125 | How the Top 1% Actually Invest Their Money (It’s Not What You Think) with Tad Fallows

Patrick: [00:00:00] What actually happens after you win the game? Financially after the exit? The liquidity event. The moment most entrepreneurs think they’re chasing, why do so many still feel like they’re searching for what’s next? Welcome back to another episode of the Vital Wealth Strategies Podcast. I’m your host, Patrick Lonergan, and today’s conversation is one that every entrepreneur needs to hear, specifically if you’re building towards or thinking about life after a big win.
Patrick: I’m joined by Tad Fellows, co-founder and managing director of Long Angle, a private, highly selective peer community of over 5,000 high value net worth entrepreneurs across 4,500. Fees, no fees, no pitching, just real conversations. And over $300 million collectively invested into alternative opportunities.
Patrick: In this episode, we unpack where founders are actually investing post exit, why many are turning away from traditional advisors towards trusted peer groups, and how your identity, purpose, [00:01:00] and approach to wealth evolves after success. If you want to build wealth that actually supports the life of one, this is a conversation.
Patrick: You’ll want to hear all the way through. And before we dive in, if you want to apply what we’re learning, head over to vital wealth.com/resources. We’ve built a vault of tax strategy and wealth building tools specifically for entrepreneurs. That’s vital wealth.com/resources. Make sure you check it out. If you enjoy the episode, be sure to subscribe, share with someone who needs it.
Patrick: Leave us a review. Alright, let’s dive in.
Patrick: So, uh, I’m excited about this. Ted, thank you for, for joining us.
Tad Fallows: Hey, thrilled to be here, Patrick.
Patrick: Um, so I’m, I’m thinking about the, the challenges that the, the entrepreneur has that’s, that’s making healthy income and. Uh, you know, we’ve got a few different issues. A, we’ve got, you know, an over concentration in our business. Traditionally, you know, typically, you know, it’s like that’s where they hold, uh, most of their wealth.
Patrick: And then, then they’re typically holding wealth in [00:02:00] their traditional markets, which are, uh, kind of boring. And then you also look at where, I don’t know, uh, we’ll call it the, the ultra high net worth. You know, the billionaires live and they have a just a. A broad base of alternative investments. And, and it’s interesting when you look at the data around alternative investments, what they do for your portfolio, they tend to, to smooth out the ride and increase return.
Patrick: And so, uh, we don’t need to get into all the, the nitty gritty details there, but I, I, I just think about, you know, the, the problems that the entrepreneur’s facing and they’re unsure if they’re making the right moves with their capital. You know, there’s, uh, you start to get money and it’s like, man, there’s so many opportunities out there.
Patrick: They’re frustrated by, I’ll say the, the fragmented. Uh, noisy investment information that’s out there in the world. You also start looking at financial incentives and you’re like, how do I even, who do I know who to trust here? And, uh, they’re just concerned in general that they might be missing opportunities.
Patrick: That more connected investors, uh, are, are accessing. And then, you know, I think about [00:03:00] the philosophical problem around wealth shouldn’t be built in this like isolation. Uh, investors shouldn’t operate alone. They should operate in rooms with and have better conversations, better access, better frameworks.
Patrick: And so I’m looking forward to getting into, um, what you built with long angle and how, how that comes together. So thanks for joining us here today.
Tad Fallows: Yeah, really excited for the conversation and, uh, what
Patrick: What’s.
Tad Fallows: is very much why we started this community. So I started it. With my co-founder about five years ago, and that was really after we had our own liquidity event where we had bootstrapped a software company starting our, you know, mid twenties to our mid thirties.
Tad Fallows: It was about 10 years it was a, and then we sold it to a strategic acquirer. So basically on one day we had a. Added two zeros to the liquid net worth and had all these new questions both around investments as you’re talking about, but also a lot of other questions in terms of whether that is insurance, whether that’s estate planning or more lifestyle things of, okay, how do I make, biggest question any of our members have is how do I make this wealth and asset and not a liability [00:04:00] for my kids?
Tad Fallows: Uh, ’cause a lot of them still have kids around the house. So had all those questions. And didn’t want, I felt like the only source of good information was something like a Goldman Sachs or a Credit Suisse, and while they had high quality information, there’s just this question of, well, are they telling me to buy X, Y, Z because that drives up their a UM, or is it because that’s really the best thing for me.
Tad Fallows: So we wanted to just start a group of peers for all the sub same situation where nobody’s trying to sell each other anything.
Patrick: No, I, I, I love this. And I, I’d love to get into, um, more about long angle and let, let’s, let’s just talk about that. Can you, can you tell us about the community that, that you built and, uh, uh, I think, I think it’s also good to, let’s talk about the threshold for, for who is a good fit to, to join the community and where we need to be from a, let’s say, net worth point of view.
Tad Fallows: Yeah, so I think, you know, banks have these classifications where actually are not bad. Where they say high net worth is someone with one to $5 million. Very high net worth is five to 30 [00:05:00] million, and ultra high net worth is 30 million plus. Maybe you can argue with inflation, they moved around a little bit, but they have those basic categories, I think we fit really in best in that very high and ultra high net worth category where typically. It’s people with more than 5 million tend to find the most value. We have a sort of hard floor of 2.2 million
Patrick: Yep.
Tad Fallows: house, but really around 5 million. You start to get to these questions, and I would say up to a couple hundred million net worth. When you get into the truly, you know, I’ve got a billion dollars. You have a separate set of problems and a separate set of resources, you’ve got a guy for that. But the person who has 20 million, 30 million, are typ. You know, you can’t afford to start your own family office on that, but you do have a lot of complexity. So a great example is the estate tax. Typical advice if you’ve got a couple million dollars, is, Hey, look, the exemption’s 30 million.
Tad Fallows: No one ever hits it. Don’t worry about it. And that is fully, that’s totally accurate, but is not useful. If, if you’ve got 20 million today and you’re 45, you’re almost certainly gonna be well over the threshold by [00:06:00] the time you pass away. So it is relevant to you. So it’s, it’s those kinds of questions. So I think really that five to a hundred million is probably the bulk of members, or five to a few hundred million.
Patrick: Yeah. No, that’s, that’s fantastic. And, and I really appreciate, you know, when we start thinking about, uh, the, the Goldman Sachs and, and some of those other avenues that we can go invest our money, uh, I think you’re, you’re right. You know, we, we start seeing, uh, the, I’ll call ’em, the conflicts of interest start to show up and there’s, there’s a conflict for me too.
Patrick: Uh, the advice is directing my, my dollars to, uh, have them manage those dollars. Right. And it kind of makes sense. Uh, ’cause it it, on one hand, you know, there, there’s a financial incentive. On the other hand it’s like, well, they can only really give you good advice on the dollars that they can see. And. Have some insight into and how they’re performing and all those other things.
Patrick: And you know, some of these private investments don’t have like, clear insight into, into what’s happening or that real estate project or you know, what have you. So, [00:07:00] uh, but that doesn’t mean it’s not best for the client, for the, the individual to have their dollars invested in those things. ’cause I, I think we, we see there’s so much wealth built in.
Patrick: Private investments, there’s better returns from things like private credit, uh, from a, uh, compared to, you know, um, you know, some of the, the traditional, um, we’ll call ’em interest rate place, you know, um. So I, I think there’s, there’s so many unique opportunities here. And can you give us a little insight into like, let’s, let’s say I’m a member and I’ve got, you know, because we, we’ve got a number of clients this year that, uh, have exited their business and they’re exactly what you’re talking about.
