Basic Capital's Founder Abdul Al-Asaad Tells Us His Plan To Disrupt The Existing 401k Market (Debt Funded Investment Accounts)

Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Shaffer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode.

Welcome into Chit Chat Stocks, the podcast to help you find your next great investment. Today we have Abdul Al-Asaad, founder of Basic Capital, a disruptive new startup, and we can say has turned into a little bit of a debated startup in the 401(k) and IRA space. They have some interesting ideas on how to improve this sector, and I think our listeners, while this isn't about a specific company or stock sector, this could affect the entire individual and 401(k) employment investing world. So I thought it would be fascinating to get Abdul on the show and let's get right into it. Abdul, tell us about yourself and how you guys and what you are building at Basic Capital.

Abdul Al-Asaad: Brett, Ryan, Thank you both for having me. I really appreciate this opportunity. I'm co-founder and CEO of Basic Capital, as you mentioned, and we've been building this company for 3 years now. We launched it earlier in May of this year, and it's taken the internet with a storm. And I'm happy to share more about what we do. Basic Capital, at the most basic level, no pun intended, is really a new way to build wealth. That's what it is. Traditionally in America, the way people built wealth is via a mechanism called savings, which is, you know, you make $100,000 a year if you're lucky, and you save 1% of that $100,000, and that translates into $1,000, and you hope that 100 years later you have $100K of savings. I understand there is some compounding effects along the way, but what we're really trying to do is, is build a new way to build wealth that combines the idea of the mortgage, which was the greatest invention of the 20th century in terms of unlocking ownership for everyday Americans. It enables them to present value their future rent payments and really turn it into an asset, and combine that concept with the second best idea of the 20th century, which is the 1985 index fund invention by Jack Bogle of Vanguard that really simplified investing and said instead of buying a single name stock, you can buy a basket of stocks and set it and forget it type of thing. And what we're really trying to do is give people mortgages, give people financing, not to buy a house or a car or to go to school, but to buy a diversified basket of assets. Why do this? Like, let's just kind of take a step back and ask ourselves a very simple question. Like, why does this matter? Let's go back to this idea of savings and why savings, in my opinion, is somewhat of a scam. Saving is the least democratic idea in our country. Why? Because if you make $400,000 a year, you can save 50% of your income. And live on $200,000 and 50% of your income, that means you can capitalize your annual income after 2 years, right? If you save $200K in one year, you can cap— you can get to one year of income after 2 years. Your saving rate is your capitalization rate. That's one way to think about it. But if you make $100K a year, the maximum you can save is 10%, which means it's going to take you 10 years to capitalize one year of income. But the median income in America is not $100K. The median income in America is closer to $60K. So you can save maybe like 1% or 2%. In fact, actually, most people do not save. Most people live in a revolving credit card loop. Most people buy now, pay later things. So saving as a concept is an idea that works for the rich. Saving as a concept is literally an anti-democratic idea. The richer you are, the larger the percentage of your income you can save, the larger the dollar amount that translates into because you're saving a larger percentage of a larger income. And the lower income you are, the smaller percentage you can save, the smaller the dollar amount because you're saving a smaller percentage of a smaller income. And that dynamic created the situation where we find ourselves into today. Where America has the greatest wealth engine, wealth-building engine in the world. It's called financial markets. It's called capitalism. It's called the New York Stock Exchange. And 50% of people are assetless. They have no exposure to stocks. True stat, 50% of people. And 40% of people are asset-light. And asset-light means they only own $27,000. Stocks and bonds. And the vast majority of the greatest country in the world, the vast majority of the wealth of the greatest country in the world is owned by the top 10%. And what we're really trying to build at Basic Capital is a new mechanism to build wealth that does not rely on savings.

Yeah, it makes sense. And I like the way you describe it, how as you, as your income scales, your proportion that can be allocated towards savings, obviously scales as well, assuming your lifestyle doesn't change drastically or you don't move the goalposts.

I understand that's a big assumption, but Morgan Housel is going to come out and say, well, most people— I understand that, and you probably should not scale your lifestyle, but I understand that not all rich people say it, right?

Yeah, in theory, if you kept your cost the same, right, the proportion rises. So maybe let's Let's talk about what you're building here with Basic Capital. What, I guess, innovation are you pushing for in the 401(k) space and why? What's the motivation?

Yeah. So going back to this idea that in order to build wealth, you need to own assets. And the reason why you want to own assets is because at some point you can no longer work, right? There is two sources of income. There is labor income, which is your W-2. And then there is your investment income, which is your K-1. That's it. So one day your labor is going to— your labor depreciates over time. Your ability to do work depreciates over time. You get old, you can no longer go to the factory. You get old, you're no longer as sharp in your mind. But also AI takes your job, right? Like that's the other things like you're like your asset is your labor and your labor depreciates over time. So the way to build wealth in America is actually to build wealth using other people's effort. And the way to do that is to own stocks and bonds. You own a stock in Nvidia, now you are benefiting from the Nvidia ingenuity and the Nvidia intelligence and the Nvidia investments. How do you own assets? Well, I looked into that because I do not come from wealth and I wanted to own assets. And there's really 3 ways to own assets. One way to own asset is to inherit it. Which is really, really great if that's an option for you. Inheriting a trust fund is amazing. The other way to own assets is actually to marry into it. So you just marry rich. That's also great if that's in the books for you, in the cards. That's not really in the cards for me.

