Prof G Markets: How Scott Manages His Money

25:10I got Pell Grants and I borrowed some debt undergrad. grad, but when I went to school, it was so inexpensive, you didn't have to take on a lot of debt. I think I had a total of like$20 ,000 debt by the time I got out of graduate school. So that was pretty manageable. Bought homes, but the debt was always cheap. I never was in a position where I had too much debt. What I did do is debt has a bad name. In a low interest rate environment over the last 10 years, I have borrowed on margin and levered up on stock purchases. So if I have a million dollars in stock, I would take out two, three,$500 ,000 on margin because I could literally borrow money like one and a half percent.

25:51And then I would invest it in a massively diversified basket of stocks. And that's dangerous because you're levered. But what I found is in a low interest rate environment, leverage was a real feature because you're essentially getting free money and the market was going up. So all you needed to do is beat it by one and a half percent. So I don't like to, you know, all debt is not bad. All of these financial or personal financial advisors will say all debt is bad. It's not. Leverage is an amazing thing if you diversify against it and you can borrow money at a real low cost. Now, you want to be really careful with it and want to make sure you're diversified and be ready to lower your leverage quickly.

26:30But, and, you know, you're upping your risk. but borrowing against my stocks and against assets for me you know i could have paid all cash for my houses i didn't i was able to borrow money for 2.25 so i always borrowed the maximum amount and i put it into the market but i diversified like crazy when did you buy your first house when i was 28 in san francisco two years out of business school i bought a house for 285 000 in potrero hill san francisco with my girlfriend and i was i had just started profit and she was working and i think arthur anderson and i think we borrowed the money for the down payment from her parents which was like the down payment was like 60 grand what is your approach what is your philosophy on buying homes it's sort of a big topic among young people right now do you think young people should be buying homes should be should they be renting what percentage of their net worth should they be spending on on the down payment what's your approach to home buy?

27:31It's situational. And I look at it through the lens of someone who was able to kind of buy homes and ride what has been this unprecedented increase in the cost of housing or increase in real estate prices. So I think my advice is a little bit tainted. Buying homes and real estate has been really good for me. If you're living in a part of the nation that's been hit hard and you feel like there's an opportunity to buy a home and you have the down and it's not going to place a huge amount of stress on you in terms of the monthly, I think buying a home not only has economic return, but has great psychic return.

28:08And a decent way to aggregate wealth is to get to know the local area, scrape together the money for the down payment. There's very few assets you can lever up kind of four or five to one and that are tax advantage. And then fix up the home. Hopefully you or your partner has some skills. And then two years later, sell it and up to a quarter of a million dollars or 500 ,000 is tax-free in terms of the gain. And then wash, rinse, and repeat. It's like a decent strategy for building real wealth. But having said that, I mean, you live in Brooklyn, Ed? Where do you live? Where do you live in Brooklyn?

28:43I mean, how the fuck are you going to buy a home? Yeah. I mean, I know how much money you make. You're in the top 1 % for whatever you are, 14 year olds. You're for your age group. You're in the top 1%. And you still can't buy a home in Brooklyn or at least a, you know, I don't, I would imagine starter homes. There are like a million half, 2 million bucks. I don't even know what they are. Probably higher. Yeah. Okay. Two to 3 million. And you need to be really thoughtful about taking on seven figures of debt at your age. And so what I would say is, unless, unless you're smart enough to be born with rich parents, you want to do the math and you want to find people who can help you do the math and say, does it make sense for me to buy a home?

29:24What kind of financial stress is it going to put on me? Because a lot of people now will say, based on the Case-Shiller Index, that you're, in a lot of cities, better off renting. They say the tri-state area of New York is a better place to rent than to buy because the yields are so low that you can rent it for less than the cost of the mortgage payment, right? But I think these are one of those decisions where if you don't understand how to do the math, you need to find someone who does and make a really informed decision. So I think it's situational, but there's also real advantages to renting, slamming the keys down on the kitchen counter and heading to Las Vegas to be a blackjack dealer, open a cigar bar and date strippers.

30:01That's what I see for you. Good. Bright future. You've also been very active in alternative investments. I mean, you talk about psychic income on your house, but you've also bought a lot of real estate purely for the investment benefits. And you've done a lot of angel investing. You've invested in a lot of private companies. When did you start getting involved in that stuff? This is a good story. In 1997, Kleiner Perkins invested in this wedding registry that would be on the internet called Dellen James. And the CEO was this very impressive woman. I don't remember her name. And we had done the brand strategy, I think, for Dellen James to profit.

