How Elon Musk Got $94 Billion for Free?

If you guys don't understand this, you'll probably never really be rich. And this one thing is sort of the key. It's how the rich use debt. In fact, it's also how Elon Musk used debt to get $94 billion for quote unquote free. The truly wealthy use debt in a way that we don't really understand. And I wrote about it in this tweet that went a little viral. And so I thought we'd break it down here. This tweet is all about one type of debt that the wealthy use that I consider good debt. Bad debt is like credit card debt, short term debt for, you know, payday loans, those types of things. Not good. What I am going to talk to you about is one type of debt that most people don't realize. Almost all of those in the Forbes 100 list use. The truth of the matter is we were taught a bunch of lies about debt. The debt is always bad. It's irresponsible, it's dangerous, it could bankrupt you. We were told that maybe even debt was predatory facing the highest debt levels ever. All debt is bad. If to college you're almost certainly going to get it and if you do, it will follow you for the rest of your life. And when you scroll through the responses on this tweet, it's pretty hysterical because some mention that the Aramaic word for sin and debt in the Bible are the same. Another says Islam says taking interest is forbidden. A quick scroll of the Internet says even the fat and happy Buddha has a framework on money called the Buddhist Dhamma, which means that money that originates as interest bearing centralized, privatized debt is unethical. So like our conflict on debt goes deep. But all of those things, maybe some of them are true and there are echoes of it. But if you categorically don't use debt, I don't think you're ever going to have that fu level of money that we all talk about here. You don't want to go bankrupt, but you have to understand that debt is a lever that lifts the world. When you remove the emotion from it and insert the efficacy of debt, I think you're going to change your mind. Okay, so how do people use it? Here's one I'm going to talk about today. It's called stock collateralization. Fancy word with a ton of vals that really means this. Avoid taxes. Take out loans on your equity. So Elon Musk, Larry Ellison, Bill Gates all borrow against their stock to get money and avoid capital gains tasks. This is called securities based loans, stock collateralization. But really how it works is if you hold a sizable share, a sizable number of shares of a listed company, you can do this same thing. You can essentially take out money on your equity. Let's do a case study. Study really quick. Musk, for instance, has an Evergreen credit facility that means a line of credit debt, $90 billion, where he uses this strategy. He takes out his full 175 million shares of Tesla stocks, let's say at Merrill lynch, where he has them. He calls up his banker and he says, hey, can you pledge? Which means put up the collateral at the bank in my stock in order to give me cash. So let's say they won't let him do all 175 million, or he doesn't want to. So he takes 88.3 million Tesla shares, which is what he did. That's a 36% of his stake. That 36% is worth $94 billion because he collateralize or uses them as something that the bank can come in and take back. If he doesn't pay back their loan, he can take out now $94 billion in cash without having to sell his stock. He doesn't have to make any changes. It's just a loan. Typically, the interest rate on These loans are 1 to 3%. They're super, super low. And now Elon's money can keep growing because he believes in Tesla and the stock staying in the market. But he can take the $94 billion and go do something else with it. So let me tell you how common this is. 32 billionaires that we can track from the Forbes 400 have this type of line of credit of about, let's call it Fortune 500 companies, all of those that are out there, more than 500 of their executive officers have stock loans. And 5% of large shareholders pledge collateral, too. So that means even the people who own the stock do this thing. The average pledge is $427 million. Pennies, basically. Now, while the total amount tracked from this group is going to astound you, it's more than $239 billion. And that's according to audit analytics. I'm not making this stuff up. So the most successful people do it. A bunch of executives do it. How does it work and how can you use it? Okay, well. Well, how do you repay the loan without selling? Lots of people ask me. Aren't you just kicking the can, having to eventually pay? Maybe. Or your stock keeps growing and covers your debt service, which means the amount that you have to pay as interest on your loan. So say you're getting a return of 10% over time and you're paying less interest than that, you are ahead. If your loan interest rate is 5% but you're making 10%, we are winning. Your dividends basically pay for the interest. Now you would say, hey, I totally get why they do it. It's like free money. But why else do rich people take out these loans? Shocker. It's because they're not dumb. First and foremost, taxes. It is much cheaper to borrow against the value of your shares than to sell and pay taxes to cover the gains. Think about this for a moment. Let's get, let's get mathy on you. Federal capital gains tax can be 37% at the high end. States also have capital gains tax. So if you live in the tax prison hell hole with beautiful scenery that is California, you have a 13.3% capital gains tax. Which is probably why Joe Rogan picked up to Tejas before that Spotify deal came through. Or why most executives do the same things before they sell their stocks. It's pretty simple. Capital gains tax equals price of the stock sold minus original purchase price. So anything that is the difference between those two, their pain. So let's do a cost comparison of how this breaks down, which is pretty astounding. So let's say the interest expense is 1.5%. Could be up to 3% over 5 years. Let's say you have $100 million loan. $100 million loan at 3% APR equals $3 million in paid interest. 