MI Rewind: What is Money? w/ Jim Crider

25:05No, the value of money itself or good money means that we don't have to have that messy means of exchanging value. That is what money is for. Let's take a quick break and hear from today's sponsors. Even Einstein had blind spots. That's why modern science is built on the idea of peer review. Investing may be more art than science, but that doesn't make peer feedback any less valuable. The tricky thing is finding qualified people who are interested and willing to help vet your investment ideas. That's why we built the Intrinsic Value Community. It's a place to connect, share ideas, learn, and get feedback.

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26:55That's public.com slash T-I-V-P. Paid for by public investing. Full disclosures in podcast description. Just like everybody else, there was a time when I was a beginner investor, and I have to say, investing is particularly filled with jargon that can just make it so difficult for new investors to understand what is going on. But it's never too late to get smarter about stock investing from the ground up. At The Investors Podcast Network, we've made a habit of studying the world's best investors. And now I'm just selling those learnings into a simple course for you or for anyone in your life who you might want to share the gift of knowledge with.

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28:06And for a limited time, you can use code stocks15 for a 15 % discount at checkout. All right, back to the show. Yeah. And I think you'll find time and time again throughout history that Just stories similar to the Yap Island. Money has to be difficult to produce. History shows that the money that has lasted the longest were those that were the most difficult to produce. And that is why gold and silver were money for thousands of years. Despite any new technological innovations over the last century, gold has generally had its supply increase by 1.5 to 2%. And another reason why gold has been a preferred form of money was because of how durable it was.

28:48It's said that practically any gold that has ever been produced over thousands and thousands of years, all that gold still exists today and is held by somebody. So the conundrum with any form of money is that there's an incentive for market participants to produce more of it because it has value above its utility. And since there are thousands of years of stockpiles of gold, It's so durable with all of it still around. It's a good form of money because the gold miners aren't able to produce huge amounts of gold and crash the price and cause those distortions in the economy. And gold and silver are like the only two forms of money that despite all the advances in technology, they haven't been able to produce, call it 2 % more of the gold supply.

29:30All the easy deposits have already been tapped into around the world. So all the gold they're mining is in these hard to reach places. It's almost like a difficulty adjustment for gold. And the only way there'd be some massive flood to the market is just some crazy innovation like Elon Musk starts mining gold on the asteroids or someone starts mining gold on the ocean floor or something of that nature. It's just something that would be like this huge innovation in terms of mining gold. So gold is really the only thing on the planet that historically humans haven't been able to figure out how to create more of it relative to the current supply.

30:06And despite any large price increases, like during the 70s, gold had this massive price run, yet we didn't see just a huge influx of the gold miners mining a lot more gold. And this phenomenon really existed for thousands of years until Bitcoin was invented. Bitcoin has a fixed supply cap of 21 million. So any massive run up in price, the miners aren't able to front run it and mine more Bitcoin. It It has this fixed amount that is produced every year that is in the code, and that's going down over time. I'm curious, just thinking through gold. And yeah, if you said hypothetically, if Elon Musk was able to mine gold on the asteroid, would we treat that gold in the same way that the Yap people treated the rhinestones that O 'Keefe was able to procure?

30:53It's like, hold on, you cheated the system. This is supposed to be difficult to procure. Or maybe vice versa. So it's like, hey, babe, I got you a gold necklace, some of that asteroid gold, and maybe that would have a premium on that. I don't know. But again, we like to see that, hey, this was difficult to obtain because it is meant to communicate value. And if we value something, usually that's how some sort of importance. And again, if the more valuable something is, the more rare that's going to be. So yeah, if Elon was able to do that one day, which I wouldn't put it past him, I'm curious how we would even treat that.

31:22Because again, that would be a workaround, just like what Keith found. So, Len Alden wrote this fantastic article called What is Money Anyway? that outlines the history of money in the US. And I wanted to touch on that a bit in this episode. For many years, money in the US was backed by gold. Since gold isn't very divisible and isn't very convenient to use in day-to-day transactions, people would deposit their gold at the bank and people could have paper claims against that gold. After the First World War in 1934, the US declared that gold was actually illegal to own. So Americans were forced to sell their gold to the government in exchange for$20 per ounce.

32:02The dollar was then revalued relative to gold at $35 per ounce, which benefited the government tremendously at the expense of those that had to sell their gold. And that's a 41 % price increase in the price of an ounce of gold practically overnight. And that's pretty crazy to think about that gold is this precious metal that is very difficult to produce and was chosen by the free market to be used as money. And the government forced everyone to sell that gold for dollars at a price that was obviously favorable to the US government. So it was illegal to own from nearly 1934 to 1973, so nearly four decades.