30:40So Kleiner called and said, this is amazing news. We're going to let you co-invest with us in this round. I called my partner. I'm like, oh my God, Kleiner Perkins is letting us co-invest without fees. And so we scraped together every nickel we had. Maybe it was even earlier than that. Maybe it was 96. It was like a quarter of a million bucks. And we put it into Della and James alongside of Kleiner Perkins. And we're waiting to get a 250 million back, you know, because everything Kleiner Perkins does has got to turn to gold, right? They invested in Amazon and Google. And basically the company went out of business like nine months later.

31:11It was a zero within my first VC investment went from a quarter of a million dollars to zero in about nine months. And what you realize is nobody knows, you know, there are some people that are smarter than others. You're better off investing in Berkshire Hathaway than some joy bag of donuts thing, but no one really knows. But my advantage that I've leaned into is that because I advise a lot of these funds, I get a look at a lot of investments and they'll let me invest alongside of them. Now, I never go all in on anything. What I do is say, okay, this looks cool. I can add some value here. So I'll invest 2%, 3%, 5 % of my net worth in this alongside of you.

31:49And I'll go on the board or I'll help, I'll be an advisor and you're going to give me additional equity. So effectively, I'm investing not only without fees, but with negative fees. I'm getting better, I'm getting to a certain extent, I'm getting better economics than the investor. That is my advantage. So I lean into it. And even Goldman Sachs, who manages my money and wants to put me in private equity funds or their funds, I say, what are the fees? And they say, well, it's like two and 20. I'm like, why would I pay you guys fees when I can invest in very similar investments at no fee or negative fees?

32:21And Goldman being good fiduciaries, they say to me, you should absolutely do that. They don't try and sell me on their funds. They take the responsibility to me really seriously. But that is my advantage. And so you want to think to yourself, what is my advantage? And if the answer is none right now, then just low cost, vanguard, diversified index funds and ETFs. But over time, you might develop advantage. I really understand, I don't know, food trucks. And I'm going to buy a food truck and I'm going to lease it out to somebody. I just understand the economics. I understand, you know, I don't need this capital.

32:55I can lock it up where you can go into more illiquid investments that should have a higher return. I'm a small investor. Well, then you should probably be investing maybe in micro cap stocks or micro cap funds or, you know, it just everyone has at some point an advantage and you want to lean into that advantage. One thing it feels like you did, though, is position yourself to have an advantage in the highest risk and highest reward categories. Like you didn't just become an expert in VC. At least from my understanding of your career trajectory, it was very intentional working your way to be in a position where you can have that advantage and enjoy that position and that access to those high return investments.

33:44You're being generous was accidental. I didn't have a plan to figure out a way to position myself to get advantaged investments. I positioned myself to try and do something I was good at, build a business, work hard, try and create financial security, and then just do the course of, I mean, Ed, I'm 35 years older than you. So if you were to spend 35 years working as hard as you are, being as successful as you are, and the rest of the team were to do the same thing, over the course of those 35 years, you aggregate a series of relationships with companies and people that will provide opportunities.

34:17and the key is recognizing the opportunities and taking advantage of them. But I didn't, by any stretch of the imagination, I thought I was gonna make all my money starting and selling companies. And I have made a lot of money from starting and selling companies, but where I've made actually more money is that along the way, I do work for a hedge fund evaluating a company and they say, we think we're gonna take the company private and they say, well, would you be interested and go on the board? I'm like, yes, but I want additional equity. all right and then i'll say i'm only going to do this unless i can co-invest i'm not interested in going on a board and just collecting some money and free dinner once every three months i want to be able to co-invest i have elbowed my way into deals i've called the ceos of companies that are going public i know i have a public profile and i call them and i say i love this company can i invest in the ipo and most of the times they don't return my email but some of the times i get a call back or an email back saying so-and-so is a fan of the show and a fan of yours, and you can invest.

35:17And let me be clear, that is privilege. And in some instances, it's probably unfair, and I absolutely take advantage of it. And it goes back to the same reason, if you want to be successful professionally, economically, romantically, you have to be willing to endure rejection. Failure is usually in isolation. Good investments and victory are in the agency of others. You know, the majority of really stupid fucking mistakes you make are individual mistakes. And the majority of great decisions you make, I find are crowdsourced. And you want to trust your gut, but you want to save yourself from yourself.

35:52And the way you do that is before you double down on something and put 10 million or, you know, half your net worth in something, because you're so excited about it. You call some people and say, this is what I'm thinking of doing because it's very hard to read the label from inside of the bottle. We'll be right back after a quick break.

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37:29We're back with Prof G Markets. what is your approach to spending how much do you spend how much is appropriate did you spend a lot as a young person i mean you talk about you know that feeling of one you want to pay for your mother's health care bills and two you see the dudes whose parents have the aspen house and the hamptons house and you want to be a part of that i mean how has spending played a part in your life? It's purely discretionary. It's totally flipped. When I was younger, I always lived below my means. But when you're young, you can have a lot of fun without money. You know, beer and dating and college football is a lot of fun, and it doesn't have to be that expensive.

