Prevailing wisdom extolls the virtues of diversification. Spread your effort and investments so that no venture can bring you down. But how much do you know about anything with so little time invested in each? Look at the richest individuals in history, and you’ll find very few who did it by diversifying. Most took big bets on themselves, burned the boats, and pushed all their chips onto the table. We debate the merits of both strategies in this episode.

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Watch the episode here

 

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Should You Narrow Your Focus Or Spread Your Bets?

Frankie.

Ian, you son of a bitch.

Frankie, I’m already having a great day because Jenny made bacon and I got to it before the kids did. I’m not going to lie to you.

There’s another great thing happening. Ian is also flexing behind him. I see over your right shoulder, you got some cards. Whom do we get on the desk? Who’s on the right? I want to see that card on top of the right.

These are all sales I’m looking to ship that I’ve sold on eBay already. That is a Ted Kluszewski 1951 Bowman card. The back is a little bit beat up. It was still sold for $20. I’ll show you one more because you always the Meats cards. That is a Joe DeMaestri. That is a Rodeo Meats card, which came in a hotdog package. There are a couple of holes in it. The card is peeled off on the face. It still got me $50.

I’m doing some internet trolling and I’ve found someone who’s looking to load a bunch of sports memorabilia so I’m going to try and buy some stuff later.

You’re going to buy a storage unit?

It’s in someone’s basement. I’ll go through it with you when I get around to it but I’m going to make a call to him as soon as we finish. I’m going to try and buy all of these football cards before 1990.

It’s fascinating. Frankie has made a fortune by buying prices no one else can get their hands on. All the time, I’ll send him a note like, “I landed this card. It’s a PSA 10.” He’s like, “That’s awesome.” I’m like, “Look, there’s another one. That same seller selling the same card.” Frankie’s like, “I can’t buy retail. I’m in here looking in people’s garages and ship for gems.”

Frank found a few gems. He’s also found some garbage and so because Frankie’s my best friend, I’m like, “Solidarity. I should not buy all high-end shit. I’m going to try to go do some bargain hunting.” I found a full set of a 1989 football set. I’m like, “Probably getting fleeced.” He wrote back, “You’re probably getting fleeced but it’ll be fun. Here’s what I’ve learned so far. Normally, they’re a little off-center. The corners are a little chipped or they wouldn’t have been selling it in the first place.” One of us is going to hit big one time. It’s going to be great.

We’re going to be rich, Ian.

For the record, I want to go back to I’m in a good mood because I had bacon. That is almost a one-to-one correlation in my life. If Jenny makes bacon and I get my hands on it before the kids, I almost always have a great day, Frank. It’s rare I have a bad day when I start with bacon. It’s rare I get it because I’m usually in my office before the kids are up and going to school. I should sleep in more because Jenny’s been making bacon more often. It’s a good way to start the day.

Why is mama cooking breakfast with no hog, no barking from the dogs and no smog? That’s a great line from a great song, It Was a Good Day by Ice Cube.

Amazon is in the news. They’ve announced further cuts so they’re going to go up to 10,000 cuts. A lot of them are in the corporate area. One thing struck me in their announcement, Frankie and got me thinking. Jassy, their CEO came out and said that they were doing a full business review of all of their businesses. They were very focused on profitability.

The big tech companies, in general, had been spreading their bets all over the place for decades. Tons of unprofitable businesses, moonshots trying to figure out the next billion-dollar business and lots of patients. The reason is the economy was great. We’re in this everything bubble and Amazon’s the everything store.

They had so much profit coming in from their retail business, cloud business and advertising that they could spread their bets all over the place. The market’s different and those cash cows aren’t generating the same cash. Jassy is going and looking at all their businesses. What’s come out of this is they’re looking hard at their hardware businesses.

It turns out people are not buying as much on Alexa as they initially thought. They just use Alexa for trivial and silly Google questions, play a song and google what was the New York Met’s record in 2021. “Amazon, could you put on Christmas music?” They’re not going on and saying, “Amazon, order twelve Gillette razors.” They’re not doing that.

That was the bet years ago with Alexa as people get so used to having Alexa that they do all their shopping with it but that’s not happening. The Alexa business loses $5 billion annually, which is wild because almost everyone I know has an Alexa or multiple in their house. It’s still not making money because they spend so much on R&D. An exciting thing for me in this is that Amazon has Ring. They bought Ring years ago.

The Alexa business for Amazon loses 5 billion annually, which is crazy because almost everyone has an Alexa. Click To Tweet

Ring announced years ago that they were coming out with a connected car alarm. They announced that before we ever even raised money, it was in our investor deck that we thought that was a good thing because Amazon is saying this is a big enough market that they want to enter it. Ring does not have a car alarm on the market. With our car alarm, we’re going to beat them to market with our tiny little team in Atlanta. It’s a talented team but I guarantee you, we’re spending a penny for every dollar Amazon has spent to try to get a car alarm to market.

David and I were excited to see this because it’s like, “Jassy has taken a chainsaw to their hardware businesses,” which Ring is one of their hardware businesses. The car alarm is a good example of that’s a business they’ve been working out for two years and you cannot go buy a car alarm from Ring. How much money did they waste?

What Jassy is saying is, “We’re going to go get focused on our most profitable businesses and we’re not going to operate the way we did while this everything bubble was operating.” He’s looking at, “This is December 22, I’m not going to treat my business the same way I did on December 21.” Wall Street likes that. They’re like, “Great. Get back focused on being the best retailer. Get focused on your cloud business and advertising.”

I bet Jassy is going to find 4 or 5 businesses, reinvest heavily in those cashflowing businesses and cut everywhere else. It got us thinking a little bit for an episode, where should everyone be looking to operate differently? Is this the time to narrow your focus no matter what you’re doing or is it better going into a recession to spread your bets?

There are a couple of things that come to mind with this. During boom markets, it makes a lot of sense to not pay government taxes. What you do is spend tons of money like $5 billion. Nearly everyone has a ton of money but it’s a rounding error for Amazon. I don’t know what their top line is annually but their market cap is very close to $1 trillion so this is 5% of their market cap. It’s a small number even though the numbers are astronomically big.

These are the things that lead to big decisions and inventions that power things. This happens a ton in healthcare, medicine, tech companies and all of these different things. Meta’s going through the same thing. They used to be Facebook and then they’re Meta. They’re trying to do the metaverse and all these other things. This happens but what I’ll say is this. As you were talking about this, I hadn’t thought about it earlier but I thought about it now, did you ever read David McCullough’s book about The Wright Brothers?