Patrick: It’s like, oh, I, I went from. You know, very little liquidity to all sorts of liquidity. And, and now, now I’m looking at what do I do with these dollars? And, um, they’re, they’re getting lots of phone calls from lots of people saying, Hey, here’s, here’s a new opportunity for you to put your, your money into whether it’s a real [00:08:00] estate deal or, or not.
Patrick: So let, let’s say I, I’ve, I’ve had a liquidity event, or, or I’ve just been stacking up a million, million dollars a year in, uh, free cash flow that I’m, I’m, I’m sort of tired of the traditional opportunities. How does that conversation go? How, how does it work inside of long angle where I, I can start to, to explore and have conversation around, uh, new opportunities?
Tad Fallows: Yeah. Question first, I should be clear. I’m not a wealth manager, so I’m not
Patrick: Mm-hmm.
Tad Fallows: anybody’s portfolio and put an 80 20 into anything. So this is really
Patrick: Sure.
Tad Fallows: conversations that people have
Patrick: Mm-hmm.
Tad Fallows: And first, I would say, I think there is nothing with just, you know, saying, Hey, putting my money to the s and p Index Fund might be a little boring, but you know what, over the last a hundred years, it’s compounded at 10% a year, so you could do worse.
Tad Fallows: I think there’s often this sense of, hey, now I have 20 million. I need to do something more creative. And I do think it is interesting and there’s opportunities to do better if you tweak with these things, but I don’t think people should feel a sense of pressure of, Hey, I have to do something different.
Tad Fallows: If you’re [00:09:00] somebody who is comfortable with the so-called bogleheads portfolio and just, you know, sticking all in the stocks and you can have the stomach to write out the volatility, it’s certainly not. There’s nothing wrong with that approach. I think a lot of our members, and I will say that 75, 80% of them don’t work with Wealth Manager.
Tad Fallows: They’re people who manage their own assets. Partly that’s just because they look at their, the numbers and they say, Hey, you may call it. 1%. I call that 200,000 a year post tax. So
Patrick: Right. Right.
Tad Fallows: Um, and then a lot of them are just, you know, frankly interested in, they’ll say, Hey,
Patrick: Mm-hmm.
Tad Fallows: person.
Tad Fallows: I was capable of creating this wealth. I’ve run a business. I understand a spreadsheet. I actually don’t think I’m gonna do any worse than the next guy at doing this. And so they wanna manage it themselves. But regardless, um, I think where. are often looking to where they want to add more. So we do, uh, every year we do an asset allocation benchmark survey across our members, which is actually pretty cool ’cause it’s hard to get data of people with tens of millions of dollars about how they’re actually investing their money.
Tad Fallows: Um, and again, across different wealth managers [00:10:00] or self-management, et cetera. Uh, and I would say public equities are certainly the biggest portion of that for almost everybody. Public equities are, are the anchor, but. If you look at it compared to what you might call a conventional
Patrick: Portfolio. They’re much less
Tad Fallows: People have under
Patrick: under
Tad Fallows: portfolio in cash and bonds. ’cause they’re saying, Hey, if I’m talk, taking a long game here, I made 10 million by the time I’m 35, much
Patrick: I’m more
Tad Fallows: how that’s gonna compound over 50 years than exactly how smooth that path is. So they tend not to do that. They
Patrick: they
Tad Fallows: in, into alternative assets, as you’re
Patrick: things,
Tad Fallows: a conventional, uh,
Patrick: uh, portfolio.
Tad Fallows: and the value of those drive.
Tad Fallows: I would say the biggest thing is really, as you said, that diversification, where if you look at traditionally, you say, if I just have stocks and bonds, the only way to bring down my volatility is by bringing down my return. If I’m willing to go from a 10% expected return to a 6% expected return, then I’ll put a bunch of bonds portfolio be a smoother ride probably. but if I say, Hey, I don’t want to give up that expected return, but I do want a smoother ride, I think that’s really where these alternatives come in. [00:11:00] So if you look
Patrick: You look at something like,
Tad Fallows: I would
Patrick: I would say the following.
Tad Fallows: equity like returns, which means that expected returns of say, 10 plus percent, you could look at private equity. Could look at venture capital, you could look at private credit, you could look at oil and gas, litigation, finance. Then you can get into the really more esoteric things like electricity trading, whiskey, aging, sports, team ownership, et cetera. Um, and, but I’d say it’s really mostly that I was saying, Hey, I want something that still has very strong expected returns where I can expect to get, let’s say, low double digit.
Tad Fallows: Over the cycle and these things are less than perfectly correlated. So by balancing it out, rather than putting money into bonds, I’m gonna put in these other things, which over time should give good returns. And I can talk a little bit about the, the how becomes much more important. These ’cause it’s harder to do than it is to go buy a stock.
Patrick: Yeah. Yeah. No, I, I think that’s, that’s really good. And I, and I wanna talk a little bit about the, and, and. Maybe this is too nerdy, but, uh, when we think about, uh, non-correlated [00:12:00] assets, you know, we think about the stock market and the bond market and, and everybody sort of has this perception that, uh, when stocks are down, bonds are up and vice versa.
Patrick: Right? And, uh, or, or bonds are just kind of cruising along doing what they do. And, uh, they’re a nice. Um, they, they counterbalance each other, but I think we, we rewind a few years. Uh, we go back to 2022. Um, and we had, uh, we had a really interesting scenario where both the, you know, interest rates were up, inflation was kicking in and the stock market was down.
Patrick: And so it was like we were losing money in the bonds and we’re also losing money in the stock market. And people are looking around going, I didn’t think this was supposed to happen this way. Uh, and we had sort of forgot, ’cause we’d been on a 40 year. Like interest rate, decline scenario that you could, you could lose money in the, the bond market.
Patrick: And so when we, when we look at other asset classes that are non-correlated to the stock and bond market, um, the interesting thing that happens is ’cause I, I think we need to pay attention to. [00:13:00] Um, you know, when my, when my portfolio’s down 10%, it takes me 11% to get back to even, okay. When I’m down 20%, it takes me 25% to get back to even when I’m down 50%.
Patrick: It takes me a hundred percent gain to get back to even. And so like those recoveries are just super painful to, to, to work through. And when we have a non-correlated, uh, portfolio. It smooths out the ride a little bit. I, I’m not down as, and again, there’s, there’s lots of research out there on, uh, what happens when you have a non-correlated portfolio.
Patrick: You look at, um. Uh, the Yale fund is at Swenson and then, uh, Ray Dalio, some of these all weather, uh, you know, portfolio construction guys have found out that like, oh yeah, you can smooth out the ride by having some of these alternatives in the mix. And, uh, it really does allow you to have better returns over the long term ’cause you don’t have those huge drawdowns.
Patrick: So, I dunno if you have anything to add to that, but I, I think that that information is, is [00:14:00] worthwhile and it’s. It’s a really good reason to start thinking about how do I get more alternatives into my, my portfolio.
Tad Fallows: Yeah. Completely agree with that. And I think what’s interesting about alternatives, partly there, there is the reduced correlation and that totally depends on the asset. If you looking at something like large cap private equity, that’s gonna be pretty well correlated because if KKR takes something private for $10 billion, the only way they can really exit that is to. IPO it for 20 billion and so they, their returns are going to correlate. There are things that are a lot less correlated, like if you look at some trading strategies, you know, let’s say I’m trading some commodity or train some electricity. It is really just a totally different thing that’s drive my returns.
Tad Fallows: That does not mean it’s risk free. They can have a terrible year, they can be down 30%, but it is differently correlate as you’re saying. I think most things are probably litigation. Finance is another one.
Patrick: Yep. Yep.
Tad Fallows: is really am I gonna win this lawsuit? has a pretty small amount to do with what’s the state of the economy look like.
