Abdul Al Assad - Leverage for the People!

Ladies and gentlemen, welcome to the Business Brew. I am your host as always. This episode features Abdul Al-Asaad. Abdul founded Basic Capital, which launched in May. There were many activities pre-launch, but official launch in May. And when the product was launched, there were reactions from people that were convinced that this was a bad idea that was bound to blow people up. There were people that were convinced that this is a great idea that everyone should have access to. I said, I don't know which which is true. So I reached out to Hunter Hopcraft, who is a friend of the show, and he made the intro to Abdul Al-Asaad. My understanding of the product is it's basically offering 4-to-1 leverage. So you put a dollar in, you now have access to $5 of funds. 4 of those dollars, at least in some of the material that I saw, are invested in mostly BB credit. You're basically borrowing at SOFR plus 4.5 and lending at SOFR plus 6.5, so there's a 200 basis point spread. I still don't fully understand why you're borrowing at a lower rate than you're lending out, but that's something that you get to work on for yourself should you find this episode interesting. And I would just say that I, one of the things that I value about this show is the ability to have these conversations with people. My initial inclination would say don't go anywhere near this product, I think that that initial inclination has a reasonably high probability of being the wrong thought. So I hope that this episode expands, if nothing else, your knowledge of what is available in the financial space. So without further ado, and after the sponsor reads, please enjoy the show. Also, none of this is investing advice. Everything in this program is for entertainment purposes only. Please consult a financial advisor before making investment decisions and do your due diligence. We're gonna do this one reasonably quickly. Fiscal.ai. I feel like a lot of my reads to this point have been to the retail/prosumer market. Here's who I'm gonna pitch this time. If you have a business that is reliant upon financial data and you feel like your current provider is too expensive, i.e., FactSet, check out fiscal.ai. They have an enterprise-level tier. You will be happy with the data quality. I cannot attest to whether or not it's going to do all of the things you need it to do. Only you can attest to that. So if you love yourself, use fiscal.ai/brew to get 15% off, and maybe you can figure out a way for you and your business to save a good amount of money. I can win, you can win, they can win. That's called Win Win Win. Check it out, fiscal.ai/brew. The other sponsor of this show is Trata. You can find them at trytrata.com/brew. Trata is a transcript library of sorts, our, uh, buy-side to buy-side conversations on individual stocks. The analysts are anonymous, but the library is vast and growing. And they, like I said last week, the thing that I like about the Trotter transcripts is you're hearing two analysts and they are labeled bull, bull. So you have a sense of, you know, how people lean. I was checking out one for Hagerty just recently. It's good stuff. You know, one of the analysts on the Hagerty call referred to themselves as the axe. I haven't gotten fully through it, but they do appear to know quite a bit. If you call yourself the Axe, you better. So, uh, anyway, I'd check it out. You have, you have high-quality conversations, buy-side to buy-side mostly. And at the end of the day, Trotta makes finding a bull or bear on any stock as easy as clicking two buttons. Over 125 funds globally contribute to over collective—

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Check this out. Over 125 funds globally contribute to over 2,000 tickers. Trada is the real deal. The funding from Y Combinator. I would say that I prepped for this call by reading a transcript between two funds, but I did not. That would be a lie. So I didn't, but I did, I did do other prep using Trada and I liked it. It's not just your typical background from a transcript library. Check it out. You can join as a lurker or join as a contributor, and Trata will pay you hundreds of dollars per call. For a free trial, go to trytrata.com/brew. That's trytrata.com/brew. People tend to like podcasts where I do think it's like more of a discussion rather than just like, oh, hey, let's talk about your corporate pitch, right?

Yeah, yeah, yeah. Nobody wants to listen to that. No, it's lectures. Lectures are brutal for a reason. And I'm a big podcast listener. And to me, I wake up on like a Saturday or Sunday. Or during the week on my commute and I just put on, you know, Joe Rogan or something and, you know, I'm in for 3 hours. It's like when Lex Fridman drops like a 3-hour episode, I'm like, let's go.

Like, yeah, well, dude, he did one with, um, it was Dylan Patel and another guy on some AI thing. It was like 5 and a half hours.

Yeah. Yeah.

And I was sitting and I was like, this is so dense. I need to like sit there and take notes. But if I do this for this, I almost have to dedicate half a week just to one podcast. Yeah.

Yeah.

Yeah.

Yeah.

Try to figure out what they're actually talking about.

Yeah. And I'm sure you're a little bit like me where like, if I hear something I like, like if they reference an article or an author, I usually like to go like, be like, oh, like let me go find out who that person is. And there is something really beautiful about that. There is something really nice about like Discovering like a Substack or a Twitter account or a podcast for the first time, and you're like, oh yeah, this is going to be like good, like 2 or 3 weeks worth of like content going back in the days, reading their stuff. But if you drop a 5-hour dense podcast, like I'm not doing that. Yeah.

Well, I mean, it was okay to be fair, but You know, it was a lot. I was talking to this guy, Adam Robinson. He's been on the pod and he was on Tim Ferriss's pod, which is how I found out about him. But I was asking about the idea of reading 500 pages a week or whatever. And his comment was, I think he said this on the pod. He might have said it. We've chatted a couple times offline, but he was like, I like to just focus on 10 pages in a day.

Yeah.

And like really understand the thought. Not every day, right? But like there's certain days where just thinking about one thought all day long can actually get you much further than— so sometimes you do run across podcasts that really causes you to drive, you know, deep. Maybe this will be that podcast for some people.

I hope so. I'm here for it.

I'm here.

There you go. Let's go.

So I reached out to Hunter after I saw a little bit of, I don't know, there were a lot of, a lot of comments to, I guess you had a tweet that went kind of viral. Yeah. And there was some comments and I kind of couldn't figure out from, from the comments or, or from, you know, the tweet exactly what you guys did. So I reached out and here we are. So that's kind of the backstory to that. Do you want to tell people sort of your background and what you're building right now?

Yeah, of course. My name is Abdul Al-Asaad. I'm co-founder and CEO of Basic Capital. Basic Capital is the first company that gives you credit, non-recourse financing, to participate in financial markets, to invest. Today in America, it's very easy to access consumer credit to consume. You can buy now, pay later anything. 95% of purchases on Black Friday were done on buy now, pay later. People send your credit card to your door to consume. We're the first company that gives you long-term duration financing to invest. When we launched the business in May, we've been building it for 2, 3 years, but we've been building it in stealth under the radar. The business in May, it became like a national sensation. On Twitter, people were like losing it. You know what I mean? Yeah. The reactions that we got is either this is the best thing since sliced bread, this is like really needed, this is amazing. Like people need to participate in capitalism in a more meaningful way. We give people credit for stupid reasons. Why don't we give them credit for a good reason? Or they are like, this is crazy. This is gonna bring back the Great Depression. This is 2008, all the Michael Burry like memes. Yeah. I mean, the, hey, hey, there is a bubble.

Yeah.

There was no in between. It was, it was very, very bamboozled. It was very, very, you know, and to me I was like, I think that's good. I think, I think the most fascinating ideas are usually trigger this type of reaction, this type of extreme reaction.

Yeah. Well, not to continue to go back to Adam Robinson, but one thing he likes to say is there's there's a decent amount of money to be made in things that are blatantly obvious and things that make no sense. And I will tell you that my general bias when I hear things like let's give people leverage for their IRAs is how is this guy going to fleece people? And this is bound to end up wrong.

Yeah.

So, but I normally, I normally wouldn't. But then I saw like Josh Wolfe is with you and I saw Hunter and I know Hunter. Reasonably well. I mean, I've read him for 2 years and he's been on the pod and I was like, all right, there's probably something I don't fully get here. So thank you for agreeing to come on the program and, and maybe explain a little bit about what you think the misperceptions are or, you know, whatever. One thing you said, which was hard for me to get my head around, is how do you offer leverage in a way that's non-recourse? How does that structure actually work?

