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

20:04So, of course, this would be real raise, any sort of real inflation-adjusted raises, of course.

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20:52Given our earlier conversation about the fact that your contributions are the single biggest determinant of the success of your portfolio and the growth of your net worth, many people who are listening to this want to increase their contributions and need to increase their income in order to do so. However, there are a variety of ways that people can increase their income, and those options come with their own advantages and disadvantages. Can you enumerate some of these options and the pros and cons of each? Yeah. So when I discuss this in the book, how we can increase your income, I have five different, or technically there's six different ways.

21:28Well, the six is kind of a surprise we'll get into at the end, but there's like five different ways I think people can increase their income. Some of these are, you know, main hustle things, as they say, in terms of your core job. And some are, you know, side hustles or other things you can do on the side, whether it's freelancing, stuff like that. So I'm going to kind of talk about each one of those. So the first one I talk about is like selling your time or expertise. The thing about selling your time, like you can go and, you know, work for someone else, have a part time job, you know, you're an expert in a specific thing, and you can maybe tutor someone, teach someone something.

21:58Those are easy ways to kind of do that. The pros, obviously, they're easy. There's low startup costs of doing that. There's even like, you know, stuff like Instacart and all sorts of stuff now where you can just sign up quickly and start doing something for someone else. The con is like your time's limited. It's not really going to scale in the same way, right, as something like selling a product, which we'll get into in a second here. What strikes me as I hear you talk about this is that this applies both to gig economy work, Instacart, driving for Uber, as well as for more specialized work like freelancing or consulting.

22:32In either case, there are low barriers to entry, low barriers to getting started, low startup costs, but it's not scalable. Exactly. The alternative instead of just say, okay, well, I don't want to sell my time. I want to sell something that's not completely linked to my time. My second thing is, well, if you could sell a skill or service, right? So that's still going to be obviously linked to your time if you have a certain skill for doing something or you have a service you provide to someone. If you get better at that thing, you can still charge the same price. And if you can just lower the amount of time it takes, you can just you can sell it for more.

23:02Right. So you can think of that being like, let's say you're great at photography or something. You know, you just and you can even developing photos or Photoshop is an example of that where that's a skill you're selling. You can sell that and they have no idea how much time you take to do it. Right. And they're not explicitly paying you for the time. Right. So that's something where you can get higher pay. You can build a brand around it about a marketable skill or something. The con, I guess, is like it just takes time to develop a skill. Like skills are not easy to develop. There's a lot of things out there where you can make money and just when you're selling your time, you don't need to have too much skill.

23:31But then there's things out there where you need to spend that time to either develop a skill or develop expertise or something. And that's also not going to scale too greatly for most things. Like if you're selling a skill or service, there are some ways it can scale. But generally, you know, if you need to, you know, do 10 Photoshop things, you have to instill some time. So still, they're very similar one and two, but I think there's a slight distinction there. Right, right. And it seems to me that in order to stand out from the crowd, you would need some sort of niche differentiation. Yes, exactly.

23:58And so you have to find that's where brand building comes in. I think that's an important point to bring up. The next thing you can do is just teach people. And I think like teaching people, whether they're doing it online or in person, if you can do like an in-person course. In-person courses are harder, but now there's so many different online courses that I've seen people build courses and either do cohort based or they do ones where they just record themselves in a video and they teach people or even even think of YouTube as kind of like a teaching platform. and that's very scalable, right?

24:22I mean, you can have millions of people watching you on YouTube, right? If you're teaching about something, right? Versus if you're just doing it in person or something like that. The problem is there's lots of competition because it's so lucrative and can be so lucrative. There's a lot of people on YouTube. There's a lot of people in these teaching platforms. So once again, it's about branding and how do you stand out? How do you attract students? It's gonna be an ongoing battle to do this, right? To keep getting people to come in. So how do you kind of keep, create a referral network? So that's another way of thinking about it.