Tad Fallows: I’d say most things are probably somewhere in the middle. [00:15:00] Um, you know, if you look at something like, uh, oil and gas, which is one I like a lot, it has a lot of uncorrelated factors like you are doing. You’re very happy today if you’re an oil and gas, because every time the straightforward moves is closed for another day, the
Patrick: Yeah.
Tad Fallows: oil goes up that day. Uh, but you know. If the economy goes you know, most things are gonna be dragged out to some degree with
Patrick: Right, right.
Tad Fallows: I think it’s partially a correlation. The other interesting things about this is. say sometimes people ask, Hey, what is an alternative asset or a private market asset? And really the key difference there is that term private market where if you look at stocks and bonds and then some things you can access through those channels, like REITs, is really, you’ve got these regulators like the SEC, making sure that there is very little fraud.
Tad Fallows: You’ve got full information and you have these hedge funds in Connecticut with all their supercomputers doing price discovery. So the price is always quote right. Um, and you know, I think the prices are, you know, pretty accurate when you get
Patrick: You get these private markets,
Tad Fallows: All those
Patrick: all those go away.
Tad Fallows: I think both creates an opportunity and a risk.
Tad Fallows: It means if you don’t know what you’re [00:16:00] doing, I can just randomly pick 10 stocks, throw a dart at the wall, and I’m going to get the s and p return. Like, it’ll be fine. The prices are all accurate because other people are doing the work for
Patrick: Work for me.
Tad Fallows: I just invest in 10 random hedge funds or 10. Random VC funds, I am not going to do well.
Tad Fallows: I’m not gonna get access to the right ones. I’m not gonna pick the right ones. And the profits are much more concentrated in those top quartile or top decile funds. They’re not evenly distributed through the market there. So that’s a real problem if you don’t know what you’re doing
Patrick: You’re doing
Tad Fallows: of feel a sense of FOMO and want to just, you know, do something. But on the
Patrick: the other
Tad Fallows: the
Patrick: Adopt
Tad Fallows: if
Patrick: C Birth and.
Tad Fallows: get access to the top tier ones and understand how to underwrite them and get access to the right fee structures, then there’s the opportunity for. Really getting alpha, uh, which I think is almost impossible to do in public stocks.
Tad Fallows: I am not going to better figure out what NVIDIA’s profits are next year than some guy at a hedge fund, but that’s different. These private markets, they’re not so efficient.
Patrick: Yeah. No, that’s, that’s great. And can we talk a little bit about liquidity for a minute? Because I, I think [00:17:00] there’s a, liquidity premium put on, uh, public markets, right? Uh, I can, I can turn my dollars into, or I can turn my investment into dollars like anytime I want. Um, but when we, when we think about somebody that’s had a liquidity event, and, and I think this is, goes back to your, your discussion around, uh, your comment around, you know, I, they hold a relatively small percentage of their assets and bonds and, and we can look at that and go, the reason they do that is because.
Patrick: They only need a small piece of their portfolio to sort of manage their financial freedom. Right? The rest of it is legacy money that can grow for a long period of time. So I, I’ve got assets that are, um, positioned outside of, uh, what I’m gonna need. They’re, they’re long term. Can you talk a little bit about, um, the, we’ll call it the value of, um. It being illiquid. ’cause I, I think we, there’s some, there’s some actually, some, some good value there because I don’t have that [00:18:00] liquidity premium.
Patrick: And also maybe there’s, uh, I think this is maybe underestimated, uh, there’s also a value of not having all of the government oversight, uh, and sort of cost of, of having a, uh, publicly traded, um. Security as well. So I, I don’t know, can you touch on, on those two things? Yeah. Thank you.
Tad Fallows: it’s funny where I thought you were gonna say there was, there’s, there can be a behavioral benefit to illiquidity where if you’re in the middle of COVID and your public portfolio drops 40%, can be not for everyone. There’s some people who are perfectly stomach it and just say, Hey, stocks are on sale, I wanna buy more.
Tad Fallows: But there’s a lot of people say, Hey, I can’t take the pain anymore. I’m gonna,
Patrick: Right.
Tad Fallows: the sell button here.
Patrick: Yeah.
Tad Fallows: are in a venture capital fund. Your assets, you’re probably just as worried about them, but you can’t do anything about it. And I think that’s why for a lot of people actually their house can be their best investment because you’re not panic selling, I,
Patrick: Yep.
Tad Fallows: here in Dallas, maybe real estate’s gone down five or 10% in the last year.
Patrick: Mm-hmm.
Tad Fallows: doing anything about it. I’m not worried. I’m still living in [00:19:00] my house. And so I’m gonna get that long term return. Uh, again, this isn’t everybody, but I do think for a lot of people that illiquidity, you know, it’s funny, fidelity did this study of who their very most successful investors were. And number one, this list, you’re smiling, maybe you know this, it’s people who are dead. Because they don’t trade at all. They, they just get the long-term return. And so you both do, as you’re saying, you get paid by the market. You, you get rewarded for the liquidity. But I think it can drive some, some good behaviors there and now the
Patrick: Now the downside.
Tad Fallows: I, I, I would not advocate that many people go to a hundred percent illiquid.
Tad Fallows: I think there is a lot of benefit to that liquidity. Or even, there’s other things you can do with, if you’ve got 5 million public stocks, you wanna get a mortgage, well, I can move my money to Wells Fargo, they’ll gimme a discounted mortgage. So I think it’s really nice to have that pool
Patrick: There
Tad Fallows: for the money
Patrick: the money they you
Tad Fallows: right
Patrick: need right now.
Tad Fallows: Uh, one thing that people. Not everybody, but some people who makes ’em feel better about that is they look for stuff that generates some income and whether that is private credit. Again, oil and gas, you know, there’s a number of these strategies, hedge funds, where it may [00:20:00] not be liquid, but I know if I’m getting five or 10% distributions every year, I feel much better about that money being locked up.
Tad Fallows: ’cause I’m still seeing some cash that I can either spend or reinvest.
Patrick: Yeah. Yeah. This is, this is good. And, and I think one thing, it’s really, really hard for almost anybody to see a 40% drawdown and not want to take action. And, and I think the, the reason being is. Our brains are wired to run away from danger, right? When a, when a a bear is chasing me, I’m, I’m gonna run away from that.
Patrick: And that’s what a 40% drawdown feels like. It’s like, oh, this is danger. I need to get away from it. Now, intellectually, we can know that things just went on sale, but there’s this nagging thing that we, we tend to see that this time is different. This is when it all falls apart. I, I better get my assets and move it to something safe.
Patrick: ’cause I’m,
Tad Fallows: Yep.
Patrick: know, I’m, I’m experiencing all the pain right now, and so. When I, and another reason, you know, I think it, uh, is [00:21:00] nice that. Going back to the house example you gave us, um, I don’t have a meter when I walk up to my house to know what my house value is. So it could, it could drop 10% in value, but since I’m not seeing that displayed every day, I don’t, it’s not really bothering me.
Patrick: You know, it’s something I really gotta go look up. You know, Zillow’s made that maybe a little more easy to, to see the value of my property, but, uh. Um, and it’s not as easy to like, make a phone call and, or click a button and, and make that sale happen. So, uh, I think those things are all like really good for protecting the investor, uh, from themselves, from making those, um, more emotional decisions.
Patrick: So, um,
Tad Fallows: The other thing that, that I found personally on this front
Patrick: mm-hmm.
Tad Fallows: while I think that, you know, Vanguard and, uh, totally passive, zero cost index funds are great, I think the one downside is it makes your money a little more abstract. Like if you say, I’ve got $10 million in V-T-S-A-X, well, I don’t, that doesn’t really mean anything to me.