32:38And in 1944, at the end of World War II, the world came together and put together what's called the Bretton Woods Agreement in 1944. Most countries pegged their currency to the dollar and the US dollar was pegged to gold still. So citizens couldn't redeem their dollars for gold, but foreign creditors were able to. So the dollar was backed by gold during this time period. They weren't able to just magically come up with more gold, but they were able to print more dollars and adjust the ratio between the dollar and gold. Preston is always mentioning how even though the dollar was backed by gold, they were increasing the money multiplier or the ratio between the dollar and gold after the Bretton Woods Agreement to help finance government spending.

33:21In 1944, the money multiplier was around five. And around 1970, the money multiplier increased to 10. So that's just the increase in the money multiplier over those years is like a 2.7 % inflation rate for those foreign creditors. So then we had World War II in the early 1940s, and the US government no longer had enough gold to back all the dollars that had been created over time since they were financing the war, paying for all these, had all these increased liabilities. So inevitably in 1971, we had what's called the Nixon shock where US President Richard Nixon announced that US dollars were no longer convertible to gold for foreign creditors.

34:01So essentially the whole world was backed by the dollar and now the dollar was no longer backed by gold. It was just backed by the faith in the US dollar and the US government as the issuer of that currency. Ever since the announcement in 1971, all fiat currencies have been free-floating and not backed by anything or not backed by gold. And that's with the exception of Switzerland, which kept its currency backed by gold until 1999. For those of you who aren't familiar, fiat currency is essentially just a government-issued currency that isn't backed by any physical commodity like gold. Then in the 1970s, the US made a deal with the OPEC countries to only sell their oil for dollars, which has essentially created additional demand for dollars.

34:46The OPEC countries then received military protection and trade deals with the US. That is what we now know as the petrodollar system, which you'll probably hear from time to time when you hear about the history of the US and the US dollar. A result of this system is that it created a lot of demand for dollars as all the countries around the world needed to trade with it. Because there was this extra demand, this made US exports more expensive and US imports less expensive, which has led to this massive trade deficits in the US. We all know how all the products that we're buying on Amazon, most of them are coming from China or coming from some other country because it's much cheaper to produce those goods in other countries.

35:27So the US has just had this massive trade deficit. They've been exporting dollars essentially and importing all these goods. So with the whole world now using fiat currencies, all governments around the world benefit from being able to produce those currencies for a cost much lower than the actual value. So it kind of ties in to what we're already talking about. It's not hard to get on your computer at the central bank and just click add X number of units. So there's not much work that needs to be done to create those new units. In the US, for example, if they want to start funding a new government program, it's much easier for them to just print the money themselves rather than increase the taxes on everyone in the US.

36:07It's kind of a sly roundabout way of them taxing the people. So being able to print new money is a form of taxation as the value of all the dollars that the citizens are holding go down in value as more units are printed by the government. The coronavirus pandemic is a perfect example of this. The US M2 money supply grew by roughly 40 % over the past couple of years. And a lot of that money ended up flowing into financial assets. And you mentioned your home a little bit earlier. To illustrate this, the S &P 500 has gone up roughly 40 % in the last couple of years as well. So at a general level, your dollars can buy less of a basket of stocks or less real estate like the real estate in Texas than it could two years ago.

36:51And that's in large part just due to the money printing. So that's kind of the history of the US in just a few minutes and how we got to where we are today. We were on the gold standard for many, many, many years because the free market really just selected gold as money. And governments have found a way to go to this government-issued currency. Originally, everyone would deposit their gold at the bank. We would get paper claims against that gold. and then they just kind of cut the link between the paper and the gold. Now we find ourselves today, we're 50 years into just using a currency or a money that isn't really backed by anything.

37:28Yeah. It's interesting. The US dollars used to be backed by gold. You could take it in and exchange it for gold itself. Now it's backed by the full faith and credit of the US government. Frankly, as I ponder that, I don't know what that means. If I went to the government and I said, hey, I want to give you this dollar, what can you give me in exchange? They would say, well, here, you can have some faith in me. What does that mean? Full faith and credit of the US government. Their ability to bomb another country in war, that's why it's valuable. Is it valuable because they're able to enforce that that is money in the US?

