Prof G Markets: Scott’s Investment Portfolio — a Breakdown

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0:57This week's number,$32 million. That's how much revenue the Caribbean island of Anguilla earned last year from.ai web domain registrations. True story yet? Last night I was at a urinal in a bathroom at a famous restaurant. The guy next to me said, oh, you're circumcised. And I said, nope, that's just the wear and tear.

1:24I like that. I like that. Get it, Ed? Get it? I get it. Okay. Welcome to Prop G Markets. Ed, what are we discussing today? We're doing something a little different today, Scott. we're going to take a look at your own personal investments over the past year. We'll talk about what went well, what went poorly, and perhaps what surprised you. And at the end, we'll discuss your investment strategy for the year ahead. Sound good? Sounds good. So let's start with a pretty general question. Between stocks, bonds, real estate, private investments, what does your overall asset allocation look like right now?

2:02My asset allocation is about 40 % real estate, which is a lot, and then about 40 % private investments, and only about 15 % or 20 % publicly traded stocks. Has that balance changed significantly from previous years, or is that pretty standard for you? When I was younger, obviously, I had a lot of money in real estate because I kind of levered up to buy a home. And then as I got more money, it was more public stocks. And I have reduced my public markets exposure, increased my private market exposure, and increased my real estate. So the reason why I own so much real estate is, one, I really think it's a tax-advantaged asset class.

2:48And it's the kind of asset you can, if you don't lever it up too much, you can hold forever and then might make a good asset to give to your kids. But essentially, I have two types. I have kind of consumption real estate and then rental units. And the rental units are great because you can depreciate them 2 % or 3 % of your real estate. It's the most tax-advantaged asset class in the world. So even though these rental units that I have have gone up in value every year, every year I can depreciate them. I think it's 3 % a year. There's no other asset that as it's going up in value, you can take a write-off against it despite the fact it's increasing in value.

3:21Then I look at demographics, and we are building 1.5 million fewer homes than we need every year, which just says to me that there was going to be a demand supply imbalance for a long, long time. So I just love rental units. and I think it makes sense. Where I have the bulk of my real estate holdings is in what I call a 0.1 % strategy that I've adopted over the last five years. And that is, I used to own one home. Now I own four. My belief, again, based on economic trends, is that what's happened in the US is happening around the world, and that is massive income inequality. And that is the 1 % continues to garner more and more.

3:59They weaponize government, They keep their taxes low. They invest in monopolies. They massively weaponize the tax code. And there seems to be, in my opinion, just unbelievable explosion in the ultra-rich. So in the U.S., for example, the last 10 years, the number of billionaires has gone from 500 people to 2 ,500. And so what I've done is I've bought four homes in what I call 0.1 % neighborhoods. So I have homes in London, New York, Palm Beach, and in Aspen. And there's some consumption in there in the sense that as I get older, my priorities are the following. I want homes where my kids, when they leave for college, will come visit me.

4:44And so I want to have homes where they think, oh, you know, we'll go see dad. And two, as I get older, I primarily just want to, you know, like I always say, I want to be in beautiful places and just wait for the ass cancer. And so there is some consumption here. And generally speaking, I think that as income inequality continues to get out of control, that these areas are going to increase in value faster than inflation. And then privates is disproportionately high because I have access. I know a lot of, after working in tech and business for 30-odd years in consulting where you speak to a lot of CEOs and in academia, where what I do, I meet with a lot of CEOs and a lot of venture capital firms based on starting companies.

5:31I have a lot of access that other people don't have. And if it's a story of privilege, trust your instincts. But I get invited to invest in companies alongside of kind of tier one private equity and VC firms at sort of negative fees. They will let me invest if I put in, say, a million bucks, they'll give me 1.2 or sometimes up to 2 million in equity to go on the board or be an advisor. So I get to invest. Most people have to invest with fees. I get to invest with negative fees. And so I disproportionately allocate money to privates. I have less money in the stock market because I've come to the conclusion that nobody can pick stocks.

6:05The only time I invest typically in a stock is when I have access to the IPO because I either have advised the CEO or the investment bank running the book for whatever reason I can get allocation. It's a rigged market. Most of the pop for the first couple of years is usually on the first trade. So unless I can get allocation in the IPO, I don't do it. Again, if that sounds like privilege and access, it is. I've worked hard to get it, but it's still a rigged market. but I don't invest that much in public market stocks anymore because I find it a bit emotionally trying. Today, I checked my stocks probably six times, and I hate having a scorecard every day.