Tad Fallows: And now if I just see every month for two years, that [00:22:00] number’s going down, I feel like this is a terrible investment. Whereas this could even be individual stocks. I know. Oh, if I own. A million dollars of Exxon, and I see that that now dropped to 500,000, but I know while they still own all those oil fields, they’re still producing just as much oil.
Tad Fallows: They’re still paying me the same dividends they were before. It feels more, more tangible, and I think
Patrick: I think that’s also.
Tad Fallows: market side where by the nature of them being more concentrated and people research them more, I think they often understand more what they’re investing in. So they say, okay, if I’m in this venture capital or this private equity fund, and I know these are the five portfolio companies.
Patrick: company.
Tad Fallows: Both. I can’t
Patrick: I can’t sell even if I want
Tad Fallows: and have that
Patrick: and have that bad behavior, but I probably also.
Tad Fallows: to sell because it’s not just this ticker that doesn’t really mean anything to me.
Patrick: Yeah. And I, I think that that can work both ways on, on analyzing the opportunity. Uh, I remember Sun Microsystem, CEO, back in the tech bubble burst or tech bubble of early two thousands, late nineties, early two thousands. And, and he publicly said like, I don’t know why anybody’s investing in our company at, at this [00:23:00] multiple.
Patrick: Right. It was, it was trading it like. 20 times revenue, like 20 times sales. And he was like, we have to fire all of our people and not, and, and still produce the same amount of revenue and it’s gonna take 20 years for you to get your money back. Like, that’s insanity. Like nobody should make that investment.
Patrick: And so I think there’s, there’s some, uh, when we invest in, you know, the total stock market funds through Vanguard. We’re making some of those investments, you know, some of those companies at the top end that, you know, logic has left the chat and you know, people are just keeping pumping money into it. And we’re by default investing in those, and we’re actually maybe investing a lot of money in those because, you know, it’s, it’s weighted, it’s cap weighted.
Patrick: It’s not like I’m investing. Yeah. So
Tad Fallows: You’re buying Tesla at a trillion. Whether you think
Patrick: right.
Tad Fallows: they’re, even though they’re losing market share in the auto industry.
Patrick: Right. And, and there’s, so I, I think that’s, you know. I think that’s one side of the equation. [00:24:00] And then I think you, you nailed the other side. Like, I can make a decision and I can look at the market making foolish decisions and go, look, I can, I can see the underlying assets here. I, the dividend’s still healthy.
Patrick: I’m okay holding onto this thing long term because, uh, of all of those factors, it’s a solid investment that I’m, I’m in for the long term. Uh, back to that fidelity study you cited that, uh, you know, people that just hang on, uh, tend to do, tend to do really well. I’d like to venture into private credit a little bit.
Patrick: Can you just define that? Because I feel like that’s a, uh, that’s a pretty broad category and uh, it’d be good to just sort of narrow this down a little.
Tad Fallows: No, it’s really interesting. And, and I’ll say actually if people want to dive deeper on this, for those who’ve been nerding out on it, private credit has been getting crushed recently. And we actually, uh, I host a podcast called Navigating Wealth. And coming out this Friday, we’ve got an interview with, um, one of the senior people at Blue Owl. Which is one of the big, you know, a hundred billion dollar private credit funds and one that has been sort of a poster [00:25:00] child for some of the bad press. And we really dove with her for about an hour into what are all the mechanics that have been driving the recent, uh, private credit issues. So people may, uh, again, that’s getting launched this week.
Tad Fallows: People may be interested in checking that out, but
Patrick: But generally what?
Tad Fallows: is. It’s, uh, sometimes, you know, pejoratively called something like Shadow Banking, but what it really is, is it’s, if I want to borrow money and I’m a big company, could in theory go to a bank to borrow that money happens more in Europe than the us.
Tad Fallows: I could issue bonds, which happens a lot if I’m a big company or I can go borrow from one of these private credit
Patrick: Credit
Tad Fallows: and
Patrick: generally,
Tad Fallows: a little bit more there. Let’s
Patrick: let’s call.
Tad Fallows: It’s, you know, it varies depending on the, whatever treasuries are at. But let’s call it maybe 10% being a, you know, quote, normal, um, private credit
Patrick: Credit rate ever and
Tad Fallows: it is typically done
Patrick: done actually by
Tad Fallows: firms.
Patrick: firms. So
Tad Fallows: or Carlisle, somebody like that, I wanna buy a company for 10 billion. will
Patrick: we’ll probably put in
Tad Fallows: billion of
Patrick: billion equity and I’ll go borrow another 4 billion.
Tad Fallows: credit. Those [00:26:00] ratios can change depending on what I’m buying, but it’s, it’s, you know, a way for them to enhance their equity returns and then the private credit lenders say, Hey, I’m get, or the people lending, investing in those loans, we’ll say, I’m gonna get a
Patrick: Get a 10% return here.
Tad Fallows: I’m
Patrick: Not much safer
Tad Fallows: in the
Patrick: position capital,
Tad Fallows: I’m perfectly happy to get this. That’s basically what it does. I would say
Patrick: say over.
Tad Fallows: this has really grown over the past 10 or 20 years, I don’t know what the numbers are, but let’s call it a five or tenfold increase in the amount of this private credit lending. I think
Patrick: I think that made a.
Tad Fallows: nervous. They said, Hey, it tends to end poorly when you see loans on anything growing 10 x over the
Patrick: Over the course of decade
Tad Fallows: that’s often a recipe for failure.
Tad Fallows: And so I think people are. PO
Patrick: are
Tad Fallows: to say there’s gonna be a challenge there. There’s also been a couple of of fraud cases actually turned out to have almost nothing to do with private credit. If you look at Tricolor or first brands, those were actually bake loans, but people sort of conflated things and said, oh, that must be a sign.
Tad Fallows: There’s problem in private credit. So people keep looking for this disaster to happen. But, and then there’s also been some stuff recently [00:27:00] around software
Patrick: software.
Tad Fallows: hurt by ai and a lot of the private equity owned companies are software companies. And so question, hey, is that gonna cause problems here? But you know, without getting probably too far into the weeds anyway, but
Patrick: But basically what you would do is.
Tad Fallows: in private credit is you are giving some big company, like, let’s call it Gall, is one of the big names. There are Blue Owl. You’re giving them a million dollars and they’re turning around lending it to private equity companies to help finance these buyouts.
Tad Fallows: And you’re in a privileged position on a capital stack there, and that’s performed very well. You know, the biggest, and I know that you’re very into tax optimization. I think the
Patrick: Biggest challenge, private credit.
Tad Fallows: throws off ordinary income. So if I’m living in California and I’m a high income earner, I’ve got effective 50% tax rate.
Tad Fallows: So if I’m seeing a headline. 12% return. That’s really only 6% after tax. So it’s okay, but it’s not great. Um, what I think is actually the most interesting way to go about this, and you need a bigger portfolio to do this, but you can invest in private credit through a private placement life insurance policy.
Tad Fallows: Now I am
Patrick: I have not,
Tad Fallows: life insurance guy. Like if you tell me should I [00:28:00] buy whole life? I’ll say, I don’t know, need to know anything. The answer is no. You should not buy whole life. But, uh, private placement life insurance is much lower fee drag, um, just because the nature of it, it’s about a 1% fee drag all in broker fee, cost of insurance, all, all the different fee layers.
Tad Fallows: Colorado 1%, then it
Patrick: but then it.
Tad Fallows: totally protected from taxes. So if you have that headline, 12% return on your private credit. It goes down to 11% after tax, not 6% after tax. So you actually have a huge opportunity for arbitrage there.