37:57Therefore, hey, this is valuable and money because we say so. Then the government goes and prints 40 % in a couple of years. That sounds like they pulled an O 'Keefe on us. They found a cheat code on making more money in a cheap manner that they didn't have to do the work for it. And I was just laughing a second ago, thinking I can be on high alert if the next chairman of the Federal Reserve's last name is O 'Keefe. I know it's time. But yeah, it's very interesting to think about these things. And again, just the implications of having unsound money and for someone to have the ability to unfairly come in and change what money is or change the value.

38:32Because again, you are mixing signals of an expression of value for everyone else who's holding that thing. And yes, if you own financial assets, then you aren't as adversely impacted as someone who doesn't own financial assets. So if you're someone who on one end extreme, you own lots of high-end real estate and art and stocks and stuff like that, and the value of the dollar goes down, because we could argue, is the value of your goods going up or is the value of the dollar going down. I would say it's a mix of those two. Right now, I'd say it's disproportionately the value of the dollar is actually going down, but it's a mix of those.

39:09But again, if you hold those things, perfect. You just maintain your purchasing power because you held your value in those goods that are more inflation resistant versus on the other extreme here, if you're someone who lives off of a fixed income and doesn't have any assets, and your fixed income is$5 ,000 per month. And you need$5 ,000 per month to live your lifestyle and you don't own any assets. And then the cost of the things that you need to survive goes up by 30%. Like my grocery budget's up about 40 % over the last year. And that's well, partially because my kids are growing, getting bigger, and they eat more and they feed a significant amount of their food to our dog.

39:49But still the groceries are up significantly. And if you own no assets that you can sell that help hedge that inflation, and you only have this, again, this fixed income that maybe has a small cost of living adjustment annually or doesn't have one, you just got left behind. And it's things are getting worse for you. And that's where inflation is taxation disproportionately on those who do not own assets. You can take it even a step further. If you own assets via credit, or especially cheap credit that is not marked to the market, then you are even further ahead. If you, in a place that experienced hyperinflation, let's just for fun, say, said that you owned a 100 ,000 acre ranch in Venezuela.

40:30And I don't know, I'm just going to make up numbers. Let's say you owed a million dollars for that ranch, Venezuelan dollars. Okay. So you owned, let's say a hundred million Venezuelan dollars for this ranch. And that would usually be a hundred years of work. Okay. Well, the Venezuelan dollar becomes worth 100 or 99 % less. Well, suddenly you're able to pay off that ranch with one year of work, a few months of work versus a hundred years of work. So you just benefited disproportionately compared to others. You actually just procured this amazing ranch for one year of work versus the hundred years of work you're supposed to do.

41:09So again, the value that you put in was disproportionate to the value that you received because money itself, which is supposed to communicate those things is supposed to be a clear signal of communication was hijacked by bad money. And that actually goes in with one of my favorite stories about money itself is the glass beads in Africa. Because I think that is very salient to think about how this can have an adverse impact on people who don't understand what sound money is and how cultures and people can get left behind. So Africa, a lot of people groups in Africa used to use these glass beads as a form of money, and they would usually wear them as necklaces.

41:46And that was what they used for money. It was easy to get around and take with you and trade with and everything. And glass at that time was difficult to make. So it wasn't highly inflated amongst those cultures. Well, Europeans started coming in and recognizing that that is what was the means of currency in those locations. And Europeans had technology to make glass very cheaply and easily. So they went back to Europe, made a whole bunch of glass right quick, brought it back down to Africa, but they were smart about it. Smart. They were cruel, but smart. They went just village by village. They didn't display it, let everyone know, hey, guys, we're loaded because people would have caught onto that.

42:24They went from village to village and they were quiet. They started buying assets, these valuable assets for this money that was not as valuable as the people thought it was. They knew it wasn't valuable. The people didn't know that yet. So they would trade, Hey, I will buy your farmland for X amount of glass beads. Oh, perfect. This glass bead communicates this value of farmland that is a fair trade. So they would do that. They started buying assets. They went from village to village before the people realized that the glass bead money had been inflated. And suddenly there's this trade-off of things of true value with an inflated worthless form of money.

43:03So again, it stole from people because they weren't understanding what money was, and they weren't understanding that money had been, quote unquote, printed or created from a system outside of themselves. And we could argue that is sort of what's happening with people with fiat currencies right now, especially with people who don't own assets and are trading their time for something they think is valuable, but actually isn't. It just was created out of thin air, and you're giving away something of value. If that something of value is a farmland or something like that, or if that something of value is you're trading a lot of time working and being away from your family for something that maybe isn't as valuable as we've been told it is.