24:47Another way you can increase your income. The fourth thing is selling a product. So if you create a product, you know, that's obviously very scalable because if you can create a product in a way that you can create a lot of them or even especially a digital product can be very scalable. Like I just write for I write a digital book once and I can sell it in infinite times in theory. Right. The other issue is there's lots of upfront investment there and a lot of marketing. Right. To do something like to sell a product. There are pros and cons to each one of these things. Those are like those are all those first four basically all like kind of side hustle gig economy things.

25:18Yeah. Yeah. Would it be accurate to say, based on what I've heard you just describe, would it be accurate to say that there is an inverse relationship between scalability and startup cost? There can be in a lot of cases, right? Like maybe there's some like Goldilocks zone or some magical outlier out there. But generally, like if you're selling a product, like the only way you sell a product that people like, it's really good. It's generally has to be like pretty good. You have to have some deep skill or expertise in creating that product or something. It's not going to just come to you out of nowhere.

25:42Right. So the only one I'm doing on this list right now is I'm selling a book. Right. And it's like and I did that by writing online for five years about investing and reading so much and investing and doing this stuff. So it took five years of work to even get to something that I could actually, you know, create and send out there. Right. So it takes time and you have to do it. I wasn't really being compensated for until like 2020 started running some side ads on my website. So I started to get some compensation for that. But for three years, it was free. It was nothing for no ads, nothing on there.

26:11And so I just I was just working for nothing, basically, just doing because I loved it. Right. So that's an example of like you have to put out there's a long runway, but then, you know, maybe you can pay off one day. Who knows? Right. And then the last thing I want to say is climbing the corporate ladder. I know a lot of people talk about, oh, you know, you got to start your own thing. You got to be your own business owner, this and that. But I think for a lot of people, just being a professional, a corporate professional, there's nothing wrong with that. There's nothing wrong with a nine to five.

26:35And there's a lot of people that do well in that environment. And there's a lot of people that you can build a lot of wealth there. There's a lot of millionaires that are doing nine to fives. It's not about like, oh, my gosh, I have to run my own business and all this and all that because it's not necessary. Right. There's a lot of people that can do that. And so the pro of working in a corporate environment is you're going to gain skills and experience. You're going to work with lots of people. There's going to be a lot more exposure for you versus you're trying to do something on your own. Right.

26:58And there's less risk around your income growth because generally, you know, most over time, a lot of positions, you know, you'll get promoted. Your income goes up. And we've seen that this is true. Generally, you look in the data and it's true for most people in these kind of corporate environments. It generally goes up and then obviously does a level off at some point. But for a lot of people, it does keep going up from your 20s, 30s into your 40s even. The only problem is you don't control what you're doing. You don't really control your time in the same way. Right. So that's something to think about.

27:21Right. It's a downside. But yeah. And the last thing. So that's the main hustle. The last way to raise your income. Number six is buy more income producing assets. Think like an owner. You know, that's really the best way to raise your income, because going back to what we said with the Save Invest Continuum, you're taking money out of savings. You're taking your savings and you're investing it. And that's going to raise your income and raise your income and raise it. And that's the ultimate goal. All of these ways to raise your income should be funneled into income producing assets, which do it for you, right?

27:46So that's the ultimate goal eventually. So I think that's kind of a good way to think about it is like all of these things you're doing to raise your income. The point is to get that money invested so that it keeps paying you. You don't have to keep working for it. Right. So yeah, essentially what you're doing is selling your time as a stepping stone to allowing your money to make money for you. Exactly. You're taking your human capital and converting it into financial capital. And that's kind of how I like to think about it. It's almost like you're rebuilding yourself as a financial asset equivalent.

28:13And of course, this is very weird to say things like this, but like you're basically saying like, hey, I only have so many, so many hours I'm going to work the rest of my life. You can think of your human capital is like always a dwindling asset, not because you can't learn new skills, but you just you're going to run out of time eventually. Right. So over time, your time, you know, in theory, your time's going down. So while that's happening, while your human capital is decreasing, you need to offset that by increasing your financial capital. So it's it's paying you even when you can't work anymore.

