About Indestructible Wealth: I’m Jack Gibson. I’m your wealth strategist and I’m here to help you make some money. The Indestructible Wealth Podcast is for young entrepreneurs who want to make, keep and grow wealth to enjoy now, and for years to come.
Episode #41 – Entrepreneurs and Employees Should Invest Differently
Podcast Episode Transcripts:
Disclaimer: Transcripts were generated automatically and may contain inaccuracies and errors.
Welcome to the Indestructible Wealth Podcast. This is the place where we help young entrepreneurs to make, keep, and grow wealth that you can enjoy now, and for years to come. I’m your host Jack Gibson, a serial entrepreneur, founder of multiple seven and eight figure businesses, and wealth building strategist. Each week I’m going to share my tips, resources and secrets, to help you create a plan and build the life you’ve dreamed of.
Today’s episode is on why I believe employees and entrepreneurs should invest differently. Now this particular post on LinkedIn got 30,000 views, which is pretty high for one of my posts. A lot of them get 500 to 1000. So the algorithm caught it because people were really engaged in reading it. So I figured that you guys would enjoy this content as well. But first, before we get into that, you guys know I will give you a little update on what’s going on with something entertaining with the Gibson fam. I don’t know if you like it. Some of you may just think it’s completely boring and skip through that part. That’s fine. You can do that. But I want you to have a little bit of a personal connection to what’s going on in our life. And hopefully we entertain you a little bit, but we just went to the night of destruction. Doesn’t that sound pretty cool. The night of destruction, it was at the Hartford, Michigan Speedway. This is where they do, like races and such. And this is really unique to us because we’re not like race fans. It’s not like our style, like we love sporting events, but that is just a totally boring type of event for us to go to. But one of our buddies invited us to go and it seemed like something fun with the kids. Essentially it’s a complete and total shit show of 70 cars that are beat up, junkers come in and they just do all kinds of different events. They race around the track. One of the races a bus was literally driving around shooting off fireworks at the other cars going by. It was awesome. Another event, there were cars that every car that entered had to have a trailer and some of them had campers. One of the campers, this is great. The campers had spray painted on this side. Your mom stayed here last night. I love it. I loved it. So good. Another couple of the cars were towing little boats. And so if your trailer detaches from your cars, like 20 laps you’re out. So imagine 70, I don’t know maybe there were not that many in this particular event, there were at least 50 entries and all these cars are just whipping around the track, just crashing into each other and they don’t clear off a car. So if the car stalls out or dies or crashes or whatever, they don’t clear it out so you just have to work your way around it. So anyways, needless to say, if you can ever get to a night of destruction. I think these are gaining a lot of popularity. So just do a quick Google search and I think they’re a really profitable way for race type venues to attract a new audience, AKA those that are normally going to go like a regular race. You can take the kids, you don’t have kids, you have a great time and they launch fireworks at the end, which is some of the best I’ve ever seen. Yeah, Night of destruction!
So let’s dive into our subject for today and not everybody probably agrees with me on this particular concept, but I feel that the process of investing or the plan strategic plan that you said up and I haven’t really dove into this much on my podcast or even on any of my topics before, but I thought this was critical for you guys to understand the distinguishing characteristics between how an employee would potentially want to think about their investing plan versus an entrepreneur.
So here’s why I’m saying that employees and entrepreneurs should invest differently. Employees need to build equity. An employee has no equity. Equity is essentially ownership value. So think about equity in your home. We all understand that our home’s worth $300,000 and the mortgage that we have that we owe on it is $200,000. Boom! I have a $100,000 in equity value or ownership in that particular asset or really it’s a liability, right? Your home, as I’ve said before is a liability because it doesn’t make you any money it costs you every month. However, you can still have equity, you can sell an equity value in a liability that doesn’t probably make sense to a lot of people that’s why they think it’s an asset. But you don’t realize that equity until you actually go to sell, up until that point that particular your home is the liability because it costs you money every single month. That’s the definition, the simple definition of a liability and asset is something that pays you. Thinking about equities, like stocks. Stocks or equities that you buy, you have $10,000 worth of stock. That’s $10,000 worth of equity or ownership that you have. So being that an employee is a wage earner they don’t have any equity in that company that they work for and in order to create wealth, equity value growth is absolutely critical. We buy stocks so that they increase in value, the equity or your ownership value in that stock goes up. We buy real estate so that it pumps out cash flow. Yes, but also, so that the value of that property goes up as we also pay down the debt on that property we create more equity value in property.