3 million x 5 years equals $15 million paid. Now, capital gains tax with no loans. Let's say you have $100 million at 35% tax. That equals $35 million. So you can already see the difference. You're saving 20 million bucks at the top. Now I'm no genius, but the difference between the two sounds pretty good to me. I'd like to keep $20 million in my pocket. Now, depending on the scenario, you could also write off the loan interest expense so that 50 million bucks against new investments, which further decreases your capital gains. So I'm not an accountant. I'm not telling you what to do in this situation. I'm not saying this works for everybody, but I am saying it works for a lot of really rich people. People. Okay, Number two reason, no limitation on loan purpose. So for a mortgage loan you have to buy a property, right? They're not going to loan you money for a million dollar house. For you to Go buy a truck. For a stock margin loan, you need to buy stock. So when you want to have a margin account where you're going to say, I'm going to buy this stock and I want to have extra money to buy more stock, it goes to that one particular stock, right? Stock margin. For stock collateral loan, which is what we're talking about here, you can do pretty much whatever you want. The interesting thing about these types of loans is that banks typically do not request a loan purpose. So you could take out $94 billion if you were elon and buy Mars or you could buy a home, travel, pay off expenses. You have a lot more flexibility now. It is up to the bank. But typically when they're dealing with these big dogs, they don't really care. Number three is it's a simple process. So I don't know about you guys. Have you gotten a mortgage lately? It is a colonoscopy. So how's this work? You just feel my pulse? You don't need a certain credit score or submit proof of income. You just have to hold the asset. Which of course means you do have to have some money to take loans on the money. In this case, it does take money to make money, but they don't have to go through everything else that you're holding. It's one factor. The fourth reason is you can invest more long term. So a stock collateral loan allows you to increase liquidity without selling. What does that mean? It means you have cash in your pocket to do stuff with without having to take chips off the table in the form of stocks you like for founders. This is awesome because it means you could avoid dilution, meaning that you sell and then you own less of your company, let's say. So you monetize your shares without losing control. If you've seen we've crashed, you watched a stock loan deal go down live. When Adam went into his bank, took out a large loan on his non publicly held stock at his brokerage account. You know, Business Insider axios reported that 400 million came from stock loans and the rest from outright sales. That's how he bought all those mega mansions and his hanging out doing whatever Adam Newman does. The fifth reason is that this trend is normalizing. So I have a loan out on shares in one of my brokerage accounts. I've had them many times. For instance, I took out a loan at like a 2.5% interest rate to invest in a debt deal that was paying 13%. The deal pays for itself. I don't have to use Cash to buy it. It's a win win. My money is just working harder, right? It's like driving the whip on your money. Now, most of my friends with higher net worths do this as well, but it's not just for high net worth. Like Wealthfront, Wells Fargo, lots of firms do it for smaller accounts now. Big, huge. Like, blow it up right now. Disclaimer. Don't be an idiot. The downsides here, they're big. In the worst case scenario, you could lose it all, the stock goes down, you need more stock or more cash to compensate, you don't have enough money, and you lose everything. That's a pretty big downside. Oh, my gosh. Okay, so I'm late. Nothing new there. But I wanted to give this to you guys really quick. We, like many of you, hate tax season. And so I reached out to our partner. They Bench. Thank you, Bench, to get these businesses in working order. And they told me about this thing that I'm kind of obsessed with. It's called Bench Retro, which basically means that if you're late, it's actually fine. They help businesses get back in line with the irs. They help businesses clean up their historical nightmares. And they basically make sure that there's no job too big, messy, or, you know, badly done. So if you guys don't know about Bench Retro, you should check it out. Thanks for sponsoring our video. I love these guys. Link below. And you know how we do it here. I don't talk about anything I don't use. All right, I gotta go. There's also an opportunity cost, which means your stock could be locked up, unable for you to sell until the loans were paid. And then you miss out on a great deal. This is why firms are thoughtful on who are allowed to do this. So the questions I would ask myself are just a few about debt before you take it on. So if you're like, cody, should I do this debt deal? I don't know. You have to be the adult here. Here's what I ask myself. Will it pay for itself? Number one, what if it doesn't? So I play this out. It's called second and third order effect thinking. So you're basically thinking, what if, what if, what if? Number one, will it pay for itself? I only take on debt when whatever I'm using it for will pay me more than the debt service. So more than the interest rate. So I don't buy boats or fast cars. I do deals. Here's an example. I bought a rental property with a stock loan, using the income to pay for the debt service. So I made more than the 3% they charged me. Example number two, buy a business with a stock loan. Use the profit to pay for the debt service. All right. The second, what if it doesn't work out? What if I am totally wrong and I end up not being able to cover the debt service? What will I do? I try to not take risks that I'm aware of, at least that will bankrupt me. So how do you cut your losses? Well, in those two instances before, you could sell the rental property. There's inherent value there. It means it's worth something in and of itself. And two, you could sell the business. Right, because the truth is that chaos theory reigns, which means something can go wrong. It probably will. Let's put a little bow on this bad boy, shall we? Debt is neither good or bad. It's simply a tool. A tool that the super wealthy truly understand and wield intelligently and that most of us do not use well. And you know, I understand this because I came from an immigrant family where the thought of debt was so bad that my parents don't even have a mortgage on their house. They paid it off entirely because they were concerned about what it could mean to owe somebody something. But when you think about debt as just a financial instrument, your game changes completely. You never want to forget the old Warren Buffett ism, which is never risk what you have and need for what you don't have and don't need. But you definitely need to understand this tool called opm or other people's money. If you have questions on debt, why don't you throw it below? We'll try to answer some of them. Did I forget to tell you that we have an entire article on this on contrarian thinking? If you want to subscribe to our newsletter, if you want to see all these graphs broken down, nice little detail, I would subscribe right here.