Scott Galloway: Stop Being an Earner, Start Being an Owner

Dave:
If you don’t own assets, you’re about to be in for a rude awakening. That’s Scott Galloway’s warning. You may know him as Prof G. He’s an entrepreneur, NYU Stern School of Business professor and author of the Algebra of Wealth. Scott has gotten wealthy three different times because per his own words, he’s gone broke twice. He tried to time the market, he launched numerous companies, and he still made it out alive. Scott says today’s economy is different. It’s “prosperous, but fragile.” If you’ve got assets, it’s good, but if you don’t, it’s a real struggle. So how do you move from being on the earner side of the table to the owner side so you can build wealth and not get stuck in the rat race? We’re going to talk about everything today, the chance of an economic crash, whether AI will pay off, should you buy a house right now, and if so, where?
And why getting a corporate job may get you to financial freedom faster, contrary to what 99% of people are saying.
Hey everyone, I’m Dave Meyer. Welcome to the BiggerPockets Podcast. Today we have a very special show for you. Our guest today is Scott Galloway, also known as ProfG. Scott Galloway is a successful entrepreneur. He is one of the foremost economic thought leaders in our space right now and a prolific author. And he’s the kind of guy who’s just going to tell you exactly what he thinks. He does not pull punches. And today I’ve got a lot of questions for him about the economy in general, about housing and how to get ahead in this confusing economy. Let’s bring on Scott Galloway. Scott, welcome back to the BiggerPockets Podcast. So good to have you here again. Thanks for being here.

Scott:
It’s great to be with you, Dave.

Dave:
It’s been three years since you’ve been on the show and of course a whole lot has happened geopolitically and economically. And I’d like to just start at the top. How would you describe the moment we’re in right now in the American economy?

Scott:
I guess K-shaped and it feels like prosperous but fragile. I was walking through New York the other day and New York, 65 million visitors last year, 85 billion in economic activity, 400,000 jobs. Broadway attendance is greater now than all the attendance to all the sports teams regionally. Job growth of 1.1 million, but the asterisk is inflation is at 4.6% versus 3.4 nationally. So if you’re in the right place at the right time in New York, it’s never been better. Bankers’ compensation is up 38%. But if you’re the kind of person who has to show up for jury duty, you probably have inflation and your rent is just getting more expensive. And of those one million jobs created, most of them were in healthcare. Most of those people are taking care of old people. And I think that’s a larger metaphor for the United States and that is if you’re in the right place, if you have the right credentials, the right skills, it’s just never been better.
One of the reasons the middle class has an increase, and some people would argue it’s decrease, and we don’t like to talk about this because catastrophizing is a better narrative, is that a lot of the middle class has been elevated in a millionaire status. There are a lot of people making a lot of money. GDP growth in the US is actually pretty strong. Unemployment isn’t that bad. Now go to the fragility part, whether or not living on borrowed money from future generations, spending $7 trillion on five trillion in tax receipts, that feels like a recipe for disaster. And I would argue some of the damage we’re doing geopolitically will take generations, if ever, to repair and that our economic relationships and alliances aren’t even being frayed. There’s enormous fissures. So K-shaped, if things are good for you, they’re probably great for you, better than they’ve ever been.
A lot of people just struggling, I think, to maintain wage growth with inflation and what I would call a series of macro or structural decisions that will haunt us.

Dave:
I worry about many of the same things and do personally identify with the feeling of fragility. It does feel, even for those of us who are fortunate to remain employed, to have assets, to be doing relatively well in this economy, it just feels like something is about to break. Do you get that sense?

Scott:
If we woke up tomorrow, Dave, and the S&P was off 20% in one day and it was off 40% a year, we’d go, “Well, of course it is.”

Dave:
Exactly.

