Category: simonblack

There’s something I’ve always found mesmerizing about watching animals in the wild.

They have the most incredible instincts, honed from countless generations of survival against constant threats.

Animals have a keen sense of danger. They know immediately when something doesn’t feel right, and they act on it without hesitation.

I saw an incredible example of this last year when I was visiting a remote wildlife reservation in Zimbabwe.

It was late in the afternoon on a hot summer day, and my friends and I were ensconced in a hidden observation bunker situated on the edge of a water hole.

The animals all began to arrive, one species at a time, to cool off before nightfall. First the elephants. Then Rhinos. Zebras. Giraffes. Baboons.

It was a playful mood; all the animals seemed to be enjoying the water, when without warning, there was a stillness. The gazelles froze. The zebras’ ears perked.

Something wasn’t right. A smell. A sound. Something.

So they got the hell out of there.

We found out later that a ravenous pack of hyenas was on the prowl nearby, so the animals’ instincts were spot-on.

Deep, deeeep down, human beings have the same highly refined instincts.

Our long-lost ancestors struggled against every imaginable danger. And those lessons are hard-coded in our DNA.

We sense threats. We can feel it when something’s wrong.

The difference between our species and animals in the wild, though, is that we humans have way too many external influences that muck it all up.

Case in point: last week was obviously a tough one for anyone with any sense of humanity.

Acts of terrorism are scary.

And hearing about completely innocent people on a popular pedestrian promenade getting mowed down like bowling pins by some madman is definitely going to cause some discomfort.

But down here in Latin America at least, there was ensuring wall-to-wall news coverage for the next several days in a way I hadn’t seen since 9/11.

It’s all we saw. Terrorism. Terrorism. Terrorism.

This really amps up the fear factor for something that is already difficult to stomach.

So it’s easy to understand why I keep hearing people say things like, “We’re living through the most dangerous times in human history.”

It’s easy to lose perspective. But on the balance we have it pretty good.

13th century Europeans faced a far greater threat with the approaching Mongol hoard.

A century later they faced an even more terrible fate with the onset of the Bubonic Plague, which ultimately wiped out around 30% of Europe’s population.

Even in more recent times, the threat of nuclear annihilation between East and West posed a constant threat.

Yes, acts of terrorism are appalling. But taken in historical and mathematical context the danger is actually quite low.

The Cato Institute published some data recently showing that the chances of dying in a terror attack are around 1 in 3 million.

Statistically speaking, you have a better chance of being crushed to death by a vending machine.

But we don’t demand that our governments spend hundreds of billions of dollars that taxpayers cannot possibly afford in order to protect us from vending machines.

That’s because deep down we sense that vending machines don’t truly pose a threat.

But with terrorism our senses are heavily manipulated until we believe that the threat is far greater than what the statistics show.

The real irony is that the manipulation works both ways.

Just as we are manipulated into being terrified of certain risks that pose no real statistical threat, we are manipulated into ignoring other risks that are far more likely.

I would raise financial markets as an obvious example.

The stock market in the United States is at an all-time high, with valuation metrics that have rarely been higher in more than 100 years of data.

Bond markets around the world have literally never been more expensive… EVER.

In order to return to levels that are more in-line with long-term historical averages, stock and bond markets would both have to suffer steep losses.

But instead of encouraging investors to independently assess these financial risks, mainstream media often dismisses such assertions as pessimistic bugaboo.

Or another obvious long-term risk– that Social Security is going to run out of money.

I write about this one frequently. The Social Security Trustees, including the Treasury Secretary of the United States, state very clearly in their annual report that Social Security’s major trust funds “will be depleted in 2034.”

Yet despite the totally predictable, unavoidable, widespread consequences to Americans’ primary source of retirement income, the public is manipulated into ignoring this threat as well.

Instead of the truth, we continue to hear the same tired mantra– “Social Security is just fine,” despite every shred of objective evidence to the contrary.

We’re also told to believe ridiculous axioms like “the US government’s debt doesn’t matter,” even though they have $20+ trillion of it and spend like drunken sailors.

But no. The experts tell us that this is not a risk worth concerning ourselves with. Angry brown people want to kill us. Focus on that instead.

Human beings have a 1 in 3,000,000 chance of suffering from a terror attack.

Yet there is currently a 100% chance that Social Security runs out of money in 2034.

Only one of these manages to find its way into the news.

Not to mention, if properly informed, people can actually DO SOMETHING about the latter. There’s plenty of time for intelligent people to prepare.

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There may perhaps be no other group of investors that’s more DESPERATE today than pension funds.

Pensions, of course, are the giant funds responsible for paying out retirement benefits to workers.

The idea is that both the employer and the employee typically contribute a set percentage of the employee’s salary throughout his or her career with the promise that, upon retirement, he or she will receive a fixed monthly payment.

Many state and local governments rely on these ‘defined benefit’ pension pension plans, as do a handful of large corporations.

The reason that these pension fund are so desperate is that the vast majority of them are underfunded.

We talk a lot of about how Social Security is rapidly running out of money.

But according to Credit-rating agency Moody’s, state and local government pension plans are also $7 trillion short in funding.

And corporate pension funds are underfunded by $375 billion.

The reason is quite simple: investment returns are simply too low.

Pension fund managers invest all of their funds’ cash in various assets– stocks, bonds, real estate, etc. with the hope of generating safe investment returns.

