Why The Rich Hold Cash But TELL You To Invest — Transcript

Full transcript

1. 0:00Drake is on a stage in Columbus telling
2. 0:02200 people to buy an index fund and the
3. 0:05phone in his jacket says $1.4 million
4. 0:09in Treasury bills. Hotel ballroom,
5. 0:12financial literacy night, coffee that
6. 0:14tastes like the carpet. He sold his vac
7. 0:17company four years ago. He's quoting
8. 0:19Warren Buffett. Buy the index fund,
9. 0:22don't time the market. Row three, Nadia,
10. 0:2531, dental hygienist, writing it down.
11. 0:29That night she moves her emergency fund,
12. 0:32$8,200,
13. 0:34into an S&P 500 fund because cash just
14. 0:38sits there. It's February of 2020. Five
15. 0:41weeks later her fund is worth $50,400.
16. 0:44Her office is closed and her
17. 0:47transmission is making a new noise.
18. 0:50Drake's phone says $1.1 million sitting
19. 0:53there, on purpose. This isn't a video
20. 0:56about rich people lying to you. Drake is
21. 0:59quoting a real letter. He's quoting the
22. 1:01second half. The first half is one
23. 1:04sentence long. It's about you and in 12
24. 1:07years I have never heard anyone read it
25. 1:10out loud. My name is Nick and I've spent
26. 1:12an unreasonable number of evenings
27. 1:14reading quarterly filings from people
28. 1:16with more money than some counties to
29. 1:18find out what they actually do with it.
30. 1:21If you've ever been told to just invest
31. 1:22by someone who clearly didn't need to,
32. 1:25hit subscribe. Quick honesty note, Drake
33. 1:28and Nadia are composites. I made them
34. 1:30up. The numbers around them are real and
35. 1:33I'm not a financial advisor, so this is
36. 1:35arithmetic, not advice. One thing before
37. 1:38the ballroom. If the problem isn't
38. 1:40knowing what to invest in, but what to
39. 1:42do first, we put together a short book
40. 1:45called The Money Ladder. Six levels, one
41. 1:47job each, and level one is a thousand
42. 1:50dollars in cash, which, spoiler, is
43. 1:53where this video is headed. It's at
44. 1:56nickinvestbook.com,
45. 1:58link below. Okay, let's start by ruining
46. 2:01the meme because most versions of this
47. 2:03title get the number wrong. There's a
48. 2:05club called Tiger 21, about 2,000
49. 2:09members, average net worth $140 million.
50. 2:13They pay around 30,000 a year in dues to
51. 2:16sit in a room and tell each other where
52. 2:18their money is.
53. 2:19In the second quarter of this year, the
54. 2:21answer was not in cash.
55. 2:247%, the lowest since they started
56. 2:27counting in 2007.
57. 2:29Capgemini surveys millionaires worldwide
58. 2:32every year. Their number is 24% and
59. 2:35drifting down.
60. 2:37Bank of America asked Americans with at
61. 2:39least 3 million to invest. The younger
62. 2:42ones held 19% in cash, the older ones
63. 2:4515, and then there's the one everybody
64. 2:48means, Berkshire Hathaway. As of June
65. 2:5230th, $365
66. 2:54billion in cash and Treasury bills. More
67. 2:57than the yearly output of Finland
68. 2:59parked. Buffett has a rule in writing
69. 3:02that it can't drop below 30 billion. 30
70. 3:05billion is his floor. Most people's
71. 3:08floor is the overdraft limit. So, here's
72. 3:10the first thing that should bother you.
73. 3:127% is less than you. The Fed's household
74. 3:16survey came out 2 weeks ago. The median
75. 3:19family has $8,200
76. 3:22in checking and savings against a median
77. 3:25net worth of $215,900.
78. 3:29That's about 4% of your wealth in cash.
79. 3:32If your balance is anywhere near 8,000,
80. 3:35you're not behind. You're the median.
