| 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. Bitcoin treasury meta-company | The basic situation is that the stock market will pay $2 for $1 worth of Bitcoin. This fact was more or less discovered by MicroStrategy Inc. (now Strategy), [8] which exploits it in enormous size: It runs a huge pot of Bitcoin, trades on the stock exchange for about twice the value of the pot, and sells more stock to buy more Bitcoin in what I have called a "perpetual motion machine." When you discover a financial perpetual motion machine, though, people tend to notice, and you probably can't patent it. (Nor does MicroStrategy want to: It proselytizes for this approach, which is called being a "Bitcoin treasury company.") And so companies keep copying the idea: They pivot from being software or biotech companies or whatever to (1) accumulating pots of Bitcoin and (2) selling stock, at a premium to the value of the pot, to buy more Bitcoin. My intuition is that you can't get the same results as MicroStrategy purely by copying what it does. My intuition is that MicroStrategy has some sort of first-mover, publicity, memetic advantage: When people think "I'd like to buy some Bitcoins on the stock exchange," they think of MicroStrategy first, so it commands a bigger premium than some random Bitcoin-treasury-company-come-lately would. But I am not sure that's right. You could make a sort of arbitrage argument: If MicroStrategy is selling $1 worth of Bitcoin for $2, and I start Matt's Pot of Bitcoins Inc. and sell my pot of Bitcoins at 180 cents on the dollar, arbitrageurs should buy my pot at $1.80 because it's cheaper than MicroStrategy's $2, until the prices converge. I leave it to the reader to find the holes in this argument; I sure can't. [9] Still, many crypto treasury companies do seem to think that it's hard to compete directly with MicroStrategy, so they either (1) come in with big scale and name recognition (Twenty One, a huge Tether-affiliated pot of bitcoins) or (2) pick a different lane. Be an Ethereum or Solana or Trumpcoin treasury company, rather than a Bitcoin one. Or: Presumably MicroStrategy's value proposition is that it is a non-financial US public company, so regular US retail stock investors and possibly index funds can buy its stock, even if they couldn't buy Bitcoin directly. Presumably regular stock investors in many other countries would do the same thing, if you built a Bitcoin treasury company for them, so people do. We talked once about Metaplanet, which is roughly the MicroStrategy of Japan. The last few days have seen several Bitcoin-treasury announcements, which these days often take the form of mergers rather than pivots. Instead of some random healthcare company announcing "we're gonna start selling stock to buy Bitcoin," some random healthcare company will announce "we've merged with a pot of Bitcoin run by a crypto team, and now we're gonna start selling stock to buy more Bitcoin." Starting with some Bitcoin establishes credibility, and having a team of crypto people lets you argue that you won't just buy Bitcoin, but also proselytize for it, which seems important in this line of business. For example, Bloomberg News reported yesterday: KindlyMD shares gained as much as 706%, the most on record, after the health care services company agreed to merge with Bitcoin holding company Nakamoto Holdings Inc. to start a Bitcoin treasury strategy. Many companies have shifted into buying and holding Bitcoin on their balance sheet, which was popularized by Michael Saylor's Strategy.