Two great strategies.

Two—

the greatest strategies of all time. The third strategy is you actually just buy the capital, you buy the assets. There is a fourth strategy, which is you build it. You start a small business and you build your own business, but that's immensely dangerous. Like, that's immensely risky. Like, it's, it's really— we'll come back to this point. Starting a bodega or a pizza store or your own podcast or your own venture, your own plumbing business, is like a really high-risk strategy. You're putting your entire life in that. So you want to own the assets, you want to buy the assets. How do you buy the assets? As we said, traditionally via savings. Well, what we're trying to say is when you want to buy anything in America, you finance it. You're going to buy a house, you take a mortgage. You're going to buy a car, you take a car loan. When you want to buy an intangible asset called education, you take a student loan. When you want to buy Christmas gifts for your family on Black Friday, you use buy now, pay later or credit card. We finance everything in this country. Why not finance a diversified pool of assets like stocks and bonds, the S&P 500? And what we're really trying to do is essentially bring financing and credit to long-term savings. So whenever I say this, people freak out. So I understand the concern here is like, Abdul Al-Asaad, you're bringing leverage to everyday people. They could blow themselves up. This is dangerous. This is risky. And my response to this is two things. One, people are already levering up. Like, people are already taking buy now, pay later. People are already taking credit cards. We send credit cards to people's doors in this country. Just think about that. We call people and we say, you qualify for a $30,000 loan. And somehow we, the people that want to give financing to folks so they can buy The S&P 500, you heard about people. So that's one aspect that people are already using leverage. They're using leverage via zero-day expiry options. They're using leverage via prediction markets. They're using leverage via consumer credit. The second argument is if you're going to take leverage to buy assets and assets are very volatile, and that's why people do not like to leverage up assets, you really want two things. You want a long-term investor. Because asset prices exhibit what's so-called a random walk over a short period of time, but they have a positive drift. They tend to go up all the time, like over 10, 15, 20, 30-year period. So you want a really long-term investor and you want to avoid what's so-called sequencing risk or timing risk. You don't want to enter the market at the wrong time. You want to dollar cost average your exposure. Let's see, is there a mechanism in America where you are forced to hold your investment for 30 years and you are forced to make regular contributions? It exists. It's called the 401(k). It's called the individual retirement account. So what we built is essentially a way for Americans to come to us, contribute a down payment, let's say $20,000, and we give them long-term maturity, long-term duration financing, not margin loans, long-term duration financing, 10, 15 years, one day hopefully 30 years to buy diversified pool of assets. Let's say Ryan is a customer of Basic Capital or Brett. You would come to us. The first thing we do is we open a limited liability company called Basic Capital for Ryan or Basic Capital for Brett. It's a Delaware LLC. You would contribute a 20% down payment into the LLC the same way you would with a house. So let's say you put $20,000 in. Now you are the owner of that LLC. We give the LLC $80,000 financing for 10 years, and soon we're launching 15, and very soon we're launching 30. So now you went from having $20,000 of assets into— in your limited liability company to $100,000 of assets. $80K from us, $20K from you. The important thing to know, to understand here, is one, you are not the borrower. So unlike consumer credit, you are not liable to pay back the $80K. The $80K is only collateralized by the assets that you're going to invest in. Two, this is duration financing, which means you have to pay it back at the end. And if the value of the underlying assets fluctuate, you're not going to get mark to market. You're not going to get margined. Leverage is really dangerous. I understand. I, similar to you, I'm a huge passion about financial markets. I studied financial history. I studied economics in college. I worked on Wall Street. I worked at Goldman Sachs. I understand how dangerous can leverage be, but I also understand how beneficial it can be if it's structured in the right way. And today, retail investors can access margin financing, but they cannot access duration financing the same way private equity sponsors can. And what we're trying to give them is long-term duration financing, non-mark-to-market, non-marginable, limited liability financing at S+200, which is 6.5% today. So your break-even point is 6.5. As long as your assets produce more than 6.5, you make leveraged return. If they don't, you lose money. There's no magic to this. I mean, they're all, what happens if the market goes up or down or, or stays flat? Well, you lose money. Like that's how investing works.

So I think this is where a lot of people misunderstood, I guess, like the idea behind Basic Capital was a lot of people thought these were margin loans. A lot of people thought your 401k drops 20%, you're getting margin called, whatever it is.

Yeah.

Can you explain this a little more? Like, go into the debt structure, how these are specifically term loans, so you're less likely— it is more accommodative to the volatility that people can expect in a 401k.