28:37Right. That's kind of the idea. Right. So let's talk about owning income producing assets, because you make a distinction, as do I, as I've said many times to this audience, that any asset earns money in one of two ways, either through capital appreciation or and or through the dividend or income stream that it pays off. But there are certain assets that only earn or lose money via capital appreciation, and those are speculative, the ones that don't have any kind of income stream attached to them. And I see that you, like me, tend to not prioritize those more speculative assets as much. Can you talk about how you came to that decision and from there lead us into a conversation about specifically the income-producing assets?

29:24As you mentioned, like you said, there's two ways. There's basically like there's price changes and how people feel about prices. That's one thing. What people think something's worth. And then there's something which a lot of people might call fundamentals or earnings or income. There's different ways of discussing that. And those things, I think, are more weighted in some sense of reality. Right. And so the example I like to give, you know, imagine there's this factory they're selling for, you know, a million dollars. But, you know, this factory is producing, you know, half a million dollars of profit every year.

29:53Right. And so it's like, wow, that's a great like, why wouldn't I do extra earnings? That's incredible. It's incredibly that's the pricing is great, right? So it's like you can say it's worth 10 million or 1 million or whatever. No matter what, that anchors the earnings. The earnings exist. They're real and they're paying off half a million dollars a year. That's real. So whether the price is jumping up and down around that, there's always this anchor, which is fundamentals. Now, compare that to gold or Bitcoin or art or wine. And there's not the same thing. The only reason the price of those things change is based on attitudes and perceptions of those things.

30:24Now, of course, I'm not saying that income producing assets, people can't feel differently. For example, you know, factories could go out of fashion for some reason. Oh, I don't want to own a factory. They're too whatever dirty or this. We can make something up, right? Let's say investors just decide to give up on factories. And guess what? The price of that factory goes from 10 million to 1 million. And now it seems like a bargain. But at the end of the day, if it's still producing that half a million dollars a year in profit, that's something real that people can touch. It's really it's going to pay you out no matter what.

30:49It's not just based on the whims of the market, right, so to speak. I'm not saying you should never own gold or never own crypto or never own art or wine. I own all of those all of those things. I don't own gold. I own crypto and art. I've dabbled in wine and thought about other things like that. But mostly I just try to keep that like 10 to maybe 15 percent of my portfolio, all of those non-income producing assets. So I say 85 to 90 percent of your portfolio should be in, you know, income producing assets. So that's things like stocks, small businesses, real estate, investment properties, REITs, all these.

31:21There's a bunch of different things I talk about in the book. If you want to invest in royalties or something, that's another one you can do. And I just do that because there's income streams associated with them, right? Bonds, all these things have income streams. And so for me, it's really just about finding something that has some anchor to reality and paying me versus I have to do it completely based on the price action. I'm not saying you can't make money doing that. The entire crypto space made money completely on price action. I'm not saying there's no fundamentals or no use case there.

31:49but the use case isn't always necessarily linked to cash flows. There are exceptions to that. There are times where you can take your crypto coins and stake them and earn money because you're providing liquidity and all this. I don't want to get into all the super crypto things. And there are ways of turning these non-income producing assets into income producing assets, but that's not their main use case, right? There are uses for these things. I'm not saying they're not useful. I'm just saying they don't necessarily provide a cash flow. And that is the thing that I have to have i feel more secure owning income producing assets and i think most people will feel more secure owning income producing assets over the long haul yeah you want to dabble in those things i don't care i just think just keep it to a smaller percentage of your portfolio you know i've looked at the data on a lot of stuff even when i i ran a simulator i was trying to figure out what's the optimal portfolio when i when bitcoin first did this big run up in 2017 and it said it was like and remember this is like the perfect so it was like if you went back from like 2010 to 2017 or something, it was like the best thing you could have done was like 55 % stocks, like 40 % or 43 % U.S.

32:51bonds and like 2 % Bitcoin or something. So it was in there, but it was just like very small because of how risky it was or something. And just thinking about that, I think that's kind of the philosophy I like to use. And I don't think there's any right mix of this. I just think when you're investing, you've got to have income producing assets.