Fainé, well, thank you so much for having me, first of all. And we'll get into the structure in just a second, but I wanna take a step back on a point that you mentioned bypassing. And you said something like, when I hear somebody saying, oh, I'm gonna give leverage to people's IRA, my first intuition is like, How is this person going to fleece people?

Yes.

And no offense taken, no offense taken, just to be clear.

Okay.

And Mark Andreessen, A16Z, Andreessen Horowitz, top tier VC, he has this incredible thought, let's say, where he says some of the most important industries in our society, think healthcare, think financial services, have a certain moral stature to them. And because they have a certain moral stature to them, innovation, the hurdle for innovation becomes really, really high. Nobody actually wants to go into innovating into healthcare because you're dealing with people's health, right? Like you do not want to make somebody sick. You do not want to make somebody ill. You do not want, like there is very little room for experimentation there. And the same thing with finance. You're dealing with people's money. You're dealing with people's hard-earned dollars. So it has a certain moral stature to it, like banks. If you walk into a bank branch from the old days, not today, they look a lot like churches. High ceilings, big. You walk in, they make you feel small. It's almost like you walk in into a church. And I think this moral stature to finance is important because you are dealing with people's hard-earned wages and hard-earned capital. but at the same time, it de-incentivized a lot of otherwise good-willing people to enter the space and innovate. So who actually ends up entering the space and innovating in these financial services? Either somebody who has complete, like no moral compass at all, like they have no moral consideration. That's like this, the classic scammer, right? Or somebody who is like really like forward on the risk spectrum, like me, who really believe in their idea. That they're like, okay, I'm willing to do it. And there are examples of that. You think of Jack Bogle, 1980s, he created the index fund. And in the 1980s, before you buy a stock, there was no index funds, so you had to buy a single stock. What you did is you called your broker, Wolf of Wall Street style, and you asked, or actually I take it back, your broker called you, right?

Yeah.

Your broker called you and said, hey, I have my hand on this amazing stock. And you would go buy the stock and Jack Bogle showed up and he had this crazy idea, which is don't buy a stock, buy the entire market. His idea was do zero due diligence. In other words, his idea was literally do zero work, pay no attention to equity research reports, buy all the companies, the good ones and the bad ones. And people sued him for lack of fiduciary duty. Because he was quite literally, right, asking you to buy all the companies, the good ones and the bad ones. And some of them are very like evidently very obviously bad. Some of them are not a going concern. And he's like, no, no, no, just buy the whole thing. You'll be better off in the long run. And people sued him. People said mean things about him. I have a poster behind me. It says Stamp Index Funds an American, which is a poster that they literally, literally put on Wall Street and around New York and around Philadelphia to discourage people from buying index funds. Because why, how, why would you buy a stock with doing no diligence? Every now and then you have somebody who comes out and they do a big innovation and they're honest and they're trying to do their best because they really believe in their idea and the idea works. But because of this moral statute of finance, unfortunately it discourages a lot of otherwise good actors. To innovate and to create. So I just wanted to touch on that. I mean, partways—

Yeah, hang on, wait, now that we're having this conversation, 'cause we can get back to the structure.

Yeah.

I would just say that I think some of the skepticism comes from, it, it, what I'm about to say is a little ironic after what you just said, but where I think some of the skepticism comes from is the history of people successfully using leverage, I think is littered with far more blowups than things that go right.

Is that true? Is that true?

I don't, I don't, I don't know. I don't know. I haven't seen all the data. So you, you may know that that is not true. I think that's a skepticism.

Yeah.

Especially when put into retail's hands. And I don't know.

I mean, let me, let me push you back here.

And I, and I think people that are asking for, for reasonably high fees, which you don't have low fees, we can debate whether or not they're high fees. That's also something that is against the grain at the moment. So, and then I think on the back of some very prominent promoters of SPACs that didn't go well, you probably are suffering a little bit in people's minds from the taints of 2020 and 2021 that you may not have been a part of, but it's the old sort of—

No, this is my first—

It's not even the company you keep, but like you're associated with it, right?

Yeah, yeah. Full disclosure, I never SPAC'd anything.

Yeah, yeah, no, I know.

I never launched a meme coin.

But the SPAC guys are saying the same thing, right? Like, oh, look at the innovation that we're bringing to the market. So I think that's part of what you're fighting against a little.

So let's go back, let's go back and test a couple things. You mentioned the history of leverage is full of examples of where people blow up more often than they did well. And you mentioned the fees. As a concern. And then you mentioned the SPACs thing, and I wanna address the three aspects of these things starting from the latter one, SPACs. I don't believe in single name investing. So I believe the best, the third best invention of the 20th century, and we're gonna come back to the first two, but the third best invention of the 20th century in financial market is Jack Bogle's invention of the index fund. Because it's simplified investing and it said do no work, buy and hold long-term. You cannot beat the market. So I don't believe in SPACs. I don't believe in buying single name stocks. I don't believe in meme coins. I'm a blockchain enthusiast. I think there's so much money in financial markets are being made by middleman, middlemen that just extract fees for no good reason. And I think we should try to neutralize that. And I think, you know, DeFi offers an exciting opportunity there, but I'm not in favor of a certain coin or anything like that. So to start with the last aspect, I don't believe in single name stocks. I don't believe in meme trading. I don't believe in SPACs. The fees, we're gonna come back to the fees is like you get what you pay for. And that became, that is actually the negative part of Jack Bogle's legacy, which is it generated this thing where it became fees in, in themselves became extremely negative. But the problem is that fees are actually a scale game. And if you go back and you look at the first index fund that Jack Bogle launched, it was a 2% expense ratio. I think it was 1.150 bps or 180 bps, but it was close to 2% expense ratio. And what happens with asset management, particularly passive asset management, is that it's a scale game. So it scales like software. So as you scale, you lower the fees. But actually the first index fund, we did not start out with 5 basis points. Jack Bogle could not have built Vanguard with 5 basis point index fund. He started with 180, which for the time was really cheap because the brokers on the bid offer side, when they sold you single name stocks, particularly pink sheet stocks and particularly highly volatile stocks, they made massive massive money on the crossing, on the bid-offer. So that's the point to the fees. Eventually they will go down, but you can't start from day one at zero, like that no fee, eventually everything gets commoditized. But in day one, the fees will have to be high to build a real business. The first point you said, leverage has a history of more people blowing up than not. Is that really true or is that just a behavior bias? I think we in society, in financial markets, we tend to remember the bad days more than we actually remember the good days.

All right, hang on. I gotta stop you 'cause I like what you're saying, but all I hear is background noise. Is it possible for you to get to like a quieter room?

Hey guys. Yeah, just gimme one second.

Yeah.

Hey guys. I'm sorry, I'm recording from here. Is it okay to keep, to keep things just with that logo? I'm really sorry. All right.

Thank you.

Of course. Thank you.

So, so we were talking about leverage and whether or not it's really true to, yeah.

The, the third point that you mentioned is that leverage has a history of more people blowing up than benefiting from it. And here's what I wanna like challenge your thinking and challenge the audience. And stay with me here, okay? Just, just hear me out. I think in financial markets, contrary to popular opinion, we remember the bad days more than we remember the good ones. I mean, if you go on Twitter today, everybody is talking about crisis. Everybody is talking about a bubble. Everybody is talking about '08. Everybody is talking about 1999. But when you look at the fact, when you look at historical performance of the stock market, Sure, there has been 30% drawdown every 10 years or so, but it's every 10 years or so. It's 10% of the time. It's not 100% of the time. And I think here you get a lot of the bias that is a lot similar to nuclear technology, right? Where nuclear technology has massive potential to give us infinite abundance for our society. But then, you know, you have one or two horrible examples and that basically makes us move to fossil fuel and makes us move to something that is much more expensive, much more challenging, et cetera, et cetera. You look at airplanes, by the way, you look at airplanes when they first started out, they were not that safe. Safety is a function of reps. It's a function of reps. Like if you look at these financial markets and we will talk eventually about basic capital, but I think this is fascinating for whole other reasons. Safety is a function of FRIBs. When you look at the stock market, when it first came out in the 1800s in America, it used to be the volatility, realized volatility was much higher. You look at 1929, you look at the 1930s, you look at the '80s, you look at the '70s, '90s, early 2000s. And what happens is that with every crisis, a new regulation comes out, or with every crisis, we learn something different about how credit works and we learn something different about how financial markets work. I mean, let's actually put numbers on it. How long does it take for high yield spreads to normalize, for credit markets to basically go back to working functionally? In '08? No, I'll tell you, in '08, in '08, it took actually a couple years for spreads to normalize.