Yeah. So when you take financing, you can take two types of financing. One is called margin financing, and margin financing means you have to maintain a certain margin over the value of the loan. And if you do not, you get called. Margin financing famously does not have term. You can have it as long as you maintain the margin. That's called call loans. Back in the days, during the Great Depression, they used to call them call loans or callable loans. It's a loan that your lender can call back at any time. Or you take what's so-called term financing, like a mortgage, 30-year term, 15-year term. A student loan is a 10-year term, 15-year term. That means the lender cannot call it back until 15 years later. That's the innovation here is instead of giving people margin financing, we give them long-term duration financing. So what you are making a bet on is you're going to put 20% down, take 80% financing. So now you have 100%. And you are betting that over the duration of that, you know, at the end, it's point to point, 10 years later, 15 years later, the value of the underlying assets is going to be higher, not lower. Is it possible that it's lower? Sure. That's the risk you're taking. Now, if along the way the assets drop down by 50%, you are not getting margin called. If at the very end it drops by 50% and you've accumulated gains along the way, that's unfortunate for you, but maybe you can amortize your loan. Maybe one day we launch 30-year financing, so you're taking less risk. The very good example to think about here is a house, Ryan. If you buy a house and the next day your neighbor sells the house at 30% discount next door, the bank is not gonna come to you and put you on the streets, right? Student loans, a good example. I went to Harvard and after I graduated from Harvard, Bill Ackman started talking about Harvard online and Harvard started to go down in the ranking. Everybody hates Harvard, right? Like Harvard graduates are not getting jobs, right? It's not like my student loan provider is gonna call my loan back because Harvard went down in the rankings, right? Right, right. The, the, the, the genius of term financing is that it buys you time in the market. And the way to build wealth with our product is actually not fast. It's actually slowly. You are really making a 10, 15, 20-year bet on financial assets. And during that period of time, if financial assets underperform, you can go to bed comfortable. It would be unfortunate. So let's say actually you put $20,000, we gave you $80,000, and the next morning assets drop 30%. Which is possible, by the way, right? Like, they go down 40% down. It's unfortunate. You're technically underwater. But if you do not sell, you can ride the wave back. It's the same thing, by the way, if you buy a house. Like, I have friends who were in the Bay Area before COVID They bought a house. You're talking $2, $3 million homes. And COVID hits. Everybody leaves SF. Everybody is like, SF is out. And they had to move to change jobs and they got wiped out. And but think about the difference between a house and here. When you buy a house, you're taking your entire life savings, putting it into a down payment, getting 5 times leverage to get long your zip code. I mean, if you go to your financial advisor and you tell him, I want to take my entire life savings, put them as a down payment, lever up 5 times to invest in the local labor market of Columbus, Ohio. What will he tell you? How is that a good trade? Like, think about how concentrated that risk is. What if it's Detroit and Ford moves the factory to China? What if it's Miami and all the crypto boys leave? Right? What if it's California and Elon Musk is like, I'm going to move to Austin, Texas? This local real estate market can be very volatile. People do not know that. And what we're saying is take 5 times leverage if you have 10, 20, or 30-year horizon. That's when it only works. But do not buy a house. I mean, you can if you want to. We're not— there is nothing against the mortgage. Buy a diversified pool of assets, buy the S&P 500, because now your exposure is not a bet on your local labor market. Your exposure is on the human ingenuity and innovation and global growth. That, in my opinion, is a better risk-reward thing. Now, how do you solve the issue that if it goes down 30%, well, your dollar cost average, we have solved that problem, right? The market goes up, the market goes down. The way you solve that issue is by dollar cost averaging your contribution. Every time you put a contribution, you get leverage on it. So let's say you put $7,000 a year, which is your IRA contribution. We give you $28,000 leverage. If you do that over 10 years, you've accumulated so much leverage over the 10 years, but also you dollar— you bought on the lows, you bought on the highs. Each particular financing has a 10-year maturity. So you really built a ladder. Type. You see what I'm saying? Because, you know, you regularly contribute, so you have a ladder of maturities, you have a ladder of exposure. And we wanted to put this in a simple wrapper that people who do not want to day trade stocks, they just want to buy and hold, can get leverage without— while being able to go to bed at night. Does that make sense?

I think that totally makes sense. When you mentioned the dollar cost averaging, that is understandable for myself. I think understandable for the listeners as well. You take your $500, $1,000 each month and that can help you ride out. Even if you weren't on leverage, you'd do the same thing, ride out the market waves over time. So you're not just putting in your entire life savings at the potential peak, which you talked about, unfortunately happens all the time in the, the housing market. One thing listeners might be interested in is what are the actual assets that someone investing with Basic Capital is buying? Is it flexible? Is it a specific fund? Explain that for the listeners. Before we move on, we want to talk about our friends at Interactive Brokers. Interactive Brokers is our favorite brokerage platform. They make it easy to buy stocks, ETFs, options, futures, currencies, bonds, and more, all from a single unified platform. And Interactive Brokers allows you to maximize your returns by minimizing your costs. They offer zero commissions on US stocks and low commissions on international securities. They aren't cutting corners either. Interactive Brokers' one-of-a-kind smart routing technology gets you the lowest price possible in 36 countries and 28 different currencies. Interactive Brokers is our home for stock trading, and we wouldn't go anywhere else. If you're getting serious about investing, it's time to upgrade to a broker you can trust. Head on over to ibkr.com. Restrictions apply. Interactive Brokers is a member of SIPC.