And that’s precisely the problem.

With interest rates still hovering near the lowest levels they’ve ever been in 5,000+ years of recorded human history, it’s very difficult to achieve a significant investment return without taking on substantial risk.

Most pension funds require a minimum annual investment return of between 7% to 8% in order to stay solvent and be able to pay out their beneficiaries over the long-term.

California Public Employee’s Retirement System (CalPERS), for example, is one of the largest pension funds in the world.

And over the last 10 years CalPERS’ investment return has averaged just 5.1%. They need 7% to stay afloat.

SAFELY earning 7% is a difficult task today: government bonds in the US yield around 2%. Even junk bonds, which are ultra-risky, yield just 5%.

Real estate returns are also falling, with the average apartment building yielding between 3-4% according to the National Association of Real Estate Investment Trusts.

In fact the biggest apartment-focused real estate investment trust, Equity Residential, earns less than 3%.

Bottom line, it’s EXTREMELY difficult for very large funds to safely earn 7-8%.

And this matters… because they’re responsible for YOUR retirement.

I write a lot about the need to have a good ‘Plan B’… a backup plan in case the primary option doesn’t work out.

Well, considering that most federal, state, local, and corporate pensions are VASTLY underfunded AND consistently fail to meet their investment targets, it seems pretty obvious that Plan A for retirement isn’t going to work out.

Having a retirement Plan B means getting creative and taking matters into your own hands.

Part of this includes setting up a better retirement structure.

For instance, a self-directed SEP IRA and solo(k) both allow contributing nearly 10x more each year for your retirement than a conventional structure.

Moreover, the right retirement structure provides far greater flexibility in where you can invest your savings.

Instead of being tethered to overpriced stocks, bonds, and mutual funds, a good retirement structure allows investment in alternative assets like international real estate or cryptocurrency.

One type of asset to consider for your retirement is royalties.

A royalty is money that other people pay you in order to use an asset that you own.

For example, inventors who own patents receive royalties whenever big companies use their ideas.

Songwriters collect royalties whenever their music is streamed on Spotify or used in a TV commercial.

Investors who own mineral rights on a property collect royalties whenever a mining company pulls gold or silver out of the ground from that property.

Warren Buffett compares a royalty to owning a tollbooth: after you make an initial investment to build the toll road, the upkeep is minimal.

But you collect cash forever as vehicles pay you to use it.

Royalties are starting to become more popular investments, especially among pension funds.

Last month the Canada Pension Plan Investment Board committed up to $325 million for a portion of the future royalties in Venetoclax, a cancer drug.

Also in July, mining giant Glencore announced it was in talks with Ontario Teachers’ Pension Plan for a 50:50 venture for its royalty assets (including a royalty for the Antamina copper-zinc mine in Peru, which was expected to fetch around $250 million).

Lots of funds have also been launched specifically to invest in music royalties.

Round Hill Music Royalty Fund owns rights to more than 4,000 songs from artists like Frank Sinatra, the Beatles, Aerosmith and Billie Holiday.

Specifically, they own the rights to Land of a Thousand Dances, a song written by Chris Kenner and popularized by Wilson Pickett in 1966.

The song appears in the movie Forrest Gump and various video games, and it generates between $300,000-$400,000 a year, according to the fund’s CEO.

Another hedge fund, Shamrock Capital, raised $250 million last year to buy the rights to music, movies, TV shows and even video games.

I’ve even done this myself, buying rights to a country music song.

So anytime the song is streamed on Spotify or downloaded in iTunes, I received a royalty.

And while the earnings are by no means guaranteed, music royalties can often earn between 10% to 25% or more each year.

That’s hard to find in today’s investment environment.

And while the big institutional money is coming into royalties, there are still plenty of opportunities for the small investor. It just takes a little bit of digging.

Source

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About a month ago I joined the Board of Directors of a publicly-traded company that invests in US real estate.

The position brings a lot of insight into what’s happening in the US housing market. And from what I’m seeing, the transformation that’s taking place today is extraordinary.

Buying and renting out single-family homes has long been the mainstay investment of small, independent, individual investors.

The big banks and hedge funds pretty much monopolize everything else. They own the stock market. They own the bond market. They own all the commercial real estate. They even own the farmland.

Single-family homes were one of the last bastions of investment freedom for the little guy.

(Real estate is how I got my own start in business and investing so many years ago; I was a 21-year-old Army lieutenant fresh out of the academy when I bought my first rental property.)

But all that’s changing now.

Last week a huge merger was announced between Invitation Homes (owned by private equity giant Blackstone Group) and Starwood Waypoint Homes (owned by real estate giant Starwood Capital).

If the deal goes through, the combined entity would be the largest owner of single-family homes in the United States with a portfolio worth over $20 billion.

And this is only the latest merger in an ongoing trend.

Three years ago, for example, American Homes 4 Rent bought Beazer Pre-Owned Rental Homes, creating another enormous player. A few months later, Starwood Waypoint bought Colony American Homes.

And of course, Blackstone was one of the first institutional investors to start buying distressed homes, forking over around $10 billion on houses since the Great Financial Crisis.

At one point, Blackstone was reportedly spending $150 million a week on houses.

There are some medium-tier players coming into the market as well. A friend of mine runs a fund that owns about 2,000 rental homes in Texas, and he’s buying every property he can find.