Yeah, I'd say like 24 to 36 months would be my guess.

Okay, well let's look at COVID. At COVID, which is—

Well, that was different 'cause then you had the bazooka. That was like in no time.

But that's exactly the point. The point is in '08, we learned that, hey, when there is a credit crunch, you launch a primary credit facility, you launch a secondary credit facility, you lower interest rates and you go out and you buy, you stabilize the bond market and you buy government bonds and you provide ample liquidity to the banking sector. And when we did that in '08, it took us a bit longer than we wanted to, right? Because it was the first time we're getting grips at it. But when '08 happened, when COVID happens, Within basically like a couple weeks, the market normalized. Now we ended up doing too much fiscal stimulus. We sent too many checks to too many people and they went out and they spent in a time when supply was constrained and that created inflation. Yeah, inflation and whatnot.

Yeah.

Right. But that was actually purely fiscal stimulus. That was like sending checks to people's doors.

I thought it was all the supply chain. I didn't think it was the checks, but I don't know, maybe I read it wrong.

It's the combination of—

I'm kidding. I'm kidding.

It's the combination of both, right? I mean, like in retrospect, it's the most obvious thing. You have constrained supply and you're giving more people, more ability to do more demand. I mean, what, what, what did you think was going to happen?

So, well, I was on team transitory and I was wrong. So, but yeah, I, but you look the size of the checks and then the continuation of 'em, that was a problem.

But that's not, and then you look similarly, by the way, you look at the history of leverage. Let's look at the mortgage. The mortgage was invented in 1932, FHA, The Federal Housing Administration, a New Deal, FDR launched the mortgage, 1930s. From the 1930s until— home ownership rate in the 1930s was in the low 20s. In 2008 or today, home ownership rate is 65%. So 65% of Americans own a home. Massive, by the way, one of the highest globally. And basically we had a 100-year run. Where we give everyday people leverage by a highly concentrated asset, a non-cash flowing asset, a non-diversified asset. And what we created 80 years later is a nation of owners. Now in the '80s, Bill Clinton came and Bill Clinton created DEI mortgages. I call them DEI mortgages where he was like, ah, the banks are not lending enough to the underserved communities. So he passed a bunch of like housing affordability acts in the '90s. Under Bill Clinton. And these acts were meant to help people who are underserved to access the mortgage market. It loosened lending standards because it was believed that the banking sector is being too stringent and too biased against certain borrowers, particularly lower income borrowers. And we loosened the lending standards and we went away from the standard 30-year mortgage into all types of like, you know, crazy structures. Yeah, exactly. And then we blew up. But let me ask you this question. Let me challenge you back.

I got my first house on one of those, one of those liar loans. So, so I don't think, for the record, I didn't create, it wasn't total fraud.

Yeah.

It wasn't, I don't, I don't think it was totally honest either. Just because, yeah. I remember somebody said to me, they were like, just fill in this section, I'll fill in the rest and then you'll have the loan. Yeah. And I was like, this doesn't feel right, but okay. It's work.

Yeah.

But lemme, lemme ask you, you know what? I had roommates. It actually worked out pretty well for me.

But, But let me ask you this question about '08. You know, a bunch of people lost their homes in '08. I don't wanna underplay '08. A lot of people lost their jobs in '08. It was very problematic what happened, right? It's very sad, very tragic, et cetera. But let me ask you this. If you were a policymaker and you fully knew that at some point a housing crisis would happen and a lot of people would lose their home, knowing what you know about the mortgage market, that we went from 20% home ownership to 65% home ownership. That now home equity or equity, yeah, home equity makes almost half of the average American's net worth. Most of people's wealth is tied up in their home because of the mortgage, because it enables them to present value their future rent payments and buy an asset instead of giving to the landlord. Fully knowing what happened, would you or would you not have given people the 30-year amortizing mortgage?

Yeah, I would.

Credit markets, initial fragility and financial instability is inherent part to financial markets. You cannot hide from it. You cannot hide from it. I mean, I, when I was in college, I was really influenced by this economist called Hyman Minsky. And the whole point about Hyman Minsky is that like financial crisis will keep happening again and again and again. And I really believe that the system overloads, and at some point it retracts. And the question that we should ask ourselves today as Americans is, would we rather keep 90% of the country locked out of this system that sometimes go up, sometimes goes down, or have them participate? If they don't participate at all, they will for sure get left behind. And that's what happened. 50% of Americans own no stocks. 40% of Americans are asset light. So 50% is assetless and 40% is asset light. The average investment balance is $27,000 and the top 10% virtually owns all the wealth. If you lock people out in the name of protectionism and in the name of like, this is risky, they will for sure not participate in the ups.

Yeah.

If you allow them in, they'll participate in the ups and the downs. And to me, I would rather have people participate in this system and lose money every now and then than in a condescending manner say, oh, this is too risky for you. You know, oh, this is not for you because it becomes a self-fulfilling prophecy and ends up creating the society we have today, massively inequitable. Not to mention that we're getting better and better at dealing with crisis. So long story short, You know, just to kind of keep the listener anchored here, you said leverage, you said fees, and you said SPACs. And I said, I don't believe in single name stocks. Fees will eventually come down because when they started, they started high for the index fund and leverage. We tend to remember the loss more than the win. That's like a classic human, it's called prospect theory. Losing money hurts more than winning money. So we tend to be more traumatized by events like '08 and 1929 than a lot of people think. I think everybody thinks the opposite. Everybody thinks like financial markets get exuberant and they have short memory. I actually disagree. '08 was almost 20 years ago and we still talk about it and we still put Big Short memes on Twitter every time we see something. So I would argue, like, I don't know if I would argue we have a short-term memory. I'm not entirely sure I agree with that.

I'll tell you two things. One, with respect to single stock names, I, I, I do believe in it, but I, but I don't know how many people are good at it. But if we ever go through another '08 and there is ever another consumer products company like Apple that has lines out the door despite what's going on, buy the shit out of that stock. That I know. That, that one I do believe in.

Did you buy it?

And, and look, I— you're, you're obviously correct that, um, everyone should incentivize participation in the system. I think that what you as a company are fighting against from a narrative perspective is why, why should it be in a levered product and not just the S&P, right? Like, we should give people— we should just drive people to indexing And the S&P is the easiest thing to tell people to own, especially since it's been on this massive run that's kicked everybody's butt for, you know, ever. So that's where I think that the disagreement comes from.