43:42Yeah. You mentioned some fantastic points right there. I think one of the things I took note of is that we're seeing the financialization or just a monetary premium put on all these assets. So like I mentioned how Bitcoin is pure monetary premium. Now, people that understand the dollar is falling in value over time, they're doing everything they can to get out of dollars, especially right when they get it. They get their income, they're like, yeah, I'm going to put 20, 30, 40 % of my paycheck, every single one in the stock market. They don't even look at the value of the stocks. They don't look at if stocks are up or down.

44:15They just know that stocks over the long run will go up as the dollar goes down in value. Other people do that with maybe real estate or other asset classes, like you mentioned. And you hear that another interesting thing to think about is that it actually incentivizes people to take on debt, like you're saying with the Venezuela example. You listen to some finance people like Dave Ramsey. He's like, avoid debt. Don't get into any debt. Debt is bad. The borrower is slave to the lender. But when the dollar or just the money is falling in value fast enough and you're able to get a loan, say you're able to get a loan for real estate for 3 % and the dollar is falling in value at a rate faster than 3%, then all of us are really incentivized to take on a loan for 3%, go and buy a house, rent it out, cash flow it.

45:00Then your house's value goes up over time and the value of your payments is going down over time. So it creates these poor incentives in an economy. And you think back to say 2008, the banks were just giving out loans to anybody and everybody and they knew they were quote unquote too big to fail. So it creates these incentives all across the economy that can really hurt a lot of people in my opinion. Yeah, it punishes prudence and it rewards speculation. And that's why you see so much speculation in frothy markets. I mean, there's so many things that are in a conservative and traditional valuation.

45:36Most things are overvalued right now. But again, how do you assign value when the measuring tool in which we're supposed to judge value is seemingly broken at the moment? That's where speculation comes in and why real estate costs multiples more than it did in 2007. The stock market is outrageously trading these outrageous prices and fine art and wine. There's so many interesting things that people are just buying as a means of speculating and trying to store their value in because they don't trust the dollar to actually store that value. Well, I got plenty of questions for you about Bitcoin. You're thinking about this all the time.

46:15You're talking with many people. Bitcoin, like I mentioned, is pure monetary premium at its current value today. And it doesn't produce any cash flows like, say, the stock market or real estate. It's totally dependent on just what the market values it from day to day. So how do you grapple with this idea that Bitcoin doesn't have any intrinsic value and how do you work through that with people wanting to invest in it? I don't see that as any issue. Again, going back to the value of money itself is not in its utility or what people would consider utility, like gold, it being pretty to look at, or it being a good form for teeth filling or whatever.

46:57That is not where I find the value of money. Its purpose is strictly as a clear means of facilitating trade and communicating value again over space and time. That's its purpose. So I don't have any issue there. Really, the people who say that gold is valuable because it has these other properties, Yeah, we could argue. Yes. Again, if Elon Musk was able to mine an asteroid, maybe it would flood the market and hurt the value of gold on its means of trade, like as money. It would help because more people, we could use gold for its other use cases more so. It's like, yeah, there's that. But really, the people here are saying that gold is worth more than Bitcoin because gold actually has use cases beyond money itself.

47:40I doubt 99 % of these people have ever actually taken their gold bullion and said, you know what? I'm not going to use this as money. I need to conduct energy right now. So I'm going to hook up my battery to my bars of gold. These people who are making these arguments that it's useful, you're not using it. No one's hooking up their gold bullion and using that to conduct energy or melting it down and using it for these different things. Get out of here with that. You're not using it for the things you say it is. You're using it to store value. That's why you're using it. Let's just be honest. One idea I've been grappling with is my asset allocation in my portfolio.

48:15I'm a big fan of Bitcoin. You're a big fan of Bitcoin. You're heavily invested. And an idea you'll hear in traditional finance is that you need to be diversified. You need to be in different sectors of the stock market. You can't have too much exposure to risky, quote unquote, risky assets like Bitcoin. So how do you think about diversification in a portfolio? Diversification serves multiple purposes. One, we could argue whether or not diversification is a means of growing wealth. I would say that the fastest, this is not a guaranteed way of growing wealth, but it is more speculative. But the fastest way of growing wealth is through concentration.

48:51Most of the people, the wealthiest people in the world did not achieve their wealth by investing 10 % in their paycheck into a 401k and buying a broadly diversified portfolio. No, they usually did this by starting a business, which is a highly concentrated position. They are putting their time and their money into a single business. That's like me going and buying 100 % of one stock. That's what a business is. That's what owning a company stock is. You're investing in that business. So if you're a business owner, you're investing strictly in that one business. And that's how the vast majority of highly wealthy people achieve their well is through concentration.