Great question. Great question. So just to summarize the earlier point, as long as you have long time horizon and you're dollar cost averaging, you'll be able to ride the wave. If you sell at the bottom, you will lose money, but you would lose money if you were a leveraged investor. So if you have 10, 20 year horizon and you dollar cost average, this is compelling. Now, the question is, what am I investing in? I wish I could give everybody 5-to-1 leverage on the S&P 500 on day one. I think the greatest asset class of the world is the S&P 500. I don't think anybody can pick good stocks. I don't think anybody can outperform that. But unfortunately, we can't start out with that. Why? Because the financing cost, that 6.5% that you have to pay us, right, as a cost of capital on the 80, does not come from your own pocket. It has to come from the underlying assets. Because remember, the financing is limited liability, so I can't come after Ryan's paycheck. So the underlying assets needs to generate enough income to cover the financing cost. So today we have a list of eligible assets. These eligible assets exist on like our customers see them and choose from them. We have guardrails. You can't take the money and put it all in Bitcoin. You can't take the money and put it all in a prediction market. But who knows, maybe one day you'll be able to. We have no plans to doing that. Our plan is to give people long-term financing to buy eligible assets. We ask you to allocate a minimum allocation to credit. So you can generate enough income to pay off the financing cost. So for example, if you put $20 and we give you $80, the cost of financing is $5. So you have to put enough money in bonds to generate $5. Now here's where people misunderstood it. You do not have to put them in treasuries. It doesn't have to be risk-free bonds. You can put them in The high yield index that pays S+500. And sure, are there high yield defaults? Of course there is high yield defaults. But if you buy the high yield index, overall the high yield index have done pretty well. It pays S+400, right? S+400 to 500, depending on how deep you go, depending if you go private or public, depending if you go asset-backed or corporate. And we have a list of bond funds by top tier managers. These bond funds tend to be a hybrid of private credit and public credit. They generate on average S+550 and you owe us S+250. So there is 300 bps spread, right? So you're making that 300 bps spread levered up 5 times, which means you're making 15% return on equity from the positive carry alone. The metaphor I like to give to people here is imagine if you bought a house with a mortgage and then you rented out the house and the rental income is bigger than the mortgage payment. It's literally the exact same trade. Sure, is it possible that the underlying renter stops paying you the rent and you go default? 100%. And now you're in trouble. But that's if you bought only one house and you rented only one house to one renter. But if you participated in a big pool of bonds and they pay you S+550 and you only have to pay S+250, there is enough cushion. So even if 30% of these companies go bankrupt and delinquent and stop paying you interest, you still make S+350 or S+400. And remember, when you are in credit, you are structurally senior than the equity. I mean, we're getting pretty technical here, but I'm happy to go as deep as you want. But when you are in credit, you're actually structurally senior. So you actually are entitled for your money back when you— and the recoveries tend to be somewhat decent in that space. So going back to your original question, what are you allowed to invest in? We ask you to allocate a minimum allocation to what we call income-generating assets. These are real estate, private credit, public credit, high-yield bonds, et cetera. To generate income. And the other allocate— the other bucket we call convexity bucket. And that bucket can either be QQQ or it can be the S&P 500. That's it. Basic capital is for the boring investor. It's not for the day trader. It's not for the zero expiry option. It's not for the guy who puts on straddles and call spreads and put spreads. It's not for the person who wants It's for the person who wants to set it and forget it. It's for the person who wants to have more chips on the table but did not inherit them. It's for that person. They do not want to just buy SPY. They want one step. They want to go one step outside the risk spectrum, but they do not want to do anything stupid. They do not want to do anything too crazy. And when you take duration financing and you dollar cost average, and you build a portfolio that is self-funding, that's a reasonable risk reward.

So I, I, I like the renter analogy. And just to kind of sum it up here, and maybe this is me taking a stab at summing it up, basically you've got, uh, I believe I read in a Matt Levine article, it's somewhere like 85% exposure to these different income-based products, and then you've got sort of a equity kicker, if you want to call it that. So you've got some exposure to equities and then you've got primarily these income-generating products. And like you said, it's not like you're— it's not like it's one bond. It's a pool of different companies.

Yeah. Different managers.

Right. So I guess my follow-up question there would be, is the goal to expand the investable products? Are you trying to offer more of these either on the equity side and the income side?