To be clear, our customers invest in index funds that are diversified bonds and the S&P or QQQ. So I actually push people to invest in the S&P 500. What I am doing is I'm giving them long-term duration financing to buy the S&P and bond portfolios. So I'm not selling them a levered ETF, and we'll talk about that in a second. So it's not like I created a new fund and I'm asking people to buy the ETF. No, no, no. I give you 10, 15, and soon enough will be 20 or 30-year duration financing at 6% non-recourse to buy the S&P and diversified bond portfolios. So it's not like I'm asking you to invest in anything new. I'm not asking you to invest in my fund. I'm not asking you to invest in my ETF. I'm not asking you to invest in my SPAC. What I'm telling you is you can go take 5-to-1 leverage to buy a house from a bank, or you can come to Basic Capital and get 5-to-1 leverage to buy the S&P 500 and a diversified bond fund. But going back to, I, you know, on this point of like, you want people to participate. Why is leverage important, Abdul? Like why give it, like why care about leverage? Why is the leverage such a, why are you so sticky about that? Why not just buy the index? Well, that's how people build wealth today is via this mechanism called saving. Okay? How does saving work? Bill makes $100K a year. He can afford to save if he lives in New York or in a metropolitan place, 2, 3% of his income, say 2% after the taxes, by the way, $100K, 50% is going to the government. So you're working half a year for Uncle Sam. So net-net, you're making $60K after taxes. The median cost of living in America, it depends on the city, but like the median cost of living in America is somewhere in the 80s, $80K. In places like New York, it's $100K. So you are actually in the hole about $10K after taxes. And that makes sense because 60% of credit card holders are revolvers. They're not transactors. So when you have a credit card, 40% is transactor, This is people like you and I, I assume, people who pay their credit cards on time. 60% are actually revolvers. So these are 60% who are relying on the credit.

Yeah. They have some sort of evergreen draw.

Yeah, exactly. And 95% of Black Friday purchases were done with buy now, pay later. So first of all, like the way to build wealth in America today is via this mechanism called saving. And most people are locked out of it because they make too little compared to the cost of living. That's the Michael Green a couple weeks ago. He said that. Yeah, I saw that article.

That was an interesting article.

The median poverty line is $140K and everybody lost their mind. But even if that's not true, like let's say actually you can, even if that's not true.

Yeah, well it doesn't have to be precisely true. It's the idea that he's conveying.

Exactly. But even if that's not true, let's talk about how saving works and why saving is the most anti-American idea. And saving is the most anti-democratic idea. And I know I'm gonna get a lot of hate for this on Twitter 'cause I know Dave Ramsey and all these guys out there are telling you save, save, save, get your credit card points. We built a nation of scammers basically. Like we're telling people to maximize their credit card points and to do backdoor Roth and do all this like tax engineering instead of just simply like giving them a more effective tool to build wealth. Like we're literally building a nation of some sort of tax hackers. And wealth is not something to be hacked. Wealth is not a hack. Wealth is about being able to participate in the market. And unfortunately, what we give people is a bunch of hacks. But why is it a hack? There is this guy called Thomas Piketty from Paris École d'Économie, Paris School of Economics, 33 years old, published a book called Capital in the 21st Century. He's gonna get a Nobel Prize for it one day. 700-page book. It was the most iconic book of 2013, 2014, I believe. And his whole thesis is R is larger than G, which is stocks compound at 8%, wages grow at 2%, which means mechanically stocks get more expensive than your wages. Just think about that. Long-term average rate of return of stocks is 8%. Long-term wage growth is 2%. Facts. This is not me. This is the Federal Reserve. What that means mechanically, mechanically, you cannot build your way to wealth. Like quite literally stocks are getting richer, more expensive in nominal terms, and your savings are worth— every year the stock market gets richer by 8%, but your wage gets richer by 2%. Let me give you an example. Let's say you make $100K a year and you save 1% of your income a year. That means it'll take you 100 years to capitalize your annual income.

Yeah. Okay.

100 years, you're cap rate, assuming no compounding, just for, to make the math simple. If you make $400K a year, like lawyers in New York do, like fi— like Wall Street folks do, like the guys, like the software engineers on Twitter tell you, These guys can save 50% of their income 'cause they make $400K a year, which means it takes them only 2 years to capitalize their annual income to get to $400K in savings. In other words, the richer you are, the easier for you to save a higher rate.

Yeah.

That translates into a higher dollar value. The poorer you are, The lower the percentage of a lower number. That's why saving is a scam. It quite literally doesn't work. The lower income you are, the less effective a tool it is. The higher income you are, the more effective a tool it is. Saving is not a middle-class tool. It's a rich people tool. And That's why people feel gaslit in America. It's because they go on TV and people tell them the reason why you are poor and the reason why you're poor and broke is 'cause you do not save enough.

No, no, no.

The lower income you are, the less effective saving is as a wealth-building mechanism.

Yeah. I don't know that I like how you're framing this, but I think where we could totally agree is that the lower income you are—

Oh, why do you not like it? 'Cause it's uncomfortable.

Well, I don't know. I don't know. I don't know.

I mean, we're gonna get—

It's the uncomfortable truth that nobody wants to acknowledge. Well, yes, I think the uncomfortable truth is not that saving is a scam per se. I mean, we're going to argue about semantics here. I think the uncomfortable truth is if you make $100,000, it is so hard to save a sufficient amount of money.

And even if you save, it'll take you so long.

Yeah. Well, like how much can you possibly save?

Right. I mean, even if you do it, it'll take you a longer time to get to like, one year worth of income. That's the—

Yeah, no doubt. No doubt. But I think that's a function of it's hard to save a big percentage.

Yeah. Yeah.

And I mean, it's almost like you talked about Vanguard, the scale that, you know, you have to have an income that enables an asset, like an escape velocity that you can save a sufficient amount to really start to build.

Exactly. So now when we have established that saving is an imperfect tool, We have established that for most.

For most.

For most. For most. Okay. I'm gonna slowly, slowly— I like you. I'm gonna slowly—

For the record, I like you. I just, I just wanna make sure we're, we're agreeing to what we're agreeing to.

I'm gonna wheel you in. I'm gonna wheel you in slowly but surely. Slowly but surely. All right.

Fair enough.

Now when we have established that saving is an ineffective wealth building tool for most.

Okay. I, I, we can agree on that. I like that.

The question is how do, how, how else Can people build wealth? And today there is no alternative. There is the 401(k), which is basically like saving-based mechanism that you save up as—

Well, they could go out and buy a house they can't afford.

How do you, how do you buy a house? How do you buy a house?

Well, you, you gotta have a 20% down payment and house prices are through the roof. And then you gotta have access to a mortgage that you can't get. But other than that, it's easy.

But, but you get leveraged.

Yeah, no doubt. No doubt.

You get leverage. So now let's play financial advisor for a second. Disclaimer, nothing I say on this podcast is financial advice. Do not think this is financial advice. Please do your own due diligence. But Bill, let's play financial advisor for a second. Imagine you go to your financial advisor and you say, I want to take my, let's say you saved up $200K, which is a lot of money to save. As I said, the median American has $27,000 in their portfolio. Let's say you find a way to get to $200K. And you go to your financial advisor and you say, I want to take 5-to-1 leverage to buy a call option on my zip code, on basically the school district in my neighborhood, on the local labor market. 'Cause that's what a house is. You are taking 5-to-1 leverage to make this highly concentrated bet on your local labor market. And if Ford moves the factory out of Detroit to China, that becomes called flight. Like what? It's like, it's like literally, it's got a lot of negative carry. Well, one, negative carry. Two, property taxes. Three, you can be doing everything right and one day you wake up and the pipe breaks. And now you are $30K in the hole.

Yeah. Well, this, I mean, this is what I mean. The cost of home ownership is quite high.