81. 3:37The average is 62,900
82. 3:40because a few households have a Drake in
83. 3:42them, but look at the shape, not the
84. 3:44slice. Drake's 7% is $1.4 million.
85. 3:48Nadia's 4% was her entire emergency
86. 3:51fund. The don't hold more cash than you.
87. 3:55They hold cash that does something.
88. 3:57Yours just has a bank, which raises the
89. 3:59obvious question. If the cash is doing
90. 4:01something, why does every one of them
91. 4:04tell you not to hold any? Here's the
92. 4:06advice, straight from the source. And I
93. 4:09need to be fair, because fair is going
94. 4:11to sting a little. The advice is right.
95. 4:14October 17th, 2008, the market is down
96. 4:1840%. Warren Buffett writes an op-ed in
97. 4:21the New York Times called buy American.
98. 4:24I am. He tells the country he's buying
99. 4:27stocks. And then he says the sentence
100. 4:30this entire video hangs on. Quote, this
101. 4:33is my personal account I'm talking about
102. 4:35in which I previously owned nothing but
103. 4:37United States government bonds. The man
104. 4:40most famous for telling you to buy
105. 4:42stocks kept his personal money outside
106. 4:45Berkshire entirely in government bonds
107. 4:48until the crash. Then he bought.
108. 4:51He wasn't lying. He was finally doing
109. 4:54the thing the cash was for.
110. 4:56The advice itself holds up. His 2013
111. 4:59letter tells the trustee for his wife's
112. 5:01money to put 90% in a very low cost S&P
113. 5:06500 index fund. Then he bet a million
114. 5:09dollars on it. 2008 to 2017, an index
115. 5:13fund against five hand-picked funds of
116. 5:15hedge funds. The index did 8 and 1/2% a
117. 5:19year. The hedge funds averaged about
118. 5:21three. Performance comes, performance
119. 5:24goes, he wrote. Fees never falter. And
120. 5:28the data keeps agreeing. Last year, 79%
121. 5:31of actively managed large-cap funds
122. 5:34trailed the S&P 500. Over 20 years, 93%.
123. 5:40Professionals with Bloomberg terminals
124. 5:42losing to a fund that doesn't think.
125. 5:45Then there's the chart, you've seen it,
126. 5:47JP Morgan's version, 20 years in the
127. 5:49S&P, fully invested 10.6%
128. 5:53a year. Miss the 10 best days, 6.4. Miss
129. 5:57the best 20, 3.7. The lesson on the
130. 6:00slide is never sell. Here's what's not
131. 6:02on the slide. Seven of those 10 best
132. 6:05days landed within 2 weeks of one of the
133. 6:0710 worst. They're the same storm. Miss
134. 6:10both the best 10 and the worst 10, and
135. 6:13you end up almost exactly where you
136. 6:15started. The chart is true. It's also a
137. 6:18brochure. And then there's Ray Dalio.
138. 6:21January 2020, Davos, cash is trash, get
139. 6:24out of cash. October 2022, on Twitter, I
140. 6:28no longer think cash is trash. What
141. 6:31changed? Rates went from zero to four.
142. 6:34The advice tracks the interest rate.
143. 6:36Your memory of the advice does not. You
144. 6:39heard cash is trash once and kept it
145. 6:41like a jingle from a car commercial.
146. 6:44So, that's what you get told. Index
147. 6:46funds win, timing fails, stay invested,
148. 6:49all true. And every person saying it is
149. 6:52sitting on cash that has a job you were
150. 6:54never told about. Three jobs, actually.
151. 6:56Drake's 1.4 million sits in Treasury
152. 6:59bills. In February of 2020, those paid
153. 7:03about 1 and 1/2% which was still 150
154. 7:06times what Nadia's bank paid her. Today,
155. 7:09after the Fed's hike in September, a
156. 7:11bill pays close to the Fed's range, 3.7
157. 7:15and 5 to 4%. Call it 3.75.