Sure, the usual; Kindly seems to be trading at about 10 times its net asset value, so selling $1 worth of Bitcoin for $10 is nice work. [10] But what is their lane? Here's what they say, per Bloomberg: "There are many different major capital markets that do not have a Bitcoin treasury company, and so part of what we're trying to do is we're trying to use Nakamoto as a beachhead for bringing Bitcoin to the capital markets," Nakamoto Founder and CEO David Bailey said in an interview. "Every single country will have a Bitcoin treasury company and we're in the very early stages of that process," Bailey said. "Not only are we raising a Bitcoin treasury at Nakamoto, but we're actually gonna use that Bitcoin to acquire public companies around the world and convert them into Bitcoin treasury companies" Here's the investor presentation, which runs through countries that do have Bitcoin treasury companies (the US, Japan, Hong Kong, a few others) and countries where Nakamoto is working on something (Abu Dhabi, Brazil, India, South Korea and "ultimately every capital market a target"). The point, I think, is that Nakamoto is not just going to be a pot of Bitcoins listed on the US stock exchange: Its goal is to go out and get pots of Bitcoins listed on other stock exchanges, so it can sell its Bitcoins at, you know, 200 or 300 or 1,000 cents on the dollar in lots of places where they've never even heard of MicroStrategy. What would Satoshi Nakamoto think? What a strange vision of crypto this is. In the future, in every country, you will be able to go to your locally regulated stockbroker and pay a premium of 100% or more to buy shares of stock of a trusted local company, denominated in the local currency, that will hold Bitcoin for you. If you want to transfer your Bitcoin across national borders you can … I don't know, sell the stock on the exchange through your broker, do a foreign exchange transaction to convert rupees into dirham, find a stockbroker in the target country, open an account, pass know-your-customer checks, fund the account with local currency and then buy stock in that country's local Bitcoin company (at a 100% or more premium). Seems like it might be easier to buy Bitcoin? But what do I know. The way many sorts of carbon credit work is that various natural things — trees, grass, soil — store carbon, and if you leave them alone they will keep storing carbon, and if you don't they will release carbon into the atmosphere. If your baseline assumption is "these trees will get chopped down," then not chopping down the trees reduces carbon emissions, relative to the baseline of chopping them down. Big companies want to buy carbon credits to offset their own carbon emissions, and not chopping down trees reduces carbon emissions relevant to some baseline, so you can package not-chopping-down-trees into a financial product and sell it for a lot of money to big companies. This is all pretty well known by now, but it is a piece of financial engineering that still leaves me in awe every time I think about it. There are various problems of measurement here — what is the correct baseline? — but there are also problems of ownership. I can easily promise not to chop down any trees in Alaska, because I do not live anywhere near Alaska and am not handy with an axe. Should you pay me for carbon credits because I refrain from chopping down those trees? Probably not. Similarly, if I were to say to you "if you give me millions of dollars, Maasai herders in Kenya will rotate their animals' grazing of a huge tract of grassland so that the grass will lock more carbon in the soil," you might have any number of questions, at least one of which would be "why am I giving you the money for something that the Maasai are doing," or I guess something that they're not doing, or I guess something that their animals are not doing (eating the grass). I would have an answer for you! The answer would be, like, "I am organizing a conservation group that will inform the Maasai about the benefits of changing their grazing patterns, and the group will get the money and use a lot of it to build hospitals and other public services in Kenya, and the Maasai and other herders will participate in the governance of the group and share in the benefits, so in an important sense really you are giving the money to the Maasai." But. You know. Why am I pitching you this opportunity? Why are you handing me the check? The Wall Street Journal reports: The Northern Kenya Rangelands Carbon Project is the world's largest soil-carbon plan, its boosters say. Launched in 2012, it was designed to preserve some 4.7 million acres of grasslands to lock in carbon on land communally owned by the Maasai, Borana and other pastoralist groups, which is part of a network of protected areas hosting threatened species such as cheetahs, black rhinos and Rothschild's giraffes. ... The carbon project, designed by the American soil scientist Mark Ritchie and run by the Northern Rangelands Trust, a Kenyan nonprofit, requires herders to rotate livestock grazing so grasses can recover and lock more carbon into the soil. … While some herding communities back the project, there has been fierce backlash from others. Rights organizations such as London-based Survival International say project backers didn't properly obtain local consent for the project. The critics argue the project disrupted migration patterns based for centuries on the seasonal availability of pasture and rainfall. The Northern Rangelands Trust and project developers say enforcement of grazing plans is managed by community leaders, and that participation is voluntary. The dispute reached a flashpoint in 2021, when 165 pastoralists from two conservation areas sued the Northern Rangelands Trust in Kenyan court for allegedly using their land without consent. The plaintiffs accused the trust of creating the conservancies—which acted as the herders' representatives in the carbon deal—through pressure and intimidation rather than informed consent. The court ruled in their favor. "The trust has sold over six million carbon credits, worth between $42 million and $90 million depending on market prices, to buyers including Netflix and Facebook parent Meta," but now Verra, the nonprofit that certifies carbon credits, has put the project's credits under review. You could imagine reviewing the credits at two levels. There is the level of philosophical legitimacy, where the question is like "is this project that is supposed to be done for the benefit and with the consultation of the local pastoralists actually what they want," and if the answer is no then you have in a sense bought the carbon credits from people who had no right to sell them. And then there is the level of physical reality, where the questions are like "where are they grazing, how's the grass doing, and how much carbon is being released," and if the answer is "everybody's grazing where they want and the grass is all dead," then you have bought carbon credits that don't actually reduce atmospheric carbon. I feel like the two classic ways to get a good job in finance are: - Organize your whole life, starting in high school if not earlier, around finance. Read Money Stuff and trade stocks in high school; read Margin of Safety and trade convertible bonds from your college dorm; get a summer investment banking internship in college that turns into a full-time offer after graduation that turns into a private equity offer before you even leave campus.