You are literally, I mean, not to mention property taxes, not to mention like, so what we have taught people is we're giving them 5-to-1 leverage to go out and make a highly concentrated bet on their local labor market. And if your labor market happened to be in a highly volatile place like Miami, where some VC tweets, they establish a bubble, then everybody moves back to SF 'cause SF now is the hot new thing. And now Miami is left in the gutter. The variance between how different markets have performed in real estate is massive. Real estate has on average grown at 2% in America over the past 100 years at 2%, you know, but you're levered up 5 times. So really your rate, your effective return is like 10% on your housing, but that's actually massively varied. That's actually mostly driven by Los Angeles, San Francisco, New York, Nashville, Austin. If you lived in like a normal city like Minneapolis, right? Like that's a big variance. So let's go back to what is Basic Capital trying to do? Why am I talking about leverage? I am a younger guy, if people cannot tell. Not that young, by the way, I'm 30 years old. I wanted to build wealth, but I did not have enough money for a down payment to buy a house. And I also did not wanna deal with the headache of buying a house. And I also did not want to be stuck in one location. I wanted to have more money to invest, but I wanted to invest in something more diversified. Like the S&P 500. And when I went to the bank, the bank said, you can borrow to buy a house at 6%, 7% today, but let's say at 7%. You can borrow money to go to community college at 5%, called student loan. You can borrow money to buy a car, which is a depreciating asset that loses 30% of its value. The moment you drive it outside the house for 8%. And I said, what about this? Give me that rate, but I do not want to buy a depreciating asset like a car or a concentrated asset like a house or an intangible asset like a college degree. I want to buy the S&P 500. Give me a 30-year non-mark-to-market, non-marginable, Financing at a low rate, and they didn't wanna give it to me. And that's exactly what I wanted to build. I wanted to combine these two ideas, the 30-year amortizing mortgage with diversified index investing. What is Basic Capital? Basic Capital enables you to take what we call the retirement mortgage, where you come to us, you put 20% down, let's say $20,000. We give you 80%. We give you $80,000. So now your investing power went from 20 to 100. This 100 is invested in a diversified portfolio of stocks and bonds, and it has a 10-year term with no mark-to-market. So if the market drops 50%, nobody is going to call your money. That's the crazy idea that we launched, and that is what drove FinTwitter crazy. And, but really all we did is we combined two very tried and true ideas, diversified investing and non-mark-to-market leverage duration financing into one product. And people who opened up and read, they became fascinated by it and they became big fans. And people who said this is just a margin loan, They got confused.

Yeah. I hope you're enjoying the conversation. I am interrupting the program to remind you that this show is brought to you by Fiscal.ai as well as Trata. You can go to fiscal.ai/brew for a 15% off all paid plans offering. Fiscal.ai, super clean data, super good UI and UX. If you want to be the best analyst you can be, you need Fiscal AI. If you don't like yourself and you don't care about your profession, don't sign up. That's fine. But if you care about yourself and you love yourself, sign up for fiscal.ai/brew. Get yourself a trial and see what everyone is raving about. And by everyone, I mean me. Secondly, Trata. T-R-A-T-A. Try trata.com/brew. Check it out. Analyst to analyst transcripts. These people have done the work. You're not going to read through a bunch of fluff and a bunch of narrative and a bunch of background information. You're going to get the analyst to analyst conversations labeled bull, bull, bull, bear, bear, bear, bull, skeptic, yada, yada. End of the day, this is high value for time. That's what they're going for. They're trying to build the most useful transcript library that you can find. So try tratta.com/brew, check it out. So why is it not a margin loan? How are you able to offer this kind of financing to the average person? Well, it's, uh, I mean, I know it's not callable. I get that. But like how, how did this structure come about?

It's more expensive. It's more expensive. So if you go to Robinhood right now, Robinhood will give you 2:1 leverage at 5%. By the way, even lower. If you, if you, if you like, if you have $10 million, I think Robinhood, we can pull it up. Robinhood margin rates is like 4% today.

Yeah.

But here is the catch though.

Well, you can get called out at any time.

Exactly. You get called out at any time. So margin today, Robinhood margin rate is 4.2% if you have a lot of money.

Yeah. Well, some would argue they don't really care about their customers, but the, that some would be me.

But if you go to, if you go, if you go to your broker, you can borrow at 4%, which is basically prime. You can borrow at prime, but the catch is if the asset drops 10%, you get auto-liquidated. This is a horrible idea for 99.9% of people, by the way. Like hedge funds blow up that way, like sophisticated investors blow up that way. But let's look at what private equity guys do, which, who are very different from hedge funds. Private equity guys, when they buy a company, they do not finance it with margin. They don't go to their prime broker and borrow at 5%. Or 4%, they go to the high yield bond market and they issue a 7-year bond or a 10-year bond with no maintenance covenants, no mark-to-market to take the company private. It's called leveraged buyout. They're funding the purchase with duration financing, long-term financing. And the reason what we do is we provide everyday people long-term duration financing. That is non-marginable to buy diversified assets. What's the problem? The fee. We charge 6%. Robinhood charges 4%. So people are—

Your 6% is not fixed though, right? It's, it's basically a spread trade on 90% of the portfolio.

Yeah.

As I understand it. Right.

Yeah. We charge S+200 on the financing cost. So it's SOFR+200.

Yeah. So when people see the 6%, 'cause, 'cause this I've seen in the comments, people like 6%. What happens if bond yields go down? What needs to happen? And this is not financial advice, but I would think about it this way, is if you're borrowing at floating, you should be investing at floating. Yeah, right. Otherwise the spread has— can create problems for you.

Yeah. And our customers, 90% of the bond portfolio that our customers are allowed to invest in, and they choose to, is actually floating rate bonds. So you're investing at S+500 and you are paying S+200. You're making—

So what are we talking? We're talking like bank loans and like private equity or private credit?

Yeah, double B credit, double B credit. I mean, let's call a spade a spade, right? Double B, you know, you're earning S&P 500. That's not nothing. That's very juicy. So it's double B credit, but double B, I mean, there's a lot of work has been done on double B credit. You look at default rates in 2008, BB credit reach the 12%. So if you're earning S+500 and 12% of your portfolio went delinquent, they stopped paying, you would be earning S+400, which is still much higher than your S+200 cost of capital. So what do you need to go delinquent on your payment? Because this is self-funding. You're not paying the mortgage cost out of your own pocket. You're paying it from the bond yield on your portfolio. Basically, interest you're earning needs to go from S+500 to S+200, which means basically 60% of double-B credit needs to go bankrupt or delinquent. Is it possible?

Sure.

But that would be like an event that is like 3 or 4 times worse than '08. It's entirely conceivable to have such a massive credit event in the economy. And the only way this would work is basically if everybody shuts down their business And they do not sell anything anymore. And that's called COVID. And we saw what happened during COVID The Fed went out and they provided grace. They provided primary credit facilities, secondary credit facilities. They stabilized the market. Lenders extended and amended. We're becoming better at dealing with these small bursts of crises. But yes, if 60% of double B companies go bankrupt, That would be a problem for our customers.

I mean, in a weird way, it seems like the way that, from a timing perspective, which is always impossible, but it seems to me like the way that this could not work, and it would not be unique to you, but like as if a customer committed to you when the spreads were super, super tight right before a credit event happened, that could be bad.

So how do you do that? How do you solve this problem? There's tried and true principles to solve this problem. It's two things. One, long time, long time hold. Just own it through the down and the up because you eventually, if you, you'll come back up. So just have long time horizon, non-marginable financing, which is what we do. And two, dollar cost average. So make equal weight contribution. Over a long period of time. I'm not saying a big credit event is not going to happen. I'm not saying it's impossible to lose money. We could lose money, but a really bad event needs to happen and you need to sell at that worst possible time for you to actually crystallize that loss.

Yeah. Well, sometimes it's hard for people to dollar cost average through those really bad events.

So that's why we are a 401(k) company. So we are actually, we have two product lines. We have an IRA product line that's direct to consumer. And we have a 401(k) business where we manage 401(k)s. We integrate with the payroll provider. Customers put 80% of their money into a target debt fund and 20, 10, 5% of their money into our LLC. So that brings me to the third best invention in the 20th century. So we said there is three great inventions in the 20th century, the mortgage, which we talked about. The index fund, which we talked about, and now we talk about non-recourse financing, limited liability. When our customers invest, what we do is we open a company, we open an LLC in Delaware called Basic Capital for Bill. Bill puts $200 of his paycheck in it. We give him $800, 10-year non-marginable, non-recourse financing. The borrower is not Bill. Yeah, it's the LLC.

Yeah.