158. 7:18On Drake's pile, that's $52,500
159. 7:22a year. Now, scale it. $20 million at 4%
160. 7:27is $800,000 a year. That's 9.7 times the
161. 7:31median household income for not spending
162. 7:34it. And Berkshire's cash and bills
163. 7:36earned $3.06
164. 7:38billion after tax in the second quarter
165. 7:41alone. About $34 million a day, every
166. 7:45day, including weekends and Buffett's
167. 7:48birthday. The pile people call sitting
168. 7:51on the sidelines is by itself one of the
169. 7:53most profitable businesses in America.
170. 7:55It just has no employees. Here's your
171. 7:58version. Your 8,000 at the national
172. 8:01average savings rate, which the FDIC
173. 8:04puts at 0.37%,
174. 8:07earns $30 and $0.34 a year.
175. 8:10At the big bank rate most people are
176. 8:12actually getting 0.01,
177. 8:15it's 82 cents. 82 cents for a year. You
178. 8:20could lose that in the couch and not
179. 8:22notice the couch. Now, the Federal
180. 8:24Reserve pays banks 3.9%
181. 8:27on the money they park overnight at the
182. 8:29Fed. Your bank pays you 0.37,
183. 8:33the gap is three and a half points. It's
184. 8:35not an accident, it's the product. On
185. 8:38your 8,000, that's about $290 a year the
186. 8:42bank keeps for holding your money near a
187. 8:44computer. Multiply that by every
188. 8:47household in the country and you'll
189. 8:48understand why the branch lobby has a
190. 8:50fireplace. So, job one, for the rich
191. 8:54cash is a paycheck. For you, it's a
192. 8:56donation.
193. 8:58Same asset, different account. Now, the
194. 9:01one that built the legend. September
195. 9:0323rd, 2008,
196. 9:05Lehman has been dead for eight days.
197. 9:08Goldman Sachs needs money and needs it
198. 9:10from someone who doesn't need anything.
199. 9:13Berkshire writes a check for $5 billion.
200. 9:16In exchange, preferred stock paying 10%
201. 9:19a year, $500 million annually, plus the
202. 9:23right to buy another 5 billion of
203. 9:25Goldman stock at $115 a share for 5
204. 9:29years. A week later, General Electric,
205. 9:32same play. 3 billion, 10% warrants at
206. 9:362020-2025.
207. 9:3710% guaranteed from Goldman Sachs plus
208. 9:41the stock. Nobody with a brokerage app
209. 9:43was offered that deal or any deal
210. 9:46because in a panic the only person who
211. 9:48gets to write terms is the one who
212. 9:50doesn't have to sell anything to show
213. 9:52up. Buffett put it plainly in the 2017
214. 9:55letter, "During the crisis, we liked
215. 9:57having Treasury bills, loads of Treasury
216. 10:00bills. That's what the cash was for, not
217. 10:02safety, pricing power." When everyone
218. 10:05else is forced to sell, cash isn't a
219. 10:08cushion, it's a menu and you're the only
220. 10:11customer. And Drake learned this the
221. 10:13expensive way. In 2009, he owned a small
222. 10:17apartment building on the side. This
223. 10:19fact business had payroll due and the
224. 10:21only thing he could sell fast was the
225. 10:23building. He sold it in March of 2009,
226. 10:27the exact bottom. He still drives past
227. 10:29it. So, on March 23rd, 2020, when the
228. 10:33S&P closed 34% below where it had been 5
229. 10:37weeks earlier,
230. 10:39Drake moved 300,000 from T-bills into
231. 10:42the same index fund he'd told the
232. 10:44ballroom about. Not because he's a
233. 10:46genius, because he had cash and he
234. 10:49remembered the building.
235. 10:51Nadia, the same week, was on hold with
236. 10:53the unemployment office. Hold that.
237. 10:56We're about to meet her transmission.
238. 10:58Here's the one nobody says on stage.