38:13Spending time with friends is a lot of fun. I lived for one summer at UCLA. I literally lived off of Top Ramen, bananas, and milk. I needed$3 ,300 by the end of the summer to pay off my fraternity house bill and tuition Otherwise, I wasn't going back for my junior year of college. And I had a job changing beer taps in downtown LA. And I thought, okay, if I spend like, I think$110 a week total, including my apartment, including food, including everything, I can save$3 ,300. And I did it. And you know what? I still had a nice summer. You know, when you're, whatever I was, 20, 21 at UCLA, living in Los Angeles, you can have a nice life and not a lot of money.

38:56until the age and then I had student debt. I was always starting companies. I'm comfortable not spending money. Once I sold my first company profit, once I then sold L2 and then the bull markets, I kind of flipped my complexion around this. And that is one of the reasons I moved to Europe is I want to get really good at spending money. My reductive analysis after molesting the globe for the last 30 years is that America is the best place to make money, and Europe is the best place to spend it. I have no desire to give a lot of money to my kids. Most of the kids I know of rich people are fairly fucked up, so I'm going to give them enough money such that they can do anything they want, but they can't do nothing.

39:39That's a famous Buffett quote. But I am really into spending money right now. I spend a lot of money not on things, but on experiences. And I've got my kids for a few more years. I'm in a great relationship. I'm healthy. My job is not that taxing or stressful. I love what I do. I like the people I work with. So I am spending an absolute shit ton of money. And, you know, I fly private. I go to the nicest places in the world. I invite friends. I'm now taxing myself between 100 and 200 % a year. Every dollar I spend, I try and give away one or$2 a year because I now rationally know I have a lot more money than I need.

40:21but I spend two to$400 ,000 a month and it's worth it. I'm just loving the shit out of it. I love capitalism. I love making a ton of money. I love spending a ton of money. I love giving away a ton of money and I don't think there's anything wrong with it. I think it's wonderful. I want to grow the economy. I want to pay people well. I want to enjoy the shit out of those. The world offers so many amazing things with money. It offers so many amazing ways to transfer time and money to other people. And I'm an atheist. Time's going faster. I know I'm going to be at the end sooner than I like. For me not to do everything and use my fears or insecurities around money would just be a waste.

41:05So I am in the spending part of my life and I am enjoying the shit out of it. Are you spending, when you say, because you have a lot more money now, but are you spending more as a percentage of your income than you were as a young person? No, because I've built up an asset base. So I'm still actually, I think my net worth is actually still growing because I've got that base and I had some big wins and got very lucky. But I'm, I mean, I'm spending more in a month than I would spend in a year, just 10 years ago. And I'm spending more than I would spend, you know, the entire decade in my twenties.

41:44and such that I can feel okay about myself. Every year I look at the amount of money I spend and I give that between one and two X that away. You know, I want to add value, right? And I was very non-philanthropic growing up. I didn't spend a dime or a minute of my life helping others. And it's like, it's just kind of dawned on me that I haven't really added a lot of value other than the bullshit capitalist notion. Well, I create jobs and I'm productive. That's such horseshit, right? That just means you're part of the capitalist society. Okay, there's some value there, but there's not a lot. So I'm trying to catch up.

42:20But at the same time, I'm not going to sacrifice. I don't need to sacrifice. I just do, oh, there's Formula One in Las Vegas in October. Let's book it. Let's book it. Oh, you're going to be in Aspen. What are your friends doing? I don't know. Let's fly them out. Why wouldn't we? Why wouldn't we? Right? I mean, you're going to be, my attitude is, I'm going to be dead soon. And I can't take it with me. And I don't want to give it to my kids. I want to give it away. Why wouldn't I start giving it away now? And why wouldn't I just spend the shit out of it and enjoy it? I mean, I hear myself saying this stuff and it just sounds so douchebaggy.

42:57But I think capitalism, you know, money is a wonderful thing. You can save a lot of people a lot of time and energy. You can do a ton of great things with it. You can enjoy it. your family can enjoy it you can do wonderful things for your friends it's just it's a ton of fun and why why would you work this hard and get this lucky and not really enjoy it you know we spend a lot of time talking about planning for retirement that's a big topic in personal finance but then another crucial part of personal finance is planning for your death so how do you think about that do you think about your will often when did you decide come to this conclusion about giving your kids money what are your thoughts on what to do with your money when you die well as soon as i had my first kid i took out a five million dollar life insurance policy because i realized that if i died i mean my partner and my kids would be okay but i always thought if i die i want them to be sad but i don't want them to be scared and at that time i didn't an event of money that if I passed, they would be fine.