Scott:
We have 10 companies, 40% of the S&P. Those companies are basically priced to perfection. And if you look at the CapEx of AI right now, which is driving I think 90% of GDP growth, 73% of earnings growth, the underlying assumption to justify the spend and the stock prices is that the AI sector is going to be a two and a half trillion dollar sector, which is bigger than all of tech right now. Right now it’s at about 150 or 200 billion in revenues. We think it’s going to 12X. And if it doesn’t, say it ends up only being a trillion dollar category AI, if these 10 companies sneeze the US market and ultimately the global markets of which the Dow and S&P now represents 50% of global equity value, 70% if you add in debt, the whole world is going to catch walking pneumonia. Now that may not be the worst thing.
I almost feel like a managed correction, although there’s no such thing, a correction as opposed to a crash might be a good thing because the problem is guys like me and you who own assets, it’s been champagne and cocaine. If you own stocks and houses, you’re fine. You’re doing great. You’re hedged against inflation. You’ve seen extraordinary gains. The problem is the entrance, the closest they’ve gotten to the party is they get to throw their credit card in and we swipe it. If America was a household, it makes 50,000 a year tax receipts. It spends 70 government spending. It has 390,000 in debt and that debt is not dischargeable when the parents die. The kids are going to get it. So I like what Jamie Diamond said when asked what a recession is, he said something that happens every seven years. We really haven’t had a full-blown recession in arguably kind of 17 years.
So the question is, is it a recession or a crash? And if you’re a perma bear like me, I keep waiting for it to happen. And the reality is I’ve been wrong. And something I always try to ask myself is what could go right? Because the economy so far has been extraordinarily resilient and continues to grind on. But I would argue that the soft tissue and the fragility is that it feels as if the West, the US, and accidentally the global economy has become a giant bet on AI.

Dave:
It just seems like it’s rampant speculation without any fundamentals. And I don’t want to say that AI is not an incredible technology. It is. If anyone has used it, you can tell that it is going to be transformative. I used to be, Scott, before I was doing this show, a data analyst. That job is not going to exist for entry level people anymore. But the idea that the bets that these companies are making and the very unclear motives about what the executives at these companies are doing makes it feel like everyday people are absorbing risk into their retirement savings and into their portfolio that they might not even necessarily know that they’re signing up for. And it really, for me, calls into question, what do normal people do? Even though we don’t know if there’s going to be a crash or a collapse, I think it’s fair to say that risks are rising.
And so in an environment of rising risk, what do you do?

Scott:
So the first thing is when Trump was… I’m not a fan of Trump. When Trump was elected in 2016 and 2016, I thought this guy is not bright. It’s going to be terrible for the markets. And I sold most of my equities. So they had run up a lot because I bought a lot of Amazon, Apple and Netflix in 08 and 09 and had done really well on those. So I lost whatever it was living in New York, 34% of that in taxes. And then six months later I recognize that the economy and the market is bigger than any one person, even the president. And the market surged and I bought back in. I basically reduced my net worth by 20 or 30% by having an emotional reaction to the markets. And the advice I have to anyone is, yeah, the market is expensive. Yeah, it’s fragile.
You always want to be in the market because no one has the ability to time it. And if you go back in history to the bigger tech crash, 2000, the economist called it perfectly. It described exactly how it was going to play out and it called it perfectly, but it called it in 1997 and over the next two years the NASDAQ doubled. So about the time guys like me say, watch out for a crash, oftentimes the market scorches up. It goes from crazy valuations to insane valuations. So generally speaking, to believe you can time the market is a hallucination, so you always want to be in the market. Now, what I would argue, and this is what I’m doing, is to be in the S&P is not diversification. What I argue is that your Kevlar against this type of risk is diversification. I never really appreciated the power of diversification.
I’ve been wealthy three times because I’ve gone broke twice and I was fortunate enough to get it back, but I’m not going back there. I don’t have the youth, the mental strength to start over again. So what I do is I don’t put any more than three or 4% of my net worth in any one thing. And my advice is if you’re like me and maybe a little bit older and think, okay, I’d like to get rich, but what I really don’t want is to get poor. Really think about diversification, not only across stocks, but across asset classes and across geographies. Having said that, I’m kind of with Buffet. I think cash is trash. I think you may want to look at debt because people are finally getting paid for debt right now. But for the most part, I believe you always want to be in the market.

Dave:
We got to take a quick break everyone, but we’re going to be right back with Scott Galloway right after this. Welcome back to the BiggerPockets Podcast. I’m here with Scott Galloway. Let’s jump back in. Does your definition of diversification, Scott, contain any real estate?