239. 11:00Look at where the Tiger 21 money
240. 11:02actually lives. 34% private equity, 23%
241. 11:08real estate. 57% of the portfolio is in
242. 11:11things you cannot sell on a Tuesday. A
243. 11:14stake in a company, a fund that calls
244. 11:17for more money on its schedule, not
245. 11:19yours. The 7% cash isn't there instead
246. 11:22of the 57, it's there because of it. It
247. 11:25funds the capital calls, covers the
248. 11:28spending, and pays the property tax
249. 11:30while the real wealth stays locked up
250. 11:32compounding. The cash is what makes the
251. 11:35illiquid bets survivable. Pull the seven
252. 11:37out and the 57 becomes a hostage
253. 11:40situation. Berkshire's the same. It's an
254. 11:43insurance company wearing a conglomerate
255. 11:45as a coat. Almost 178 billion dollars of
256. 11:49float, premiums collected against claims
257. 11:52that could arrive any Thursday. That's
258. 11:55why the 30 billion floor exists. When
259. 11:58bills come due, Buffett wrote in 2014,
260. 12:01"Only cash is legal tender." That's not
261. 12:04a hoard. That's the reserve requirement
262. 12:06for being allowed to own everything
263. 12:08else. So, here's the rule the rich live
264. 12:10by and never phrase as a rule. The
265. 12:13amount of risk you can afford to hold is
266. 12:15set by the amount of cash you never have
267. 12:18to touch. Drake can sit through a 57%
268. 12:22crash because the crash never gets to
269. 12:24vote on his groceries. Earns, hunts,
270. 12:27protects, and you were only told about
271. 12:30the index fund. Now, watch what that
272. 12:32costs.
273. 12:33Nadia puts her 8,200 into the index fund
274. 12:37on Wednesday, February 19th. The
275. 12:40market's all-time high, nobody knew that
276. 12:42yet.
277. 12:43March 9th. The market drops 7% in
278. 12:47minutes and trading halts for the first
279. 12:49time since 1997.
280. 12:52March 12th. Halts again. March 16th.
281. 12:56Down 12% in a day, the worst since 1987.
282. 13:01March 17th. Her office emails closed for
283. 13:05what the email calls 2 weeks. March
284. 13:0923rd.
285. 13:10The bottom. Her fund is 5,420
286. 13:14dollars. And the transmission, which had
287. 13:17been making a noise she'd been turning
288. 13:19the radio up over, is now making a sound
289. 13:23the radio can't cover. Quote, "4,100
290. 13:27dollars."
291. 13:28So, she sells. Not because she panicked,
292. 13:32because the car goes to the job, the job
293. 13:34pays the rent, and the rent was due in 9
294. 13:37days. She sells the whole fund, pays the
295. 13:40mechanic, and keeps $1,320.
296. 13:44Here's the math nobody on the stage ran.
297. 13:47The market was back at its February high
298. 13:49by August 18th. 6 months. Had she been
299. 13:53able to wait, her fund was back to even
300. 13:55by summer and about 9,000 by Christmas.
301. 13:59She wasn't able to wait, but crash
302. 14:01wasn't her problem. The crash was
303. 14:04Drake's shopping trip. Her problem was
304. 14:07that her only cash was wearing a stock
305. 14:09costume, and the costume came off in the
306. 14:11same 5 weeks that more than 20 million
307. 14:14Americans filed for unemployment. And if
308. 14:16you're thinking, "Well, I'd have held
309. 14:18on." Think about when the layoffs
310. 14:20happen. The bottom. The two things
311. 14:23arrived together. They always have. 37%
312. 14:27of American adults could not cover a
313. 14:29$400 emergency with cash per the Fed's
314. 14:33survey this May.
315. 14:34Bankrate's number, fewer than half could
316. 14:37cover a thousand.