6:41One of the reasons I've never purchased crypto is I know my personality. The fact that it trades 24 by 7 would just be bad for me. So one of the things I like about owning real estate and owning privates, which is 80 % of my assets, is that you don't have to mark your book every day. And I find that is emotionally comforting or just less kind of emotional stress, if you will. Yeah, I think the thing that jumps out to me is this unusually low public markets exposure and you're sort of over-indexing on private investments and real estate. Your advice to listeners is, generally speaking, diversification, low-cost ETFs, let time take over.

7:22But when I look at this portfolio, just from the bird's eye perspective you just laid out, it doesn't totally reflect that. Is there a reason why you're not following your, say, standard advice right now? So some things I'm following, some things I'm not. So a couple of things. One, this is not, it's like, don't do this at home, kids. And here's the reality. If I lost 90 % of my wealth, I'd still be fine. I'd be bummed out. I probably couldn't maintain this lifestyle, but I'd still have enough money to live really well. And my kids would be fine. I can take more risks than most people. In addition, I have access that other people don't have.

8:04I mean, that's the reality. And I'm trying to lean in. And I do that. I lean into my access. I'm very self-conscious saying it, but that's the reality. I am following diversification. I have everything from an investment in a company that buys old aircraft engines, fixes them up, and then leases them out to cargo planes. to real estate, to investments in software companies, to investments in supply chain benchmarking companies. I have to claims against a bankrupt FTX. I do have decent diversification. I'm not diversified geographically. Most of my companies are in the US. I have a little bit of exposure to Europe, but I do have pretty good diversification.

8:46and I do let time take over in the sense that I usually don't invest in anything. I'm not a trader. I usually don't invest in anything that I don't plan to hold for several years. And a lot of the stuff I buy, I mean, for example, the real estate, I don't plan to ever sell it, none of it. I mean, until my kids need it or want it or what have you. So the other thing I don't do, I don't try to time the market. I realize that it's very difficult to do. I find a good company or a good opportunity. I lean into it and I plan on holding it for a long time So let's go through your wins and losses and we'll we'll start with the losses.

9:24What have been your biggest Failures in investing in the past 12 months? Well, I don't think of those failures my my biggest loss is because if you do what I do and you invest I mean, I think I have 30 or 40 different investments if you if you looked at every investment over I don't know a million dollars in value. I have at least 30 or 40 of them and and that goes to diversification. I don't like to have any more than, you know, I have one asset that's probably almost 15 or 20 % of my net worth, one of my homes, but that's it. Nothing else is more than kind of 5 % and most is two or three. The biggest loss, I lost$15 million shorting the market last year.

10:06I do it as a means of hedging. I had a lot of exposure to tech stocks, had a lot of exposure to individual stocks where I got in the IPO. So I would short some high flyers by selling calls against them. And some of them just skyrocketed and I got just hammered. Now, the year before I made money, the year before that, I'd made a lot of money. So I started believing that I was good at it. And that's a lesson to not trust your emotions. I was lucky I wasn't good. And I started believing I was good at it. So I got more aggressive with it, which really hurt me. And also I write covered calls in all my stock positions.

10:37So if I own Airbnb at a hundred bucks, I'll write a week long, I'll write calls on the number of shares I have. So if I have 10 ,000 shares at a hundred bucks, I write calls on 10 ,000, say expiring at 105 and I'd get a buck premium that week and I'd make 10 ,000 bucks. And it's all great as long as the stock doesn't go above 105. Now, technically you're hedged because you just give up the gains above 105 because the stock's gone up. But what happened to me a lot last year is these stocks would skyrocket. And if I wanted to hold onto the stock, I had to go buy the calls back and it cost me a lot of money.

11:11And then I wrote calls nakedly against some companies that I thought were really high flyers and would just made no sense. And I learned the hard way the market can stay irrational longer than you can stay liquid. And some of these companies, a couple of them went up 30 % in three days. And I'd have to write a check for two or three million bucks. Anyways, I've still made money on this strategy over the last three years, but I lost$15 million on that. A couple of my private companies, I've marked down substantially in value. I was an investor in Post News or am an investor, fantastic CEO, fantastic idea, a competitor to Twitter.