I called him for his perspective on what’s happening in the housing market. Here’s what he told me–

There are lots of little guys assembling portfolios of 10-100 homes. And I like to buy these guys out because they have much higher funding costs than us.

And, eventually, as we get larger, medium-sized funds like mine will get bought out by Blackstone and the other mega players.

In short, medium-sized funds are buying up all the little guys. And mega-funds like Blackstone are buying up all the medium-sized funds.

This means there’s essentially an ‘arms race’ building among the world’s biggest funds to control the market, squeezing small, individual investors out of the housing market.

Then there’s the situation for renters.

US Census Bureau statistics show that, over the past decade, the number of rental households has been rising steadily while the number of homeowner households has been falling.

In other words, the American Dream of owning your own home has been fading.

It’s easy to understand why–

US consumer debt is at an all-time high of over $1 trillion (mostly credit card debt), with an additional $1.3 trillion in federal student loans.

Americans… especially younger people, are far too heavily indebted to be able to save any money for a down payment.

Moreover, despite all the hoopla about the low unemployment rate in the US, wages are totally stagnant.

(Plus bear in mind that most of the jobs created have been for waiters and bartenders!)

So the average guy isn’t making any more money, or able to save anything… all while home prices soar to record levels as major funds gobble up the supply.

This means that the new reality in America, especially for young people, is that if you’re lucky enough to not be living in your parents’ basement, you’ll be relegated to renting your house from Blackstone.

But… there is some interesting opportunity in all of this.

With a supply of more than 17 million rental homes in the United States, there’s a LONG way to go for this trend to play out. We’re still in the early stages of the mega-fund consolidation.

And some savvy little guys are figuring out how to cash in on this trend.

Think about it: mega-funds don’t have the capacity to buy up homes one at a time. They just don’t have the time.

They need to buy homes in big volume… hundreds, even thousands at a time. And they’re willing to pay a premium if they can buy in bulk.

That’s why medium-sized funds like the one my friend runs in Texas are basically assembling large portfolios with the sole purpose of flipping everything to the mega-funds.

But smaller investors can play this game too.

Medium-sized funds need to buy in bulk as well. They don’t have the time or resources to buy up homes one at a time.

This creates a unique, niche opportunity for individual investors to assemble small portfolios, say, 10 properties, with the sole purpose of flipping to medium-sized funds.

We know some people already doing this—

They essentially put several single-family homes under contract simultaneously (with only a small deposit on each home).

But, BEFORE they close, they make arrangements to flip the entire package of homes to a medium-sized fund through a double-escrow closing.

This structure guarantees a neat profit to the small investor while requiring limited up-front capital.

And like most great investment opportunities, it’s been very lucrative so far because very few people are doing it.

Source

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A few weeks ago the Board of Trustees of Social Security sent a formal letter to the United States Senate and House of Representatives to issue a dire warning: Social Security is running out of money.

Given that tens of millions of American depend on this public pension program as their sole source of retirement income, you’d think this would have been front page news…

… and that every newspaper in the country would have reprinted this ominous projection out of a basic journalistic duty to keep the public informed about an issue that will affect nearly everyone.

But that didn’t happen.

The story was hardly picked up.

It’s astonishing how little attention this issue receives considering it will end up being one of the biggest financial crises in US history.

That’s not hyperbole either– the numbers are very clear.

The US government itself calculates that the long-term Social Security shortfall exceeds $46 TRILLION.

In other words, in order to be able to pay the benefits they’ve promised, Social Security needs a $46 trillion bailout.

Fat chance.

That amount is over TWICE the national debt, and nearly THREE times the size of the entire US economy.

Moreover, it’s nearly SIXTY times the size of the bailout that the banking system received back in 2008.

So this is a pretty big deal.

More importantly, even though the Social Security Trustees acknowledge that the fund is running out of money, their projections are still wildly optimistic.

In order to build their long-term financial models, Social Security’s administrators have to make certain assumptions about the future.

What will interest rates be in the future?
What will the population growth rate be?
How high (or low) will inflation be?

These variables can dramatically impact the outcome for Social Security.

For example, Social Security assumes that productivity growth in the US economy will average between 1.7% and 2% per year.

This is an important assumption: the higher US productivity growth, the faster the economy will grow. And this ultimately means more tax revenue (and more income) for the program.

But -actual- US productivity growth is WAY below their assumption.

Over the past ten years productivity growth has been about 25% below their expectations.

And in 2016 US productivity growth was actually NEGATIVE.

Here’s another one: Social Security is hoping for a fertility rate in the US of 2.2 children per woman.

This is important, because a higher population growth means more people entering the work force and paying in to the Social Security system.

But the actual fertility rate is nearly 20% lower than what they project.

And if course, the most important assumption for Social Security is interest rates.

100% of Social Security’s investment income is from their ownership of US government bonds.

So if interest rates are high, the program makes more money. If interest rates are low, the program doesn’t make money.

Where are interest rates now? Very low.

In fact, interest rates are still near the lowest levels they’ve been in US history.

Social Security hopes that ‘real’ interest rates, i.e. inflation-adjusted interest rates, will be at least 3.2%.

This means that they need interest rates to be 3.2% ABOVE the rate of inflation.

This is where their projections are WAY OFF… because real interest rates in the US are actually negative.