Patrick: Yep.
Tad Fallows: do need a lot of money to make this work. Typically, they’ll have like $5 million minimums.
Patrick: Yep.
Tad Fallows: actually doing something within the community. We’re putting together a group plan where we can get those minimums down to more like $1 million, which I think we haven’t launched that yet, but a lot of our members are interested in. So I think we are gonna try and do a sort of collaborative thing like that. Um, but, but that’s
Patrick: But that’s basically.
Tad Fallows: The big knock is the tax inefficiency. And then, um, yeah.
Patrick: Yeah. Yeah. No, I, I, I love that. And we do have some clients that, uh, we think private placement life insurance makes a ton of [00:29:00] sense, especially if you’ve had a large exit and it’s like, okay, uh, I love the tax wrapper of life insurance. You know, I, when you think about what life insurance does, it creates all sorts of unique tax opportunities.
Patrick: And so it’s like, how do I leverage those to my, uh, my favor and private placement life insurances? Uh. Uh, a unique way to do that. So, uh, we’ve had a few episodes on the podcast on that, and, um, uh, I think it’s a fantastic tool and I love how you’re, you’re thinking about it. ’cause if I, if I have some after-tax dollars, now all of the after-tax dollars shouldn’t be in life insurance, uh, by any stretch.
Patrick: But it’s like, it is a unique place to hold those maybe tax inefficient assets that, um, um, you know,
Tad Fallows: if you
Patrick: yeah.
Tad Fallows: somebody might say a 60 40 or an 80 20 portfolio,
Patrick: Mm-hmm.
Tad Fallows: with that 40 or 20% being in bonds. Personally, I would say that should be in private credit because you’re still on the lending side. You’re still further down the capital stack, but you’re getting much better expected returns than you are with bonds.
Tad Fallows: And I would say
Patrick: I would say
Tad Fallows: hedge funds. [00:30:00] So big names. There are things like, uh, millennium or Citadel or you know, Jane Street, Hudson River trading. They don’t
Patrick: they don’t have.
Tad Fallows: out returns. You’re not gonna make 30%. A year, but you could make probably 10% a year in a consistent, repeatable way.
Tad Fallows: That, again, is low correlation to your point there. And so I think that idea of putting 10, 20, 30% into these, again, 10% expected return, lower correlation private credit, and multi-Strat hedge funds are a great way to go about that. If you can get access. They tend to have very high minimums.
Patrick: That’s, that’s great. I also have seen private credit include everything from like, you know, some mezzanine debt for real estate financing to, uh, you know, also, um, you know, yeah, I, I’ve seen it levered into, uh, some of the real estate side too. Yep. So.
Tad Fallows: all kinds of things. I mean, I, I, we also like some of those niche, niche year ones. So, uh, I think you and I were talking about before the show where a lot of times in our [00:31:00] community, once or twice a month, we’ll sort of put together some pooled feeder fund where say, Hey, a lot of people are interested in this investment, but they don’t want to hit a 10 million minimum.
Tad Fallows: So I’ll have a hundred people each invest a hundred thousand hit that minimum. And on the, we’ve seen some interesting things on the private credit side. These are a lot smaller. It’s not like the blue hour or the gall, they’re managing. $50 billion, but a fund of maybe a hundred million, well, they’ll be secured by some interesting assets.
Tad Fallows: So whether that is whiskey sitting in barrels, that’s aging as your security, that could be SaaS receivables or your security. The, uh, we’ve actually done some interesting stuff in cannabis lending because you get, again, these niche share things. You get interesting dynamics there where, because of federal regulations, a bank can’t lend a cannabis.
Tad Fallows: So you have these lenders who. Are extremely bankable where they’ve got positive cash flow, they own their own real estate and they’re still paying you 15% because they can’t go through the traditional banking system. And so again, it doesn’t work at huge scales, but you can pick up some of these arbitrage opportunities on, on the smaller scale there.
Patrick: Let’s take a quick second here because I want [00:32:00] to hear from you. One of the biggest goals of this podcast is to bring you conversations that actually matter, not just what we think is important, but what you are dealing with right now as an entrepreneur. So if you’ve got questions around tax strategy, investing exits, or anything we’ve talked about in this episode, head over to vital strategies.com/questions and submit them there.
Patrick: That’s vital strategies.com/questions. We’re actively using your questions to shape our future episodes. Bring on the right experts and go deeper into the topics that are most relevant to you. We’re also answering these in our newsletter, so don’t just listen. Be a part of the conversation. Go to vital strategies.com/questions and let us know what you want to learn next.
Patrick: Listen.
Patrick: Now, Ted, one thing I, I think is, is interesting is, uh, I was actually on a call with a client of ours that has a, a Goldman relationship. And, uh, we were talking about, uh, [00:33:00] alternatives and what percentage of our portfolio should be allocated to alternatives. And I’ve, I’ve got opinions on this and I’ve heard.
Patrick: Um, you know, we, we’ve got a number of clients in Tiger 21, um, and Tiger 21 will release their, um, I’ll say typical member portfolio. You know, they’ll, they’ll look at that. Uh, we’ve also seen some studies done on, you know, billionaire portfolios and where their, what percentage of their assets they’re holding in alternatives.
Patrick: And then, then you sort of move down the, um, the scale. And it’s, it’s surprising to me that. Um, you know, maybe an ultra high net worth, uh, advisor is, is saying, Hey, have a small percentage of your assets in, uh, what we’ll call these alternatives. And so I’m, I’m curious if you have, uh, thoughts or opinions or if you’ve seen discussion in the community one way or the other on, you know, what percentage of my assets I should hold in,
Tad Fallows: Yeah.
Patrick: uh, alternatives versus like traditional stock and bonds.
Tad Fallows: Yeah, I got two thoughts on that. One is we do, as I [00:34:00] mentioned, this annual survey, so we have, you know, hundreds of people responding every year of saying, Hey, what is your, and we ask across 60 different categories, what’s your allocation look like? So in general, those private market
Patrick: Market assets if I
Tad Fallows: define that broadly. It’s about a 30% of their assets. Now I’m
Patrick: now.
Tad Fallows: in their investment real estate. We can, we can argue, and that’s maybe 10 of those 30% are investment real estate. We might argue that owning a rental property is not a private market investment, so it could go either way. That also includes a lot of, like, in your case, ownership of private companies.
Tad Fallows: So as an entrepreneur, maybe half of my money is in this private company, and that wasn’t necessarily intentional allocation. It just sort of grew into that. But if you, if we leave those aside, I’ll call it maybe. 15, 20% of money in these private or alternative assets. Um, now the thing that’s interesting is you said, Hey, why would Goldman Sachs, you know, not tell you to put it there? Uh, I’m not somebody who is categorically opposed to wealth managers. You know, I think earlier in my career I had this sort of religious [00:35:00] opposition, and now I see a lot more benefit they give. You know, maybe somebody is too busy, maybe they’re not interested, maybe they’re getting older, maybe they’re worried about their spouse taking over.
Tad Fallows: Something happens to them. I think there’s a lot of very good reasons why somebody can go with a wealth manager, but I think the biggest risk of conflict of interest is just. fee structure reasons we can get into is based on assets under management. And again, I used to think that that was a truly criminal thing.
Tad Fallows: I, I’m, now I’ve come to terms with the fact that I don’t work with one, but that, that’s how they charge is a percentage of assets under management. But what it
Patrick: What it.
Tad Fallows: are just fundamentally incentivized not to recommend you to invest in something they can’t manage. So as I mentioned, you know, we do these, uh.