49:26Now, I'm not saying that's the right thing to do, especially for most people. But again, we have to call a spade a spade and concentration generally leads to higher wealth if you make it through the scathing fires of concentration. So you have to be aware of the risks there. Now, on that same token, diversification is a phenomenal way. Historically, it's been a phenomenal way of achieving a relatively consistent means of growing wealth over a prolonged period of time at a relatively expected rate. So that's nice. Also, it's a great way historically, again, I don't know it's past performance, who knows what happened in the future, but it is tend to be a great means of preserving wealth.

50:04So if you had all the money you need to do everything you want in life, it would be foolish to just keep all of your value or all of your worth in one thing. You want to preserve that. So you're going to buy lots of things to reduce that risk of that wealth being stripped away because one thing fell. So that's why you buy a broadly diversified portfolio of goods. So yes, diversification is great. It also helps with people. So people themselves tend to be irrational investors. There's what's called the behavior gap. So the behavior gap, there was years ago, a study was done to see how people's behavior impacts their performance in investing.

50:41And I'm going to butcher the numbers a little bit, but stay with me. The study was done. It pulled the average performance of a bucket of mutual funds. And this bucket of mutual funds returned on an annualized basis, roughly 9%. So those were the funds. Okay. Well, then they pulled a group of investor returns. These investors invested in these same mutual funds that achieved 9%. But these investors over that same period of time achieved an average annualized 7 % rate of return roughly. So how do people have a underperformance by 2 % per year when they invested in the exact same things that achieved a 9 % rate of return?

51:20That can only be accredited to the people. It wasn't the investments. It was people's emotions. We are irrational and we're emotional when we invest. We talk to our neighbors at a barbecue or whatever, our crazy uncle at Christmas, and they say, hey, you should buy this thing because it went up a bunch. We hop in, it starts going down, we freak out, we sell. So we do these things that lead to poor rates of return. And that's where you see this behavior gap. And that's where, again, a diversified portfolio certainly can help because being concentrated can lead to an even poorer behavior gap there.

51:54Because if you're in something that's moving by 10, 20, 30 % per year, you might freak out. That'd be like being with a group of friends at a theme park and everyone wants to get on the roller coaster. You know you don't really like roller coasters that much. Maybe you don't like heights, but you feel like you should because everyone else is having fun doing it. So you get talked into it and you're like, yeah, this would be a good time. You know what? Everyone else loves the roller coasters. I'll do it too. You hop in, you put your seatbelt on, you got the little thing over your chest. You're going up that big hill and it's sort of exciting at first.

52:21You got the butterflies in your stomach and you're getting pumped. Then right when you get up top, you realize, you know what? I don't really like this. And you hit that big drop and you decide, yeah, this isn't for me. So you take off your seatbelt. You don't want to do that. That's a horrible idea. Yet that's how most people invest. We get pumped up because we see our friends excited getting on top on the roller coaster. We hop in there with them. The roller coaster starts going down. We decide to bail out and just get destroyed. You have to consider your behavior when you're investing. Again, diversification, that helps out with maybe not being on such a crazy roller coaster.

52:56Yeah. I 100 % agree that a lot of investing is definitely behavior and human psychology can work against us because you want to buy low and sell high and investing, obviously. But most people, like you mentioned, do the opposite where they buy high and end up selling low, just buying into the hype. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you. We've got a handful of other shows for you to explore, from learning about Bitcoin to embracing a richer, wiser, happier lifestyle.

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54:06Seriously, go ahead. I promise you'll like what you find. Bonus points if you show your support for our work by clicking follow. If something piques your interest, just start listening. No hard feelings. I'll be waiting for you back here. Just like everybody else, there was a time when I was a beginner investor, and I have to say, investing is particularly filled with jargon that can just make it so difficult for new investors to understand what is going on. But it's never too late to get smarter about stock investing from the ground up. At The Investor's Podcast Network, we've made a habit of studying the world's best investors, and now I'm distilling those learnings into a simple course for you or for anyone in your life who you might want to share the gift of knowledge with.