The 12-month US government bond currently yields 1.2%. Yet the official inflation rate in the Land of the Free is 1.7%.

In other words, the interest rate is LOWER than inflation, i.e. the ‘real’ interest rate is MINUS 0.5%.

Social Security is depending on +3.2%.

So their assumptions are totally wrong.

And it’s not just Social Security either.

According to the Center for Retirement Research at Boston Collage, US public pension funds at the state and local level are also underfunded by an average of 67.9%.

Additionally, most pension funds target an investment return of between 7.5% to 8% in order to stay solvent.

Yet in 2015 the average pension fund’s investment return was just 3.2%. And last year a pitiful 0.6%.

This is a nationwide problem. Social Security is running out of money. State and local pension funds are running out of money.

And even still their assumptions are wildly optimistic. So the problem is much worse than their already dismal forecasts.

Understandably everyone is preoccupied right now with whether or not World War III breaks out in Guam.

(I would respectfully admit that this is one of those times I am grateful to be living on a farm in the southern hemisphere.)

But long-term, these pension shortfalls are truly going to create an epic financial and social crisis.

It’s a ticking time bomb, and one with so much certainty that we can practically circle a date on a calendar for when it will hit.

There are solutions.

Waiting on politicians to fix the problem is not one of them.

The government does not have a spare $45 trillion lying around to re-fund Social Security.

So anyone who expects to retire with comfort and dignity is going to have to take matters into their own hands and start saving now.

Consider options like SEP IRAs and 401(k) plans that have MUCH higher contribution limits, as well as self-directed structures which give you greater influence over how your retirement savings are invested.

These flexible structures also allow investments in alternative asset classes like private equity, cashflowing royalties, secured lending, cryptocurrency, etc.

Education is also critical.

Learning how to be a better investor can increase your investment returns and (most importantly) reduce losses.

And increasing the long-term average investment return of your IRA or 401(k) by just 1% per year can have a PROFOUND (six figure) impact on your retirement.

These solutions make sense: there is ZERO downside in saving more money for retirement.

But it’s critical to start now. A little bit of effort and planning right now will pay enormous dividends in the future.

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What’s money worth if interest rates are negative?

Interest rates, after all, are the “price” of money.

When we borrow money from a bank and pay interest on the loan, it means that the money we’re borrowing has value. That –capital- has value.

Negative interest rates, on the other hand, suggest that capital is totally worthless.

This isn’t a philosophical exercise. These are the times we’re living in.

Despite a few tiny increases, interest rates worldwide are still near the lowest levels they’ve been in 5,000 years of human history.

Bankrupt governments across Europe who are already in debt up to their eyeballs have issued trillions of euros worth of new debt with negative yields.

And there have even been famous cases (also in Europe) in which bank depositors have had to PAY interest, while borrowers were BEING PAID to take out a mortgage.

Capitalism is defined by capital.

How does capitalism function when the cost of capital goes negative?

How does price discovery take place in a market where people (and governments) are literally being paid to borrow money?

I’m asking these questions because I honestly don’t know the answers.

Something is fundamentally broken in the market today.

Stripping capital of its value causes people to do stupid things.

How else could anyone explain that Argentina, a country in perpetual crisis that has defaulted on its debt eight times in the past century, sold billions of dollars worth of 100-year bonds last month to eager investors?

Or that Netflix, a company which consistently burns through billions of dollars of capital, was able to borrow over $1.5 billion at an interest rate of just 3.625%?

Again, this company lost $1.7 billion last year.

Plus they say they’ll lose another $2.5 billion in 2017, and that they don’t see this situation improving anytime soon.

In fact, Netflix’s most recent quarterly report states very plainly, “we expect to be FCF [free cash flow] negative for many years.”

Tesla, another serial value destroyer, is also tapping the debt markets.

That company is raising $1.5 billion to fund production of its low-priced Model 3.

That will bring the total amount of capital Tesla has raised since 2014 to nearly $8 billion.

Of course, Tesla needs to keep raising money because they burn through it so quickly.

Tesla loses $13,000 on every single car that it makes.

And the company has lost $1.6 billion in the past two quarters alone, not including the absurdly expensive Model 3 launch.

Then there’s Uber, a company ‘worth’ nearly $70 billion (and has raised around $14 billion in cash).

Yet the company loses nearly $3 billion every year.

And let’s not forget the mad dash for Bitcoin, which just hit yet another record high… or the even more high-flying market for ‘Initial Coin Offerings’, or ICOs.

ICOs are so white-hot that, earlier this summer, one company raised $153 million through the Ethereum blockchain in just THREE hours.

And of course there’s Ethereum itself, which is up 2,000% so far this year.

Perhaps most telling is that the domain Ethereum.com is available for sale for TEN MILLION DOLLARS.

Ironically the domain investing.com sold for just $2.45 million a few years ago.

Even Facebook’s fb.com sold for less— $8.5 million.

Now, I’m very much in favor of the crytpofinance movement.

But it’s clear that countless people are throwing money at an asset class that they don’t understand or know anything about.

I wonder how many retail investors who bought Bitcoin at its peak have ever read the original white paper… or have a clue how it works.

Or how many ethereum speculators understand a single line of code from the blockchain’s all-important ‘smart contract’ programming language?

People today are reckless with their money. They’re blindly throwing cash at anything that could produce a return.

This is the type of behavior that takes place when capital loses its value.