So people can customize. So this is not a fund. Everybody has their own little LLC. So for example, Ryan might— like, I'll tell you what our customers do. Our customers say, Abdul Al-Asaad, I have $1 million in SPY. I'm overexposed to equities, but I have no interest owning 8%, 9% bonds because that's not enough return for me to retire on. I'm going to take $200,000, roll it over into your IRA. Lever it up to a million and make it 100% bonds. 100% bonds. So now what you did is you diversified away from SPY. You might say, why would you diversify away from SPY? Isn't SPY diversified? Well, SPY is NVIDIA, buddy. We have the entire, the entire, like, we have the entire American worker population. Basically levered up to the circle jerk happening right now between NVIDIA and Oracle and OpenAI. Like, let's just be honest about what we just did. The entire 401(k) space is $11 trillion levered up to these 4 or 5 guys running around telling us about GPUs. I'm a huge believer in AI, huge fan of Jensen. We know a lot of these people, we work with them. but you are betting there on something extremely metaphysical, which is future growth manifesting itself. When you invest in basic capital, the bulk of your return actually comes from income, contractual income that people owe you, and they owe you your money back. That's the difference between investing in credit and investing in equities. But the problem with investing in credit is that credit does not generate enough yield on its own. To be compelling to retail investors. Because if you can only save 2% of your income and you make $100K a year, your hurdle rate is 15% to be able to retire. I mean, that's why people don't save. People don't save because, you know, just footnote, people don't save because they're lazy or because people are stupid. People don't save because they have high discount rates. And the way you make saving more compelling to them is by giving them higher rates of return. And that's what we're really doing. We're literally giving them a higher rate of return that meets their hurdle. So what we did is we made credit more compelling of an asset class to everyday people because they can get equity market-like returns from contractual cash flows without taking equities concentrated risk, which is NVIDIA. Does that make sense?

Definitely makes sense.

So what I was going to say is people can customize. Like somebody might go 100% bonds, somebody might go 85/15. And in the future, we want to allow greater and greater flexibility. We want to allow somebody to go 50/50. We will never allow you to do a single name. Say like, we're never going to give duration financing on like your trading skills. Like we're never going to give you like 5 to 1 leverage and be like, yeah, pay me back in 10 years. Like go day trade it. Like that, the rate on that would be like 15%. I don't think anybody wants, but like, you know, we will let you choose if you want QQQ or MSCI or SPY, like that's okay, fine. You know, that's like, that's your preference. If you want all bonds, cause you're a bit older, you can go all bonds. If you want all equities, cause you're a bit younger, one day hopefully we'll be able to launch that.

That's totally understandable. And look, you guys are, you just began this thing. So no one should expect that you have the breadth of products that you will have once the business starts maturing. One thing before we get to your guys' business model I want to talk about is who's your target customer? Is this the everyday individual? Is this someone that just graduated college? Is it the high earners? Who is the perfect customer for Basic Capital?

And to follow up there really quick, for your business model, who are you actually going out and selling to? Is it like HR departments or like Okay, that makes sense.

The ideal customer for Basic Capital is somebody who has at least 10-year horizon or more. So young people are a very good fit, middle-aged people are very good fit, but also old people are a very good fit. You know, we're doing really well in sciences in this country. We're doing really, really well, perhaps too well. And now with all these peptides and all these things, people are living forever. And the miracles of modern science is stretching the median lifespan. And if you are 70-year-old, you still have 30-year horizon. You still have 20-year horizon, by the way. Just because you're 70, it does not mean you need all your money right now. Like people who are 70-year-old still have 20-year horizon. I mean, God's willing, who knows? And I actually think this is going to stretch further and further and further with the miracles of modern medicine. So the ideal customer for Basic Capital is somebody who has at least a 10-year horizon. If you need the money in 6 months, if you need the money in 2, 3 years, do not invest in Basic Capital. And even if you have a long-term horizon, you should size your bets. You should not go all in like in one, like, you know, spread your eggs. You should put 10, 20%, 30% of your money with Basic Capital. 10%, 20% in a down payment to buy a house, 10%, 20% in assets you like, 5% in crypto, whatever you like. That's your prerogative. I diversify. So the ideal customer is long-term horizon. And we wanted to stay away from retail investors because we thought that they are too susceptible to behavior issues. Where if the market drops, they might get nervous and they might liquidate at the worst possible time. Right. Let's say the market drops 15%. They lost basically most of their equity, most of their original 20%. They get nervous, they sell. That's what happened in COVID. Market was down 30%. People sold. Then the market ripped back up 30%. I don't know if you know, but the market closed up 30% in 2022 or 2020. I can't remember. I think 2021. Like, it's insane. So we decided to leave the— we have a retail product, we have an IRA product. You can just download the app and put money in and you'll be okay. But we're really focusing our effort is on the 401(k) space because that's how the average American builds wealth. Most Americans have their money in either a home equity or in a 401(k). And the 401(k) space is basically run by this cartel It's literally, it's literally, literally ran by a cartel that holds the American worker hostage. And they say you have to buy the Fidelity Target Debt Fund, the Vanguard Target Debt Fund, that's 30% cash when you are, when you are 25. And not only that, you know, I don't know if you've ever opened up like a Fidelity or one of like, I don't want to name names, but if you open up a traditional Target Debt Fund. You know what you see inside it? A bond fund that is also managed by the same manager that has another expense ratio, and an equity fund that is managed by the same manager. So they charge you like 50 basis points for the Target Debt Fund, and then inside the Target Debt Fund, it's not like there is bonds and stocks. No, no, no. There is like bond funds and equity funds that they charge you on yet another expense ratio, and they don't care. They don't care. They're fat, they're bloated, they're lazy, and they hold you hostage because when they go to sell, they're not selling to the worker, they're selling to the HR leader. And in this country, we built a dynamic where the employer is so scared to do anything that they just go buy IBM. They go by the big names and these big names are, are not thinking about the struggles of the American workers, which is they cannot save that much. But here is the deal. If you add up all of American workers, because there are so many of them, there is 300 million of them. It turns that that becomes $10 trillion of assets. But that $10 trillion of assets is very concentrated with very few people. And when you aggregate them, they make a lot of money. So to them, they don't care that the average balance account is $27,000 because if they manage the Amazon 401k plan and the Amazon 401k plan, Amazon, I think is the third largest employer in America after Walmart and after the United States government. If they manage the Walmart 401k, they don't care that the average balance in the 401k is $5,000 and people are under 40. Because there's 2 million workers in the Walmart 401(k). And what I'm building, or like what we are building at Mesa Capital, is a product that speaks to the worker first, which is, hey man, you are left out in the dark alone. You have the smartest brains on planet Earth working every day to build robots, to automate the Amazon warehouse employees. You have the smartest brains globally working to make AI take over your job. And all that productivity gain is going to accrue to capital owners, is going to accrue to shareholders. And you are left out in the dark being charged 50 bips through 3 fund line items. And they just don't care. They just don't care.