Passive income producing real estate is probably my favorite way to build not only build equity because it’s so much stabler and predictable and it also cranks out incredible cash flow with tax advantages. Of course real estate, I understand that it’s not for everybody, but I believe that everybody should be able to find ways to get exposure to owning real estate inside their portfolio. I’m going to do a podcast coming up here in the next few days where I’m going to outline what you can do and where you can place your money that’s going to be passive in nature where you don’t actually have to go out and scout properties, look at properties, analyze deals, put in all of that legwork you can just buy into things that don’t require so much of your expertise you’re going to be essentially leveraging off other people’s expertise and leveraging off teams. So that’s really critical is that if you’re investing into real estate on a passive nature, you’re more investing into the team that’s behind that real estate venture, then you are actually buying into the property itself because the team is going to determine the success of the operation by far.
Of course, as an employee, I strongly recommend that in order to build equity of your own and have more control you start a side hustle and I understand that not everybody has that drive. They don’t have that desire, maybe it’s not the right timing in their life, maybe they’re already working 60, 70 hours a week in their job and it just doesn’t make sense they’ve got kids and they don’t have the ability of the time, energy, all of that to devote. I get it. It’s the side hustle, a side business. It is not for everybody, not everybody is caught out and has that kind of startup drive to do that. Totally fine. We all have to just do the things that are more authentic to us.
My father, for example, was an employee, a wage earner his entire life, and he never had a desire to start his own business. When he retired as a state farm arson investigator, He retired early at 55 and he decided that he wanted to do some consulting, like a side business. He mailed out I think 2000 letters where he would be a consultant. I don’t think anybody responded. He quit. He gave up. That was his only foray into doing a side hustle or starting up a business and that wasn’t for him. So he’s done really well just investing into other people’s companies into blue chip type stocks. He’s very patient. He doesn’t need the action. He doesn’t want to drive the initiative of driving a business or driving a company like me, we’re just completely totally 2 different humans. Doesn’t mean he’s wrong and I’m right or I’m right and he’s wrong, whatever, nothing to do with right or wrong it’s just, this is how we’re wired.
So we understand that it’s okay to not have a side hustle. That’s something you don’t want to do. If that’s the case, then you’re certainly right to buy stocks or pieces of equity and other people’s companies, because you need to be creating equity as an employee one way or the other, whether you do it through your own side hustle, you do it through investing in other people’s businesses or a combination of the 2 or investing into real estate. You gotta be looking at how I can build equity as an employee? Because the moment that for example, your company could go out of business, that certainly happens. You could get laid off and your company could just completely get disrupted by the new technology that’s coming out. Blockbuster, we talked about this before this company was a multi-billion dollar company 2 or 3 years later, ceased to exist because they got technologically disrupted by Netflix. This is going to happen over the next decade companies are going to get disrupted technologically and boom! Gone and ceased to exist, right? So this is why you need other equity, other streams of income to protect yourself and your family as an employee.
Now let’s dive into entrepreneurs. What’s the difference? Entrepreneurs need liquidity, entrepreneurs already have equity. 100% of it typically. In my case, I have 50% equity. The other 50% of our company, our primary S-corp that creates a lot of the primary cash flow for us, our main source of income is owned 50% by my incredibly beautiful wife, the Boss, she owns the other 50%. So when we started up our S-corporation back I think it was 2001. It was really cool because I was issued a thousand shares. And I’m like, awesome! I’m a shareholder. I have a thousand shares. What were those shares worth at that time? They weren’t really worth all that much because the company wasn’t generating that much cash flow. So those shares were pretty low in their overall value. But as the earnings grow of your company so does the equity value, remember all companies are valued based on their earnings. So what are earnings? That’s net income. That’s the income that’s left over after all expenses are paid. And if you have employees or marketing costs or a research and development or cost of capital or a cost of inventory all of that’s left over at the end of the year, what’s left over is the net operating income or the earnings. So if you have a company on the stock exchange, and it’s creating a $1,000,000 worth of earnings and it’s it could be valued at $10,000,000, because a lot of the companies on the stock exchange are 10X their actual earnings, that’s what they’re valued at that’s very common. So in a private nature, a private business, usually they’re not valued that high. As your earnings grow in your company, usually private companies are sold somewhere in the neighborhood of 3 to 5 times their net earnings.
