The Exchanges

Q I mean, he speaks out, Warren speaks out pretty, pretty loudly, though, against putting your money behind a hedge fund. I mean, anything as a bet, I don't know if it's with Swenson or Ackman or who it's with. Uh, so I mean, what are your thoughts on that bet he's making?

A Well, the bet he's making is that an active, uh, fund cannot beat the index. Now, of course, over time. Yeah. And, and of course it's a bit of a tongue in cheek bet, right? Because 99% of the investors who are out there doing active fund management are doing it with modern portfolio theory. And, and Warren Buffett's bet is that if you use modern portfolio theory, You're going to do the index minus whatever your fees are. All right. Now, remember, this is coming from a guy who has crushed the index for 60 years. I mean, he's got, right now, Berkshire Hathaway is right at a 20% per year annual compounded growth rate, which means that if you put in 10,000 dollars back in the sixties, you'd have about fifty million dollars right now. So he's killed the market. So you can do it. He's just betting That the guys who do modern portfolio theory can't.

AI assessment note: “Warren Buffett's bet is that if you use modern portfolio theory, You're going to do”

Q Where were you? Where are you at? Phil, how much outside capital have you raised in your, in your hedge fund to date?

A Um, this is all capital coming in from investors, and we're, we're under a hundred million, so we're not very large, um, by those standards, but what we've started doing recently is simply manage money through separately managed accounts. There's been some really amazing changes on the internet that allow brokerages, uh, to manage, um, the sale and purchase of stock through a thousand accounts all at Once, which didn't exist just a few years ago. So what that allows me to do is basically manage other people's money as well, um, that don't have the kind of qualified investing capital that you need for a hedge fund. So we're just cranking that up. And it's really, really been eyeopening as we're going into this sort of new world of investing that's full of companies like Betterment and so on.

AI assessment note: “we're under a hundred million, so we're not very large”

Q What if people don't want to be an active investor though?

A Well, I gotta tell you, man, you got a choice in my view. Basically, you got three things. You can put your money out there, and the financial advisors will tell you you're gonna make five to seven percent, and that's just simply not gonna work. You can do the math. For example, somebody who's 45 years old right now, who wants to retire in 20 years, is going to need about two and a half million dollars in, uh, in retirement capital to make it to 90 years old, spending In today's capital, in today's dollars, about 50,000 a year, Nathan. And that's, nobody has that. Okay, so number one, you're not going to get there if you follow the current advice. Second possibility, you're going to be an active investor, invest on your own, and learn how to do it. And that's, you know, we have 400 people a month coming out here to Atlanta to learn how to do that. So that's, that's second choice. And you're right. I mean, we have thousands of people a month who come into our Marketing and do determine they don't want to do it. They just say, no, I want to, I want to move on. So then the third choice is you find a financial advisor that knows what they're doing, who invests the way Buffett does. And you put your money with them. But unfortunately, the guys who can really do that are all hedge fund managers managing billions of dollars, and they're not going to take your 50,000 dollars. So we're …

AI assessment note: “So then the third choice is you find a financial advisor that knows what they're doing”

Q Active investing, though, in what? In stocks or in starting their own businesses or real estate?

A It doesn't matter. We, I start off the whole course on Friday morning with real estate because real estate is an investment that most people understand. They have a pretty good grip on it because they live in a piece of real estate. So the idea of buying a house, for example, isn't such a foreign thing as going in and buying shares of Chipotle grill. So we start off right there with how do you buy real estate? And when you look at the investors that we copy, the guys that taught me those investors, they do all that's Warren Buffett, Charlie Munger. Um, I love watching David Einhorn. I love watching, um, a number of investors that are running hedge I think are really, really good. There's probably a couple of dozen of them, but the main guy, if you wanted to just study this on your own, would have to be Warren Buffett, right?

AI assessment note: “It doesn't matter. We, I start off the whole course on Friday morning with real estate”

Q All right. Very good. I'm glad you're on today. I'm looking forward to this. Um, walk, you know, the question anyone always asks when I have an author on is they go, Nathan, just make sure the author's actually eating their own dog food. So at the risk of offending you, what makes you qualified to talk about this?

A Well, you know, by, by New York wall street standards, I'm completely unqualified to talk about this actually. I was a river guide. I was a river guide when I started investing and, um, and that would, uh, that would put me off into the, uh, you know, the nether world for, for wall street people. And, um, secondly, almost the entire rest of the world invest using the concepts of modern portfolio theory, which dominate all training for our Fund advisors. It's, it's, it's what dominates the thinking at the SEC. And in that theory, it says that you can't beat the market. So, um, I'm, I'm completely out there, uh, you know, in space as far as New York, Wall Street is concerned, but I, I'm anchored to the rest of the world by, you know, some of the greatest investors in the world who I'm following, and I've been following for 30 years, including Ben Graham, who, who sort of developed the ideas of value investing back in the thirties and forties, when he made about 22% per year through the depression in World War II, with what amounts to, in today's dollars, a billion dollar fund, and also Warren Buffett, who is his number one disciple, um, and Charlie Munger, who together run Berkshire Hathaway's investing. So I think I'm, I've got some really good people that I'm following, um, that Wall Street hates as, as badly as, as they, I hate the idea that someone would actually do better on…

AI assessment note: “by New York wall street standards, I'm completely unqualified to talk about this actually.”