Tad Fallows: Syndicated or kind of feed our funds in our community where we say, okay, this looks like an interesting one. Let’s see if we can pull money to get together there. I notice whenever somebody leaves a comment of, Hey, I’m gonna take, go talk with my guy about this 100% of the time, no matter what the investment is, their guy says, don’t put money into it, because he can’t collect an, he can’t collect a management fee.
Tad Fallows: And
Patrick: Yeah.
Tad Fallows: [00:36:00] not thinking that consciously and practice, it’s like, oh. We will go with Credit Suisse’s version of this. We have a version that’s like this, and even if it’s not quite as good, he’s gonna tell you to go with that version. Or again, should I buy this warehouse? Well, there’s no way Goldman can charge me. For owning a warehouse. And so he’s gonna say, no, don’t buy that warehouse, put into this REIT that Goldman does, or put in this public REIT that I can charge an a UM fee on. So I, I think that
Patrick: That is
Tad Fallows: probably
Patrick: probably the biggest knock I would
Tad Fallows: it’s just very hard for somebody. I think there’s a quote from HL Macon that’s very hard to make a man understand a thing if it is counter to how he earns his salary.
Patrick: Yeah, yeah, yeah. I was gonna say, there’s a, there’s a really good book out there. I believe it’s influenced to psychology or persuasion, and they start looking at, as soon as my financial incentive, uh, is tied to an outcome, my advice is going to be favorable to that outcome. So it, uh,
Tad Fallows: e
Patrick: uh,
Tad Fallows: trying to do the right thing, you know,
Patrick: right.
Tad Fallows: are, you know, uh, bad people by any means, but that is just what happens in practice.
Patrick: Yep. Yep. And I think it’s also true the other way. [00:37:00] Like even if I’ve already been compensated, uh, we think about, you know, uh, we’ll call it our, our politicians and lobbyists and that type of thing. If, if I was paid, you know, a half a million dollars to go speak at this convention, now moving forward, I’m gonna be favorable towards that, uh, that particular, uh, organization.
Patrick: So, yeah, I, I think those things were, um. I think they’re undervalued. Uh, they’re, they’re, they’re not, people aren’t paying as much attention to those as, as they should when they’re receiving advice from people. G like going, wait. Uh, and I think Nasim, uh, Taleb does a great job of sort of beating up on, on some of those, uh, those things as well.
Patrick: So, um
Tad Fallows: And now I will say, again, not speaking his wealth manager, ’cause that’s
Patrick: mm-hmm.
Tad Fallows: but the reason I’ve come around to it being okay to do this, to charge based on a UM
Patrick: Mm-hmm.
Tad Fallows: We spent a long time looking on behalf of our members, Hey, can we find some really good wealth manager, top tier who charges just a straight hourly fee?
Tad Fallows: It’s like, Hey, my lawyer charges me by the hour. He doesn’t charge 1% of my portfolio, so why can’t you? And I think what it ultimately [00:38:00] came down to I. There are not that many really good wealth managers out there, and so there is more demand than supply. And if you are smart enough to be a good wealth manager, you are going to go with a client who’s willing to pay you a lot, not the client who’s only willing to pay you $10,000 a year. So I, I think it’s, it’s like that quote about, I wouldn’t wanna be a member of any club that would have me,
Patrick: Yeah.
Tad Fallows: to take. Be a client of an advisor who is willing to take 5,000 a year when he could be taking 50. And I think that’s really the core thing. So you
Patrick: Yep.
Tad Fallows: you want that, you gotta come to terms for paying for it.
Patrick: Yep.
Tad Fallows: I’m not willing
Patrick: Yeah,
Tad Fallows: I don’t think there’s anything wrong. You know, I tell my wife, if I pass away, you should hire a guy like that.
Patrick: sure, sure. Yeah, no, I, I, I think that makes sense. And when I, I also think about how we like to structure our, our engagements and we, we have flat fee consulting, uh, because I, I like it better than. The, uh, hourly rate because you’re, when it’s hourly, you’re not incentivized to call me, where when you’re paying me a monthly fee, you’re incentivized to call me about every possible thing.
Patrick: And we’re [00:39:00] meeting monthly. And so, uh, we think that makes sense. And then we cap our, our a UM fees as well. ’cause it’s like, look. After a certain point, you know, we’re pricing based on complexity, not, not the value you’re bringing to the equation. And, and we like to quantify our value. So, um, so we, we think all of those things, um, make a lot of sense.
Patrick: And, and then the final piece, I think commissions just are problematic across the board. Uh, they’re, they’re challenging and so we. We just donate a hundred percent of all of the commissions we receive to charity. ’cause uh, uh, we take, we don’t take them every opportunity we can, but there’s some things like if somebody needs disability insurance, I can send you out into the marketplace.
Patrick: Now we’ve got the conflict out in the marketplace, or we can just place it for you and, uh, take care of it that way. So, yeah, I think this is, uh, this is good. This is a lot of fun. Um, all right. So. I’m also thinking about, um, and this, this might be, uh, a question that’s too hard to answer, but is there a, is there a, like when you start looking at these private [00:40:00] investments, you should, here’s sort of the, the entry point.
Patrick: This is something you should consider first, and then you, there’s like a, a stack that you, you continue to work your way down as you, uh, continue to progress in the, the private investment space.
Tad Fallows: Yeah. Yeah, that’s a great question. Um, and I would say, I think if people are interested in this, joining our community, there’s no membership fees in our community. So if you’re interested in joining, uh, you can go to long angle.com, uh, and apply there. And, and so I would
Patrick: So I.
Tad Fallows: because we do a couple of these every month, um, and we share all of the diligence materials, all the recordings of calls with the managers, et cetera, if people just wanna learn about it.
Tad Fallows: They don’t have to participate in any of these pooled vehicles, but that it’s a good, good way to learn. So I’d say the first thing is to learn about it. and then I would say in terms of how to go about it, probably important. There’s two ways you could do it. You could just say, Hey, this is interesting.
Tad Fallows: This is sexier than stocks. I see this cool venture capital thing. I’ve heard of Lightspeed. I wanna invest in Lightspeed. I’m just gonna go ahead and do it. That. It is probably not the
Patrick: the.
Tad Fallows: [00:41:00] go. I will admit I fall prey to that at times. You know, I’ve got a buddy who’s starting a biotech and I think he’s really smart, and so I’m gonna put some money in there.
Tad Fallows: It’s not gonna be a smart portfolio allocation, but it’s just something that I wanna do. I think if you’re talking significant money, the more responsible way to do it is to think about what do I,
Patrick: What do I.
Tad Fallows: do for my portfolio? Am I trying, is it something that I believe we’ll have? Higher expected returns than the rest of my portfolio, let’s call it.
Tad Fallows: I think this thing has historically delivered 15% IRR that’s better than getting anywhere else. So that’s what I’m trying to do. Or as we talked about, is it this diversification play? Is it a superior tax treatment? So, so to think about that, um, and I would say broadly, you can put these things into, uh, a couple of categories.
Tad Fallows: One is. Uh, equity like instruments. So if you think of public equities, public
Patrick: stock
Tad Fallows: of one end of that spectrum where they’re the largest companies, they’re the most liquid, you can then basically just keep going all the way down the spectrum and you will get smaller
Patrick: small, smaller
Tad Fallows: with less and less information.
Tad Fallows: They
Patrick: they [00:42:00] probably have on individual company
Tad Fallows: Uh, perspective higher and
Patrick: and higher.
Tad Fallows: But if you have a portfolio, you’re not necessarily doing that and you’re probably going up on the expected return. So the other extreme would be venture capital or angel type of investing where you have extremely long periods.