I did not.

It’s a great book. The Wright brothers invented flight. They were bicycle mechanics from Ohio who in the summer would drive down to North Carolina. They ultimately invented flight on a little hill in Kitty Hawk, North Carolina, which is in the Outer Banks. The Wright brothers did one thing. They worked on a device that propelled. The device propelled on the ground, bicycles.

They took it to the air and they were able to be the first people to figure out how to beat science and fly. They competed against a ton of people. The US government was big and spending tons of money on how we get people to fly. They were all very distracted or they didn’t have the right motivations. The Wright brothers were doing it from a place of purity and they wanted to do it.

Against all odds, they won. They were singularly focused on 1 thing that had 2 applications. When you get into a recession, it’s a wonderful story that talks about what happens in a recession. You must focus on fewer things, not more. If you look at history, the people who make change are focused on one specific thing and ultimately can have multiple applications.

 

That’s what’s starting to happen. In little businesses like mine, we’re focused on what’s the top line and what drives the most revenue. We don’t have pet projects. My unemployment numbers are way different from Amazon’s because I have a much smaller company but percentage-wise, it’s relatively similar.

You said something there too about when you get into size. Google was born during The Great Recession. That’s when it got hot. When Google started, it was insanely focused on being good at one thing. Search. We want to be the best search engine in the market. We want to get the most quality. When you type in a question, you want to get the answer you want on your first shot. Most search engines back then sucked. They didn’t get you what you wanted. You had to hunt and peck. Sometimes your answer was on the third page of the results. Google was very focused on building the best algorithm.

Google is one of the biggest companies in the world. The search engine can’t keep growing so they have to place bets in a lot of different places to find the next search engine. When you’re small, you can’t spread and dilute yourself. You have to figure out, “What can I make the most money in this market? How do I invest most of my resources in that to be great?”

Take our car alarm company. We’re not starting with ten products, Frankie. We’re starting with one product. You can’t customize it. You’re either for us or not for us but that’s the product we have. We have to be very good at it. Our focus is early in 2023 selling 3,000 of those and we’ll worry about having a diverse set of products when the cashflow makes sense.

People don’t usually come to market with nine products. They come to market with one. If you come to market with 9, you quickly go down to 1 because you realize it’s hard to do multiple things. It’s the way I was saying with the Wright brothers. It’s hard to do a bunch of things. It’s easier to do one, especially when everything is focused but then you can take your focus and make it go outward.

With the car alarm company, I’m an investor in it. I’ve looked at every deck and a lot of the stuff I had to sign off on, I couldn’t share it. I’m fairly well-trusted here but at the same time, there’s a lot of proprietary information in there. There are iterations like, “Here’s device two. Here’s device three. Here’s device four.” We’re getting device one out the door.

These are things we think the future could look like because we excite people with the future. This is the one we’re solely focused on because we are going to learn how to fly. There isn’t a device like this so you’ve got to get something out, test it and make sure it works. That’s what ultimately happens. There’s survival or relevancy. Once you get survival or relevancy, then there’s sustainability. That’s when people get into multiple offerings and different products.

I love your thought there. Something popped into my head. Diversification is sort of a luxury. You earn the right to diversify because you have enough assets to do it or you’re wanted enough in the market where you can diversify into other areas.

It pissed me off in my twenties when people are like, “You need to diversify.” Screw you. I need to not go broke. This is the money that I have because I had no money. I need to do everything I can and lump it into something that I know was a winner. Everybody thought I was nuts that for every penny I had, I put in NVR’s stock.

I believed in the company. I knew the inner workings of the company. I wasn’t terribly global yet. I was in my twenties. I believe in this place. I understand the management and the business strategy. I remember after 9/11 I put $3,000 into whomever the precursor was to American Airlines. I remember they announced that they were going to bankrupt the company and take the stock down. I saw that. I didn’t know what it meant and I remember I lost my $3,000 because they took the stock to 0. That meant something to me then. When people talked about diversification, I was like, “That’s a luxurious problem for rich people who are old. I don’t have that luxury.”

I was the same way, Frankie. I held my stock options until maturity. I’d hold that ship for ten years. I never sold. I had people telling me the same, “Sell some of that and spread it out to other companies.” I diversify more. It’s a luxury. At the time, I didn’t have time to research other companies. What company did I know better than the one I was working 16 hours a day and 6 days a week? I knew my company inside and out. I knew the CEO, the presidents, the board, the chairman, our strategy, our land position and what we thought was going to happen in the next twelve months.

I trusted all those people. I trusted they weren’t going to do dumb things. I knew them personally. I was the same as you. Why would I diversify? I’m all in on this company in my energy, especially during The Great Recession. I got blinders on. I’m going to kick ass and do my best because I believe in this company and our strategy. I also knew something about my company.

One thing I thought NVR did a good job of was they didn’t play favorites. People didn’t get jobs because they knew someone for the most part. NVR found the best talent and put them in. It was a meritocracy. If you were kicking ass, you could come from outside the company as I did and race up the ladder as long as you produced. Not until later did I get focused on diversifying anything. Now, I’m relatively diversified versus then. I got my hand in a bunch of different pots.

A good summary before we move into the next piece is this. Diversification is a luxury that comes with age, money, a skillset and a wider reach. I have 50 people that work here whom all help me. I can look at more things from the standpoint of I have more exposure because I got more people who can do it than I can take the information.

Diversification is a luxury that comes with age, money, a skillset, and a wider reach. Click To Tweet

Ian, we talked about this when we did the episode on the ten things you must do differently in a recession. It makes sense to say it here. What you want to do is find things with a high floor and a low ceiling. That was what we had talked about. This fits perfectly here. You go from diversification to things where you know you’re going to put money in. It’s going to get a return and you’re going to get it back. It sets the tone for everything we’re going to talk about.

Talk about that. Jassy is cutting the hardware business because it’s not as profitable and he’s focusing on the core retail business, the core cloud business. When you look at your real estate business, Frankie, Cava Companies in December 2022, how are you looking at your business in December 2022 versus December 2021, before this mess of a market started to crumble?