History is full of similar examples of capital losing value, including the famous episode of hyperinflation in Weimar Germany.

Hyperinflation hit Germany after the country printed paper money to finance its debt payments after World War I.

The government was printing so much money that they had to commission 130 different printing companies to run around the clock.

In 1914, at the beginning of the Great War, the exchange rate of the German mark to the US dollar was 4.2 to 1.

In 1923, the rate jumped to 4.2 trillion to one. The German mark was essentially worthless.

The currency lost value so rapidly, waiters would have to jump on tables to announce price changes every half hour.

Workers would bring wheelbarrows to work to collect their wages… then immediately leave to spend the money before it lost its value.

The barter system set in, with craftsmen offering their services for food.

Children would make arts and crafts with money, adults would burn the worthless paper to light their stove.

I doubt many people are setting money on fire to heat their homes today.

But they might as well be.

With so many investors throwing their capital into phenomenally pitiful investments that consistently lose money with no end in sight, or bonds which guarantee negative rates of return, the end result is the same–

That money is being set on fire.

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After roughly two months away in Europe and Asia, it’s great to be back here at my favorite place on earth.

I’m not talking about Chile– although I do enjoy the country. I’m talking specifically about this farm. It’s the perfect place for me.

The views are sensational. I’m surrounded by nature. And there’s an imposing backdrop of snow-capped Andean peaks to frame the vista.

And the stars at night are more vibrant than almost anywhere else I’ve been in the world… including the remote savannahs of Africa.

But I’m not here just for the stars or the views…

I’m able to organically produce almost all of the food I eat on the farm.

There’s an exceptional variety of fruit and nut trees, including peaches, plums, nectarines, figs, walnuts, almonds, chestnuts, apples, oranges, tangerines, lemons, cherries, blueberries, strawberries, pears, apricots, loquats, grapes, and quince to name a few…

I can grow pretty much everything save tropical fruits like bananas.

I also produce olives and press my own olive oil. I grow rice and wheat, so I have my own flour.

I even produce my own wine. And I distill organic waste into ethanol to use as a biofuel.

There are free-range chickens that produce organic, all-natural eggs. Pigs and sheep for meat.

Plus the farm has plenty of sources of water and energy. It’s totally self-sufficient… and abundant.

While the total farm size exceeds 1,000 acres, the portion that I farm for personal use is a fraction of that.

But it’s still more than enough to produce FAR more than I can consume. (You’d be surprised how little land it takes to feed a family– even half an acre is sufficient.)

The surplus can be saved, sold, or in certain cases like biofuel, converted into a different product.

It might not be everyone’s cup of tea, but for me this lifestyle is ideal– one that’s based on production and independence.

It’s a powerful feeling to not have to depend on the outside world. And I miss it when I’m away for too long.

I spent years searching for the perfect place to create this lifestyle for myself.

Most of Asia was out of the question since it’s very difficult for foreigners to own property. Europe and North America were cost prohibitive.

That’s how I ended up in Chile.

I’ve traveled to more than 120 countries in my life. I still visit 20-30 countries each year.

And I’m always evaluating business and investment opportunities when I travel… including real estate.

It’s remarkable how expensive property can be in certain countries, like the US. And how cheap it is in others.

I originally chose Chile because, among other things, land prices here are considerably cheaper than in other regions of the world with a comparable climate and soil quality.

The climate and soil is one of the reasons my farm produces such an abundance of variety.

Central Chile is one of the few regions in the world with ideal growing conditions suitable to most plants.

While there are four distinct seasons (this is important in agriculture), it never gets too hot… or too cold.

The only other regions of the world where these conditions exist are California, parts of the Mediterranean, the Western Cape of South Africa, and South Australia.

And by comparison, an acre of highly productive land in Chile, with full water rights, can easily cost 50% to 90% less than what I would pay in the most fertile areas of the US or Europe.

I’ve found this price vs. quality ratio for Chilean land to be unparalleled– especially for farmland and for oceanfront property.

This is why I started a large agriculture business here in 2014. We currently have several thousand acres under management and will become one of the largest producers in the world for our crop in a few years.

There’s no way I could have done this in North America.

In addition to prices in Chile being dramatically lower, the risks are also lower.

Foreigners can own full title to both land and water rights without any restrictions whatsoever.

Developing property doesn’t require years of permitting from 10,000 different government offices.

Our agriculture business deployed more than $50 million to acquire and develop farmland. And the government didn’t hassle us. They were actually, surprisingly supportive.

Labor costs here are also incredibly cheap.

And if you don’t find what you need in the local labor market, you can import foreign labor with minimal red tape. I’ve already brought several workers here from the Philippines.

If it sounds like I’m trying to convince you that Chile is the perfect place, I’m really not.

This country is definitely no Shangri-La. it has plenty of challenges and idiocy.

But my responsibility is to present you with information and global opportunity.

And the fact remains that if you’re looking for compelling investments in raw land, especially agriculture and oceanfront, Chile is still one of the best deals in the world.

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In 353 BC, as violent class warfare broke out across ancient Greece, one wealthy Athenian lamented in his journal,

When I was a boy, wealth was regarded as a thing so…admirable that almost everyone affected to own more property than he actually possessed. Now a man has to be ready to defend himself against being rich as if it were the worst of crimes.

Ancient Greece had become deeply divided at that point.