Scott:
You’re pressing on my soft tissue. So my advice to everyone is basically around investing is low cost index funds. I’m like, don’t kid yourself. You think you’re smarter than the market, you’re not. And if you think you’re smarter than the market and start investing in individual stocks or hedging, just keep in mind you’re competing with the person on the other side of the trade is a PhD in liquid dynamics from MIT who got hired by a hedge fund and has super computers and AI helping them. That’s who you’re competing with. So low cost index funds. Having said that, I, like so many people, think I’m smarter than your average bear and I make individual bets.

Dave:
Me too.

Scott:
I just can’t help it. I just can’t help it. I think, oh, I’m onto something. And I do get some psychic reward from it. And then I think about my winners and I talk about them. And then when I go back and look at everything, I’m like, okay, I performed two percentage below the S&P, if I’m honest. But I’m a big believer in demographics and one of my economic role models is Peter Drucker. And the demographic shift that I see and that I’m investing behind is the following. I think income inequality is only going to get worse and that the fastest growing cohort in the world isn’t going to be Latinas or Southeast Asians or old people. The fastest growing cohort is going to be people worth over $10 million. The number of billionaires is I think quintupled in the last 10 years. The number of centimillionaires I think is up two or three X.
And it’s like, okay, what do they buy? They buy Hermes, they go to St. Bart’s. They’re actually fairly boring people. They kind of do the same thing. And very wealthy people want to own homes in one of five places or a second home, Dubai, London, Palm Beach, New York, and Aspen. And so my kind of alpha, if you will, is I have spent a disproportionate amount of my net worth on homes in four of those five cities, thinking that one, I like to fix them up. I get psychic income from that. Two, I get an additional kicker and that is I’m trying to make it hard for my boys to avoid me. When they say to their friends, “We can go to Maslana Surf or we can go to Aspen. We have to have lunch with my dad, but it’s free.” And then I think in five to seven years I’m going to sell some or all of these places.
But what I see is very, very wealthy people are the most homogenous people in the world. They look, dress, smell, feel the same, and they all want to live in the same places. And I believe they’re all aggregating around a handful of places. And so I have put a lot of money into residential real estate. If I had it to do over again like everyone, I would just buy single family rentals. I think real estate, just because of its tax advantages, is just a great way. As long as you don’t over lever yourself, you look at it and think, okay, let’s assume the market gets down 20, 30, 40% with the bank on it. So rental real estate, I think it is hard to find a category that on a risk adjusted basis is a better way to get rich slowly.

Dave:
Exactly. That’s what we say on the show. It’s not get rich quick, but it’s get rich for sure over the long term if you just keep making those bets. Which of those five cities are you missing?

Scott:
I don’t own a home in Dubai. And by the way, I’ve owned these homes for anywhere between four and 10 years, and the two markets that have performed the worst, you’re a smart guy. So I’m in London, New York, Palm Beach, and Aspen. Rank those in terms of returns over the last 10 years.

Dave:
I would say I would put Palm Beach at one.

Scott:
Ding, ding, ding. Hands down. Yes.

Dave:
Okay.

Scott:
Yeah. I own real estate there. In the last 10 years, it’s tripled.

Dave:
The amount of capital just going into that area of the country has just been absolutely insane.

Scott:
Yeah.

Dave:
All right. Two, I don’t know much about the London market, but I would go with Aspen second.

Scott:
You’re very good at this. You’re very good at this. It

Dave:
Is my job.

Scott:
Aspen is number two. I’ve only owned real estate here for about three years, but I would bet it’s up 50% in the last three years.

Dave:
Well, your thesis is spot on then. There’s normal people in New York and London, but there’s no normal people in Aspen.

Scott:
Well, and then tied for last place, New York and London. And if you had asked me 10 years ago, here are these four regions, you’re going to invest in all of them. And I want to diversify because I think I know what I don’t know. And I’m like, nobody knows. But if someone had forced me to speculate, I hands down would’ve said London or New York, that those cities never go out of style. And I don’t think my London property has kept pace with inflation. And I think my New York property, which I’ve owned for 10 years, has barely kept pace with inflation.

Dave:
It’s been an up and down ride there.

Scott:
Yeah. This is just all a long-winded way of saying

Dave:
Nobody knows.