If you remember in 2021, until about October, everything was pretty good. I remember reading an economist article in 2021 and how that said we’re never going to see inflation again. Three months later, we got that wrong. Around Q4 of 2021, you started to see the ticking of the interest rates and things changing a little bit.

It started to change after Jerome Powell got reelected. Although that’s supposed to be an apolitical position, it’s political. He didn’t start raising interest rates until he was appointed for his next term. The market was good for us through about April of 2022. The six months in Q4 2021 and Q1 2022 felt different. We were looking at a discretionary move-up buyer.

What does that mean in English? It means someone who is going to sell their 2nd or 3rd home and is going to pick a nice home, $700,000 to $1.5 million in Richmond, which is a ton of money here. They’re going to move into it because they have a ton of equity and the interest rate is low. That’s the market that we were playing in.

If I can make 15% on a $100,000 house or 15% on a $1.5 million house, I’d rather make 15% on a $1.5 million house and those are about the margins. It’s a lot more money. We’re focused on that market. What we’re looking at is the price point for the first time because it’s gotten to an affordability market. We’ve talked ad nauseam here about interest rates being locked. These are the things. You could speculate at a higher dollar before because the market was strong and now, you want to take a presale or do different things that are going to allow you to make sure you get your profit and your money back versus trying to stretch.

 

You interact with a lot of business owners that are in a similar space to you through your mastermind. What kind of strategies do you see most people taking?

I was having this conversation with someone who works here. A lot of people don’t know what to do. Ian, I know what to do. We put all of our money into the company we used to work for because we believed in it. The reason we believed in it is that they’d been around for 55 years when I left in 2009. They’d been around for 65, 70 years in 2022. They’d been through multiple cycles.

The leadership team had been through multiple ups and downs. They went bankrupt in 1989. They came out of it on the other side in a way that the course was taught at Harvard on how to come out of bankruptcy, this company did a great job of it. We learned these things but most people don’t know them.

Our former CEO whom Ian went to work for when he transitioned over from GE, his name was Dwight Schar, owned part of the football team in Washington DC at some point. This guy achieved financially in ways that most of us can never dream of. He used to say hope isn’t a strategy. Someone told me, “I’m praying more and that’s how I’m going to get through this market.”

That seems like hope. That’s throwing up a Hail Mary. That is not the way to do it because most people don’t have the skillset. Most people have not been in this business for more than fifteen years. We have had remarkable things happen with an incredible wind at our back. I don’t think most of the market that I compete against is prepared.

When I quit my job in 2009 and I wanted to go find a different job, I had two major things I wanted to do. I wanted to own real estate but I also didn’t want to compete against Corporate America. I wanted to compete against mom-and-pop. I’m not terribly smart but I’m smarter than most of the people who run their businesses out of the back of a truck. It is the time when all the fundamentals that we’ve used for the last few years are going to benefit us as long as we can get through it. Most people don’t know what to do because they lack the skills.

It reminds me of a joke. A guy keeps going to church and praying to God, “Please let me win the lottery.” Every week, he goes in and gets a little more agitated. It starts with begging. The second week he comes in and he’s like, “I didn’t win the lottery. Come on, God. I’ve been good.” In the third week, he comes in, “You’re not a just God. I’ve prayed to you.” The fourth week he comes in, he’s indignant, “I’m leaving the church. You’re the worst God ever.” Thunder cracks and a big booming voice comes over while he’s in the church and says, “Moron, start by buying a ticket.”

Whenever I hear people talking about praying their way out of it, it’s like, “That’s nice but maybe you should take a little bit of action and not just hope for some things coming out of it.” When you look at your business, you have multiple lines of business and lines of work. You have different opportunities to make revenue. Are you leaning into one more than another? Are you taking a similar approach to Jassy? What’s the hardware business that you’re saying, “I’m going to put that on the shelf?” Your term is, “Let’s put it on mothballs for a while. We don’t need to do anything with it.”

I don’t have the diversification that Amazon has because I don’t have the frontline revenue or the top-line revenue. For me, it’s the product offering and the price point are the first places to look. Where are you spending money on marketing? One of the things we talked about is what percentage of people we do repeat business with or do we get referrals.

Something that I was told wasn’t a business source, I’m told is a good business source. It costs me $50,000 a month to run ads on television. If I was to build a newsletter and send it out to each person who sold us a house over the last ten years and we sent it to them every single month and we gave them $500 for a referral that closed, that would cost me 1/17, maybe 1/50 as much as television. It’s one of those things that’s effective. What you have to do is a couple of things. You got to look at where you’re spending, where you’re making your money and how you potentially spend a little bit less. Refocus some of those efforts on things that could potentially pay some more.

As a smaller business, you got to look at where you're spending, where you're making your money, and where you can spend less. Click To Tweet

This story is fascinating to me, Frankie. When you told me that you were shocked to find out how many of your sales were coming from referrals, I found that very interesting because you strike me as someone who, 1) Invests very heavily in lead sources. 2) Whenever I ask you, you know down to the penny what it costs you to get a lead from different sources.

Frank advertises on TV. Frank has billboards. Frank uses social media. Frank sends $50,000 in postcards based on lead sources of people that are behind on their utility bills or taxes. Frank has lots of different lead sources and knows them well. When he told me, I found out that I’m getting half my business from referrals and it blew up my mind. That shocked me.

It also was a lesson that a lot of times some of the absolute best business ideas are sitting right under your nose and you don’t even know them. Some of that, I’d be interested in. 1) How that happened, how you’ve been in business ten years and you’re just finding that out. 2) Sometimes a function of you was spread so thin on so many different lines of business. Now, you’re honing your focus more because the market is not giving as much.

There’s a happy ending to this story. We’re doing it now and working with people but it didn’t make its way to me. I talked about the people who don’t have the skillset. Most of my managers haven’t lived through one of these before. They’re relatively new at managing a business of this magnitude and size. I’m not. This is smaller than I’m accustomed to but they are.

They’re not asking the questions and elevating it. We’re not pushing and looking underneath these nooks and crannies. The reason this came about is that I started banging the drum about 75 days ago and things you have to do differently in a recession. It came up in a conversation with a lead manager. A lead manager’s good enough at their job where they’re like, “We still do this but we’re not focused on it but we could easily turn this into a program.” One of our good buddies is Jeff Paxson. We talked to him, the Mister 2% from Indiana. He sends me a letter once a month. He writes 1 paragraph or 2 but most of it is like boiler stuff.