54:44With my How to Get Started with Stocks course, you can master the principles of excellent lifelong investing with valuable insights for both beginners and pros. The course covers 10 different sections, beginning with the basics of what a stock actually is and how the stock markets work, to strategies to optimize your retirement savings, how to pick great companies for the long term, what to look for in ETFs, and how to monitor your investments, plus so much more. To begin getting smarter about investing, just visit theinvestorspodcast.com slash get started with stocks. That's theinvestorspodcast.com slash get started with stocks.

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56:03You can get started by creating an account for free. Who knows, maybe TIP Finance will help you find your next 100 to 1 investment. Between the screener and Legend Investment Portfolios to reference, I've gotten a ton of ideas from TIP Finance. What are you waiting for? Take the next step in your investment journey today with the right tools at your fingertips. Grab your device and type into your browser, theinvestorspodcast.com slash TIP-finance to get started. That's theinvestorspodcast.com slash TIP-finance. All right, back to the show. I really wanted to ask you, as someone plans for retirement, they need to decide how much money they need when they retire.

56:49And if they're invested in Bitcoin, they see these past returns of call it 150 % on average over the past 10 years or so. And that's just the average per year. Some years, that's way higher than that. Some years, it's down drastically. And in projecting how much you'll have when you retire, you have to factor in, you call it 10 % Bitcoin allocation. How can someone project what their returns are if Bitcoin is part of their portfolio? Is that something you're actively doing? Or how do you determine how much someone saves and if you can expand on that idea? That's a great question. Frankly, it's a difficult thing to do because of the volatility.

57:29So there's a number of things that we're doing to consider allocation and expectations and and track your portfolio in tandem with what the portfolio is there to do, which is to serve the purpose of you being able to do what's important to you in life. So your money, I know earlier at the very beginning, you asked me what money is, and I gave you more of a theoretical and dry answer. But money, I say this all the time, money is simply a tool and a resource to help you do what's important to you in life. That's what your portfolio is. It's a means of helping you do what's important to you. So that's what we're tracking.

58:01Anyways, going back to it, there's a few things me. One, because of the age demographic I work with, we do not utilize at this moment a Monte Carlo simulation. So Monte Carlo, for those who aren't familiar with that term, Monte Carlo basically pulls your current financial data, and then you state what you want to have in the future. If in 20 years, you want to have X dollars for the rest of your life, and you expect to live for this long, and then the Monte Carlo grabs a whole bunch, usually thousands or thousands of possible market performances and maybe different inflationary rates and says, hey, based off of all these possible market scenarios, your expected probability of success is X percent.

58:42So if just for instance, if you have a million dollars right now, and just to be real simple, in one year, you need a million dollars, like you're probably going to have a Monte Carlo, it's going to say, hey, you have a 99 % chance of success. Well, the longer out your time horizon, and the more volatile the investments themselves, and the more unknowns you have, the more wild the Monte Carlo will be. And because of that, the average person I work with is going to be typically late 20s to late 30s. I would say average is about a 33-year-old married couple who's just now getting in stride with their career.

59:14So a lot of families I work with right now, maybe they're making between$80 ,000 to$200 ,000 of income, but expect to eventually be making$400 ,000 to$800 ,000 of income. Well, how on earth are you supposed to consider that with a Monte Carlo projection? Or how do you consider the fact that right now you're employed, but you're also starting a business that there's a very good chance that you're going to be able to sell for$3 million when you're 46? How do you consider the fact that right now that Monte Carlos have been using a set 2.5 % to 3 % inflation, and now CPI is 8.5%, and I would argue that inflation is far higher than 8.5%.

59:45How do we consider that? How do we consider an investment that has grown on an annualized basis of roughly 150 %? So one, we don't use Monte Carlos. So what do we do? Well, one, we track on a very regular basis, your net worth, but also how is your net worth serving the purpose of your financial independence? And what I mean by that is net worth is obviously just your balance sheet of assets versus liabilities equals net worth. That's good to track. However, that can be deceiving. If you have a net worth that is primarily concentrated in a corn farm and you want to retire, but you don't want to sell that asset, you want to leave it to your kids, it's going to be difficult for you to actually understand how your net worth is serving your ability to retire.

1:00:30So we take it a step further and we look at, I just call it your financial independence number. So what we do there is, first off, is fixed income during financial independence. So that's going to be if you own rental properties or oil rights or trust fund, or even if you said, if Clay, you said, hey, Jim, I want to quote unquote retire at 45, but between 45 to 65, it would be amazing to be a barista at a local coffee shop. We would take a super conservative number there. We'd say, perfect. If that's what retirement is for you, you're still working a little bit. We'll say you'll earn X dollars.