Scott:
And so you don’t need to find the needle in the haystack, buy the whole haystack. And so that’s what I’ve done. I’ve concentrated in real estate, but I’m trying to diversify. I do believe that cities, two-thirds of economic growth over the next 20 years is going to happen in 20 super cities. I do think that cities are a marvel of humanity around cooperation and bumping off one another. So I invest in urban areas, so to speak. But yeah, nobody knows. I would’ve gotten this wrong. If they’d said go all in on one place, I would’ve picked London or New York and I would’ve been wrong.

Dave:
Yeah, that’s a good point on diversification, especially when you’re doing it from your perspective, which is you have a lot of capital, you’re not operating these properties daily as rental properties. You don’t need to be there as frequently as people in our audience might who are sort of investing all into their business. But I do love the idea of diversification. I talk about that a lot on the show, just diversification geographically, but also even within strategies in real estate, people who do flipping, that’s a risky business trying to balance that out with rental properties or multifamily or industrial and that kind of stuff. So I think it’s the only responsible advice with the level of uncertainty we have in geopolitics and in our economy, diversification is the only honest answer is that no one really knows and the best place is to spread out your capital.
And we’ve talked a lot, Scott, about capital, but I’m curious your thoughts on how people should invest their time because it does feel, to your point about a K-shaped economy, that you need to do more than just have a W-2 job. Perhaps you’re one of these mega earners, but the majority of us are not. And so is it required now for people to have a side hustle or to do something on the side? Is this idea that you can sort of just work a job and become prosperous, even if you do all the investing, follow all the investing advice that you gave, or even if you’re the best investor in the world, is that enough anymore?

Scott:
In general, I think I’m less fond of the side hustle culture than most people. And that is, I get it. If you’re at a job and you’re younger and you can’t afford to leave because of your health insurance and you want to investigate other things, so you start on evenings and weekends as side hustle to learn about it, to see if you can make money at it and maybe double down on it at some point. I get it. If it’s a chance to test stuff, I get it. But what generally I find is that if you constantly have side hustles, it means your main hustle isn’t working. And that the majority of very successful people have a monocular focus on one hustle, and that is they find a place, they find a seat somewhere where they have senior level sponsorship, the company’s growing, they’re good at it, and they kind of go all in.
And I would argue success is in the last 10%. If you’re at a good company that offers stock options, it’s easy to romanticize entrepreneurship. The greatest wealth creator in history is the US corporation. 99.99% of people don’t have an opportunity to go to work for JP Morgan and Google. When people come to my office hours at school, they don’t want to talk about my strategy course. They want career advice. And it usually goes something like this. I have offers from JP Morgan and Google. The kids coming out of NYU are blessed. They have still huge demand for them. AI or not, they still have a lot of professional opportunity. I have an offer from JP Morgan at Google, but I’m thinking about starting my own business. I really want to do my thing. And I say the following, don’t be fucking stupid, go to work for Google.
If you have access – It’s

Dave:
Hard to bet against them. Yeah.

Scott:
If you have access to these platforms, they have thousands of people doing nothing but trying to attract and retain the best human capital. And one of the ways they do that is with benefits, with strong cultures, treating you well. If you have a baby, they give you four to six months off, giving you options, making it so hard. They know how much drudgery and bullshit is involved in any corporation. They know it, so they figure out a way to make it worth it. I started Morgan Stanley right out of college and I was there two years. I did not have the skills to navigate a large corporation or be successful there, not because I was such a baller and needed to do my own thing. I didn’t have the skills to be successful at Morgan Stanley. Being skilled, patient, mature, politically savvy at a large corporation is an unbelievable underrated skill.
I did not have those skills. I went and started a small business. I’ve been starting businesses ever since then. My boss, who is only two years older than me, he’s been at Morgan Stanley the entire time. I have endured way more stress and ups and downs than him, and we both have approximately the same net worth. And most people would look at my career and go, this guy’s in the top whatever, 1% of entrepreneurs and has had some hits. And I have, but the amount of stress, ups and downs versus he’s just plotted along every year, associate, vice president, MD, partner, head of a region, chair, vice chair, and every year he’s just clocked a lot of money with a lot. So my point is I don’t like side hustles. If it’s a means of testing something, then test it. But the way you usually get wealthy is going all in on one thing.