11:46Competitors to Twitter haven't gotten any traction other than threads. So I made a substantial investment there. I've marked that down. I'm still hopeful. I made an investment in a text messaging app focusing on the healthcare industry. Everything made sense. Smart people, healthcare, handhelds. I love it. Pushing out healthcare to lower income people through corporations. Sam's or Walmart signs up and for eight bucks a month per employee, you can contact a dermatologist or a doctor and give them your symptoms over the phone text message and they use AI to connect with the right person. Great business.

12:20Hasn't grown as fast as we'd all hoped. I invested at a really high valuation. a vocational training company here in europe i have marked down really good company but i think the valuation i invested at it was extraordinarily rich and the company's doing well but the market's rationalized the private market so i've marked that down by two or three million bucks so of my losses last year i mean they all add up to probably about 25 million bucks When you say you're marking these investments down, are you coming up with your own valuations when you mark them down? Or are you getting reports from the team and learning based on other investors' valuations?

13:04How does marking them down work for you at a personal level? So I find, generally speaking, if you don't keep track of how much money you're spending and how much you're making and the value of investments, you're due for an unwelcome surprise. and so as a regular practice at least once a year if not more i sit down with the guys at goldman and i go through every investment actually i probably do it twice a year and try and mark the investment and an easy way to market is if a company raises money in the market follow-on round at a you know a hundred million you know and one percent of it then you know your stock worth a million at least if it's a legitimate mark not just insiders i try to be conservative on the mark such that I don't get too crazy with my spending and overestimate my net worth.

13:47And I always try and value it probably maybe 10 or 20 % realistically than what I could get in the open market. And some of these things are difficult to mark because they're so illiquid. But I try and go through everything and have an honest, sober assessment of what I think it is worth at that moment. We'll be right back.

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15:47We're back with Prof G Markets. Just a question on liquidity. I think what's also surprising about your portfolio is just how insanely illiquid the portfolio is. I mean, you only have 15, 20 % in public stocks. How do you manage liquidity? Like how did you manage liquidity when you needed the cash to say, buy a house in Aspen this year. What do you do about liquidity? Well, one, you can borrow against, if you have, say, 30 million in stock, you can borrow 20 million against it. So I do what a lot of wealthy people do, and that is I borrow money against my stocks. I don't do it to double down on the stock market, but I'll do it to invest in another asset that's diversified, and you can borrow at very low rates.

16:32And also, I'll sell stuff, and I have liquidity events on a regular basis. I was an investor in a subscription-based search engine called Neva. I wanted to invest in companies where I thought provided a solution to some of the systemic problems of big tech. I hate the ad model of Google. I think it's led to really terrible places. And I met this guy, Shadar Ramaswani, who I just thought was so incredibly bright. He was lead engineer at Google and he was starting a subscription-based search engine. I put 3 million bucks in. The company never got traction, but Snowflake came in and I think basically did an aqua hire because they're like, this team is so incredible.

17:06We'll pay all your investors back. And now, of course, Street R is the CEO of Snowflake. And I'm actually thinking about investing in Snowflake because I just think so much of this guy. So I got my 3 million bucks back, which is like the best venture investment in the world because I got a lottery ticket. And when it didn't hit, I got my dollar back. So I actually see that as a kind of a win. I have so many investments that typically two or three a year will have a liquidity investment. and then I deploy that capital. Also, no matter what wealth I have, I always want to make money. And between books, podcasting, speaking, the reality is I make a lot of money.

17:42So I try to still live within my means. I try to make as much as I spend. And occasionally if I don't have cash, I have an investment opportunity now and I've got a line against one of my homes. So I try to always make sure I try to always line up kind of dry powder in case an opportunity comes along. But I do try to keep track of how much leverage I have because leverage is kind of the smart person's way to get poor fast. And that is if the market has a real hiccup and you get caught with a lot of leverage. if I have X worth of net worth, I try not to lever up more than 0.1 or 0.2X, recognizing that you might have enough money to pay it back, but it's not liquid.

18:26And the problem is when you need liquidity, it's when no one wants to provide it. There's been some times I've been a little bit stretched, but for the most part, like on all my homes, I have almost no mortgages. So if I really need money, I can borrow against them or borrow against the stocks. Speaking of liquidity events, let's focus on your wins. What were your liquidity events this year? What went right? Where did you cash in? Earlier in the year, we purchased a bunch of claims against a bankrupt FTX. I bought a bunch of those at 23 cents on the dollar and just sold some at 95 cents. So that was like, and it's better to be lucky than good.