33:19you said you keep your own portfolio about 10 to 15 percent speculative and the rest are income producing assets how much weight do you give individual stocks within that 85 percent of your portfolio that is comprised of income producing assets so right now i'm actually only like 10 percent with like art and crypto right now probably 10 percent of my net worth is in those two might even be less than that. If I think about it, it might be like 8%. But of all of my assets, I have 1 % individual stocks. And in the book, and this is the funniest part. So in chapter 12, I say do not buy individual stocks.

33:51And I still stay by that statement. I did buy both the stocks I bought. I'm not going to say the names. I've said them in other podcasts and stuff. I'm not here to pump them or anything like that. I bought two individual stocks. One was a bunch of my friends did. I said, okay, let's do I put like half a percent of my net worth in it. And then the other one, I put like another half percent in and they're both down bad, very badly at the time of this recording because tech stocks have been destroyed. And so one's down like 70 percent, one's down like 60 percent or something. They're both very down very badly.

34:19I recommend you read that chapter and realize like I was right all along about that thing and I never should have done it. However, despite that, I think you can do it for fun. And so I think having won a couple percent of your portfolio and five percent, even in individual stocks, there's nothing wrong with that. I just think the bulk of people's money shouldn't be in individual stocks because it's very risky Not just the performance piece of it, but also because like you're not gonna know if you're good at it So if you're really trying to do it as I got like, oh, I'm really good at investing my own money Look, I bought all these stock picks.

34:45I'm so good at it I think it's really hard to tell if you're actually good at it If you're just lucky and you're not gonna know for a long time and by the time you find out if you find out you're not good It's not a great look There's a lot of people who started buying in 2020 and did even better in 2021 and found out in late 2021 that they're not as good as they thought they were. And so that's a kind of a big wake up call. I think we're starting to see that happen now. See, I try to keep individual stocks. I actually, in my mind, individual stocks are income producing assets. But in my mind, I try to put them into the non income producing assets because it's it's they're speculative in my mind, but they definitely are income producing.

35:19Or they're supposed to be. Yeah, yeah. No, I have that same kind of mental grouping where I associate owning individual stocks and owning cryptocurrency in the same mental bucket, Even though cryptocurrency is speculative, it's more analogous to, I think, a foreign currency exchange. Owning individual stocks, of course, you are owning an income-producing asset. You're taking ownership in a company in a very fundamental way. But given the volatility, given the risk, given the unpredictability of how it's going to go, I'm just like you. I have that same mental bucketing of this is the portion of my portfolio that is purely for play, playtime.

36:01And then this is the portion of my portfolio that's actually strategic. Yeah, I agree. And I think most people, if they think like that, they'll do fine. I think you just got to, what's the percentage? What's the split you exactly do? And so I think most people, even though there's a lot of people I know that dabble in crypto and stuff like that, and they sell like 80 % of their money in index funds and stuff. I'm like, that's the way to go. If you're going to do low-cost index fund, it's like, yeah, you're messing around 20%, but it won't necessarily be catastrophic if that even all went to zero.

36:27Now, that would still be terrible to lose 20 % of your money, but imagine if it's 100 % of your money. Now, that's really, really scary stuff. Right, exactly. Let's walk through some of the different income-producing assets that a person can invest in and sort of walk through, again, the pros and cons of each. Yeah, so there's stocks, obviously. It's the traditional, my favorite, because I think they're very easy to own and trade. There's low maintenance. You don't have to do anything. You just own them and that's it. Generally, pretty good historic returns. The cons is that there's high volatility there.

36:57Valuations can change very quickly. That's why I said like, you know, one day people think all these tech stocks are going to the moon and next day they're like, oh, these things have no earnings. Now they're down 70, 80 percent. That's what happens in stocks, right? Right. So diversifying is the key there. Can we talk about farmland, royalties? I mean, these are the things that we don't hear about very often. Yeah. So obviously stocks, bonds, investment property, REITs. The REITs are just real estate investment trusts. You're owning real estate. Someone else is running it for you, obviously, instead of owning an individual property.

