Why Public Markets Fail Wealth Builders- Co-Author of Invest Like a Billionaire -Bob Fraser- Ep- 573

So what billionaires do is they put their assets in different buckets. And these buckets, one bucket zigs when another bucket zags. That's the idea of true uncorrelated assets. And then what happens is your overall portfolio experiences far fewer losses, is what happens. And the math is there. It's called Modern Portfolio Theory. And it's basically a free lunch to get higher returns Or lower risk, you pick. And very few investors are taking advantage of it. And if you're in the public markets, you simply can't because the public markets are highly correlated.

You've been told diversification is the key to wealth, but what if the very structure of public markets quietly works against long-term wealth builders? In this episode, we uncover the math behind volatility drag and the why billions are building outside of the system. most professionals rely on. But what if the structure of public markets quietly works against serious wealth builders? Well, welcome to Streams to Impact. I'm your host, Dr. Allen. If you're a high-income professional ready for your capital to work as intelligently as you do, this conversation is for you. Billionaires don't just diversify, they structure. If you want to learn how to build intentional passive income, through secure high-yield appreciating assets, access our private masterclass Beyond the Paycheck at www.go.stetucker.com/beyond-paycheck. Now let's explore what it really means to move beyond diversification. Before we do that, just a brief disclaimer: all information shared on Streams to Impact is for educational purposes only and not investment, legal, or tax advice. All investments incur risk, including the possible loss of 100% of your capital. Always consult your professional advisors before investing. What if the real risk to your wealth isn't volatility, but its structure? Bob Fraser is the CFO and Chief Macro Strategist of Aspen Funds, overseeing more than $700 million in assets across private credit, commercial real estate distressed debt, energy with over $85 million distributed to investors. An Ernst& Young Entrepreneur of the Year Award recipient and co-author of the USA Today bestselling book Invest Like a Billionaire, Bob is known for translating macroeconomic trends into data-driven private investment strategies used by the ultra-wealthy. Welcome, Bob. We are glad to have you with us. You say that diversification in public markets often fails serious wealth builders. Can you walk us through the math of the volatility drag and why even average market returns can quietly undermine long-term compounding?

Right. Well, you've seen today, I mean, stock market drops 1,000 points and You know, we've seen this— the problem with the stock market is its volatility. It averages 17% volatility over the last 100 years, and that's a 60/40 portfolio. Well, that's a lot of volatility. And yeah, you get some great companies in there, but the bottom line is volatility destroys compounding. And none of the ultra-wealthy— you know, traditional financial advisors will tell you to invest in what's called 60/40 portfolio— 60% stocks, 40% bonds. But none of the billionaires do this, not a one. They don't do this model because, because it's too concentrated and too volatile in the, in the public markets. So you think you're buying an index, right? So let's say people will buy an index like, like the S&P 500 or the Dow Jones 30, and you're buying 500 or you're buying 30 stocks. The problem is with these indexes. So if you buy the S&P 500 index, you buy SPY or an ETF or or a mutual fund with 500 stocks in it, a third of that purchase is 10 companies, a third. So it's highly concentrated in just a few companies. And by the way, those 10 companies all move together. One, you know, they all go up and down together. You ever notice when your screen goes red, right? Everything goes red. You know, it's like, that's, that's the problem with the public markets.

Well, I totally agree with you and that's why I certainly encourage the investors we work to do a 60/20, 60 in private equities and 20 or less in public markets. So I'm right with you there.

Well, there you go.

So you said private alternatives aren't about chasing higher returns, but they're about reducing that structural risk and I would agree with that. What does that mean to you in practice and how do billionaires think Yeah, billionaires are first and foremost looking to limit their downside.

So here's a huge difference between the ultra-wealthy and the typical, you know, independent, you know, individual investor. The individual investor, and I've worked with hundreds of them, right? They're looking for headline returns. Oh, this one says 20% returns and this one says 18. I'm gonna go for the 20 'cause I wanna make more money. And what they're not showing you is risk-adjusted returns. And that is far more impactful. Losing money is far more impactful than maximizing your returns. So Warren Buffett is famous for saying the first rule of investing is don't lose money. The second rule of investing is don't forget rule number one. So the wealthy are focused on risk. They are focused on minimizing losses. and more than maximizing returns. And by minimizing losses, you do maximize your returns. And so that's probably the biggest difference. I find individual investors really focus on headlines, headline returns. Oh, they said it's going to be 18%. Well, what people don't realize is that's simply a spreadsheet exercise. And it's simply a promise. It's a claim, right? It doesn't mean anything typically. And so it's just a claim. And it doesn't, you know, I don't know when a company has ever made exactly what their claims were, right? It's just a claim.