Tad Fallows: It’s probably a decade plus till you get your money back and you’re probably gonna have 90% of them fail. But you could have, if you get into the next philanthropic, you’re gonna have phenomenal returns. So if you have a big enough portfolio there. And then basically in the middle it’s just where you want to go.
Tad Fallows: So another one on the small side is something like search
Patrick: our trunk
Tad Fallows: I’m not sure if you’re familiar with those. That’s
Patrick: that basically that.
Tad Fallows: it’s a really interesting asset class that’s historically had phenomenal, like
Patrick: 30%
Tad Fallows: over multiple
Patrick: multiple decades,
Tad Fallows: Where you are getting
Patrick: getting some
Tad Fallows: smart graduate of Harvard
Patrick: Harvard Stanford Business School,
Tad Fallows: give him or her. Uh, or you collectively, a dozen investors give it or her
Patrick: her
Tad Fallows: hundred thousand a year
Patrick: year
Tad Fallows: fund their
Patrick: funding
Tad Fallows: fund their search as
Patrick: virtual to
Tad Fallows: to buy. And that
Patrick: and that gives you right of first refusal to participate as a person.
Tad Fallows: it.[00:43:00]
Patrick: Kit.
Tad Fallows: they’re
Patrick: They’re typically buying a company that has maybe a couple million of
Tad Fallows: and
Patrick: s, they buy four times.
Tad Fallows: And then you have this energetic, smart, young guy who then takes it from 2 million earnings to five millions of earnings. And the multiple, as it gets bigger, goes from four times earnings to 10 times earnings. So he can get a. Four x, five x return over five years without working in magic. Just sort of by hard work there.
Tad Fallows: And you’ve seen that, you know, continually compounds over time. You get things like, I, I really like roll up private equity. So there’s, you know, a bunch of that on the equity side. Uh, then you’ve also got a lot of, um, then there’s just kind of the. There, there’s, we talked about the credit
Patrick: Credit stock
Tad Fallows: flavors of debt and how much risk you’re willing to take versus how much return you want. And then you’ve
Patrick: and then you’ve got start
Tad Fallows: of
Patrick: of
Tad Fallows: investments. Um, as I said, I
Patrick: I said, I really like
Tad Fallows: and
Patrick: oil gas
Tad Fallows: it’s one that puts a very high premium on getting in with a good
Patrick: operator there.
Tad Fallows: the best operators. If somebody
Patrick: Somebody to.
Tad Fallows: a dentist, somebody comes to you pitching a tax treatment of oil and gas deal, I would say, you know, run, don’t walk away [00:44:00] from that. But if you can actually get into the ones who are really delivering the best returns, the ROE on drilling wells can be, you know, 70 to a hundred percent, um, ROE on that, you know, if they’re properly hedged, et cetera. So, um.
Patrick: Yeah, longwinded way of saying, I would start with the research, but I think the biggest thing is probably the process.
Tad Fallows: of how am I
Patrick: How am.
Tad Fallows: to this opportunity?
Tad Fallows: Is it something that somebody is just coming to me to pitch? And then you really have to think about why am, why am I as, let’s say I run a plumbing company, if I’m getting pitched a biotech VC deal outta the blue, that probably meant that all the people who understand biotech VC passing this deal and is now
Patrick: Yeah.
Tad Fallows: of this plumbing company.
Patrick: On the other hand, let’s say.
Tad Fallows: you know, C-Suite at Eli Lilly and somebody’s coming to me, well, I may have a great, they’re coming to me because they want the access. I can really understand this deal and I may get great returns. So most people have a relatively small circle of competency. Again, if, if I run an oil company and I’m seeing another oil and gas deal, it’s probably a good oil and gas deal, and if not, I can analyze it. can you find a way to consistently get access to [00:45:00] things outside your personal
Patrick: Personal
Tad Fallows: That’s
Patrick: that
Tad Fallows: we try to do
Patrick: we try to.
Tad Fallows: within our community. We say, Hey, we’ve got 8,000 people who’ve made money in all these different industries, so we have people who have access and can help us underwrite these opportunities. Or maybe, again, you have a good wealth manager who you really trust and that person can give you that access. But I think it’s really thinking about your process and your access rather than just blindly saying, I want some sort of private exposure.
Patrick: Yeah. No, I think that’s good. And, and one, one thing you, you touched on was underwriting and, and I think the underwriting, one question I have about underwriting is, is we’ve seen amazing opportunities, uh, on, on the spreadsheet, but at the end of the day, it all comes down to execution. Like who are the people executing on that strategy?
Patrick: And so how much of the underwriting. Um, and how much does the community get involved in going? Okay. Let’s, let’s do our diligence on the, uh, the people that are executing on this strategy versus just believing in this strategy.
Tad Fallows: 100%. That’s critical. And I
Patrick: Yeah.
Tad Fallows: are, our experience, we have [00:46:00] learned over the past several years been doing this. Two patterns. One we don’t really go with anybody who’s maybe under a hundred million of, of. Their fund size and somebody who’s on their first fund, we typically really look for more like the third, second, third, fourth fund. And probably in the, you know, a few hundred million to a few billion where it gets big enough, you don’t have this key man risk of what if Patrick gets hit by a bus and now there’s nobody to run the company. Um, you bring down your fraud risk, all that sort of thing. Um. So I think it’s, it’s that and then specifically, okay, you could have a lot of different things on their third fund with a billion of a UM doesn’t make them all good there.
Tad Fallows: We, we do really try and take advantage of the community, I’d say both for access and for the underwriting. Um, some things are pretty easy to underwrite, like if you’re looking at multi-family residential, you don’t have to be a genius and you know, a real estate savant to understand. What the dynamics are, how interest rates move things, you know, absorption rates, et cetera. But if you
Patrick: But if you can do things,
Tad Fallows: I said, you know, [00:47:00] litigation,
Patrick: finance, oil, gas.
Tad Fallows: a person who doesn’t work in that, it can be harder from the
Patrick: Outside because it separate the
Tad Fallows: good
Patrick: good
Tad Fallows: from the bad operators, what are the metrics that you look at? And so we will try and if you look at
Patrick: you at
Tad Fallows: for example, what we’ll typically do
Patrick: do. There
Tad Fallows: we have
Patrick: we have one. We look at track record.
Tad Fallows: this fund has, you know, there’s, um.
Tad Fallows: A fund called Levine Liman that we’ve invested in that I really
Patrick: I really
Tad Fallows: got a
Patrick: like got a very long track record.
Tad Fallows: returns. But then what we did there is we
Patrick: We actually
Tad Fallows: to explore it more. We asked a member of
Patrick: community.
Tad Fallows: knows the principles there for an introduction, but then we also talked with members of our community who run portfolio companies there, and we said, okay, you’re the CEO at portfolio company that’s owned by Levine Liman. What’s it actually been like working for them in your experience? How have they added value? How, what dumb decisions have they made? Would you personally invest in their next fund? And so that gives you that kind of, I don’t wanna say inside information in the unethical sense, but just a richness of information you can’t get from looking at their deck.
Tad Fallows: And again, by having 8,000 people, you know, we’ve kind of got those [00:48:00] connections everywhere and, and those are
Patrick: Those are really helpful.
Tad Fallows: kind of avoiding bad deals.
Patrick: Yeah, yeah. No, that’s, that’s fantastic because I, you know, we, we’ve, um, being in the entrepreneur space, being an entrepreneur myself, uh, seeing lots of deals come and go throughout my, I don’t know, 25 plus year career, uh, um, looking at opportunities, um. It all boils down to the operator and their track record and, uh, because, and, and I personally, so we, we’ve got a, we’ve got an extensive real estate and background background in real estate.