He will tell a story about his family and that kind of stuff.

A lot of it is filler. I get those from other realtors all the time. I get probably three of those a month from different realtors. We can build that, print it out and send it. You’re paying for postage. I’m not a great writer. Ian’s not going to do this for me. Since I learned this, I’ve had a conversation with a blog writer who’s going to interview us, tell a story and get 2 or 3 little news things in there that promote the story that we’re trying to say like, “Now is a great time to sell prices.” Little things like this and then we’re going to put a little brochure in there about, “You get a referral, you get money.”

It’s easy to systematize that but what we need to do is have a conversation with everybody who works here and say, “If you see these things, you need to raise your hand and elevate it. You need to bring it to somebody. If you don’t know what to do with it but it sounds like a good idea or it’s generating revenue, how do we turn it into something we can systematize?”

What I’ve learned from rattling the cage is we run a good business and we’re not organized but people have gotten sloppy. I told people who are so busy, “Doing what?” I’m banging the drum and digging into things. I’m saying, “This person’s doing nothing. Why aren’t they in the office helping us with estimates?” You’ve got to force people to look different ways. I have a great staff. I’m going to teach them, “These are the ways that you must focus.”

We have a friend who’s a loan officer who sends out a weekly email and it’s all automated. That’s a service. That same letter is going out from hundreds of different mortgage companies. The guy that writes that charges you to use his bulletin that goes out with your letterhead on top. Several services could do that also, Frankie.

You might be able to figure out a way to do it via email and not have to hire a blog writer where you get a legitimate real estate writer who puts something out already. You get in on it, give them your list and send it through your software. There are other ways you could also look at it. I’m not going to delve too deep into it. The point is a lot of times, some of your best opportunities are running to your nose.

When you’re in a busy market where all you’re thinking about is, “How do I hire to keep up with this fire hose,” you’re not looking at some of that stuff because you’re making money. When you’re making money, you’re not always as focused as you can like a lot of people who are looking at their credit card bills and saying, “Why am I paying for this $5 a month app that I didn’t know I signed up for? I’m going to cut a couple of my streaming apps to save a little money.” It’s the same thing in any business. You go look and it’s going to be right under your nose.

 

Before we move into something else, I want to say this. I came up at NVR when I was a young person. I was always busy when I was at Ryan Homes. From 1998 until about 2005, I felt like I was always busy on campus and recruiting. If there was any spare time outside of doing my job, it was finding other people that could help us do the job.

Ian and I were both relatively charming. We’re good at sales. They sent us to campus. They had us in interview panels. I would go to interview panels twice a month, which in retrospect was tiring. At the time, it didn’t feel like it because I was in my twenties, it was exciting but it was super tiring. It’s a lot of extra time, effort and hours.

In about 2005 and 2006, we stopped hiring and started firing. We put a lot of effort into doing the job but who are the right people? How do we recalibrate who does what? We have to let go of people. We may have to do a job and a quarter or a job and a half. You’re never not busy if you’re doing it proactively.

The arc changes the focal point but these are the things that happen in business. It is a great time to look at, “How do I tighten my belt? How do I get more out of less?” There will become a time when we got to focus on hiring again. If you’re doing it right, you should never not be busy and always be focusing on what moves you forward at that moment.

I always knew I was more productive than you at NVR. I felt I got a lot more done. I realized why. You were always on campus but I wasn’t because I was banned from going to campus after they threw my ass in the clank of Virginia Tech. That’s why I was more productive. They were sending you because you were more trustworthy to handle your liquor while you were on campus versus old Mathews who got banned permanently from recruiting.

Frank is diving in and kicking a lot of the different tires. One thing that I’ve changed a little bit, Frankie with 5on4 Group is I am investing less in B2C. When I say B2C, B2C versus B2B. I spend money every month on marketing or at least I was. Social media marketing to sell my program and leadership essentials.

It’s a management program. It’s a twelve-week program. If you buy that program without any use of my time, it’s all fully automated for twelve weeks. It’s a $2,000 program but it costs 1,500 bucks a lead to get a sale for that. I’m making $500. It’s a lot of time, effort and energy. 3 or 4 of those sales a month are $2,000. To me, there are better uses of my time.

I’ve been focusing much more on B2B because companies are going into a tough market. I have several clients that are good clients that value me in live consulting. More of the live coaching, spending more time on the real problems they’re dealing with. I’ve been investing much more of my time so I quit advertising the B2C. I’ve quit begging for one-off deals because if I go to a big company, they could put ten people through my program. They’re paying for my live consulting so it’s much more than the $2,000 program.

Once you start doing a good job, a big company is willing to invest more in it. I’m shifting my time in my management coaching business to B2B. Fewer clients but bigger revenue and investing more time to give more value to them, I’m finding that that is a better use of my time than chasing one-offs. No referral business comes out of that small stuff. You can still buy it on my website but I’m not spending the time marketing it.

 

I would argue that’s a flight to quality That’s using your same skillset but going after a bigger target. No different than what I’m doing. I have an apartment building that I love. I bought it, financed it and did all kinds of. It’s awesome. I bought it for $860,000. I put $500,000 into it. It makes me 40,000 a year and it’s like clockwork but what I looked at was it’s a 13-unit building.

I can make 40 years’ worth of profit if I sold it in 2022. If I took that as a down payment, I could probably trade that into a 150-unit building instead of 13, especially if the market pulls back a little bit. If I find someone who’s in trouble but has financing in place, they need someone to put $500,000 down to take over their current financing. What we’re both doing in our way is what we couldn’t do in our twenties. We’re being selective and we’re diversifying but slowly and with a look to the future.

Ian does it for my company but we’re great friends. It’s pretty easy. He knows us very well but why focus on 50-person companies when you focus on people with thousands? It becomes what they call an evergreen business model. You start focusing on where there is less drag, more efficiency and ultimately more revenue. What I like to say is where can you look at where they aim? Where can you look where nobody is? Where can you use your skillset?

We talked about it and joked about it with the baseball cards. I’m using the same strategy I use with real estate but in my market, everybody’s looking for a $200,000 house. Less people are looking for $20 million properties because they don’t have the money. I can use the same skillset, things, analysis, spreadsheets and contracts.

Instead of making 15% on $300, you make 15% on $20 million. Those numbers change drastically. Ian and I are both doing the same thing. This is a place to get to over time and grow into. What crypto is teaching us is there’s no way to microwave this process. You got to learn the real skills but if you use the skills the right way, you can pivot and grow very quickly.