The opportunities from new ‘technology’ and new trade routes created a lot of wealth for many people. Others were left behind.

Plato called it “the two cities” of Athens — “one the city of the poor, the other of the rich, the one at war with the other.”

Eventually the poorer citizens were able to take over ancient Greece’s prized democracy. And, putting themselves firmly in control of government institutions, the new politicians came up with the most creative ways of raising taxes, seizing property, and redistributing wealth.

They doubled taxes. Import duties and export fees were increased. Real estate transfer taxes soared.

And even though the city-states were in a time of relative peace, the government continued collecting a special ‘war tax’ to fill its coffers.

Naturally they targeted the wealthiest citizens first.

But their methods weren’t working. The poor remained poor.

So the government raised taxes even more and ‘broadened the base’ to also include most of the middle class.

It still didn’t work. They failed to realize that stealing people’s money doesn’t create long-term prosperity.

Meanwhile, commerce and economic growth ground to a halt. Anyone with any wealth, savings, or assets focused almost exclusively on protecting themselves against government confiscation.

In 355 BC the government established a new, special police force to seize assets and imprison well-to-do citizens.

Violent outbreaks became commonplace. Class warfare erupted. In the 4th century BC, the lower classes in Argos and Mytilene banded together and massacred over 1,200 wealthy citizens.

The ancient Greeks were so busy fighting each other over their own money that when Philip II of Macedon (Alexander the Great’s father) invaded Greece, he was practically welcomed as a liberator.

This is one of the themes from ancient history that keeps surfacing again and again: whenever there is a productive class, there are others who aim to steal from them.

We’re still seeing it 2000+ years later.

I was recently speaking to a friend of mine from South Africa who co-founded a successful software company there.

He works his ass off and has done well for himself.

But he explained to me that his profits, in addition to the normal tax rate, are subject to penalties because the company shareholders don’t meet a specific, racial quota.

I find this totally idiotic.

Productive people… whether they start a business, design software, build a house, write a song, or work on an assembly line, create value. They create prosperity.

In some cases, they even create jobs.

This is exactly the sort of behavior that should be encouraged, not penalized.

Yet this trend persists all over the world, as it has for thousands of years.

Fortunately, there’s a multitude of options to do something about it– to take completely legal steps that dramatically and legitimately reduce the amount that you owe.

In my friend’s case, we talked through ways to use Double Tax Treaties (DTAs) to his advantage.

A DTA is an international agreement in which two countries agree on reduced levels of taxation in the event that their jurisdiction overlaps.

As an example, South Africa has a DTA signed with Hong Kong.

The agreement states that a Hong Kong company which generates certain types of income in South Africa will be subject to dramatically reduced rates than the normal South African tax.

So in theory my friend could move his software company to Hong Kong and collect royalties from South Africa at a tax rate of just 5% (which is stated in the treaty), instead of the 40%+ that he’s paying now.

Obviously there’s a lot of ‘i-dotting and t-crossing’ to make this happen. And this letter clearly isn’t intended to be tax advice.

It merely serves as an example that there are ALWAYS completely legal ways to reduce what you owe.

DTAs, by the way, aren’t some ‘loophole’. This is both national AND international law.

Here’s another easy example– estate tax, also known as inheritance tax, or ‘death tax’

This is a tax that many governments collect on your assets when you die. It’s offensive… proving that the state views us as nothing more than dairy cows to be milked, even when we’re no longer alive.

Countries all over the world charge estate tax. The US exemption levels are currently quite high. But many states also charge estate tax at rates which can wipe out your heirs.

But the estate tax is one of the easiest taxes to avoid — you can form a domestic trust, maximize gift tax allowances, redomicile to another state, etc.

The estate tax is so easy to avoid that many accountants call it the ‘stupid tax.’

And not doing something about it means that you’re literally giving away your money to the government.

That’s precisely the point: taxation is based on the principle that a group of out-of-touch politicians knows how to spend your money better than you do…

… and that they have some divine power to maximize social benefit with public funds.

This is obviously not the case. Most governments have a track record of serial failure when it comes to spending other people’s money: war, waste… and that $2 BILLION website for Obamacare.

We can all can come up with far more productive uses for our hard-earned savings than any government representative.

And given the innumerable ways to legally reduce what we owe, we have the power to do so.

If you haven’t taken these steps already, why not?

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Yesterday a good friend of mine came over for lunch to talk about his new business.

He has a very simple and compelling concept that easily helps restaurants make more money and creates a win/win for everyone– restaurant owners, diners, and the business itself.

This is exactly the type of model that I like to invest in.

Best of all, though, the business he’s creating isn’t new. There’s a company based in Asia which started a few years ago that is doing something similar.

This Asian company is flourishing. And since they’ve been in business for a while, they’ve already built the software, tested the market, and worked out the kinks in the process.

All my friend really has to do is mirror what they’re doing over here in Latin America.

This is, by far, one of the easiest ways to start a successful business: import a business model that’s already working into a rapidly developing country.

Make no mistake, starting a business is always challenging. And there’s always some level of risk.

Customers might hate your product. You might not be able to raise the investment capital you need. You might not be able to hire the talent that your business requires.

But when you’re essentially mirroring another business model that’s already been proven to be successful somewhere else, a LOT of that risk disappears.

I’ve seen this done so many times before.