Dave:
That makes sense. I do actually like that approach. It’s kind of like the burn the boats approach where it’s like if you’re just kind of always tinkering and dabbling in a couple things, you never get good at anything. But it seems to me, if you’re going into the corporate world or any W-2 job, if you’re going to do it, you have to get really good at it because there’s this stat that I keep seeing that kind of haunts my dreams that the percentage of earnings that goes to labor now, even in corporations, it’s like an all time low. All the money is going to the top, the shareholders, the CEOs, the executives or dividends and buybacks. And so it feels like you need to either go all in on rising to the top and dedicating yourself, or do you think for some people it’s just better to say, listen, I don’t have that in me.
I should go start a business or I should do something different because it feels like the low to middle part of a corporation is a bit of a trap these days.

Scott:
It’s so situational, and that’s why the only blanket advice I would give is form a kitchen cabinet of people who are smart, that you trust, that understand the ecosystem you’re operating in, are not afraid to tell you when you’re making bad decisions. That’s the most important asset because if you go to work for just Stellantis right now, you go to work for an automobile company and you think, okay, let’s be honest, the Chinese are going to just eat our lunch the next 10 years. I don’t have what I’ll call senior level sponsorship. One of the keys to being successful at any organization, especially a big company, is having someone senior to you that is emotionally invested in your success. And then are you really successful? That’s probably not a great place to be. To be at Anthropic right now, I don’t care if you’re taking out the trash.
I don’t care if you’re in the kitchen. Stay there and write that whole anthropic thing out just to see where it takes you. Because they have 5,000 employees on a company that supposedly is going to go public at $2 trillion. So it depends where you are. It depends where you are in life. If you have a spouse that doesn’t work and you’re planning to have kids, I had someone who essentially built my last from L2. Three women all went to Nike, a big client. Nike’s stock is off 70% since they went there. For a couple of the younger ones who were probably looking to really accelerate their careers, it was probably not a great move. For one of them, she had two kids in three years. They have unbelievable maternity benefits. She likes to run. So being in Portland, Oregon, getting in good shape, getting 10 or 12 months over three years to be at home with your kids, even with the stock down, that’s not a bad rap.

Dave:
You don’t get that with entrepreneurship. You definitely don’t get the time off or the benefits.

Scott:
And also you need honest self-awareness, and that is people talk about entrepreneurship like vision and talent. No, the only talent really as an entrepreneur is your willingness to get out a big spoon and eat shit. Entrepreneurship is Latin for salesperson. Some days some of the metrics come back and it’s awful and you don’t make enough money that month. And you got to say to your partner, “I realize I’ve been working my ass off and the reward for this is that we get to take our hard-earned savings and put it back into the company.” I mean, you have to have an extraordinary appetite and stomach for risk. And two, you have to be willing to sell. And most people are not willing to sell, because this is what selling is. “Hi, I want to come talk to you about my new selling. “Fuck off. Do not call me again.
And then your follow-up has to be,” So I think you’re saying I should call you back in a couple months. “That’s what it means to be an entrepreneur. You’re selling employees, you’re selling customers, you’re selling capital. Most people are not willing to sell. The sweet spot, I think, if you look at where the sweet spot is in terms of risk to return, the sweet spot is in a company that’s like, call it 30 or 50 to 500 employees that already has proof of concept. They built something and it’s selling. Maybe they got their A round done and they’re talking about getting their B round done. The founders are super smart and I can come in and get a half a point or 1% of this company because the infant mortality rate among businesses, being employees zero and one to 10 –

Dave:
Big graveyard. Yeah.

Scott:
So it’s just a level of self-awareness around your situation. Sometimes when they come to me and say they want to start a business and it’s crazy, and I’ll say to them,” Are you rich? “It’s a different equation if you’re rich. If you have rich parents, it’s a different calculus because if you start a business and you’re trying to start a family and you guys don’t have a safety net or a backstop or a lot of money saved, that can get very stressful, very has a long-winded way of saying I think it’s situational and you need outsiders. Very hard to read the label from inside of the bottle.