19:05I had no idea that Bitcoin was going to skyrocket. But in the matter of less than a year, that investment more than quadrupled. My public stocks have done really well this year. Airbnb is up, I don't know, 40 % or 60 % this year. I'm a holder in Amazon and Apple. They've had really good years. But my big win was about seven years ago, I invested$2.5 million in a bankrupt consumer company. and the distressed credit investor is a friend of mine. He called and he's like, I'm investing in this smoking cessation company called Enjoy. And this was seven, eight years ago. And the idea was smoking is going away.

19:49And two of my friends use Endjoys to help to quit smoking. And I'm like, oh, I've heard of this company. I know it. So he said, do this, go on the board. So I invested two and a half million bucks. And this company, I went into it because I thought it was going to make a lot of money, but I thought I was going to get a twofer because my mom died of a smoking-related illness and I thought smoking cessation is great. And the UK, the health ministry or the equivalent of the FDA here sends you a vape if you're smoking because they're like, this is just, it's not good for you, but it's not nearly as bad as combustibles.

20:17Anyways, that company, we kind of went through the valley of death, if you will, and a really strong CEO, really smart investor, a guy named Jason Mudrick, who I've been friends with for about 20 years. Anyways, long story short, Altra bought it and that investment paid about$75 million off a$2.5 million investment. I gave a third of it away. But as you can imagine, that's still a huge liquidity event. So that was my biggest, that was by far my biggest hit, my biggest hit ever, other than maybe when I sold L2. And just if you have any questions about how the rich have weaponized the tax code, I was also able to take advantage of 1202.

20:53And because I'd held the stock for longer than five years and the company had net asset value of less than a certain amount, the first 25 million were tax-free. So if you don't believe that the tax code has been weaponized by rich people, it absolutely has. But I try to make myself feel better. I give it much of it away. What did you do with all that cash? Did you immediately invest it? Yeah, I deployed it in different... It's amazing how fast you can spend money. I deployed it across a bunch of different investments in private companies. I paid off all the debt on all my homes because mortgages exploded.

21:35And I was dumb. I had five-year mortgages. And now looking back, we all wish we'd got 10 or 30-year mortgages. But I thought, oh, interest rates are never going up. So I had kind of five-year mortgages. They all sort of seemed to come due last year. And I just paid them off because the cost to refinance them was going to, the cost to take out a new mortgage is going to be about 7%. And I thought, I'll just pay them off because the 7 % guaranteed return feels pretty good. So I paid off almost all the mortgages on my homes and properties, made some new private investments, but it went pretty fast.

22:09When we spoke earlier, you also mentioned this company, Flight Lease Capital, that you invested in, which is like an aircraft leasing company. Yeah, it's a great company. A friend of mine, a shot of Zimi, a super bright private equity guy, found this great group of guys. in Florida, and they're total gearheads, and they go out and they have just a look and a lock on this strange market where they buy used aircraft engines from, usually from companies or airlines all over the world going out of business. They buy the engine. Essentially, a plane, if a plane is worth 10 million, 9 million is in the engines.

22:44They buy the engine, they refurbish it, they're fantastic engineers, and then they lease it to usually a cargo company. and I'm an investor in there and it's just been a great, every year it's been, it's done really well. So that one's returned like IRRs of like, I think almost close to 30%. But the reason I did that one, I didn't get negative fees. I actually pay fees on that one is I love the idea of diversifying. I thought air cargo is probably, you know, I want to, I'm much more inclined to make investments in things that aren't tech right now because I'm so levered to tech because that's where I get opportunity.

23:18The thing I loved about this company was it wasn't really tech. It was like a lot of these engines are leased out to companies, you know, transporting, you know, materials between Mexico and, you know, Texas or wherever their cargo planes are flying. But I love that investment. Do you have any income generating investments? I mean - Other than Ed Ellison? Well, that counts, yeah. We make good money here. You know, we make, you know, millions of dollars doing books, podcasts, speaking gigs. So I try not to spend more than I'm actually making in terms of current income and then let the asset base grow.

23:55So I don't have kind of cash. My real estate, my rental units generate income, but I usually reinvest that back in other stuff. But I'm not at the age yet where I need cash flow for my investments. I still manage to live within my means for my current income, for my day jobs, if you will. And you have no interest in debt, it sounds like. I know you were considering private credit at one point, but we haven't discussed bonds. Yeah. I actually bought my first bond. I bought a$10 million bond in Gannett because I know the guys at Apollo and I like them and they were investors and they carved out a piece for me.