So now you have $1,000 in the LLC and every time you make a 401k contribution, you put $200, we give you $800. So your dollar cost averaging your contribution, your dollar cost averaging your leverage over a long, and you're holding it over a long period of time. So we are a 401k platform. Now if you say, I want to put all my money in a target debt fund and I don't want any leverage, You can't do that. We are like just like Vanguard or Fidelity in that sense. But if you want to put some of your money into this leveraged LLC that we create for you and get 6% duration financing on it and dollar cost average that, you can. Imagine basically like, here is how to, this is gonna bend your mind. Imagine if you could buy a $1,000 home putting $200 down payment over a 30-year period. So like imagine your dollar cost averaging your way into a mortgage for 30 years. Yeah, it's the same concept, but you're not buying one house, you're buying multiple.

I guess what's, what I don't understand is why am I borrowing at a lower cost than like a private credit company? I guess 'cause they have more leverage maybe.

Yeah.

Like, like why is my risk profile lower than theirs when they're like a legitimate company and I'm me?

Yeah. Well, you're not borrowing, so I'm not underwriting. Yeah.

You're borrowing is the answer.

The LLC.

Well, the LLC. Yes.

And the LLC is backed by 20% equity, which is your equity contribution, right? So there is a first loss tranche. You're not pari passu to the loan. The loan is senior to you or the financing is senior to you. So you, you are, you are the first loss tranche. So there is some equity cushion there. And the difference is the company you're lending money to is concentrated portfolio. Is diversified. When you lend money to one BB company, you charge them S+500 because this is one BB, one small business or one medium-size, middle market PE firm or middle market thing. So there is some concentrated risk, but a diversified portfolio, the expected losses on a diversified portfolio of a BB credit is much lower. You see, it's, it's diversification.

Yeah. As long as you don't have like too much sector exposure or whatever in the, in the offering.

Exactly. Exactly right. So it's diversification, which is the only free lunch, right?

Yeah.

Like basically that's what you do is you take a, a bundled pool of assets that are high yield or high risk and you bundle them together and the weighted risk of the portfolio is lower than the risk of each one individually. Now, of course, every now and then there is a big correlated event where they, a bunch of them go bankrupt at the same time. That's what happened in '08. 12% of BB companies went bankrupt. But then you size your bets appropriately. You do not put too much money into this levered product. You put only 10% of your money in it. You finance it with long-term leverage, not short-term leverage like a margin loan. And you know, you make sure that there is a meaningful spread between your cost of financing, which is S+200. And the interest you're receiving, which is S&P 500, so you can withstand material portfolio losses. We put some thought into this. I mean, I hope—

No, I know you did.

We're like 50 minutes into the podcast and I hope I've demonstrated to the listener that we're not like some sort of YOLO. Oh yeah, like YOLO. Like, you know, like what I'm saying is saving, it's really hard to build wealth with saving alone because if I was wrong, If actually it's possible to build wealth with saving, we would not have the wealth inequality we have today, right? Like we would not have the issues that we have today. Like we would not have 50% of the market people locked out of the stock market. You wouldn't have 90% of Americans own very little. So saving is not effective way. Let's look at what has been effective. The mortgage, the mortgage brought home ownership from 20% to 60%. 50% of the middle class wealth is home equity. Like why not enable people to take simple long-term duration financing to buy diversified portfolio of stocks and bonds? But we're okay giving them buy now, pay later. We're okay giving them a credit card at 24% to buy whatever they want. We are okay giving them margin loans with mark to market. Like the hypocrisy here is hilarious. You know what I mean? It's like, oh, like you know, like Anyway.

Yeah, well, the, the, I mean, the argument is going to be against your product is gonna be you're releasing a double B, a levered double B product at the wrong time. And don't you know that private credit's gonna blow up? Don't you know that it's 2008 all over again?

I don't actually, I actually don't.

I actually, I know. Well, that's, that's what I'm just saying. That's what the doomers are gonna say, right?

I actually, I actually don't know if I'm smart enough to do that. And, and I also think, I mean, there is this great paper I Somebody tweeted yesterday on Twitter, they were saying like, I think it's a Vanguard paper where it's like buying at the highs has the exact same returns as buying at the lows. If you have a long time horizon, like basically it doesn't matter if you buy at the highs, 'cause if you have long enough time horizon, like your entry price literally doesn't matter. If you have like 15, 20, 30-year horizon, like doesn't matter. And I think A lot of people lose more money in trying to time the highs and timing the lows than just if they were to dollar cost average and be patient for 20 years. I am not smart enough to know where we are in the cycle. I started my career on the high yield distressed credit desk at Goldman Sachs, and I used to trade high yield bonds and distressed credit and special situations. I'll tell you this, I've been now in my career in finance approximately 10 years. Since I started, there has been some sort of short going on. Michael Burry has protected 50 of the last 2 bubbles.

Yeah.

It's very easy to be a doomer. It's very easy to say like, oh, there's a bubble coming and eventually you'll be right. But by the way, the longer the time horizon between you predicted the bubble and when the bubble happened, the less impressive the insight is. If you tell me, oh, there is a bubble and then the bubble happens after 10 years, you can't say, oh, I told you so. Yeah. Obviously, eventually there will be a Qada event. Obviously, eventually, like somebody is going to be like, oh, where is Abdul Al-Asaad? Bankruptcies are high. Like, I agree with that. Eventually that will exist. But what I'm trying to say is it's really difficult to decide. To figure out when that time is. And I don't think sentiment is a good measure to it. Just because people are tweeting about distress in private credit, it does not necessarily mean that distress is actually material. I would argue that the fact that people are tweeting about it is actually positive because it means people are more diligent of it.

Yeah, they're thinking about it.

By definition, the way you get a bubble is if you're not thinking about it, right?

That does seem to be correct. I, I, the history would be, would agree with you. The material I saw, and I don't know, it's got privileged and confidential all over it, so I'm not going to cite too much. Directionally speaking, you're what, like between 30% and 10% S&P, or do you want to narrow that range a little bit, or does that work? My goal Because most of it's private credit, correct?

Yeah. Yeah.

And now within— sorry, I don't mean— I just want to be precise here. Within private credit, do you also have like tradable double B loans or is it all sort of private credit?

Yeah, it's, it's actually not private credit. It's actually what we invest in is interval funds, private funds that invest in a mix of public credit and private credit.

Okay.

Asset-backed securities and corporate.

Are you comfortable divulging who runs those?

Yeah. I mean, uh, the top 5 private credit managers.

Okay.

And I'm, and I'm saying like, like, you know, we don't have 2 hours.

Yeah. KKR, Blackstone, Ares, whatever.

Yeah.

Pick your 5.

Yeah. Like the best of the best.

Yeah.

You know, you can say, you can be skeptical of those, you can blah, blah, blah. But they are the best at what they do, right? So I'm not going to like some sort of like niche manager lending on some sort of like specialty real estate thing, right? Like this is the best of the best. Here is my— today our portfolio, you can customize and choose the private credit funds that you like or the private funds that you like. You can choose SPY or QQQ or MSCI. That's like what we provide within equities, only these 3 things. And the financing is 10-year term. My dream Is when I come back to the podcast again in a few years, I'll be able to tell you that today our financing is actually 30-year instead of 10.

How could you get that done?

Well, that's on me. Let me worry about that. And two, you can go 100% SPY. 100% SPY. 100% SPY.

Well, that's the thing I kind of like about the bond at allocation is the ability for the cash flows to sort of match up, fund it and pay. Yeah. Like it is tough to ask people to, to actually, I mean, I don't know, but 100% SPY, they gotta come outta pocket to, to cover the borrow, right?