So a key component though, is to remember that as your earnings grow from your private business so does your net worth, because the equity value is growing with the growth of your earnings. So what entrepreneurs need more than anything especially early on in the early stages of growing your business is liquidity. Liquidity is your ability to access cash quickly. When you have real estate it is generally not a very liquid investment. So if I have a property and I want to sell it, I could list it on the MLS. That’s the public listing system, where everybody can go and see what’s available for sale. I could get offers. I could technically, I could get an offer that same day and accept it, but it typically is still 30 to 45 days out even 60 days out before that property is actually going to close. Why is that? There’s a process that real estate has to go through, title work, appraisals, inspection, the bank has to do their due diligence and all of that stuff that usually takes a period of time. So that’s why real estate is just really never liquid. Now you could get somebody that comes by. We’ve sold properties, we’ve sent out properties to our list and we’ve closed a week later. So that is possible and that’s with a cash buyer of course, that’s the exception by far and not the norm. The liquidity on the very very low end of a property is typically a week. That’s a few get super lucky prices really perfectly get a cash buyer to come in and they’re willing to close exceptionally quick, but most property could take 30 to 60 days and I’d say the average liquidity of a property is probably higher than that terms of averaging out with the time somebody decides I’m going to sell this property until the time they actually get the cash out of it. It’s probably 90 to 120 days, on average or maybe even more than that.
So stocks, however, are really liquid, right? You can buy a stock and you can immediately sell it right away. You could buy it today and then before the close of business the stock exchanges at 4:30 Eastern Time and boom! You could instantly sell it the next minute or you could sell it the very next day when the stock market opens. So that liquidity is the quick access to cash.
So why I love high cash value whole life insurance as an entrepreneurial investor is because it provides more growth than savings accounts but it can also be tax-free but most importantly I can access my cash quickly. I can call my broker and within 5 business days I can have a check or a wire where those funds are borrowed right back out of the policy. It doesn’t interrupt the compounding of the policy and I’m being able to borrow those funds back out to be able to use in my business, or if I get a really good investment opportunity I’ve done all of those things to be able to, if I want to pay my taxes, not want to, if I need to pay my taxes, because as an entrepreneur sometimes it’s hard to project where you’re going to come in at on your final taxes. I’ve got that liquidity sitting there that I can access a percentage of the cash value of my Policy.
If you guys want to get more kind of details on this, I recorded a podcast or interviewed Rachel Marshall of the money advantage. She goes into a real deep dive into how this all works. It’s episode 16 or 17. You guys can listen to that and it’ll explain the whole concept if you haven’t done that yet.
Is that the only thing as an investor or as an entrepreneurial investor that you want to invest in? No, of course not. I’ve talked to you guys about all kinds of other opportunities that I think are really smart and great ways to go. However, this provides a great foundation for an entrepreneur to be able to stay invested and a typical policy is going to return somewhere between 4% to 6% type of rate of return. Are these policies exciting? No way. In fact, they actually bore me to death, but it keeps you invested and if you need the cash you won’t have to sell in a down market. For example, if you want to get a higher than 0.01% return on your savings accounts or checking accounts at the bank then you would need to typically stay liquid then you need to be invested in the stock market or cryptocurrency and that’s very liquid, right? You can sell crypto 24/7, the market never closes. However, that’s extremely volatile. It’s not a great way to park cash safely for when you need it. You know that the value’s going to be there and you don’t ever want to put yourself in a position where as an entrepreneur, you need to access cash, you need liquidity, but you have to sell in a down market.
That is the absolute worst case scenario. The number 1 rule of Warren Buffett, the most successful investor probably in human history is: don’t lose money. And so this puts you in a position, this strategy, as an entrepreneur puts you in a position where you won’t lose money, but you stay invested and you’re getting much higher rates of return than if you were in a traditional bank type savings account.
So I hope this helps you guys, I think that also I would like to add entrepreneurs really need to be investing into themselves probably sure employees do as well to increase their skills, increase their income, but I think entrepreneurs really need to be putting a lot more money into themselves than employees do because as employees, you’re typically you’re capped at how much earning power that you have. Whereas an entrepreneur, literally the sky’s the limit. You don’t have any ceiling or cap on how much you can make. It’s all strictly determined on your work ethic, your skills, your mindset, and your unique value that you provide to the marketplace through your right, through your skills, through your overall. What I love to call, Earning Power. So you need to be constantly pouring back into yourself to increase your earning power so that you can produce more income. First kind of baseline things that I say as an entrepreneur, invest in yourself, invest into these high cash value, whole life policies and I hope you guys understand, the thought process and the mindset behind this.
So quick episode today, I hope you guys got some value out of today’s episode. I will see you on the next episode. Here we go. Indestructible wealth.
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