1:01:01We'll plug that in for fixed income in financial independence. So we take that number and then we do a 4 % distribution of investment assets plus cash. That's going back to the Trinity study or the 4 % safe withdrawal rate. We add those two together. Then we take your desired income during retirement or financial independence. So Clay, for right now, let's just say that you had$10 ,000 of fixed income through a rental property. You had a million dollar portfolio. So a 4 % distribution rate is$40 ,000. So you have $50 ,000 of fixed income plus a 4 % distribution. You won$100 ,000 during retirement.

1:01:36So right now you're at a 50 % financial independence number. So that is something we track on a very regular basis is are you trending to reaching financial independence? Now, the good thing there is that your financial independence number is going to change over time. Your assets are going to change. Your fixed income amounts are going to change. And also your amount that you need to live the life you want when you're retired is going to change as well for tracking this on a regular basis. So we're going to be able to see in real time, are you trending in the direction of getting to 100 % financial independence?

1:02:09So we don't use Monte Carlo's. Instead, we track on a very regular cadence of seeing, are you trending towards this financial independence number? We put a heavy emphasis on behaviors we can control. So increasing your savings rate, increasing your earnings potential. Yeah. We try to be the best thing that you can do about your financial situation, especially during frothy times, is just be flexible. So we don't count on Bitcoin performing 150 % per year. That would be a horrible idea. I hope it happens. The way I'm invested says, boy, I'm betting big on this, I guess. That is not something I'm riding on.

1:02:42Personally, I am highly, highly allocated to Bitcoin and that space, but that comes with my risk tolerance. So risk tolerance is how much risk can you stomach taking? Again, that goes back to the rollercoaster. Are you okay with going down those big drops? If not, let's put you on a different ride. So that's risk tolerance. Also, I have the risk capacity to invest in aggressive assets. Risk capacity is actually your ability to take on a certain amount of risk or even not take on a certain amount of risk. So if you're a newborn baby, you literally don't have the capacity to be on a roller coaster.

1:03:14Maybe you're the bravest newborn ever and you want to ride the roller coaster, but you can't. It's too dangerous for you. In the same way, someone who needs a certain dollar amount during retirement, they don't have the capacity to invest in something hyper-aggressive or at least in a concentrated manner. In the same way, vice versa, if Clay, you're young, if you wanted to save for retirement strictly through holding your value and your money via the US dollar, you don't have the capacity to do that. You would have to save more than 100 % of your current income in order to be eventually financially independent just because the deflationary characteristic of the dollar.

1:03:48So you don't have the capacity to do that either. So we look at risk tolerance, risk capacity. How do I do that? I have that capacity because of my earnings rate, my very high savings rate, and then just my personal future position. So that's how another way we look at those, monitor those conversations or have those conversations with families that we work with. I think something that's also important is that you're building a business and that business has value. So you're earning income from that business, but the equity value of that as your income grows, the equity value of that business is going to grow as well.

1:04:21So come retirement time, if you decide to retire, go off to the beach or mountains like you like doing, whether Bitcoin performs or not is almost irrelevant because that business will likely be able to provide whatever you need should you decide to sell it or just delegate all the tasks to other people. Exactly. And that would go into risk capacity. I have that ability to take that risk. One, because I have built my personal and my family's, our personal financial plan based off me not having to work by the time I'm 45. I'm 32, 13 years to not having to work and continue living the lifestyle that we want.

1:05:00Now, worst case scenario, for those listening like that was with air quotes, worst case scenario, I can't retire at 45. Boohoo. So I have a lot of flexibility in my plan. So I'm okay with that risk or volatility. Something else I want to mention as well is to consider sequence of return risk. That is really, really important, especially with people as you approach retirement or needing the assets from an investment. I take a lot of heat from different podcasts I've been on or Twitter spaces from Bitcoin maximalist. I think it makes sense and is prudent to have a US dollar emergency fund. I think that's smart.

1:05:36I've taken a lot of heat for saying that from Bitcoin maximalist. They think that that's foolish and you should have everything in Bitcoin. Even if Bitcoin goes up by 200 % per year, which it did in the past, but who knows if that's going to continue. What if you have poor sequence of returns? So Bitcoin drops by 50%. That's really normal. What if that coincides with you needing some liquidity to you need a new car or whatever? Well, you're hosed. So same thing. If you have too high concentration in a single position, and that coincides with you needing to access those dollars or that money, you have to have a means of being able to stay afloat until that position has recovered.