37:24It's like a diversified thing. So then there's farmland. That's something I've kind of dabbled in a little bit. The issue with that, so you can own a farmland REIT. That's probably the easiest way for most people to do it. However, I don't want to name any services or stuff out there. You can just search farmland investing. You'll find a bunch of ads on Google. You'll find all of those. Those are actually very interesting because they have a lower correlation with traditional financial assets. And they still provide a lot of, like, they can provide income. There's income you can get in different ways from the sale of the property itself, the yield of what the farm actually produces.

37:54Right. That's another way you can have income and you'll have distributions paid out over time during certain deals you'll have. So, yeah, and because they're not correlated as much like if the stock market crash doesn't mean that farmland prices are necessarily going to crash. Right. And usually they're illiquid. You buy them and you wait a long time to kind of see your money back. Because of that, it's a it's a different return stream, I think, is cool. So that's something to check out a lot. But a lot of those, if you're doing like farmland on those, on those different sites where you can invest in like a crowdfunding platform, they're going to require you to be an accredited investor.

38:21So that's going to be like, you have to have a million dollars or you have to have$200 ,000 or more in income for the last two to three years. So the accreditation status thing, small businesses, you guys know what that is. You have to usually find people to do that to be an angel investor or something like that. And then lastly, it's like royalties. I mean, I think royalties are interesting. If you search royalty investing, you can find a lot of those firms out there as well. But I think that's interesting because they're kind of like individual stocks in a way because you're buying like you have to bet on like oh i'm i'm betting on this particular song is going to do well over the next five or ten years or this particular piece of art or something right and so a very piece of content is going to do well it's interesting so it's kind of like individual stock investing so i think for most people you're gonna have to have you're gonna have more money available to kind of get into these but it's interesting to me because like i don't know if you're just into music or art or something it's another way to invest and kind of have yourself aligned with that right that's another thing to think about.

39:11So yeah, so I'd say farmland, check out royalties. The other one too, is like creating your own products. So this is something where like you have something that becomes an income producing asset for you, right? And so that's kind of related to what we were discussing earlier with discussing how to raise your income, whether you're going to sell your own product, that can be an income producing asset, right? So thinking about that, if there's something you're really passionate about, creating something that you can sell to people, whether that's digital products, which are now, it's very easy to sell those things on Gumroad, or if you're self-publishing a book, you can do that on Amazon, all sorts of different ways you can do things like this.

39:40So those are the big ones that I throw out there. You don't have to do all of them. Just consider them. Just look at them. Say, does this seem right for me? Do the fees seem right? Does this seem right? You go through everything and kind of just see what fits your profile. Right. The royalties one was really interesting. I've never heard anybody talk about that before. And you give the example of the song Empire State of Mind by Jay-Z and Alicia Keys. And someone bought the rights to that for$190 ,000. The rights to the royalties produced from that song for the next 10 years. And in that example, I mean, yeah, it's absolutely easy to see you're betting that that song is going to stay popular and relevant.

40:17And you're betting that the royalties that it made last year will be comparable to or improved over the next 10 years. Like, you know, you're essentially betting on the long term viability of a song. Yeah, of course. And that's one of the things about this. And I have no idea how they probably There's people out there probably model the decay of royalties. So in the particular – I'm going to read from the example. So in the year prior before it was sold, that song, Empire State of Mind, earned$32 ,733 in royalties. I'm surprised it was only that much. I thought it would be a lot more. Well, I mean it's one song.

40:54I mean it's a big song, but it's one song. There's so many songs out there, right? So it's like – and they paid$190 ,000 for it. If the royalties remain constant for the next 10 years, that's an 11.2 % return you're getting on your money. It's as if if I gave a bank one hundred ninety thousand dollars and they gave me thirty two grand a year for the next 10 years. That's an 11 percent return. Now, there's no bank in America that would do that. Right. But maybe the royalties go down slightly over time. So the final return will be smaller. But if something were to happen to Jay Z or Alicia Keys, you know, God forbid that you would get way more royalties.