It is like when you hear the term levered 401(k), you're— and I kind of felt the same way, and you saw this online— there's sort of this knee-jerk reaction to, we're going to blow up the retirements of all these honest, hardworking folks. But then when you actually go through the structure, it's a lot more thoroughly managed, lower risk than it sounds, especially you just hear 4x, 5x leverage or whatever. I believe it's 4x. It sounds really damning, but I think you explained this really well where it's essentially a small credit spread, not small, but a credit spread levered up plus that equity kicker that we talked about. I want to go through, I guess, a downside scenario because I know that's not great for promoting the product, but I'm sure that's what people are thinking about is like, okay, we've talked about sort of the you know, getting that credit spread, amplifying it, getting sort of a double-digit return. That's great. What happens if you get to a negative carry? Where— what would create that in your mind? What sort of economic conditions would lead to you not covering the interest cost? All right, folks, before we move on, we need to tell you where we get our data Fiscal.ai. Fiscal.ai is the complete stock research platform for fundamental investors. I use the platform pretty much every single day. You'll see the charts in our podcast, you'll see it in our newsletter. This is our one-stop shop for stock research. They've got up to 20 years of financial data on all companies globally, including the largest company-specific segment and KPI dataset on the internet. That includes metrics like Duolingo's daily active users, Oracle's backlog, Rocket Lab's revenue per launch, and literally millions more data points. They've also got earnings call transcripts, ownership data, equity research reports, and much, much more. If you want complete financial data at your fingertips, you need to check out Fiscal AI. And if you use our link fiscal.ai/chitchat, you will automatically get 2 weeks of Fiscal Pro for free, no card required. If you want to upgrade, our link will also get you 15% off. Again, that's fiscal.ai/chitchat.