44:04It would be stressful for them, right? So I got life insurance. And then once I sold profit and then sold L2, and then some of my investments started hitting, I did what most people do. I got a lawyer, I have a trust, trying to be smart about it. The hard part is trying to figure out, assuming you pass away, and by most actuarial tables, I'll pass away probably 20 years before my wife does. so I wanna make sure she's fine and never has to worry about anything. And then you set up the trust, and the questions get really hard really fast. Like, when do you want your kids to have access to this money?

44:44I mean, I can already tell, my youngest, like, if I give him a bunch of money at 21, he's gonna have a Range Rover and a cocaine habit. So is it 30? Is it 40? What happens if they get sick? Do they have access to it before that? Or do you just throw up your arms and give it all away? because everybody talks a big game about cutting their kids off when they're out of college. And then you just see how hard it is for young people now. And what if your kid wants to do something wonderful like going to social work or become the country manager in Malawi for the Peace Corps as the head of the Peace Corps we were talking to?

45:19Like, wouldn't you want to afford them that opportunity? And why have you worked so hard if not to make your kid's life easier? So there's a balance there. And I don't know if I've got the right balance. I'm working through a lot of these issues right now, but I'm kind of coming to the fact that I want to give my kids enough money. I know they won't want for anything. They'll have housing. They could get a good education. But I also don't want them, I don't know, the kids who just have a lot of money, I don't know if it's good for them. I think they need to have a sense of drive and grit. But, you know, I always say if I had what my kids have, I wouldn't have what I have.

46:01And so it's like, this is a big question we have in our household a lot. How do you instill that sense of grit? And we try to do it with sports and summer jobs and things like that. But I don't know. I just might snort it all up my nose. And that might be the way I spend it all. That's good. And so I asked Prof G Media, the company, what, if they could ask you any question about money and investments, what would they want to ask you? One of the main ones was, is it worth it? You know, Mia said, has being rich lived up to your expectations? Patrick, our producer said, how much of this makes you happy?

46:43Um, you know, I've, I see you have worked so hard. I mean, you say that you live a, you know, stress-free, not too taxing lifestyle. Well, from my view, I feel like you work very hard.

47:00And that's something that I want to do as well. It's super important to me. But when is it enough? How do you reach that conclusion that, yeah, this is worth it, and also reach the conclusion, okay, I don't really need to do this anymore? Do you think you'll ever reach that point? Everything I do now, there's... A guy named Barry Rosenstein who ran Jana Partners, a hedge fund, I would call him a friend and maybe even a mentor, and I had lunch with him once, and he said something really profound or something that resonated with me. He said, life is three buckets. There's the things you have to do.

47:35So when I'm in town, Ed, and I say, Ed, I want to catch up about your career, you have to meet with me. You have to do that. There's things you want to do. Hey, Ed, the whole team is going to Tulum. You want to do that. And there's the things you should do. A coworker at Prop G is, you know, getting married. You're not that close with them, but you go because you should do that. You should invest in the relationship. You're not really excited about traveling to Short Hills, New Jersey for a wedding, but you go because you should do it. The wonderful thing about having some economic security and where I am in my life is I have taken the should bucket and I've eliminated it.

48:09I only do want and have to do. And my entire professional life is things I want to do. And there's some components of do you have to do. But I love what we do here. And that is such a gift. I really enjoy it. And I spent a good three decades of my life not doing things I love because I wanted to get economic security. Is it worth it? This is what's worth it. I have absence mostly from stress now from money. All I need to do is sit down and rationally work through the math and those demons go away. And that is a huge source of comfort. In addition, I can take my family and another family to World Cup.

48:52And we get to share these amazing experiences together that money lubricates. and you know of that$300 ,000 a month I spend I spend$100 ,000 on travel and experiences because what I want is a series of experiences that make me feel closer to my family and my friends and that expose me to all the amazing things the world has to offer I don't but the money has been where the money has made me happy and it has is I'm able to take care of people who mean a lot to me. I'm able to cement those relationships by doing these extraordinary things. And so that is just immensely rewarding. And also there's a certain amount of reward and a feel of achievement, a feeling of masculinity that I'm able to be a great provider and that I'm able to give money away to organizations that I think are worthwhile.

49:48while. It makes me feel strong. It makes me feel, you know, it makes me feel like a masculine, like I've achieved something. It feels really wonderful. So yeah, it has brought me a lot of reward. I mean, happiness is an emotion. You can get happiness or a sensation. You can get that from Netflix or THC. What it's brought me is a series of experiences in absence of stress that makes me less neurotic, less anxious, and has been an amazing opportunity to do amazing things that make me feel closer and deepen some of the relationships I have.

50:32This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavis and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thanks for listening to Prof. G Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours, and we'll be back with a fresh take on markets every Monday. Lifetime

51:01You have me In kind reunion As the world turns And the dark flies In love, love, love, love