One thing I’ll add also is it depends on the line of work you’re in also. With a startup, Frank started his business during a scary time. You left NVR when you were bumping along the bottom. You can look back and be like, “How fortunate. You started it at the bottom.” At the time, I can tell you that is not how we felt. It was challenging to get a mortgage, get debt and take a chance on a guy like Frank that wanted to start a real estate business when everyone had gotten burned by real estate businesses.

You bought some stuff at great prices then. It wasn’t easy to get it because no one wanted to give you the money to go out and do it. You were having to beg your family to do those things. A lot of great startups start during recessions. For our car alarms, Frankie, we ship out our first devices in December 2021. In the first quarter, we’re marketing like crazy.

With all the money we raised, we’re going to go try to sell 3,000 of these in the first 4 months of the year. For us, there are some advantages to a recession happening like advertising all the big companies. Facebook, Google and Amazon are laying off because it’s a weaker advertising market. What does that mean, Frankie, for our cost to advertise?

It goes way down.

That’s great for us. We’re a startup. We’ve already raised the money. I was going to have to spend money on Google advertising, Amazon and Facebook advertising, whether it was a hot market or a bad market.

What else happens during a recession for cars? People end up riding in their cars longer. It’s insanely hard to buy a car. They were incredibly expensive. In most people’s lives, 53% of Americans rent so their car for 53% of Americans is their biggest investment. What are they going to do? Have you heard about this phenomenon where people are stealing their catalytic converters? It’s crazy.

I don’t know what a catalytic converter is but if it’s missing, it’s like you’re pancreas. I don’t know what it does but I’m sure if I didn’t have one, it’d be pretty serious. It’s the same type of thing with this. What they do is lean into it. I can’t buy a new car so I’ll spend $200, $300 or $400 on this alarm that’s going to protect my biggest asset.

For us, when you look at diversifying, we’re going to start by advertising in 4 or 5 different places. We are going to look closely. What’s working? Is it Amazon? Is it Instagram? All we care about is acquisition costs. What is our CAC, Customer Acquisition Cost? How much does it cost to sell one of our car alarms or monitoring devices?

We are very quickly going to shift our budget to whichever of those becomes the winner. If it’s Amazon, cool. If it’s QVC, great. We don’t care but we’re not going to stay diversified just to stay diversified because we’re too new. This comes back to we’re small. We’re a startup. We don’t have the luxury of Coca-Cola where we spread our marketing budget everywhere to be in every pour of you. We need to sell 3,000 units at the lowest frigging cost we can because cash is important and we don’t want to burn it. We’ll diversify it first to figure out which is the cheapest and then go all in and sell 3,000 units.

What’s fascinating to me about what you said about Coca-Cola is this. The World Cup is happening so I was watching the game that America needed to win and play into the knockout rounds. It was awesome. I had it on my TV in my office. We were having a meeting. We could look up and someone’s like, “We just scored.” You’re looking up but you see the ad for Coca-Cola. Right next to the ad for Coca-Cola was Crypto.com. They bought that before they went tits up.

We’re talking about our businesses but let’s switch to investing. We’re still towards the top of the everything bubble with prices so I’m selling everything obscure that I can. Poorly-graded cards are getting too much. People are paying up because there’s so much demand so people can’t get 10s, 9s and 8s high-grade cards. They’ll pay for a 6, what they would’ve paid for a 10 in 2020.

I’m trying to sell as much of that as I can, Frank. I’m holding onto my blue-chip names, my hall-of-fame guys and my high-grade cards. I’m holding onto the good stuff. This stack you asked me about are not high-grade cards and stars but they’re cards that people are still paying money for. I’m lightening the load with fewer cards but higher quality cards that I have.

When the market drops and prices drop, I’m going to go back and buy those cards at much higher grades and cheaper prices. Investing is the same as stocks and real estate. Everything is elevated during this everything bubble from low rates for so long. The air has not come out of everything yet. It’s going to happen. I’m trying to only hold the best and keep pumping my cash flow up.

Everything is elevated right now during this everything bubble, and the air has not come out of everything yet. Click To Tweet

There’s an emotional cycle that happens in investing. I remember it was 2015. I was on the phone with the seller. I was going to see the new Star Wars movie. I remember the seller said something like, “In this market.” She was referring to how bad the market was. I remember being struck by it. I’m like, “This person doesn’t know what’s happening. This person’s caught in the emotional cycle. They’re not in reality.”

Ultimately, we bought that house at a low number because she wasn’t up to speed on what was happening. She was still telling me a story from 2009 through 2012 that the market had changed. Unemployment was backed down. It was a tired story but the masses are usually slow to adapt. What Ian and I are looking at here is this. We talked about the emotional high.

It’s the opposite of the VIX. The VIX is the Volatility Index. The VIX was the absolute lowest on March 20th of 2020. That was the moment to get in. Housing is at its peak. These things don’t last for very long and it usually takes 10 to 15 years to get back there. What I’m telling you is people are going to think that the market is higher than it is and we’re going to be able to sell. Ian is on $100 or $200 baseball cards. What did that card trade for? Pick one of those cards and tell me what that card was trading for in 2018. A fifth? Half?

That’s accurate. Some cards popped 5X in 2021 from where they were in 2019. They dropped to 50% so there’s more to come in my opinion.

There are a bunch of major reasons for it. In 2020 and 2021, nobody could go anywhere because we were all scared to death that we were going to die of COVID. Everybody hunkered down and the word staycation came out. The other thing that happened is the government printed $4 trillion and hand it out. This causes above all.

The Biden administration is taking FHA loans up to over $1 million in the most expensive markets. They’re telling us they’re fighting inflation and they’re not. They’re doing all these things to continue the flow of money. What Ian is doing is he’s being smart and prudent. He’s reaping a profit. One of my favorite sayings is, “Never apologize for taking a profit.”

Never apologize for taking a profit. Click To Tweet

These things are worth 5X what they were a few years ago. If you don’t have to have them, get rid of them and be in cash. Warren and Charlie have been doing this for decades. These are the smart things that you can take advantage of. On the other side of it, we’re going to be at the bottom long enough to capitalize if you’re smart.