1:06:12And that's why people who are retired have to look at portfolio sizing and positioning so you can absorb these volatilities. That goes with the 4 % safe withdrawal rate, the Trinity study, the portfolio they used. Again, that's where flexibility and concentration and diversification comes in to serve all of these things. Again, sequence of return risk is a very real thing that you, again, I think a lot of Bitcoin maximalists maybe who are listening to this sometimes downplay because you're looking, I don't want to say it is important. And that's one thing I like about Bitcoin people is they tend to have a long time horizon, which is fantastic.

1:06:44Most people don't have a long enough time horizon, but I would argue that maybe you want to also keep a long-term time horizon for 99 % of it, but you want to consider tomorrow just in case. Yeah. I also think a USD emergency fund definitely makes sense because although the dollar does go down in value over long time periods, there are some periods where it can increase in value very rapidly. Call it the 2008 financial recession. When you looked at the price of the dollar relative to anything, the dollar was skyrocketing in value. And you don't want to be in a position where you have to be forced to sell at inopportune times.

1:07:21And there's one more question I wanted to ask you in relation to financial planners. It seems like there's still just so many people who haven't really come around to the idea of Bitcoin at all. And you're in talks with many financial planners. Is it the difficulty of the subject around Bitcoin? Or is it just something that's just so foreign to them? Or have they already made up their mind? What's your thoughts on why they are open or haven't come around to this idea? I think it's a few things. One of them is, and I'm what's called a certified financial planner or a CFP. And CFPs generally are trained in a very conservative manner.

1:08:01So maybe that has to do with part of it is like CFPs, we are sort of brought up in a way that we look at things in a conservative way. We see this asset that sounds like it's too good to be true. Therefore, we throw it out. We throw out the baby with the bathwater. I'd say that's possibly one of the reasons. Two, financial planners, or at least the good ones, in my opinion, are busy trying to constantly learn about tons of new things. A lot of people on the outside the industry, they think what I do is investment management. Investments is probably the smallest and most commoditized part of my job, actually, even though that's what I spend a lot of time talking about on podcasts, that's actually relatively commoditized.

1:08:36So me and my CFP cohorts, we're constantly staying up to date on tax legislation and estate planning and insurance and all these parts of your financial life. So reading up on Bitcoin is not necessarily top of mine for most CFPs. They're trying to stay on top of a ton of other things as well. So maybe, and this is why I found a lot of conversations I've had. The last thing that these financial planners read about Bitcoin was maybe an article in 2017 saying that by 2022 or whatever, Bitcoin's going to consume 100 % of the world's energy. There was literally like, that's an article that I was quoted a few months ago from a colleague of mine.

1:09:12She was saying like, oh yeah, well, I read an article that at some time in the distant future, I was like, hey, that article said that right now I'd be using all the energy. I think that's part of it. I'll give them the benefit of the doubt. And it's saying that they are busy and they're trying to learn so many things. So they are wildly out of date on that. And also, I would lump in there as well, diversification. Again, we're trained to diversify. We're trained to make sure that people more so preserve their wealth rather than grow their wealth. That's what most financial planners work with.

1:09:41Most financial planners are working with people who are about to retire or just retired. They're trying to preserve wealth, not grow it. So they're incentivized to look at more diversified assets. So even if you throw in Bitcoin, it's usually in the same conversation as blockchain or crypto. That's why you have people in Bitcoin or in traditional finance who integrate Bitcoin a lot of times throw in Ethereum and these other altcoins as well, because they're looking at as a diversified stance and also looking at through not diving into Bitcoin as much as you need to, to understand that what Bitcoin actually is versus what these other things are.

1:10:18Jim, thank you so much for coming onto the podcast. This was one of my favorite conversations to date. So I really appreciate you coming onto the show and we'll have to have you back on yet again sometime. This is your second appearance on the podcast. Before I let you go, where can the audience go to connect with you? Yeah, Clay, thanks again for having me on. It was fun hanging out in Miami. I enjoyed it. Yeah. If anyone wants to talk, you can go to my website. It's Intentional Living FP, as in financial planning. intentionallivingfp.com. On there, there's a link to my calendar. You can put 15 minutes on there if you want.

1:10:53If you have just a one-off question about Bitcoin or what is my 401k, or if you want to talk about working together, put 15 minutes on my calendar. I'd love to answer any questions you might have. You can follow me on Twitter. It's Jim Kreider TX as in Texas. Happy to talk with you on there as well. Awesome, Jim. Thank you. All right. I hope you enjoyed today's episode. please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. If you've been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you're on.

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