👋 ASB Partners Nuggets 5.16.25
This is a short weekly email that covers a few things I’ve found interesting during the week.
Interesting Links/Reads
Many links are sourced from Marginal Revolution (bold and italics are my own to highlight what I found particularly interesting)
2."Half of Africa’s surface water is packed into one country: the DRC" o3 supports the claim.
Matt Levine on creative ways Elon Musk can pay himself in stock
I think that sufficiently describes the solution, but just in case here’s Clay’s email:
Is there a legal or tax reason why Tesla couldn’t buy a private company owned 100% by Musk through issuing $94b of TSLA stock in order to secure his future services as CEO? I assume the board and shareholders would wave it through. I assume it could be done as a tax-free share exchange, and Tesla would book essentially all of the acquisition price to goodwill.
Levered 401(k)
What percentage of her net worth should a 30-year-old professional have in the stock market? I am not going to give you investment advice, and there is a wide range of plausible answers. “Zero, put it all in Bitcoin” is I guess on the list. A popular rule of thumb would say 70% in stocks, with the other 30% in bonds and cash. There is, however, a good theoretical case that the right answer is really 200%, or 500%: Most of a young professional’s economic wealth is the present value of her future employment income, and borrowing money to buy more stocks is a good way to diversify away from that one risky asset.[1] Also many 30-year-old professionals buy houses for considerably more than 200% of their net worth, and putting 200% of their net worth into the stock market could again be useful diversification.
But it is not easy to put 200% of your net worth into the stock market, because where will you get the money? A mortgage on a house is a pretty standard product in the US, but a mortgage on a retirement account is not. Bloomberg’s Suzanne Woolley reports on someone trying to change that:
Basic Capital’s basic pitch: Its 401(k) and IRA platform offers savers $4 in leverage for every $1 saved. At current interest rates, the cost of that extra money, which sits in a limited liability company created for each account, would be about 6.25%.
Here’s its website, saying that “Basic Capital closes the ownership gap by enabling Americans to finance investments.”
A few points. First: This is cool. There are already various ways to get leverage in your stock portfolio (options, futures, margin loans), but they tend to be focused on the short term and prone to blowing up.[2] This is not that: This is “an [individual retirement account] paired with a fixed term, self-amortizing loan,” something much closer to a mortgage. Basic explains that “your IRA buys sole interest of an LLC that we set up and manage on your behalf,” and the limited liability company “secures financing for 4 x your … contribution.” The financing appears to have a five-year renewable term, and:
There are no margin calls or mark-to-market triggers. If the market falls below a certain level, you aren’t forced to liquidate. The financing is structured more like a mortgage: It’s a loan to a separate entity (an LLC) that holds the assets. There’s no personal recourse beyond your initial contributions; you cannot owe more than you put in, even if the market crashes.
But there is one important compromise here. A problem with the idea of a levered retirement portfolio is the interest bill. Basic’s loans charge the secured overnight financing rate, SOFR, plus 2%, so currently the rate is about 6.3%. (Basic charges various separate fees of its own.) If you put in $20,000, they will lend you $80,000, for a $100,000 portfolio, but you’ll have to pay about $5,000 a year in interest to keep the portfolio.[3] If you put $20,000 into your retirement account, it’s quite possible that you can’t afford to put in another $5,000 every year, and even if you can, it is psychologically a bit depressing to have most of your retirement contributions go to interest rather than new investments.
That is, the problem with borrowing a lot of money to buy stocks for retirement is that it has negative carry: It requires you to pay cash every month, rather than bringing in cash. You are buying stocks for capital appreciation, not steady income, and you have to make years of interest payments to get the payout at the end.
There is another related problem: Who would lend you the money? I mean, who would lend you money to buy stocks with (1) a five-year term, (2) no margin calls, (3) no recourse to you, (4) a fairly low interest rate of SOFR plus 2% and (5) an 80% loan-to-value ratio? The annual volatility of the S&P 500 is about 20%: A 20% drop in market values is not all that unlikely, and if the market drops more than 20% the lender will lose money.
Basic Capital is well aware of these problems, and it has a solution: Instead of buying stocks in your levered retirement account, you mostly buy bonds. The bonds will give you steady cash flow to cover the interest payments, so you don’t need to pay out of pocket. Basic’s FAQ explains:
Currently, funds are allocated 85% in a diversified bond ETF and 15% in SPY (the S&P 500 Index ETF). The 85% allocation to bonds is intended to generate yields that exceed the cost of borrowing, creating positive carry. The 15% in SPY provides equity upside.
And Woolley reports:
But, the thinking goes, the startup can find private credit investments from the major players in the industry that yield more like 9%, meaning they will throw off enough cash to cover the borrowing costs and then some. Mix in some traditional stock-market exposure, and — assuming those private credit yields persist and that equities gain in line with historical averages — the startup said savers can expect low double-digit returns.