The link will be in our show So we've done a lot of work to understand this because remember the financing is actually non-recourse. So if this happens, like we lose money too, right? Because I can't, unlike consumer credit or unlike a mortgage or a car loan, I can't come take your other money, right? So we need to understand our own risk because We're not, we're not levering you up. We're levering up the LLC. So, you know, as you said, you invest your money in S+500 credit. Well, what is S+500 credit? Let's just call a spade a spade. It's double B credit. This is high yield credit. This is not investment grade. This is not Google bonds. This is not Microsoft bonds. This is not the United States Treasury. This is double B credit. It's high yield. These are subprime corporate borrowers. It's— they're risky on each one on their own. But if you pull enough of them, presumably you're diversified. And that's— by the way, this is true in everything, right? Like, so let's look actually at historical default rate in BB credit. The worst it ever got in history was in 2008, 2009. When the commercial paper crisis happened, mortgage-backed securities crisis happened, credit froze, nobody wanted to lend, and bankruptcies went through, delinquencies went through the roof. And at that point, the bankruptcy and delinquency rate reached 13%. So 13%, on average, by the way, on any given year, the default rate for BB is sub-2%, way, way much Much, much lower than this, but during '08, '09, it reached 13%. So 13% of BB borrowers weren't bidding up basically. Now let's go back. Let's say you have a portfolio of BB credit that pays 9%. If 13% of it go bankrupt, you're talking about you go from 9 to 8%, or from 9 to 8.25%. For you to not be able to pay the S+ 250 or the S+ 200 on your S+ on your 80% leverage. Basically, you need, and it depends on how much bonds you allocated to, there is, there is that caveat here, but you need a, you need like basically like 30 to 50% double B bankruptcy rate. Is that possible? So you're talking about an event 2 orders of magnitude bigger than '08. Never, by the way, never seen in history. You're talking about like a 3 standard deviation event, 3 sigma event. Like you're talking about like an event that's literally 2, 3 times worse than '08. By the way, if that happens, if double B bankruptcies reach 40%, SPY is going to be in the gutter. SPY is going to be down also 80%. So just so we're clear, right, if 40% of American corporations default, the equity, which is the residual of all residuals, is going to be down a lot. So for you to go delinquent on— the only way you actually get hurt in this is like two ways you get hurt in investing in basic capital. One is you liquidate at the worst possible times. So if you invest in basic capital, you need to promise yourself, I'm not liquidating for 10 years. I'm not going to get scared and liquidate at the worst possible time. And two is if you go delinquent on the interest payment, right? You have, you have to pay the interest payment. You go delinquent and you need big bankruptcies for that to happen. But even if that happens, you can even gross it from your own money. So you can say, you know what, I'm making these regular contributions, right? That dollar cost averaging, I can use that dollar cost averaging to pay for the financing if I fall short. We didn't really account for that in our risk models internally because to us, we're comfortable with the idea that, hey, bankruptcy rates needs to reach 40% for us to get in trouble. And for that to happen, is it conceivable? Of course. If Taiwan-China happens and somehow all the companies go bankrupt, I don't know. Yeah, it could happen. But I'm not suggesting this is risk-free. I'm saying like anybody who says this is a risk-free investment, you should run away. What I'm saying is if bank, if corporate bankruptcies go really high, really, really high, you could lose money with us. So size your bets appropriately. I don't know where else you would put your money to hedge yourself, by the way. Like in an event where bankruptcy rate is 40%, I don't know where else you would go. Maybe gold, maybe Bitcoin. You know, but I don't know where else would you go in an event when bankruptcy rate is 40%. I don't think there's any asset classes that hang.

Oh, well, I totally get that. And yeah, if definitely long, you know, someone could be short a bunch of stuff, but that's not what we're talking about in this scenario. I think given that we are an investing podcast, I'm sure a bunch of our listeners are thinking, Well, how does this company make money? So what is Basic Capital's business model as it stands today? How are you earning revenue? What are your costs? Take us through, you know, the proposed or current P&L, how it looks for the Basic Capital business itself.

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Great question. We make we make money in one way and we lose money in another. So there is two fees you pay to Basic Capital. One is the financing fee, which is the S+200. That's the cost of the leverage. That's your mortgage expense. And people were like, this is crazy. This is so bad. This is disgusting. I think Bonaboth, Bonaboth, whatever his name is, Bonaboth Barabas, the Twitter personality, He was like, this is disgusting. And I was like, do you know that the 30-year mortgage rate is 7%? Do you know that we're giving you 5-to-1 financing on a diversified pool of assets, more diversified than your house, at the cost lower than what the United States government is giving you to buy a home? 6.5% is really low. Actually, you know, like it's just really low. Consumer credit is 30%, 24% APR depending if you use Amex or somebody else, but like 24% if you're buying from buy now pay later. If you can't find somebody to give you 5 to 1 non-request leverage at lower than 6.5%, come talk to me. I would love to go talk to— I would love to go ask them where is their cost of capital from. We lose money on that, by the way, on the lending. Like we're a subscale provider. We haven't like start making money on that. We actually pay a higher cost to our lenders than we lend money at because we are not at scale yet. I think when you get to the billions of dollars, you can lower your cost of capital materially, but we're comfortable with that. And then the second fee that you pay us is you pay 50 basis points on the total assets as a servicing fee. Why do I need this servicing fee? Well, I need to open this LLC for you. I need to file annual reports. I need to open a brokerage account for you. I need to build APIs, automated trading, reporting, tax filing, K-1 generation. I need to open a self-directed IRA or a self-directed 401(k) that can custody an LLC that doesn't have a CUSIP or an ISIN, which is technically a private asset. I need to work with these custodians. These custodians have fees. I need to pay lawyers. Structure the agreements. At scale, you start to make money, don't get me wrong. But the way you pay us is just like you pay a mortgage servicer 50 basis points to service your mortgage. You pay us 50 basis points to service your retirement mortgage. Is it expensive? Yeah, it is. It's not for free. We're not a nonprofit. 6.5% cost of capital. Is that expensive? I don't think so. If you can find cheaper, you should go take it from them. Regardless of the whole fee thing, don't buy. If you can find somebody, if you can find somebody offering this for cheaper, go to them. Um, that's the, that's our fee structure. Does that make sense?

Yeah, it does.