Different people will want different things, right? So like somebody will say, I actually can spare the interest payment on this. and I'm happy to pay for it. And somebody might say, actually, I would, I can spare $200 a month to save and I want to get leverage on my savings and dollar cost my average way in or something, you know what I mean? Yeah. So somebody might be constructive on equities and they want to go along equities. Somebody might be bearish on equities and they wanna be more senior in the cap stack. Somebody might hate credit and And they just want to own equity. They hate private credit because they read an article online, 'cause Michael Green tweeted about it or something. I don't know. You know, so, so the goal is to, just like you can take a mortgage to buy a ski chalet house, right? And you can pick your own zip code. You're gonna be able to take a mortgage and pick your own financial asset within guardrails. You're not gonna be able to go like, I want You know, Bitcoin. But the idea is, can we give people duration financing to buy financial assets instead of margin financing? That's the idea. Yeah. Very simple. Like, can we give people duration financing to buy assets instead of margin financing? And there will be different rates for different asset classes, right? There'll be like, yeah. And you, you're gonna be able to customize, you're gonna be able to play around with it. And, and that's really the, the vision here. And I'm really excited about that future because I think more and more people want to participate in capitalism, but saving is not really giving them the participation they need to be an effective shareholder of our great country.

Hmm. Interesting. I do know that you did a decent amount of backtesting. What is a scenario that if you were telling people, like sort of prepare yourself for mentally? Obviously nothing's financial advice and you gotta do your own work, but like when you were going through the cohort level data, I mean, what was a setup for the worst return?

Yeah, liquidating, having short time horizon. Please, please, please, please, please, please do not even consider Basic Capital if you have anything less than 10, 15 times price average. This product only works if you have a long-term bet. And if you, to a certain degree, I mean, even if you do not dollar cost average, but if you dollar cost average, it even becomes better. But even if you do not dollar cost average, you need to have 10-year plus horizon. And by the way, this is not like an easy sell, like, right? To go out to customers and be like, I want, who wants to invest for 10 years? It turns out actually the entire 401(k) space, Turns out anyone with a longer time horizon. Yeah, not the meme stocks guys. And the meme stock guys are making fun of us on Twitter, but that's fine. You can go buy meme stocks. We're going to go give duration financing to people who have duration. Listen, asset prices are said to exhibit a random walk. They call it random walk over a short period of time, but it has a positive drift. And basically what I'm enabling people is to lever up that drift. If that drift ceased to exist, it's a problem. By the way, that drift ceased to exist in Japan. They stagnated.

Yeah.

But that's Japan. That's not America. And I don't know, there's no logical, I mean, there is a lot of logical arguments I can enter here, but I just believe in America. Warren Buffett does. We're not Japan, we're not Europe, we're the United States of America. We're the epicenter of innovation globally. Every great company wants to go public in our stock market. Every great global company wants to go public in our market. Every great company of the past 100 years came out of our market with the US dollar. And I really, yes, if you do basic capital in Japan, you could lose money. Because the market was actually flat for like 30 years. If you do basic capital and like assuming you are 100% equities, if you have bonds and you did the spread thing that we talked about, you actually would've been fine because you are just levering up the spread between the BB credit and what you are borrowing at. Let's say you are 100% equities in Europe or in Japan, you wouldn't have done as well. You would've just only clipped the spread. But the way people get hurt here is if they have like 2, 3-year horizon and they're trying to like get rich quick. And this is like, it could work for you, but you could get hurt. It's kind of like house flipping, you know what I mean? Yeah. Like if you flip a house, yeah, you could get lucky. But like if you stay in your house for 30 years, you'll probably make a decent return on it.

Yeah.

Nothing crazy, but a decent return on it.

Yeah, and going back to the, the information that I perused, I mean, almost everything in the models, unless I'm reading it wrong, has a substantial bond allocation. And then it looks to me like the return clusters are higher, but the volatility you've got to be able to live with, which would jive with having leverage generally and having duration.

Yeah, you need to be okay with like the market being down 30% and you are on paper down, like basically your equity is wiped out.

Yeah.

But like you need to be able to be like, I'm just not gonna do it. Like I'm not gonna sell. Why would you? 'Cause like now you have a call option, right?

Yeah.

Like if you actually think about it, it's kind of like what you, what you have here is like if the market goes down 30%, If you do not get forced liquidated, you have this like massive call option. You have $70K worth of call option on, on the upside.

Yeah.

So why would you, why would you sell unless like if it's like irrational loss aversion is the, is the real answer, right?

Yeah. And panic.

But yeah, exactly.

You don't, you don't know how you're gonna react until you're in that situation would be the devil's advocate side.

Exactly. And, and, and I think you can educate people around that.

Yeah. How do you, how do you view your role in that, in the education process from that perspective? 'Cause I would think that would be a, a risk to the business is everything's going pretty well and then we do have one of those events and then your clients kind of panic.

I mean, I, I go back to where we started this whole thing about why there is no innovation in financial markets. Because it's such an important model. Business dealing with people's hard, like hard-earned dollars. And I go back to Jack Bogle and Jack Bogle really had to be a prophet. He had to like walk around basically and like advocate for this idea of the index fund for like 30 years before it became really big. And I, I see my role the same way. And my role is to educate people that the only way to get rich, the only way to build wealth is really to help long time horizon and to be part of the system. And if you use credit, credit is like a knife. Credit is like any tool. It's a general purpose technology. GPT, general purpose technology. That's what credit is. You can use it for a good reason, like investing, or you can use it for a bad reason, like consuming. You're trying to do like basic capital. Is give you credit, which is not inherently bad. Leverage is not inherently bad. It's why you use the leverage. Do you use it to consume and party and buy stuff you do not need, or do you use it to invest? We're trying to give people credit to invest, and our role is to educate them that credit can be a powerful tool if it's used in the right way, and you should not use it for the wrong thing, like buying depreciating assets. Or like consuming. And when you use it, when you use credit to invest, you should have a really long time horizon. And I plan to spend the rest of my life educating people about this. And I hope one day we can create a legacy where the vast majority of Americans have a material endowment in the stock market, and it's called universal Basic capital, not universal basic income where you're relying on Sam Altman to write you a check or some freak to write you a check. You're relying not on the government, on your own endowment in the market.

I like how you called him a freak. Not him, a freak. He freaks me out for the record. I think he is a freak.

All these billionaires, man.

Anyway, I'm not, first of all, that was a very emotional segment. I found myself very emotionally tied to what you were saying. I didn't mean to break it up with a joke, but when you said some freak, Some of these guys that are making decisions are freaks. So I like your thought. You let the universal basic capital provide the universal basic income.

Exactly, exactly right. Everybody—

that's actually wealth.

That's actually wealth. You're not waiting on the government, you're not waiting on anybody to give you a handout. You are like, hey dude, I got my own portfolio. It spits out 10% every year and I live on it and I don't need your basic income. You can keep it up. You can have it, you can keep it. Like I don't need your basic income. I don't need your handout. I don't need your Social Security. I have my own endowment. But the problem is it's really tough to build endowment.

Yeah, it takes a lifetime.

Some leverage. If you don't have some, like ironically, like you, it's really hard to build an endowment using saving alone. It's really tough to buy a house using saving alone. Let me tell you that.

Well, dude, how are— I mean, how are most hedge fund managers paid? One would argue it's leverage. How are most, uh, GPs paid? It's leverage. I mean, it's all other people's money at the end of the day in some way, shape, or form. It's just, can you structure the leverage in a way that's non-recourse and not going to blow you up at the wrong time?

Yeah, and I think we created crazier things. Like, we made AI, and you're telling me there is no way to structure leverage in a non-recourse? Like, way that doesn't blow you up. Like, I'm sorry, but we created student loans, car loans, mortgage-backed securities, buy now pay later. Like the human ingenuity is massive. We created AI, you have airplanes that fly. You, we have, you're telling me we can't structure a simple way for people to buy and hold the market? I find it difficult to believe where there is a will, there is a way. You just have to go out there, put yourself out there, be willing to get the criticism. Be willing to get feedback, keep iterating, keep pushing, and eventually you'll make it. And instead of giving people prediction markets to gamble at the Grammys, we want to give them credit to invest.