One of the most successful entrepreneurs here in Chile used to live in Silicon Valley several years ago.

Back then there were a number of Peer-to-Peer lending sites being launched in the US, and he immediately realized that he could bring this idea back to Chile where the concept of Peer-to-Peer lending didn’t exist yet.

Today his company has become incredibly successful and has helped dislocate the local banking monopoly.

Clearly there has been a lot of hard work in growing that business.

But he didn’t have to start from scratch– he was able to build his company from the foundation of a business model that was already working well in North America and Europe.

This is one of the many great things about living overseas, especially in countries that are still developing.

You’ll find that there are ALWAYS products and services that are ubiquitous back home which don’t even exist yet overseas.

And savvy entrepreneurs can jump start their businesses by importing a proven model or idea that’s already working.

So if you’re an aspiring business owner trying to figure out your next move, start by looking around at what’s already working… then find a foreign country where that business model doesn’t exist yet.

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Today is one of those days when I feel blessed to have such wonderful and interesting people in my life.

A few months ago I introduced you to Ben Yu, a Silicon Valley-based entrepreneur who’s easily one of the most unique people I know.

I first met Ben when he came to our summer entrepreneurship camp a few years ago.

I knew instantly that he was bright… and different.

He had already won the prestigious Peter Thiel fellowship, dropped out of Harvard, and started a successful company (in which I invested, alongside many of our Total Access members).

Among his many talents and interests, Ben is heavy into cryptocurrency.

And a few days ago as he was reading the latest Howard Marks investment memo, something caught his eye.

Howard Marks, of course, is the billionaire founder of Oaktree Capital.

His regular investment memos are highly insightful, and on Monday we told you about the latest commentary in which Marks cast a stark warning to investors.

Marks plainly states in his latest commentary that market valuations are at their highest levels in history…

… that complacency is at record levels, i.e. investors seem to think that the good times will last forever…

… that risk levels are quite high, while returns are incredibly low…

… and that investors are engaging in some damn foolish behavior.

Among them, Mark cites multiple examples of how investors are lining up to buy bonds issued by bankrupt governments.

In June, for instance, Argentina issued billions of dollars worth of bonds with a 100-year maturity.

Bear in mind that Argentina defaulted at least five times on its debt in the previous 100 years.

So it seems likely that the miniscule return investors will receive completely fails to compensate them for the risks they are taking.

Marks also wrote about cryptocurrency as an example of foolish behavior.

On the topic of Bitcoin, ether, etc., Marks states simply, “They’re not real!” and “nothing but an unfounded fad.”

And so… my friend Ben Yu took the liberty of emailing Howard Marks to engage him on the topic if cryptocurrency.

Ben was polite, but incisive as always, saying that Bitcoin is “no more or less real than any shared concept of money. . .”

His point is that the dollar isn’t “real” either. It’s merely a concept that people believe in.

Plus, over 90% of all US dollars in circulation, in fact, are already in digital form.

When you log in to your bank account and see a number printed on a screen, that account balance exists almost exclusively in bank databases. There’s very little “real” paper currency that exists.

So in this respect the dollar is also predominantly a digital currency.

The primary structural difference between the dollar and Bitcoin is that the dollar is completely centralized.

It’s controlled by an unelected committee of central bankers who wield dictatorial authority over its quality and supply.

Bitcoin, on the other hand, is DECENTRALIZED, i.e. controlled by its community of users.

Currencies have existed in various forms since nearly the dawn of civilization, and our ancestors used everything imaginable as a medium of exchange.

Salt. Rice. Giant, immovable stones. Gold.

In the early days of the United States back in the late 1700s, people even commonly used whiskey as a medium of exchange. Worst case you could always drink it.

Each of those currencies worked because people had confidence in them.

In Medieval Japan people knew that if they received rice as a payment, that same rice would be accepted as payment for goods or services somewhere else.

For people who truly understand cryptocurrency, Bitcoin has inspired similar confidence for its users.

And with good reason. The technical design of Bitcoin solves a number of major problems that plague conventional banking and monetary systems.

But if you don’t understand something, it’s hard to trust it. It’s hard to have confidence in it.

Howard Marks admits he is in that camp. And he actually responded to Ben. Personally.

I thought that was pretty cool. And he was quite gracious.

In his reply, he agreed with the value premise of cryptocurrency, saying “The dollar has value because people accord value to it. Bitcoin may be no different.”

But he went on to conclude that

My issue is that (as I understand it), people can create their own bitcoin, whereas they can’t create their own dollars. . . To me, the idea that people can create currency and have it accepted as legal tender makes no sense. But maybe I just don’t understand.

It was an honest, thoughtful response. And one that Ben has probably heard a number of times before. I certainly have.

Marks is a highly accomplished, sophisticated investor. And he admits he doesn’t understand Bitcoin.

I know a number of other accomplished, sophisticated investors, many of whom are household names. They don’t understand it either.

It’s common in human nature to fear, or at least be suspicious, of what we don’t understand.

And that’s the typical refrain I hear from very sharp financial minds, “I don’t understand Bitcoin, I think it’s a scam.”

Ignorance doesn’t make something a scam.

And given how big the cryptocurrency opportunity is, it’s certainly worth learning about before passing judgment.

Cryptocurrency is the future. Governments, major banks, tax authorities, stock exchanges, and even central banks are moving towards crypto.