We used to have a subscription fee that freaked people out. And interesting. So we used to have $25 a month subscription fee, which translates into like $300 a year. But the reason why we did that is because we did not want somebody to put $100 in because there's a lot of operation that goes into building this, right? And you have to file LLCs, K-1s. So there is a break-even point where if you do not put at least $10K, this is not worth it because the subscription fee is $300. If you put $100 and you pay us the subscription fee, your fee is like 300% of your investment, right? So, so we put that subscription fee as a way to discourage small depositors. And I think like some, when we launched, somebody was like, if you put $20, you have to pay them $300 in subscription fees. This is, this is bad. Yes, obviously, Einstein, if you put $20 and you pay $25 a month subscription fee, this is not worth it. But that's exactly the point. This is meant to discourage people to just put $2 to see how it works. And I mean, we got rid of the subscription fee since then because we were like, whatever, you know, it's not a big deal. That was like a big thing that also like FinTwitter was like, you know, they're not like it.

Is there a way to make like a minimum contribution?

We are as low as $100 now.

Okay.

We don't have that. Like, to be honest with you, we have the opposite problem where you have like a heavy hitter Stripe engineer trying to roll over like a $500K to us and we have to give them like $2 million in leverage. You know what I mean?

Like that.

Like, because you know, a lot of people are like, yeah, I'll put $100K in this, I'll put $200K in this because they— nobody believes in active management, right? Like, I'm sorry, I take it back. Like, I understand you guys like talk about stocks and individual investments a lot, but, but like a lot of people who have some money do not believe in stock, or at least do not want to pick stocks. But they— and but also they do not want to take a margin loan, and they look at this and they're like, this is kind of like set it and forget it. And I get the leverage. And I do not want to buy a house because if I buy a house, something breaks, I have to pay for it. I have to pay property taxes, right? So I am tied down to the zip code now forever. If you're a 29-year-old, you want to move around. Like, you don't want to do that. So people take a retirement mortgage instead of a real estate mortgage, and they are like, this is tax advantage. I do not have to pay property taxes. I do not have to deal with pipes breaking. And if I want to pack my bags and move from San Francisco to Los Angeles or Los Angeles to New York or New York to Washington, D.C., I can just do that.

Yeah, no, it makes sense. I guess I feel like we've covered the basics, no pun intended there, of how the structure works. So I guess maybe last question for you. And I think you sort of answered this earlier in the episode, but if you could snap your fingers and build the ultimate 401(k) or IRA portfolio, what would it look like for you?

I think it's different thing for different ages. I don't know why I say different people. I understand like we love to say everybody has different risk tolerance, blah, blah, blah. But I think if you have a long time horizon, it's different things for different ages. If you have a really long time horizon, 30 years, and I could build a portfolio for me, this is not investment advice. I would love to find a way to get 5-to-1 financing on all equities, S&P 500, just pure SPY, ride it for 30 years, pay the 6%, and, and, and live with— that's my ideal goal. We're not there yet. We offer diversified stocks, stocks and bonds. As we get more comfortable with the model, as capital markets get more comfortable with the model, we'll launch, we'll enable further customization, more investment, more assets. But if I were to snap my finger, I really, really, really do believe these two best inventions of the 20th century in financial markets are the 30-year retirement mortgage. Sorry, the 30-year home mortgage, FHA mortgage. And the index fund. And my dream is to go down in history as somebody who coupled these two ideas together. I'm doing this because I believe in it. If I was trying to make a quick buck, I would go start an AI company. I would go work, I would go back to my old employers and I'd go back to Goldman Sachs. But I really do believe that it takes money to make money. And I really believe most people are locked out of the system and it makes them sad. It makes them left out. And I want to give them more. They have a seat on the table. Jack Bogle, Robinhood, give them a seat on the table. I want to give them more chips to play with. And I don't want them to go out doing negative PV trades. I want them to have more assets, more participation in the system, because they are working that system, they're building that system, and all the productivity gains is going to people who own the assets and people who don't have money to own the assets. And we all come to work every day inspired by the idea that we will be remembered as the company that enabled more Americans to own America.

All right, I think that's going to do it, and I, I hope that any skeptics coming in listening to this episode, uh, have maybe eased some of their worries today. And I think— do think this was a really helpful explanation of what you guys are building at Basic Capital. Um, before we sign off, where can people learn more about what you're doing? Uh, any messages to listeners?

Thank you. We're basiccapital.com. We're in the App Store or in the Android Store. Download the app, try out for yourself for our IRA product. If you are an employer or you work at a company, talk to your HR about offering the Basic Capital 401(k), which includes traditional investment options and the retirement mortgage. You don't have to do— you don't have to buy the retirement mortgage if you don't want to. Abdul Al-Asaad and I am on Twitter. Keep trolling us, keep giving us feedback. It's good, it keeps us on our toes, uh, and bring us ideas. You know, we have our idea on how to solve wealth inequality. So whenever somebody is criticizing us, I like to ask, well, what's your solution? What's your proposal? Uh, besides that, thank you for having me and appreciate the opportunity.

Of course. All right, that is going to do it. Thank you everyone for tuning in. Abdul, thank you for joining the show. As we sign off here, I want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss on this podcast—

neither am I—

or Abdul, anything either of us, any of us discuss on this podcast is not formal advice or recommendation. Thank you everyone for tuning in, and we will see you all next time.