Oh dude, this, that, what you just touched on that as a father of 3 boys, that scares the shit outta me. Like we're watching football games now and they're asking about what the lines are because you like, you can't avoid it at this point.

Let me ask a question. Would you rather your son come to you and say, hey dad, I have a grant. On a prediction market or, hey dad, I put a grand down in an LLC, I'm borrowed for, and the LLC borrowed $4,000 and I have $5,000 portfolio.

100% the latter.

Sure. If there is big, if there is a big bad event, I guess they could lose the grant, but like on a prediction money.

Well, I can't, I can't cite the study that I'm thinking of cuz I don't wanna cite something wrong, but I'm almost certain that I just, I had a guess not too, too far ago that proved that BB credit— and anyone in the credit markets can probably know this— but BB is where you want to be through the curve, right? Or, and when I say curve, I mean like a risk premium time series, right? Yeah.

Yeah.

So it makes sense, especially if like the thing that got me about the debate that was going on on Twitter with some of the replies and then especially with Hunter. Like, I— Hunter's a pretty thoughtful guy about this stuff. So when I saw he was involved, I was like, okay, there's probably more there than I'm appreciating. I think people mischaracterize your product as more equity than exists. What— the upfront fee kind of pissed some people off. You want to address that? What's the deal with that?

Yeah, we charge two fees. We charge financing fee, which is 200 basis points of our software. We charge a 50 basis point servicing fee, like a mortgage servicer. So that's like, that's designed—

You can't get that anywhere though. You can't have assets anywhere and not have that.

But the reason, the reason why people went crazy is we used to charge $25 a month subscription fee, which is $300 a year.

Yeah, yeah, yeah, yeah, yeah.

But the reason why we did that is we did not want somebody to put $100 in And that's it.

Interesting.

So we created the fee structure in a way to de-incentivize anybody from putting less than $5K, basically. You see what I'm saying? Because if you put $100 and you pay $300 subscription fee, you're paying 300% of your principal as a fee. Yeah. Now we, we thought like Fin Twitter was able to do the math and basically say, okay, this only makes sense if you put at least 10 grand. 'Cause if you put less than $10,000, the subscription fee is too high. But people were like, they did not say, hey, like this doesn't make sense unless you put $10,000. People said, if you put $100 and you're paying $300 in fees, this is disgusting.

Yeah.

And I'm like, no, it's like, it's supposed to create a hurdle. And we got rid of the subscription fees since then 'cause like it created such a big backlash. Not because of the backlash, because like we just, okay.

No, well, I mean, look, if it's a messaging issue, you might as well address it, right?

Yeah.

Yeah.

Huh.

Does, uh, this is gonna sound really dumb to those that are more informed than me, but I would imagine being in an IRA is, uh, a tax-advantaged way to do this, right?

Tax-advantaged.

And any, uh, potential issues with, uh, what am I, unrelated business income? We have. Why is that?

Because the financing is not a loan, the financing is preferred equity. We're co-investors with you, so we're not actually giving you a loan. It's not even a loan. That's why we cannot call it back because it's not even a loan. It's like, imagine if there is like a GP-LP and the LP gives you 80% of the capital and they get 6% and then you get the rest. That's basically what's going on here, right? Like we're co-investing with you. Where we are preferred equity in the LLC. We're not common equity, we're not a loan, we're not credit, we're co-investors with you. So that everything is structured as a co-investment essentially. We're not even lending you money, we're co-investing with you. We just are structurally senior and we're entitled to 6% preferred dividend. By the way, banks do this all the time. Instead of issuing debt, they issue something called cocos, contingent convertibles, or they issue something called preferred equities to fund their, to fund their operations. 'Cause banks are not allowed to take on debt. They're not allowed to be that levered 'cause they're already leveraged from deposits. Listen, like we are backed by the best investors in the space. You know, we are the best lawyers in the country working, you know, our legal bills is in the millions of dollars a year. We have literally the best lawyers working with us from the Department of Lawyers, former SEC guys, former DOL guys. We're serious about this. Like the way I get paid is in 10 years from now when Basic Capital is a multi-billion dollar company, as big as Kalshi, as big as Polymarket, as big as Affirm, as big as Robinhood. Robinhood's an $80 billion market cap business. So the way I get paid is when this becomes really massive. I'm not trying to pull like a quick one on you here, you know what I mean? Like this is a, this is like we are classic VC, long-term oriented. We're doing this for the whole, for the long, we're doing this to change the way people invest. We're not doing this to get a couple million dollars in AM.

Yeah. So in 10 years when that comes to fruition, do some of the co-investments that you have basically that like create an exit event for you? Is that, is that how the incentives are aligned?

Yeah, but we make more on the, on the regular fee, right? So like we, we're making more money on the ongoing 50 basis point fee. We lose money on the lending. So right now our cost of funding is higher than what we give to you.

Interesting. Why?

Yeah, we subscale. The bigger you become, the easier it is to raise more money.

Yeah, so your borrowing costs should come down.

Exactly, exactly. Not yet.

Interesting.

Well, because the way it works on Wall Street is if you have a billion-dollar problem, everybody wants to help you. If you have a $100 million problem, it's too small to care.

Yeah, that's right. Yeah. That's your problem, not mine. Yeah.

You know what I mean? So it's, it's one of those things where like, you have to go out, educate the credit market. Just like Henry Kravis, when he created leveraged buyouts in the '80s, he had to go out and work with Michael Milken to educate the market on high-yield bonds. And today, high-yield bonds are like this big massive space. Just like when a firm, Max Levchin created a firm in America, he had to go on the road and teach people about what buy now, let later is and teach the, you not only have to teach the customer, you also have to teach the capital markets.

Yeah.

So I spent a lot of time on the road talking to lenders, banks, insurance companies. Yeah. Some are in the US, some are in over overseas, you know, to educate them on this new space we're creating.

Huh. So, If I have a 5-year line of credit or a 10-year line of credit with you, what, and I don't mean to ask you a scary thought for you, but what happens if your company goes under? Is my line of credit called at that time?

You can keep it. The lender—

like, who's my counterparty?

Whoever takes over the thing. So basically, you know, but they can't call it back. They have to hold it for 10 years.

So that, yeah, so you would theoretically do some sort of forced sale and those people would have to honor the contracts at they're buying unless it's chapter 7.

Yeah. Somebody sits down. Yeah. Somebody sits down and wait for 10 years until they get paid back basically.

Interesting.

And you know, you sell it 50 cents on the dollar because you know, you're liquidating or whatever. It's kind of like classic, like, you know, if you have a, if somebody give you a mortgage, like if you took a mortgage from First Republic or Silicon Valley Bank and Silicon Valley Bank went under, you still have your mortgage. You just like, you know, at some point you get—

Not the best bank in the world.

Yeah. Who, who's your, who's your counterparty? Exactly.

No, I'm saying if I was at First Republic, now I'm with JP Morgan. That's a pretty good place to end up. Right?

Exactly. Exactly. So basically, you know, you, the assets end up moving to somebody's balance sheet and they just sit on it and they clip the 6%. And yeah, it's, it's very tried and true things in financial markets. It happens all the time.

So how are you funding your business? You don't have to divulge this for the record, but is it like a, a revolver?

You know, we have to, We have other funding partners and we're diversified and I'd rather not share more.

Okay. That's fair. That's fair. I used to work in a bank, which is the only reason that I'm kind of curious, but that makes sense. I would also, I would err on the side of protecting proprietary information. So awesome. All right, cool, man. Well, I appreciate your time and, you know, this is fun. I'm glad that we could do it. I will get it out quickly. It'll be out this week. But I sort of, I saw the fury of activity and I was like, I don't know, whenever I see highly polarized issues, I feel like the answer is probably somewhere in the middle or something's not being understood. So I appreciate you taking the time to at least tell me your story and the listeners. So thank you very much.

Thank you for having me. Appreciate it.

Alrighty. Have a good one. Hello!