Q And folks, what Phil specifically did is he turned a grand into 1.4 or five million bucks in five years. Phil, how'd you do it?

A Um, what I did was, was follow these basic principles of picking really good companies when they're on sale. So the first thing you have to do is believe that they ever, that they ever actually go on sale. Um, and second, I learned to use other people's money as well and build up that, um, that fund that I was, I was just developing on my own and then gradually built it up with other people's capital, which is the same path that Warren Buffett went down. I mean, when he started, he started with From other people and then invested it. And that's, it's essentially what they do on wall street. Um, but the crazy thing is that, you know, I basically found out I could do it myself and that's, that's what allowed me to do all that.

AI assessment note: “follow these basic principles of picking really good companies when they're on sale”

Q So for the people that aren't as smart as Warren Buffett, which is the majority of the world, what do they do with their money? If they don't also want to bet it and put it into one of these hedge funds that might have a hot year and then a down year where a lot of money's lost.

A Okay. So the first thing you need to understand is that if you're not going to learn how to invest, there's very, very few choices out there. And I can't even, I don't, I can't even think of anybody other than us that that's trying to do this for the small investor. So, um, I can give you the answer that they, that a lady got from social security department in New Zealand, when she said, look, I'm 50 years old and I'm not going to have enough money to retire. What should I do? And the head of New Zealand social security department said, well, what you should do is go out and get a better job and save more money. So that's choice number two, which is a little bit horrible because most people can't do that. And then choice number three, frankly, I don't, I think you have to learn how to invest. And the good news, Nathan, is that it isn't, it's really simple to invest correctly. I mean, I'll go through the points. There's only about four points.

AI assessment note: “I think you have to learn how to invest.”

Q of that and you're kind of in the middle. How do you beat a company like wealth front where if the minimum investment of 500 bucks, you're going to basically track the SMP. They're going to do some direct indexing and tax Tax loss harvesting to get you an extra one or two percentage points after tax per year? I mean, how do you beat those kinds of software companies?

A Well, the first thing to understand is that they run those, uh, computer-driven, we call them robo-advisors, using modern portfolio theory math. And modern portfolio theory math is what happened to the country in 2008. Um, it's the same math that created the giant meltdown in, in, uh, mortgage bonds. It's, it's math that Charlie Munger and Warren Buffett both just roll their eyes at because it's such nonsense. Um, and yet it's the only math there is, and so everybody just keeps going. And the basics of what you find when you move, when you move your money over to a robo-advisor is that they're going to, they're going to pretend that they can use volatility as a, a reference point for risk, and then they're going to build a portfolio around the level of risk that you say you're willing to take. And what you'll notice when you get involved with these kinds of advisors, either robo-advisors or actual advisors mostly, Is they hand you a little questionnaire and they say, you know, basically please tell us how much risk you want to take and, and how much return you want to get, which is crazy. I mean, everybody who would fill this out would say, well, I want almost no risk and I want a very high rate of return, but they don't give you that as a possible question. So they pretend that they can build these sort of low risk or high risk portfolios and adjust them for how much money you…

AI assessment note: “they run those, uh, computer-driven, we call them robo-advisors, using modern portfolio theory math”

Q might be wrong on something and I say, okay, my discount at 50% that I feel really good about that. That's that 50% assumption is another assumption, right? On top of the plan. So even if the initial plan is wrong and maybe you didn't discount enough, maybe you didn't discount, uh, maybe you discounted too much. How do you, how do you help people get their minds around that?

A No, I'll tell you where the, where the real problem comes from is, is that you, you probably are going to get your values right. If you're buying things that you understand, like mint coats and houses next door, what you're going to, where you're going to miss out on is where, where we usually end up with trouble is that the management team, whoever's running it turned out to be a bunch of greedy bastards. And then, then you can get in trouble because they can do things that you don't, they shouldn't do. And they do it for their own benefit and they do it at your expense. And that's, Almost impossible to say for sure that you're dealing, particularly in public companies, actually, that you're dealing with people who have integrity. Um, I mean, we have been burned in the past for sure, Nathan, and where we really thought we had a great investment, and the lower the price on the investment went, the more we wanted to buy it, and we bought more, and the management team screwed us purple. And I'll tell you, man, that, that, that you can't count for, except to just not have all the eggs in one basket, you know, that, that we can do.

AI assessment note: “I'll tell you where the, where the real problem comes from is”