Yeah, well, for sure. And yeah, it just doesn't make sense to me why so many people hold to that strategy when the ultra-wealthy just don't do that. Well, in your book, you emphasize that billionaires win through structure, not just strategy. So what structural advantages do everyday investors often overlook?

Right, great question, Alan. And, and so as I pointed out, so most people are in the public stock market, and the public stock market pretty much is correlated to everything else in the public stock market. So I, I have a chart in the book that shows that, you know, like value stocks are correlated to large-cap growth 97%. That even REITs, real estate investment trusts, which is apartment complexes and cell towers, are correlated 75% to Amazon and the stock market. Well, explain that. That doesn't make any sense. Why is real estate correlated to stock market? Well, the issue is the structure of the public markets causes everything to correlate. And so the only way to get out of that is to be in private alternatives, which are uncorrelated. And so, you know, for example, stock market today, you know, drops, you know, the Dow drops 1,000 points.

What gold—

I mean, sorry, but oil went up. So how many investors, how many private investors are listening to this are in oil? And, you know, how many people stopped driving today as a result of the stock market? Well, nobody, right? They're all driving. How many people stopped paying the rent today? Well, nobody. So own the gas pump and so own the rental real estate, right? Those things are not correlated and they're not as volatile. So what billionaires do is they put their assets in different buckets. And these buckets, one bucket zigs when another bucket zags. That's the idea of true uncorrelated assets. And then what happens is your overall portfolio experiences far fewer losses. Is what happens. And, and the math is there. It's called Modern Portfolio Theory, and it's basically a free lunch to get higher returns or lower risk. You pick. And, and, uh, and very few investors are taking advantage of it. And if you're in the public markets, you simply can't because the public markets are highly correlated.

Yeah, and that is interesting that even REITs that are based upon real estate correlate with the public markets, right? Yeah, I've never seen them as anything but a stock, right? No matter what they call them, because—

I call them real estate sausages, right? It's like, it's like if you, you know, you want a steak, buy a steak. You want it, you want a piece of real estate, buy a piece of real estate. You want to, you want a sausage, buy a sausage. And that's what they are, they're real estate sausages.

Yeah, it's a good way to put it there. Um, so when evaluating opportunities, which I think is In public markets, I don't think people spend any time other than people like Warren Buffett really evaluating what they're investing in.

So true.

So how do you distinguish between asset risk and operator risk, which I think in private markets, that's very— that's a very important question and you really need to understand that.

Yeah, well, the first way to mitigate risk is, is to make sure you have different buckets. So I recommend, right, have a public market bucket, have a bond bucket, right? But then have a private real estate bucket, have a private credit bucket, have a natural resources bucket that you're putting in private investments across the spectrum. That's number one. And number 2 is doing operator due diligence, right? Those are the 2 ways that you manage and mitigate your risk in privates is, is first of all, manage your allocation strategy. Never put more than 5% in any one deal. I don't care how much you love it. It's— you put any more than that, you're taking what I call the bet, right? You're making the bet. Don't make the bet. The big boys don't make the bet, right? They're playing— they're playing statistics. They're playing the numbers game. They're not trying to have a crystal ball.

Right.

None of them are trying to have a crystal ball of what's going up and what's going down. They're just trying to say, I'm spreading my risk around. I'm going to make good solid investments knowing that some are going to go up and some are going to go down. And then, and so managing your buckets is first and foremost, and second is picking great operators, right? The difference between operators and the public side is not pronounced. And there's one of my favorite charts in the book, it's from JP Morgan and shows the best REIT operators and the worst REIT operators. there's only like 1.5 percentage points of return difference between the two of them, right? They're pretty much— they're all vanilla. They're all the same. The great ones are doing mediocre, and the, the not great ones are doing mediocre. On the, on the private side, the best operators are doubling the returns of the public guys. Double. The worst guys are losing money, right? So they're making 0% returns or negative returns. And so So the way you differentiate yourself, you know, it's almost impossible. People try to beat the public markets all the time and no one can do it really. But, but in the private markets, you absolutely can beat the market. And the way you beat the market is by doing better due diligence and better underwriting of these, of these private operators. And you can absolutely beat the market. Anyone who does great operator selection consistently in the private market is going to kill it.