That’s not insignificant that the government went and raised conforming limits from $700,000 to $1 million since 2020. That’s the government trying to prolong the party. Frank and I talked about this in the last episode. At the end of a bull run, everyone wants to keep the party going a little longer. They end up at that 3:00 AM dive bar that they always regret going to. It’s usually through debt and credit cards. You fund your lifestyle a little bit longer even though you don’t have the cash.

The government does things like that. They raise the loan limits when they should be trying to pop that real estate bubble a little bit because people can’t afford to buy a house. Instead, they’re trying to keep it going by raising loan limits so much. That’s not the problem. The problem is the affordability of the house. Raising that loan limit means more people can get themselves into more debt with a high debt-to-income ratio and live beneath their means. That’s going to create foreclosures, more hardship than it’s worth and make the crash even harder.

 

They’re doing the exact opposite thing.

What was the performing loan limit when you got into the business, Frank?

It was $276,500.

They have raised $800,000 since 2002. That’s nuts. That’s a 4X or 5X increase.

In fairness, they raised it to that in California, the Pacific Northwest but in places like here, it’s over $750,000 so it’s 3X.

DC and New York are high-low limits, which is way more than you think. The ZIP codes got expanded. Years ago, it used to just be California and New York. They expanded the ZIP code so much, Frank, you wouldn’t even recognize what a high-cost limit is. Fredericksburg is $1,000,070, just so you know. That’s not California. That extends the party. It keeps sales prices higher for a little longer. What that does is it means a lot more people who don’t deserve it or who shouldn’t take on that kind of risk are going to get themselves into a $1 million mortgage. When a price is dropping and they can’t sell, they’re in trouble.

Let’s talk about this. Do you remember my buddy Mike Jake?

Yeah.

I love Mike Jake. He’s on my screen. I got a great picture of him. I was relatively new to this business in 2012 and 2013. I was having a conversation with him and someone like a newbie asked him about this program. He said something to me that was profound. They’re like, “Does that program work?” He goes, “Yeah, in 2009.” It was 2014.

He was better than me at the business then and he understood cycles. What dawned on me is, “Holy shit. He’s right. When matters.” I have gotten to a point where that’s a trope for me at this point but let’s talk about what that means. Ian and I were texting in 2008 when interest rates had a 4 handle so it was 4.99 or lower. We were like, “Can you believe this?”

They ran from 5% to under 3% or 2.5%. That was from 2008 to 2022. It was fourteen years. That was an incredibly great time to take on debt. It is an incredibly great time to avoid it with interest rates at 7% to 10%. Primary debt is maybe in the 6% but mostly in the 7%. What’s secondary debt? What’s private debt? Double digits. It’s insanely hard to make money when debt is priced.

At 3%, it’s easy. At 8%, it’s hard. 10%, 12%, it’s nearly impossible. If you haven’t stopped to think about that, stop and think about it. What does this mean? If you’re going to buy hard assets like me, can you buy them subject to the current mortgage? Can you buy or build 3 and get 1 with no debt? Are there ways to avoid debt? Debt is so expensive that it robs you of profitability.

Right now, debt is so expensive that it robs you of profitability. Click To Tweet

All the things we’re talking about with cash, I’m not holding onto the cash. I’m eliminating debt that’s lower than my current debt because it gives me profitability. Many people don’t have profitability if they’re entering the market. These are the things that you need to see from a cycle standpoint. Ian’s better at this than me with stocks. I’m good with real estate. I know what the timing looks but what do you want to embrace and avoid? Look at where you can have an unfair advantage if you do it the right way and tilt the scales in your favor.

I love that you’re talking about this because this is a part of the cycle where debt becomes important to keep everything going and pay attention to it. From a stock perspective, I wouldn’t want to own any company that is overly reliant on debt to run its business. That has to finance their business with debt. I like companies with good cashflows that can finance their business with cashflows. I know that’s boring.

Give me 2 or 3 companies that are heavily debted that you would avoid like the plague.

Almost every smaller tech stock, I would put into that world. I’d take Shopify that expanded a ton with a lot of different debt. All of those meme stocks are garbage like AMC.

What’s the antithesis of that? Apple, most likely?

Microsoft rolls in cash. They fund all of their finances through revenue. Apple’s another one. It’s boring as hell. Google. I say the same names all the time and they’re a little bit out of fashion because they got pricey. I don’t care because I own them for many years.

I got to say this is the best. Ian and I are getting ready to fly to Omaha, Nebraska, not a place to vacation, in 2018. We’re going to the annual meeting. Ian calls me up and was like, “Warren Buffett’s on CNBC and he’s talking about all this Apple stock they bought. Good grief. If we go all the way out there and all he talks about is Apple, I’m going to be so pissed.” When we got there, all they talked about was Apple.

I was so excited to hear from the oracles of the world. They announced that they’d finally bought Apple. They had never bought it before and I’m like, “That’s all I was going to ask them about.” Costco, it’s not just tech stocks for me. It’s companies that generate a lot of cash, run their businesses and are good operators.

If you rely on debt, you’re going to have troubles in the next few years because it’s going to be harder and harder to get into debt. We’re at a place in the cycle. Here’s the way it works, Frankie. It’s all different types of lending. Banks have to keep lending or they go out of business. Any lender of any kind borrows money and then lends it out.

When consumers no longer have the capacity to spend at the rate they were before, they have to take out debt. When rates go higher, those loans stop coming in. Take mortgages. Mortgages are hitting ten-year lows. You went from 3% to 7%. You had no refinances and people quit buying. It freaked everyone out. What do lenders start doing? Every cycle is the same.

 

The weakest ones are the ones who will go out of business if they don’t keep bringing in origination fees and fee revenue. They cut people but also start stretching their underwriting. They start giving people loans that they wouldn’t have given six months ago. They’ll take a crappier credit score. They’ll take someone with a bankruptcy a year and a half ago.

They’ll take someone with a high debt-to-income ratio. They take lower down payments to go in. All different ways of trying to squeeze someone into a higher mortgage payment. What that does is raise the risk profile of all those weaker players or lenders. The bigger guys start to lose business with them. Their loan officers complain and say, “I’m going to leave and go to ABC company because they’re doing stated loans.” The bigger companies, the ones that are not well-run, start to follow and do it themselves. This cycle happens when the banks are giving out the debt they shouldn’t give.