317. 14:39For those households, a job loss in a
318. 14:41downturn doesn't mean stay the course,
319. 14:43it means selling at the bottom. That's
320. 14:46the asymmetry. The rich can afford to be
321. 14:49wrong about timing. You cannot afford to
322. 14:52be wrong about liquidity. And now the
323. 14:54part that moves this from a story about
324. 14:57Drake to a story about who paid for the
325. 14:59coffee in that ballroom. In January of
326. 15:02last year, the SEC fined Wells Fargo and
327. 15:06Merrill Lynch $60 million. Not for
328. 15:08losing money, they put the cash.
329. 15:10Advisory clients who held cash got swept
330. 15:12into deposit programs at the firms' own
331. 15:14banks. In the SEC's words, "The
332. 15:20The gap between those programs and other
333. 15:22cash options at times grew to almost 4%.
334. 15:26And here's the part I had to read twice.
335. 15:29Many of those clients were paying an
336. 15:31advisory fee on the swept cash. A fee
337. 15:35for managing money into an account that
338. 15:37paid almost nothing. Which the firm's
339. 15:40own bank then lent out at four. So,
340. 15:42follow the money all the way around.
341. 15:45When your money is invested, the
342. 15:47industry earns a percentage of it. When
343. 15:49your money is in cash, the industry
344. 15:51earns the spread on it. The only version
345. 15:54of you that nobody can bill is the one
346. 15:56who moved the cash to an account that
347. 15:58pays close to the T-bill rate and left
348. 16:01it there. That version of you is not on
349. 16:03anyone's slide. Quick aside. If you're
350. 16:07the kind of person who'd rather be on
351. 16:09the other side of videos like this,
352. 16:11making them, there's a link to our book
353. 16:13below. No pressure. Back to Drake. Let
354. 16:16me argue against the title for a minute
355. 16:19because it deserves it. The rich are not
356. 16:22hoarding cash and waiting for a crash.
357. 16:24The numbers are going down, not up.
358. 16:27Tiger 21 at a record low.
359. 16:30Berkshire under its new CEO, Greg Abel,
360. 16:33bought 23 and 1/2 billion dollars of
361. 16:36stock in the second quarter. It's first
362. 16:38net buying in 14 quarters and spent 4
363. 16:42and 1/2 billion on its own shares. The
364. 16:45pile fell from 397
365. 16:47billion to 365.
366. 16:51So, the rich hold cash isn't a strategy,
367. 16:54it's a reserve. They spend it when
368. 16:56there's something to buy and refill it
369. 16:58when there isn't. And cash has cost
370. 17:01them. From 2009 to 2021,
371. 17:05T-bills paid roughly nothing while the
372. 17:07index more than quadrupled.
373. 17:10Seth Klarman, who runs one of the most
374. 17:12respected funds in the country, said
375. 17:14this year he'd almost certainly made a
376. 17:16mistake holding as much cash as he did.
377. 17:20The rich pay for their buffer in lost
378. 17:22upside every year and they pay it on
379. 17:24purpose because the alternative is being
380. 17:27Nadia with more zeros.
381. 17:30So, the honest version of this video
382. 17:32isn't they lie, it's that they describe
383. 17:34their own life using your numbers.
384. 17:37Drake said stay invested because for
385. 17:39Drake everything that needs to be liquid
386. 17:42already is. He wasn't hiding the cash.
387. 17:46He forgot it was a decision the way you
388. 17:48forget the floor is holding you up,
389. 17:50which brings me to the sentence.
390. 17:53The letter Drake was quoting is
391. 17:54Buffett's 2013 letter. Here's the full
392. 17:57instruction to his wife's trustee word
393. 18:00for word. Put 10% of the cash in
394. 18:03short-term government bonds and 90% in a
395. 18:06very low-cost S&P 500 index fund. 10% in
396. 18:11short-term government bonds, that's the
397. 18:13first half. It comes before the index
398. 18:16fund. And in 12 years of people quoting
399. 18:18that letter, I have heard the 90 a
400. 18:21thousand times and the 10 maybe twice.