Absolutely. That is the foundation of private markets is the operator. Well, the family office model once was reserved for the ultra-wealthy. What does democratizing that model look like today for high-income professionals?

Yeah, great question. And it used to be prior to 2012, Companies who were sponsors, and like Aspen, my firm, we sponsor a lot of investments. So when we were raising capital to place it into real estate or into an oil field or whatever, we were only allowed to approach people that we knew, that we had a relationship with. Okay, we're only allowed to do that. And what it does, it means no one could ever advertise or promote. You couldn't have a webpage even. Okay. What happened in 2012 is is that all changed. It's called the JOBS Act, and it made a 506— a Reg D 506 exemption, uh, C— 506 exemption. And what it allowed to do, that as long as companies like us verified that we were talking to accredited investors— and that means you have $1 million in income minus, except for your house, or you have $200,000— sorry, $1 million net worth Except for your house, or $200,000 income for the last 2 years, and you expect to do the same this year. If that's an accredited investor, as long as I verify that my investors are accredited, I can advertise, I can have a web page, I can do podcasts, I can do webinars. Well, what's happened is that has opened the doors wide. So now you can find out about these companies. You don't have to just know somebody. Right. You can find great operators. And so it's, it's been a proliferation of sponsors, and that's good and bad, right? Because there's, you know, the bugs come out, right? And, and, and you get the good, the bad, and the ugly. There's a lot of really bad sponsors that are dishonest. You know, there's not that many really, but there's enough, right, that it's a concern. And then there's just bad— there's just bad operators and plenty of them. But there's also great operators. And it is the way, if you can navigate that minefield, you can be extremely successful.

Yeah.

Absolutely. And yet there's still, I think it is, there's only about 5% of accredited investors who are actually in private markets even today. And well, I think there's a number of reasons for that, but for a successful professional sensing something structurally missing in their portfolio, What is one practical first step towards earning more with less risk through private alternatives?

You know, first step, and this sounds self-serving, but it's honestly buy the book Invest Like a Billionaire and read it. It really is the Rich Dad Poor Dad for the millionaire set and trains you how to, you know, one, how the math works, goes through all the different private alts classes, what their superpowers are, how to use them in a portfolio. It goes on how to structure your portfolios, how to, you know, You know, legally how to structure them, how to avoid, how to set up for great tax, how the big boys do this. How do they, how do they, they pay less taxes than everybody?

How?

I go exactly how they do it and you can do it too. So, so getting a, just, it's really educating yourself is first and foremost and finding great podcasts, you know, like this one and others and, and educate yourself is first and foremost is, is really the, the very, very beginning. And, and then the second is find some, find some great offers and start to take some steps. You know, I find I encourage people to find a great operator and invest a small amount and just to start to get comfortable. You know, I find I pay a lot of attention when I put a— when I write a check, all of a sudden I pay attention, right? It's all theory until then. As soon as I write a check, now I'm paying attention. So I write a check, it's kind of my dues, right? I pay my dues and now I'm going to— I read those investor reports, I talk to them and I educate myself having— because I got a little skin in the game, got a little stake. So that's really— I encourage people just to take the leap, but take a small leap and a leap that you're comfortable. Hey, if I made a mistake, it's not going to change my life. And, and if I win, it's gonna be great, you know. Um, and that's the way to get started. But first, educate yourself. Second is just, just take a small leap.

Yeah, absolutely. Well, we've had a really powerful reframing of wealth building today. So today, Bob showed us that the real issue isn't market returns, it really is structure. And so we discussed volatility drag and why diversification can dilute compounding and how billionaires reduce risk through disciplined private investing and strong operators. So Bob, thank you for helping us think beyond public markets. If you would like to go deeper, you can certainly get Bob's book. It's a USA Today bestselling book and you can find it at Invest Like a Billionaire. And we hope that you will do that. Your local bookstores are great, but you can also go through Amazon as well. And if you're ready to move beyond traditional exposure and begin building intentional passive income, through secured high-yield appreciating assets, you can join our mini masterclass. It's our free gift to you, and you can find that at www.go.stetalker.com/beyond-paycheck. Until next time, build with structure and let your capital work as intelligently as you do.

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