Patrick: I, I bought deals that. Uh, on paper were home runs. And then at the end of the day, our execution wasn’t exactly perfect and turned out to be an okay deal. And then we had other deals that on paper looked okay and we executed really, really well, and they were home runs. And so it’s like, okay, uh, I can even look in the mirror and go, yep.
Patrick: It, it all comes down to, uh, how well this deal is executed. So, um,
Tad Fallows: And I
Patrick: yep.
Tad Fallows: say, [00:49:00] especially I’d say the further out into the weirdness spectrum you’re getting, and I know weirdness doesn’t sound like a
Patrick: Mm-hmm.
Tad Fallows: kind of know when you see it. If you’re talking about like leverage crypto trading, that’s
Patrick: That’s a weird thing.
Tad Fallows: further in the weirdness spectrum you get, I think the more you need to have somebody who really understands it.
Tad Fallows: Um, so we have an example of one I, I won’t name it that we looked at, but it was in this crypto, four X trading. And on the surface you’re like, man, this thing’s phenomenal. It’s posting 10% a month return. Initially we said, okay, well we shouldn’t even look at this ’cause it’s too big. Good to be true. It’s too good to be true. And they said,
Patrick: Well.
Tad Fallows: look at the names, the principles here. These guys are, you know, senior nuclear researchers. They were senior AI execs at publicly traded companies. Maybe this is the mythical
Patrick: 20
Tad Fallows: lighting lying in the sidewalk and we should pick it up. So we double
Patrick: double clicked on it.
Tad Fallows: And what we
Patrick: what we did there is,
Tad Fallows: people on our team who’d actually run their own Forex
Patrick: mm-hmm.
Tad Fallows: and made hundreds of millions of dollars before they retired.
Tad Fallows: And we said, Hey, can you help us really analyze this? And so we got down to getting the trading logs of the minute by minute transactions from some sample days saying, Hey, [00:50:00] how are you actually posting those returns?
Patrick: It
Tad Fallows: And what’s
Patrick: was
Tad Fallows: interesting is they had
Patrick: Had indeed posting returns looked like they were, they were
Tad Fallows: it.
Tad Fallows: They were
Patrick: making a very consistent half percent, 1%.
Tad Fallows: So it was this incredibly smooth, upward linear thing. But then when you dug
Patrick: You dug down into it,
Tad Fallows: we
Patrick: we realized they didn’t realize how much risk they were trading
Tad Fallows: a minute to minute basis,
Patrick: basis. They were up 20%. One minute
Tad Fallows: 30% the next minute, and basically just closing
Patrick: each day
Tad Fallows: they’re up 1%.
Patrick: they up 4%.
Tad Fallows: appearance of smoothness, but what, um. One of the members of our deal team had run his own fund. There was a similar strategy. He said, look, this is going to, for years and years, post a very smooth a day or half a percent a day. And then one day, boom, it’s just gonna go to zero because it’s like black came up too many times in a row and all of a sudden the whole thing is wiped out. And so. You could not get that by looking at the track record ’cause it looked unbelievably smooth. There were no such thing as a down month. But if you get into these weird things, again, you don’t necessarily need to do this with, if you’re buying a
Patrick: Forklift building.
Tad Fallows: some
Patrick: Yeah.
Tad Fallows: tail risk like that lurking.
Patrick: [00:51:00] Yeah.
Tad Fallows: really complicated, you need somebody who really understands it to, you know, help you understand the risks.
Patrick: Yeah, tad, this has been incredible. Uh, I think the community you’ve built is, is fantastic. Um, you know, when I, when I think about these opportunities, um, for a lot of the reasons I, I, I, I don’t see any downside for somebody that’s got some tremendous net worth to go. Uh, just apply@longangle.com. Uh, I think you guys are are doing some really cool things and also your Navigating Wealth podcast, I think is, um, uh, fantastic as far as like a resource.
Patrick: And you’ve got, you’ve got so many resources on your. Uh, on your, your website that, uh, people should check out long angle.com. Um, the resources section, like you, you can spend hours and hours and hours, days and days, uh, digging into these things. And, uh, and I think becoming a member is a, uh, a key piece. So when I think about the, the stakes, right?
Patrick: If. If I’m not taking action on this, uh, I’m [00:52:00] overexposed either in my business or potentially the public markets. Uh, and I’m missing out access to, to better opportunities. And there’s, there’s also a wealth building inefficiency that’s taking place if I’m, if I’m not taking opportunities to, to look at these private investments for the reasons we talked about, smoothing out the ride.
Patrick: And, uh, I might be taking unnecessary risks, you know, when I’ve just got a stock and bond allocation. Um. You know, there’s nothing to, to counterbalance that. So, uh, I can end up, you know, especially if I’m holding all sorts of wealth in my business, you know, we, we think that’s a, a great way to grow your wealth, but at some point I need to start taking some chips off the table and moving ’em into.
Patrick: Um, you know, something that is not tied to my, my business, and so I can be rich on paper, but not diversified or secure. So we, we think that’s a, a wise thing to do. And then when I do take action on sort of just digging in and educating myself and understanding the opportunities that are out there, I’m, I’m building a diversified and hopefully resilient portfolio.
Patrick: Uh, I’m [00:53:00] giving myself access to higher quality investment opportunities and better decision making. You know, we think about the. The hive mind of, of 8,000 people that have been there, done that. And, uh, being able to, uh, share that intelligence, I think is, uh, is important. And then, you know, we think about the wealth that we do build.
Patrick: It supports our, our freedom, our our family, and this, this legacy that we’re, we’re trying to build. So, uh, I think what you’re doing is, is fantastic. Any last thoughts or comments before we, before we wrap up?
Tad Fallows: No, uh, really appreciate the opportunity to have me here. Um, agree with everything you said there. Uh,
Patrick: Yeah.
Tad Fallows: who are interested in following along, yeah, would love to, to hear from them if they wanna get involved in the community. And yeah, really appreciate your time today.
Patrick: No, this is, uh, this has been fantastic and I’m, I’m definitely, uh, spent some time on long angle long angle.com, but, uh, gonna be spending some more there. So, uh, tad, this has been been wonderful. Appreciate, uh, what you’re doing in the marketplace. I think this is important, valuable.
Tad Fallows: Well, thank you, Patrick.
Patrick: Alright, that’s a wrap on today’s episode. Thank you for tuning [00:54:00] into the Vital Wealth Strategies Podcast. I hope you found real value in this conversation. I walked away with insights. You can actually apply if you did share this episode with someone who could benefit from it. That’s how we continue to grow this community of like-minded entrepreneurs.
Patrick: And if you’re ready to take things a step further, make sure you visit vital wealth.com/resources. Built a powerful toolbox of tax strategies, wealth building tools, all designed specifically for entrepreneurs like you. Again, that’s vital wealth.com/resources. Go check it out and start putting these strategies into action.
Patrick: If you haven’t already, take a moment to leave us a review. It helps us reach more entrepreneurs who are serious about building. And living intentionally. And remember, you’re a vital entrepreneur. You’re vital because you’re the backbone of our economy, creating opportunities, driving growth, and making an impact.
Patrick: You’re vital to your family, creating abundance in every aspect of life, and you’re vital to me because you’re committed to growing your wealth, leading with purpose, and creating something truly great. Thank you for being a part of this incredible community of vital entrepreneurs. I appreciate [00:55:00] you. We look forward to having you back here next time on the Vital Wealth Strategies Podcast.
Patrick: Where we help entrepreneurs minimize their taxes, master wealth, and optimize their lives. Alright.