The party gets extended a little bit longer but all it means is the pain gets a little bit more acute at the end of it because there are going to be a lot of defaults at the end of this. I’ll give one more example around baseball cards. There’s a whole bunch of people that are out lending baseball cards. Eighty percent of an asset value, they’ll give you a loan.

Frank and I keep wondering, “How are basketball cards trading for $2.5 million?” Guys that are in their fourth year in the league have never won a championship, where 100-year-old iconic cards are not trading at that level and I’m figuring it out. There are lenders out there that will lend you up to $2 million based on the asset value.

When that asset value drops, you know what’s going to happen. They’re going to call and say, “Your card’s worth $1 million, not $2 million. We need $1 million back. We got a little margin call here.” That’s going to start happening and these people don’t have any money. You’re going to see a major collapse in a lot of these banks and asset prices because we’re in the everything bubble.

I want to point this out. When Warren Buffet started to buy the stock in Apple, it since split a bunch so it’s very hard to say this because the numbers are different. The basis of that stock in April 2018 was $41.31. This is Apple, 2018, a month before the meeting when he bought. It’s gone up by 3.35 times and that’s for the average person and they got a better deal than the average person.

As much as we thought this was a boring trade, it’s 3.5X in 3 1/2 years. This is why they’re some of the richest people on the planet because they understand. When you think something has run, they see that there’s still value in it and was a flight to quality early. Anything else to say on Apple or can I move on to the cards?

I’ll tell you something. They’re still buying billions of dollars from Apple. If you’re sitting here thinking, “I missed that wing.” I’m here to say that Warren Buffet is still buying a ton of Apple, Costco and Microsoft. The things I’m talking about, they’re still buying. They’re out of fashion and boring but those dudes buy things for the long-term. Even though they only got a few years left to live, they still buy shit that they want to hold for 20 to 30 years. They think they’re going to live forever.

Let’s move into a speculative bubble where it’s not as sophisticated. Trading cards. Would you say true or false, Ian? Even late in the cycle, lending standards around houses are much stronger than they were in 2007.

Yes.

All the bad decisions, policies and practices that went into housing in 2004, 2005, 2006 and ultimately 2007 and 2008 when it blew up are being used around other asset classes, like baseball cards. The same idiotic stuff that people were doing around housing is being used to fuel a different market. Is it a good time to buy baseball cards or to sell them?

 

Sell.

This is the stuff that you look at when you’re a kid and you’re like, “I wish I was this smart. I wish I understood it.”

If I don’t want to own it when I’m 75. If I don’t want to own it in 30 years. If I look out to 2050, if I don’t want to own it, I’m not buying it now. I’m not buying anything that I would want to get rid of at any time in the next two decades.

We’re also talking about a hobby that has small dollars in association with what you are able to buy. You’re doing it because there’s an emotional connection to it and you want to. It’s not like you live off of this stuff. The fundamentals that you use to invest are very different from the fundamentals that you use to buy baseball cards. If you wanted to build a baseball card collection and get rich from it, it is a good time to sell it and not a good time to buy because of all of these things.

If you want to do it, the best time to do is going to be in a couple of years. You’re going to do outrageous and good prices.

Ian and I talked about this. We’re like, “What about these idiots that are all buying these cards with debt?” What’s going to happen is people are going to start missing payments. There’s going to be a call. What’s going to ultimately happen is these small companies are going to have all of these assets, these cards they have to foreclose on and come back after.

What’s going to happen is it’s going to go through the meat grinder. Someone smart like Jamie Dimon or Goldman Sachs is going to buy these assets at $0.14, $0.15 or $0.18 on the dollar and then trade it at $0.20 on the dollar. You’re like, “Why would they not take it up?” They don’t need to. They’re going to do it quickly and fast. They’re going to get a 45%, 60% or 100% return and do it in a quarter.

That is so true. That is what they did with real estate. They went foreclosed as fast as they could to get their cash. The velocity of money and the big New York firms care about velocity. How quickly can we go make a return and turn the money over as many times as we can in a year?

They’ll laugh at someone like Ian and me who are going to take the asset, risk and time. We’re going to get it to 85% of the market and sell it. We’ll make more than they will but it’ll take us months or years or they’ll be onto a new trade. If you don’t think it can happen to baseball cards or wine, why the hell not? It already happened with real estate.

Real estate is one of the biggest wealth engines in America. We can tell a story about a friend of ours who owns restaurants. He bought a steakhouse and he owns 4,000 bottles of premium wine. The steakhouse didn’t want to move them. They sold them to him for $0.15 on the dollar. He was generous to share 9 of them with us in 1 night. We had a great time. It was incredible but it’s one of those things where these things happen. You look at speed and you’re like, “Screw it. I want to liquidate.”

Real estate is one of the biggest wealth engines in America. Click To Tweet

Frank, this isn’t just us talking about doom and gloom. It’s already hitting a lot of the luxury areas. Luxury vehicles and clubs. There’s an article that came out in New York Times that Miami nightclubs had to shut down for a few weeks when FTX went out. There’s a bunch of Miami nightclubs that were taking Bitcoin as payments.

You go buy a VIP table and there’s a couple of bottles of champagne. You spend $3,000 or $4,000 in a night. They were taking Bitcoin as payment. People don’t have as much Bitcoin as they used to and $30 billion of assets evaporated overnight with FTX. There’s a lot more of that coming where that started. The Crypto Bros aren’t out at the clubs.

Of these club owners, a few of them are worried they’re going to go out of business and it’s going to happen quickly. Why? It’s because their whole business is based on debt and they need cash to keep coming in the door. A bunch of analysts have said that the Mercedes G Wagon increased in price. This is why I’m saying the everything bubble.

We use baseball cards because I’m mired in them. I’m close to the prices. A G Wagon could be had about years ago for about $120,000. In 2021, it doubled and went to $250,000. They got up to over $300,000 at their peak. They’re already trading back down to $200,000. It was pumped up by The Crypto Bros. They were bidding. There was a short supply of a G Wagon. They don’t make a lot of those.

It’s not like a Ford F-150 where they bang them out all the time. That price has come down. Lamborghinis and McLarens are down big time, all those supercars. It starts to hit the ultra-premium market first but this all trickles down. There are job losses, debt and bad debt going on. It’s crashing. That means more margin calls. All of this starts to infest itself into the real economy.

Luxury. Premium. Discretionary. You move it down a few and boom, you’re at the low end of the market and you’re talking about a Honda Civic. It takes time but it is the case.