It’s worth understanding.

But frankly it works both ways: while it’s foolish to disregard something out of ignorance, it may be even more foolish to buy something that you don’t understand.

Countless people are buying Bitcoin right now with zero understanding of its structure, challenges, or opportunities.

They’ve never heard of hash functions or SegWit. They’re just gambling that the price is going higher.

This is crazy.

There is absolutely no substitute for learning.

And if you’re looking for an easy place to get started, Ben also took the liberty of writing an easy-to-understand article: Cryptocurrency 101.

You can read it here.

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If you invested $1 in this stock back in 1968 it would be worth around $7,000 today – returning over 20% a year for nearly 50 years.

No, this isn’t another story about buying Warren Buffett’s holding company, Berkshire Hathaway, back in the day and getting rich.

This is about buying cigarettes… In particular, cigarette giant Altria (MO).

The tobacco industry has long been one of the steadiest and most profitable in history.

In 2015, investment bank Credit Suisse published a report showing the performance of every major American industry from 1900 to 2010 – over 100 years of data.

If you invested $1 in the average American industry back in 1900, you would have had $38,255 by 2010. That’s a return of about 10% a year.

You would have done even better if you invested in food companies – turning $1 into $700,000 by 2010.

But tobacco stocks far outperformed every other industry.

One dollar invested in tobacco stocks in 1900 was worth $6.3 million by 2010 – a result 165 times better than the average American industry.

Even during the great financial crisis, people smoked more.

In 2008, Philip Morris International – the international tobacco arm that separated from Altria Group in March 2008 – sold 869.7 billion cigarettes and generated $63.64 billion in revenue (increasing 2.5% and 15.2%, respectively, from the previous year).

Cigarettes are so steady that sales even increased by 6.3% in the first quarter of 2009 during the peak of the financial crisis.

It turns out that selling addictive products is a great business.

Altria is a cash machine, and the company’s ‘free cash flow’ allows it to pay out generous dividends to its shareholders.

In fact Altria has increased its dividend for 47 years in a row.

Yet despite being one of the steadies industries in the world, tobacco stocks got crushed last Friday…

The Food and Drug Administration (FDA) announced it wants to reduce the nicotine in cigarettes to make them less addictive.

The news cratered shares of Altria, which fell nearly 20% intraday.

Yes, the FDA is trying to regulate the tobacco industry. But this isn’t the first time that’s happened.

The government already banned most forms of cigarette advertising. And it’s levied enormous taxes on the product. But the tobacco industry still prevailed.

And it will take years for the FDA to push this through, if it happens at all… Big Tobacco will fight like hell in Washington.

The larger point is that when a company as big and stable as Altria crashes 20% in a day, it’s time to pay attention.

How did this happen?

Simple: Passive Investment Funds.

Consulting firm Macro Risk Advisors estimates passive index funds (including ETFs and mutual funds from behemoths like Vanguard and BlackRock) own 85% of Altria’s shares.

And that’s part of the reason Altria sold off so hard. Before I explain, let’s talk about passive investing…

Passive investors buy stock regardless of valuation (as opposed to “active” managers who try to pick stocks that will outperform).

And they charge rock-bottom fees because no one is making complicated investment decisions.

When you put money into an S&P 500 index fund, your money is spread across those 500 stocks based on their size, i.e. the largest company gets the biggest portion of your money.

And passive funds are growing – with over $5 trillion in assets.

According to a Wall Street Journal analysis, U.S. mutual funds and ETFs that track indexes owned 4.6% of the S&P 500 in 2006.

Today, passive managers own 37% of the S&P 500 (and ETFs account for around a quarter of the daily volume across U.S. exchanges according to Bank of America Merrill Lynch).

Vanguard, which created the first passive mutual fund in 1976, is now receiving $2 billion a day from investors who want to own index funds.

And that $2 billion is immediately invested into the market, irrespective of the quality or value of the stock market.

Vanguard now owns 6.8% of the S&P 500 and is the #1 shareholder of many of the largest companies in the world.

Now, remember that index funds don’t trade stocks. They buy and hold.

Even if the FDA makes a big announcement that could affect the industry, index funds hold their positions.

But since passive funds are the majority owners of many large companies (like Altria), there’s only a small number of shares remaining that can change hands during a normal trading day.

This is why we can see such crazy volatility.

On a day where there’s bad news (like a negative FDA announcement), the passive funds which own 85% of Altria do nothing.

But many of the active investors who owned the other 15% started selling their shares.

When only 15% of the shares of a company ever trade, then the share price can collapse within minutes if even only a handful of the active investors decide to sell.

This is one of the consequences of the passive investing trend.

Small, individual investors are piling in to index funds. And this creates conditions where stocks can easily suffer WILD and violent swings.

More importantly, what happens when small investors decide they want to get out of index funds?

This means the funds will have to sell.

So just imagine what will happen if passive funds, which own 37% of the S&P 500 today, suddenly have to sell…

Altria’s 20% drop is a pretty big warning sign, yet another indication of a broken market.

We could soon see even more major dislocations, with some of the most popular stocks in the world gapping down 10+% in a single day.

As I’ve written before, this is a very good time to consider taking some money off the table.

When the cycle turns south and asset prices start to fall, it’s investors who set aside some capital for a rainy day who will call the shots and enjoy the most lucrative opportunities.

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