point is 00:43:42 it's annual risk, and the appropriate way to think about it is, what's the time horizon under which you're going to need this capital, and think about that return versus a measure of volatility around that same time horizon. So I think that's the most costly because it forces people into very conservative portfolios when their duration would suggest they should be more embracing of risk. I think one of the most common is, I believe, a misperception in the value of home ownership. And if you look way back over, you know, hundreds of years, real estate has roughly appreciated with inflation. And I think on top of that, people often do not account for all the soft costs. So taking care of the house, paying taxes on the house, paying a realtor when you

Starting point is 00:44:23 sell the house, heat, et cetera. So I think it's important to look at that asset as a good asset that does not depreciate as something valuable for the family to be happy and create memories, but not a great investment. The last thing I would say, I think it's really important in the way our labor economies evolving. Millennials are going to be more mobile than our generation has been.

Starting point is 00:44:44 And so while it used to be that we encouraged homeownership as a way to promote stability, I think millennials need flexibility to move where the labor opportunities are. Yeah, and also it's an issue about liquidity, buying your own home. Again, I'm not saying it's necessarily a bad thing

Starting point is 00:45:00 because there are so many emotions attached to own your own home. What you're saying, Doug, is that if you do the math, and especially if you put an opportunity cost in terms of time also and having your own home, it might not be the best investment in terms of opportunity costs. Yeah, I think there's an important distinction about the book in general, and that is that the book advises on what is value maximizing financially, and then we all have to take our own values, our own priorities, and overlay what we choose to do. So I make all kinds of poor financial decisions every day,

Starting point is 00:45:31 but I do it knowing that it's a consumption decision or a value decision, not an investment suit. Yeah, that's a very important point. All right, Doug. So I tried to think of the hardest question I could possibly ask you. And that's this one here. So in Peter Thiel's book, who's the billionaire out in Silicon Valley, he wrote the book Zero to One.

Starting point is 00:45:50 And he talks about really important question that he likes to ask each of his job applicants. He asks potential candidates, what is the one thing that you know about financial markets that you think very few people in the world know or understand. Okay, well, it is a hard question. So I'll take a stab at it. I don't know if it's an understanding or an appropriate application. One of the reasons I wrote the book is because I believe the quality of thinking around personal finance decisions is way, way behind the quality and the rigorous thinking that happens in investment management. And I think a lot of people are inappropriately applying the lessons of investment management to personal finance. And so what I mean by that is

Starting point is 00:46:32 insurance companies may very appropriately think about certain risk metrics and certain portfolio allocations that make sense for them. And I don't believe in many cases it makes sense for the individual. And so it's somewhat related to the last topic we talked about where efficient frontier or portfolio theory is often implied on a personal finance basis and I think it's done inappropriately. So, for example, I think people are using the wrong returns and the wrong measures of risk, and they're also not including all of their assets. So I believe the appropriate way to think about asset allocation is to acknowledge that your labor and social security looks a lot like a bond and think about your financial assets in that context. So I think it's misapplication of existing theory to personal finance versus investment management. Great answer.

Starting point is 00:47:20 My last question, Doc, would be, besides your own book, what would you say is the most influential financial read you ever come across? Yeah, so as you can tell, decisiveness isn't necessarily a strength of mine. So pick in one is going to be really hard. So what I'm going to do for you, though, I'm going to go out on a limb and pick one per decade. All right. I like it. And these are not necessarily because of the work. It's because of how it impacted my thinking. And so as a teenager, I read Rich Dad, Poor Dad. and it was very influential for me. I actually disagree with a lot of what he offers. But framework and understanding that wealth is really a product of my actions, not my investments, was a real key

Starting point is 00:48:00 insight and started me down the path of probably thinking about how I think about Family Inc. You know, in my early 20s, I read One Up on Wall Street by Peter Lynch. To this day, I still think that influences the way I think about wealth management because it's not just about an efficient markets, it's about what's my angle? Why am I better to underwrite this business than somebody else, and why am I a better owner because I can add value in a way that somebody else can't? And so I think looking at the world in the context of what skills and insights you bring, other than I'm the smartest guy in the room, which is really the case, is an important kind of insight. And then I think in my 30s, I'm a big believer in pattern recognition. Investing is a lot about pattern recognition.

Starting point is 00:48:41 I'm not, that's not to say I'm a technical guy, but more so that I think wisdom and judgment is informed by the past. And so for me, triumph of the optimist is a real solid work, very Jeremy Siegelish in terms of stocks for the long run, in terms of laying out really substantive data over long periods of time and translating that into what it means for investors like us. Awesome. All right, Doug. So we can't thank you enough for taking time out of your busy day to talk to us. I know our audience is going to benefit from this tremendously. If people want to learn more about you or your book or anything that you want to give them a handoff to, I just want to give you this open floor to really kind of throw it out there to our audience. Sure. Yeah,

Starting point is 00:49:24 no, it's all on family inc.com and it's available on Amazon, Barnes & Noble. And so I hope you enjoy it. Thank you. Awesome. So, Doug, thanks so much for coming on the show. We just really appreciate it. Yeah, no, seriously, it's mutual. You know, I got not a great retail brand. And so, for you guys to give me a shot to kind of tell the story and share my insights is much appreciated. So thank you. Absolutely our pleasure. Okay, guys, that was all we had for this week's episode. We'll see each other again next week.

Starting point is 00:49:52 Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. www.theinvestorspodcast.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only.

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We Study Billionaires - The Investor’s Podcast Network - TIP 103 : Life Inc. - Running your home finances like a business w/ Doug McCormick

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