When you’ve been through enough of these cycles, you know that every time some pundit gets on and says, “We’re through the worst of it,” you’re not. You’re never through the worst of it until everyone you know is saying they’re scared. I don’t know how many people are saying they’re scared at all, which scares the shit out of me. The more confident all the people around me, the more I’m trying to put cash in my bank, Frank.

I told Alastair this. I don’t know if I’ve told you this or not. The smartest guy I know in real estate, he wholesales 25,000 deals a year. He told me he doesn’t think it’s going to be that bad. When I heard him tell me he didn’t think it was going to be that bad, I’m like, “I should probably get more cash.” It’s scary.

If we’re wrong and this bull market rages on for ten more years, I don’t care. You and I are of a certain age and have a certain amount of assets. We don’t have to risk a lot of our money on this thing. I always come back to Warren and Charlie. Those guys go through 7 to 8-year periods where they get destroyed in the press. They’ve lost it. Those guys don’t have it anymore. They missed the tech bubble and Amazon.

They missed crypto.

All the stuff they’ve missed and they are like, “Maybe we missed it.” When the tide goes out, everyone always writes articles about how genius they are again. I don’t think you and I are geniuses. If I am sitting on cash while the market’s going up, it doesn’t hurt me that I missed a little of the upside but I sure as hell don’t want to be stuck with no cash.

If prices give us a huge sale on everything, I want to be able to buy when that happens. I want to be able to go shopping when Black Friday hits. For all things in the everything bubble, I want to be able to go shopping. If I’m early on that call, cool. I’m good with that. I’m good with being early. I’d rather that than be late and stuck.

I was at lunch years ago with a guy. He’s 3rd or 4th generation owning his family business, which is a tile company. He is a nice guy but he was born on 2nd, if not 3rd base and I wasn’t. I remember saying to him, “If the market goes on sale, I am going to leap forward.” At the time, I owned 125 or 150 houses. He goes, “How many houses did you own in 2009?” I said, “One.” He goes, “You own how many now?” I told him and he goes, “I think you did that.” I nodded and took a drink of my iced tea.

I’ve thought about it a lot since he said it. He has a perspective that I don’t have. I’ve been in the fight for a long time on the ground floor and he hasn’t. What I learned is this. I did that jump and leap. I did it with a ton of debt and the wind at my back. I did it when I was younger. I didn’t have kids, a family, responsibilities and employees. I did it alone essentially so I could take more chances. This time, I don’t want to take chances but if I do it right, I can leap forward.

What I’ve learned in all of this is, to be honest about who you are, where you’re at and what’s happening around you. Look at what you want 1, 3, 5 or 10 years into the future. How can you do it with the most amount of certainty or the highest floor that gives you the ability to not lose? If you’re doing this for the first time, you’re probably taking more risks and chances. If you’re doing it as a pro, there’s a way to do it without getting your knees skinned.

 

I’ll finish going back to something we already harped on a little bit. If you don’t have a lot of assets and you’re getting started, I would pour myself into one or maybe a second thing. I’ll pour myself into my highest conviction bet. If that’s your company and you believe in it, awesome. Be amazing at that. Good companies are going to be hard to find in the next couple of years.

In 2022, every company seems good. They all pay well but you don’t know who’s floating in bad debt. You don’t know who took bad choices. If you have good management, you have a good company and you think your company has a strategic advantage, do great and invest like crazy in that. If you’re good at one thing in investing, stay with it. Don’t spread yourself too thin.

If you have assets, I still wouldn’t spread myself too thin. Get yourself a few lines of business. Get focused on where you add the most value. Whether it’s investing your time as an employee or an owner. Find a few lines of business and invest like crazy in your highest-margin stuff. Be willing to get rid of some of the other stuff.

If you know you’ve made a windfall on something, I don’t care whether it’s real estate or crypto. If something’s up 3X or 4X over the last few years and it’s still pretty close to the high, that’s not normal. You need to understand that things always come back to normalized lines. If you’re still hovering it close to the high, get yourself a little bit of cash. It’s probably going to come back in at some point. You can never screw up by having a little bit too much cash when a market does turn.

Here’s one of the things that I feel. We keep talking about the same thing over and over again. The last ten episodes are pretty similar. If you’re not thinking about this, you’re burying your head in the sand. I had someone who took a $10 million exit from a business. They say to me, “It’s nice that you’re dealing with this because then our group’s going to know that other people are dealing with it.”

It’s not just us. Amazon, Apple and Google are dealing with it. Everybody is dealing with it. Nobody is immune to it. If you’re not scared by it, you’re lying or you’re obtuse. Both are bad. Be honest. We’ve talked about how to keep your job and assets. We’ve been harping on it for months because it’s important.

We’re talking about what’s in the news. All we’re sharing are stories that are real. Things that are happening to big well-run companies that are dominoes, that are falling in line and what’s happening in the economy and things repeat. History always repeats itself. If you’ve been through enough of it, you can see what’s coming because we’ve been talking about it for nine months. We’ve largely been right about everything. I’m not saying we’re geniuses and nor did we get rich from it but it’s happening the way history has always happened. Things don’t change too much.

Not only does it not change too much but it might metastasize and go to a different place. The bad business standards and bad lending practices that were in housing are around baseball cards. Where else are they? If you look at it the right way, it is a great time to be in cash because this bubble will burst so how do I leap forward?

I’ve got a buddy who bought all nonperforming seconds and he sat on them. He had second mortgage positions on houses and bought them in 2009. In 2015, 90% of them were garbage but 10% of them were on the coast in California and they were 4X in value. They were in Denver, Colorado. They were in Miami. Any foreclosed from the second position. He made fifteen times on his investment. He doesn’t work a lot. He makes fun of me for working too hard. He sits back. He’s smart. He picks and chooses his spots. I’m telling you that if you do it the right way, you can find the same things.

If you are new to the show, mash that subscribe button. Follow us. That helps us. It would help us if you’re one of our longtime followers and you go into Apple, give us a five-star review and write us some comments. If you have some topics you would like Frankie and me to talk about, we are both available. Send us a message on LinkedIn, Facebook or our Instagram page. Text us. We are always open to talking about the things you are interested in, our favorite readers. Frankie, it’s great to see you. I am still in a good mood from that bacon and it showed I was on my A-game in this episode.

No doubt. You’re well-fed. Both of us are happiest when fed.

See you.

 

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