401. 18:24The most famous investor alive wrote the
402. 18:26cash buffer into his own estate plan
403. 18:29first and the internet edited it out.
404. 18:32That's the whole secret, not a trade, a
405. 18:34sequence.
406. 18:35The rich hold cash and tell you to
407. 18:37invest because for them the cash is
408. 18:40already done. It's the step they took so
409. 18:42long ago they stopped counting it as a
410. 18:45step.
411. 18:46Nadia heard step two.
412. 18:48So, here's step one with prices. First,
413. 18:51move the cash.
414. 18:538,000 at 0.37%
415. 18:56is 30 bucks a year.
416. 18:58At four in an online savings account
417. 19:01with the same federal insurance or a
418. 19:04government money market fund, it's 328.
419. 19:08Over 10 years, $10,000 at 0.37 grows to
420. 19:1310,376.
421. 19:16At 4%, 14,800
422. 19:20$4,400
423. 19:22and your risk went up by exactly
424. 19:24nothing. It's the only free lunch left
425. 19:27in finance and most people skip it to
426. 19:29argue about Bitcoin. Second, size it.
427. 19:33You don't need Drake's percentage. You
428. 19:35need Nadia's 5 weeks. 3 to 6 months of
429. 19:38what you actually spend, more if your
430. 19:41income is lumpy or your car is
431. 19:43theatrical.
432. 19:45That's the amount of crash that can
433. 19:46happen to you without happening to your
434. 19:48rent. Until it's there, every dollar in
435. 19:51your index fund is a dollar you might be
436. 19:53forced to sell on the worst day of the
437. 19:55decade.
438. 19:57Third and only third, index everything
439. 20:00else and leave it alone.
440. 20:02Now the advice is true for you because
441. 20:04now you can follow it. You can't stay
442. 20:07the course if the course is also your
443. 20:09emergency fund. And if you're thinking,
444. 20:11Nick, 4% on $6,000 is nothing, you're
445. 20:14right. It's not about the yield. The
446. 20:17yield is a tip. The job is that the
447. 20:19money is there on March 23rd, which is a
448. 20:22date that keeps coming back with
449. 20:23different numbers on it.
450. 20:25So let's go back to Columbus. Same
451. 20:28ballroom, same coffee, same 5 weeks, two
452. 20:31phones. Drake's.
453. 20:33The 300,000 he moved on March 23rd is
454. 20:36worth almost 500,000 by Christmas. He
455. 20:39hasn't checked. He doesn't need to. The
456. 20:42pile is back where it was, earning,
457. 20:44waiting for the next building somebody
458. 20:46has to sell. That's not the exception to
459. 20:49his advice.
460. 20:50It's the foundation the advice is
461. 20:52standing on.
462. 20:53He just didn't look down. Nadia's.
463. 20:56$1,320.
464. 20:58Now the version of her who heard the
465. 21:00whole sentence.
466. 21:02She puts the 8,000 in an account that
467. 21:04actually pays interest that Wednesday
468. 21:06night.
469. 21:07Starts $100 a month into the index fund.
470. 21:10When the transmission goes in March,
471. 21:13she writes the check and goes back to
472. 21:15being furloughed in peace. Her index
473. 21:17fund is fine by Christmas because she
474. 21:20never had to touch it. The crash
475. 21:22happened to her exactly as hard. It just
476. 21:25wasn't allowed to collect. The rich
477. 21:27don't hold cash instead of investing,
478. 21:29they hold cash so they never have to
479. 21:31stop. That's the sentence. It was always
480. 21:34two halves.
481. 21:36So the next time someone in a nice
482. 21:37jacket tells you to stay invested, ask
483. 21:40one question. What's your cash earning
484. 21:42right now? Watch how fast they know the
485. 21:45answer. Then go find out what yours is
486. 21:47earning and tell me in the comments. If
487. 21:50you don't know, that's the answer. I
488. 21:52read them. I'll see you in the next one.