Ah. On the one hand: Yes. This solves the problems: The bonds (or private credit) pay your interest bill, so the portfolio has positive carry, and the bonds (or private credit) are much less volatile than stocks, so lenders are much less likely to lose money and will be happier to make 80% loan-to-value loans.[4] And levering up to buy bonds, or private credit for that matter, might be a good trade for an individual with a long time horizon. The long-term return to bonds is usually higher than the long-term return to cash, and you get the equity upside for free, as it were. And maybe private credit will do great over the long term!
On the other hand: What percentage of her net worth should a 30-year-old professional have in the stock market? This product is a pretty complicated way to put 75% of your net worth (that is, 15% of your assets, which are 500% of your net worth[5]) into the stock market. (And then put 425% of your net worth into, like, credit spreads.[6]) The smooth intuitive thing that one wants here is a way to put 500% of your net worth into the stock market, but this isn’t that, because that doesn’t carry.
Of course this could be a way for retail savers to put 425% of their net worth into private credit funds,[7] which, heh. We talk a lot about private credit around here, and three points that I sometimes make are:
Private asset managers looooooooooooooooove to find retail investors to sell to. Finding retail products to put private assets in is the absolute number one pastime of the financial industry right now, so I bet these guys are getting a lot of meetings.
There is a lot to be said for putting private assets in retirement funds, since your 401(k) has a long time horizon and no need for cash in the short term, so it can take some risk and illiquidity to maximize expected returns. (And there is a lot to be said against it, mostly “fees,” though also “risk” and “opacity.”)
Private credit is in theory systemically safer than banking, because private credit loans are funded by long-term locked-up equity investors rather than by short-term flighty deposits. And retirement funds, with their long time horizons, should be good sources of capital for long-term lending. But of course as private credit gets bigger it gets increasingly levered, which increases run risks and its interconnections with the financial system. One form of this is that a private credit fund will raise $100 from long-term locked-up equity investors, and then also go borrow $100 from a bank to make $200 of loans, but there are other forms. There are lots of places to put leverage. If you have a $100,000 stake in a private credit fund, you can (apparently) borrow $80,000 against it, in your 401(k).
I don’t know who is making these non-recourse SOFR + 2% loans to limited liability companies in individuals’ retirement accounts, but it would be funny if it was private credit funds
It seems we’ve created a vast multilayered system that evaluates the worth of millions of young adults and, most of the time, tells them they are not up to snuff.
Rejection reinforces the dark world mentality that is so prevalent in our culture — the idea that the world is menacing and that people and institutions are untrustworthy.
It’s just phenomenally hard to be young right now. There must be an easier way to grow up.
Here is one link. And more. And some CNN coverage. One of the few conspiracy theories I believe in.
And hey people, do you know why this, if it is true, is a real crime? Because the vaccines worked and saved many, many lives.
Talk to some vaccine scientists if you are still confused about this one.
Podcast/Videos
In this episode, Nicolai Tangen sits down with Sir Chris Hohn, founder of The Children's Investment Fund Management, one of Europe's most successful hedge funds. The discussion highlights the critical importance of high barriers to entry in investing, the power of long-term thinking, and how intuition shapes investment decisions. Chris also shares his journey into philanthropy and his deep commitment to addressing climate change and improving children's health globally. Through his foundation, which manages over $6.5 billion, Chris gives away more than $500 million annually to create lasting impact. In Good Company is hosted by Nicolai Tangen, CEO of Norges Bank Investment Management. New episode out every Wednesday.
you look at it over a longer period but most investors are unwilling or unable to
31:45
invest on a long-term time horizon because either they don't know what they're doing which
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interestingly goes uh back to what War they think it's risky which goes back to
31:58
what Warren Buffett was when he was asked what the definition of risk was you know what he said not knowing what
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you're doing so really good nugget here is that if you buy something which is really good it doesn't quite matter what
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you pay for it because it will grow and secondary over a long uh well I say the
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let's just say it like this the multiple to a point yeah whether you buy buy it at if it's growing it's all maths yep
the but I can't you'd have to ask them uh I I can't say definitively um but I um I I I
1:01:30
I yeah I I give away everything I earn i I don't really care about money for uh
1:01:37
because other than its value in helping people when did when did you learn about
1:01:43
philanthropy who taught you when I was in New York working for a hedge fund uh
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one point after about three or four years it made I don't know two or three
1:01:56
million and they I had done well and they said "You're going to get a $10 million bonus." And I just this is in
1:02:05
intuition said "I don't want it i I want to just give it to charity." And I created a a US foundation and gave it to
1:02:12
it um and I didn't really understand
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it what was driving me for 50 years
i would uh meet with Bill Gates did a lot of charitable work with him over the years
1:02:32
and he would ask me and I I couldn't answer the question and uh eventually I did understand it and uh better late
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than never as a as a soul urge that there's
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essence who we really are what we really are isn't the personality or the
1:02:50
physical body but you know soul or consciousness and and that um some would
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call it life yep that's something that gives us life and uh that
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um and will yep gave you you know in in the same way you uh Nikolai had a a
.uh that's uh the soul is is service desire to help to to to help ultimately
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humanity and u where did that come from it's innate within everyone that but the
for me I could never find any purpose or meaning in my life except
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service and uh and that is clearly uh you know something you could say it
I hope you enjoyed it.
Adam