- Do not know that finance exists, care deeply about astrophysics, get your PhD, become disillusioned with the astrophysics job market, meet a friendly stranger who takes you out to lunch and bonds with you about your shared love of logic puzzles and at the end of the lunch hands you a bag of cash and says "have you ever heard of Jane Street?" For "astrophysics" you could substitute "pure math" or "computational linguistics" or "tennis" or "chess" or occasionally "lounging at your family's enormous estate."
I majored in Greek and Latin in college, eventually stumbled into investment banking, and would then sometimes go back to my college and do recruiting, where I was very excited to interview the people who majored in weird stuff and had weird interests. There were, like, two of them. Everyone else was an applied math and economics double major and the president of the private equity club. On the one hand, that was sort of sad. Within living memory, there was a sense that investment banking and consulting were the generic elite finishing schools. You left college with a bunch of fond memories but no useful job skills, so you became an investment banker, where you learned widely useful job skills (Excel modeling, attention to detail, work ethic, firm handshakes, office politics, etc.), and then after two years you went out into the world to do whatever you wanted to do. Having the investment bank on your resume enhanced your prestige and opened doors. But the investment banks also enhanced their own prestige by recruiting a broad cross-section of fancy college graduates, some of whom loved finance and went on to be senior partners at banks or private equity firms, and some of whom were indifferent to finance but went on to become politicians or tech founders or filmmakers or writers of newsletters. On the other hand, obviously the president of the private equity club could build a pretty sick leveraged buyout model on her first day of work, which is not so true of the Greek poetry majors. If investment banking is primarily a job where you do specialized stuff, hiring people who can do the stuff — and who want to do the stuff for 100 hours a week — seems sensible. Those people are just easy; they know what to do; they show up and can be put to work immediately. Weirdly that path keeps getting more competitive; here's a grim Business Insider article about how brutal university finance clubs are: What distinguishes them is that they tend to offer their members VIP access to campus recruiters, specialized training sessions, and other tools to help students snag the all-important investment banking internship, which is the best path to a full-time job after graduation. The catch? Their perks have created a race for membership, and the admissions process to join a club can be as cutthroat as the industry itself. ... While it's unclear exactly when these clubs became must-haves for a Wall Street job, the people who spoke with BI tended to agree that the situation reflected a race among employers to recruit talent earlier and earlier. A Wharton sophomore said he knew of high school students who'd started preparing to get into clubs as soon as they were accepted to college — before they'd even arrived on campus. "I remember my senior year, after I got into college, I was just messing around. I was just having fun," but that's not the case anymore, he said, adding: "You've gotten into these places and it's like, all right, now work on building a DCF" — a valuation method. "It's outrageous." And: Club leaders from three schools told BI that their organizations accepted less than 10% of their freshman applicants, who numbered 150 to 300 in recent years. … "I have so many opportunities to network internally and have specific résumé drop links that these recruiters give to the club specifically, that are only open to members," [one leader] told BI about his campus club experience. "You want to be part of the résumé book." One funny thing about investment banking in particular is how very finely graded its junior hierarchy is. The first-year associates haze and mentor the second-year analysts, who haze and mentor the first-year analysts, who haze and mentor the summer interns. Who can the summer interns haze and mentor? Well, they can go back to college for their senior year and haze the juniors in their finance club, who can haze the sophomores, who can haze the freshmen, who can go back to their high school and pester the kids there. "Hey kid, before you get to college you'd better build some DCF models" might not be great advice — maybe keep plugging away at the astrophysics — but the point is that everyone in the banking pipeline gets to be a big shot to someone else. UnitedHealth Replaces CEO After Its Medicare Strategy Sputters. Softer-Than-Expected Inflation Points to Muted Tariff Fallout. Can Europe finally fix its capital markets? AI Startup Perplexity's Valuation Surges to $14 Billion in New Funding Round. Elliott Wins Backing From Proxy Advisers in Phillips 66 Boardroom Battle. Microsoft Is Cutting Thousands of Employees Across the Company. Apple Wants People to Control Devices With Their Thoughts. Working from Yacht. Elizabeth Holmes's Partner Has a New Blood-Testing Start-Up. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! |
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