41:22People will be listening to that song, you know. And so that's the thing to think about when you're investing in royalties. Like if anything happens to the artist, like there's could be all sorts of stuff that happens for the song or that's good or bad or vice versa. So I obviously don't want anything like that, but it's just one of the risks or benefits of royalty investing is to kind of think about how trends change. I mean, if some were to get canceled, maybe people stop listening to those songs altogether. That's the other thing. You got to think about both sides of the equation. Wow. And I guess in that way, there's also some crossover in terms of investing in art.

41:50But, of course, art is not income producing and royalties are. But with art also, you have that same issue where the popular sentiment about the artist can influence the perceived value of that piece of art for better or for worse. Of course, that's completely true. And so I actually do invest in some art, but it's like, once again, it's like it's crowdsourced. Well, I can't afford a Basquiat on my own, but I do own one through, you know, a crowdsourced platform. You can own non-income producing artists. There's nothing wrong with that. I just think like you've got to just be careful because not everything – because you don't know what the people are going to feel about pricing.

42:23If you just if you happen to sell at a bad time, you're I mean, during the Great Depression, like there's so many rich people end up selling their houses for, you know, pennies on the dollar because they just needed money. And there was no one that could afford these really expensive things. Like how many people can afford$10 million paintings? Not many. Right. So the people that are buying those things are probably only going to do it in a good market. If the market turns bad, like they're not going to be willing to spend a lot of money. So you could take a real hit on that. So that's you got to be careful when you're thinking about those types of things.

42:48So that's the only downside of investing in non income producing asset. Right. But in an inflationary environment where people are more likely to park their money into tangible items such as jewelry and art and houses in the types of tangible items that historically have survived periods of high inflation. I mean, that's sort of the other, I don't want to say market timing component to think about, but macroeconomic timing component to think about at least. Of course, yeah. All those things to think about, right? And so when it talks about when you're talking about inflation investing, I mean, I didn't really get into this in the book as much, but I've written on this on the blog.

43:25And it's like, you know, equities generally are the best bet for most people most of the time. You know, REITs are also pretty good. Real estate is pretty good for that. Home prices, things like that are good. The other thing, if you really think inflation is going to stay high for a very long period of time, then that's you would, in theory, take out some debt, you know. And why would you take out debt? Because that debt's going to get inflated away. If the cost is fixed, but the money supply is just deteriorating, you know, over time, then like you're gonna be paying back in depreciated paper.

43:53It's one of those things where, I mean, people who did that in like, I'm not saying we're gonna have a hyperinflation, again, it's silly, but any sort of thing, you know, in history where people were literally paying back, you know, they took out a loan to buy a business, and then they'd pay it back like a couple months later. And it's like, I own the I basically got the business for nothing, right? And it's kind of crazy to think that that could happen because the currency depreciated so quickly. But yeah, so those are the ways to kind of fight inflation. with investing. Excellent. Well, thank you for spending this time with us.

44:19Where can people find you if they'd like to know more about you and your work? My website is of dollarsanddata.com, all one word of dollarsanddata.com. Or you can just find me on Twitter. My at is at dollarsanddata and my DMs are open. So feel free to send me a message or questions or whatever. I'd be happy to chat with you. Thank you, Nick. Today's episode was brought Brought to you by the letter I for investing. And it is part of a special five-day series that we are doing every day this week in honor of FIIRE. In case you missed it, on Monday, we played the letter F financial psychology. We played an interview with a behavioral finance expert.

44:58On Tuesday, we played an interview with a negotiation expert. That was for the first letter I, increasing your income. And you just finished listening to this interview with Nick Majuli on that second letter I, investing. Tomorrow, we will share an episode on real estate. And on Friday, we're going to share one on entrepreneurship. That's our five-day special every day this week where we pull an episode from the Greatest Hits Vault, an episode that has previously aired on this podcast, but it's been several years. So if you're a newer listener, you might not have heard it. If you're a longtime listener, you heard it many years ago.

45:33Thank you so much for being part of the Afford Anything community. Merry Christmas Eve and I will meet you tomorrow as we celebrate the letter R and we also celebrate Christmas. All of that is tomorrow. I'll meet you there.