Dave:
I would also argue great time to start a business is when you have nothing to lose. If you can do it on scrappiness and really don’t have a family, you don’t have people that you need to support and you can easily support yourself, also a decent time to give something a shot when your time is worth nothing. Basically, you couldn’t be earning more else. People who are 22 years old, interesting time. We got more to talk about with Scott Galloway right after this quick break. Stick with us. Welcome back to the BiggerPockets Podcast. Let’s jump back in with Scott Galloway. You’ve said you think rental property investing is good, side hustle is not so good, and entrepreneurship, mixed feelings and situational. How would you evaluate what our audience does, which is majority of people working W-2, investing in rental properties on the side? Is that investing?
Is that entrepreneurship? Where does that rank for you?

Scott:
I wrote a book called The Algebra Wealth, and it’s fairly straightforward, but it’s hard. But the good news is I know how to get rich. I know how to get you rich, but the answer is similar to what you said. The answer’s slowly. It’s pretty basic. There’s a formula. You got to find something you’re good at, and the way you become good at something is through focus. Your job in your 20s is to workshop a series of careers if one doesn’t work until you find something where you think, in five years I could be in the top 10% of this industry in terms of professionals, and in 10 years I could be in the top 1%. And in an industry that has a 90 plus percent employment rate, you want to go to acting, you want to go to modeling, you want to be in sports, you want to be in restaurants, you want to be in nightclubs.
Okay. If you’re not in the top 1%, you can’t make a living. A boring industry and you think, I could be great at this, double down focus. I’m going to go all in. I’ve never known anyone with a lot of influence and a lot of money who wasn’t born rich that didn’t go pretty much all in and work pretty hard for a good 20 years. That’s just part of it. And by the way, you may decide you don’t want to do that, that you want to work to live, not live to work, move to a lower cost region. Your husband’s a nurse, you coach little league, you go to church, more power to you, you’re happy. If you’re an economic animal as I was when you were young, you got to focus and find something you think you could be in the top 10, if not the top 1%.
The next thing I say is stoicism. And what I really mean is discipline, and that is find things that give you happiness that don’t involve every capitalist incentive to buy more shit, working out, spirituality, meditation practice, time with friends, volunteer work, but have the discipline from a young age to save every month a little bit of money and put it in low cost index funds. And it’s so boring, but it’s so powerful. I didn’t do this. I always though, I’m a baller. I’m going to start and sell a company for millions. That’s stupid putting $2,000 in an IRA or a Roth or whatever. Be smarter than I was. Spend less than you make and always save a little bit of money. Then the next thing is let time take over. One of our flaws as a species is because very few of us live past 35, our brains still can’t comprehend we’re going to be here until we’re a hundred years old and that time will go faster than you think.
And then if you just have the discipline to put a little bit of money away every month, assume you don’t go double platinum, you’re not on the bestseller list, Manchester United doesn’t draft you for whatever reason, you’re going to be fine when you’re my age. And then the last thing is what we talked about, the importance of diversification. The moment you have anything resembling an asset base, try to diversify. And it’s very hard for young people. Sometimes you have to go all in and stretch to buy a home, which represents 140% of your net worth. When you start a business, you kind of have no choice but to go all in, but the moment you have some asset base and the opportunity to get some liquidity, you immediately want to start diversifying.

Dave:
I like that. Makes a lot of sense. I’m curious though, you mentioned buying a home. What role do you believe home ownership plays in the current either American dream, if you want to call it, or just the path to financial success?

Scott:
Again, it’s situational. You need to listen to podcasts like this and just do the basic math. If you’re living in, I don’t know, El Paso, you look at the ratio of what the annual rent is relative to the price, the yield, and if it’s above –

Dave:
Go buy a house.

Scott:
Above a certain amount, you buy a house. It’s just a smart thing to do. It’s very tax advantage. If you live in New York or San Francisco and you’re not rich or you’re not about to get a windfall from Anthropic, I would argue rent and take the money you save on property taxes, maintenance, mortgage, everything, and try and invest it, try and have that discipline. So it’s just situational. Now there is a psychic return to it and that is One of the really unfortunate things about our society is, I mean, you talked about as a percentage of GDP, corporate profits have never been higher, wages have never been lower. The three players or constituents in our economy are the owners, the shareholders, the workers, and the consumer. Through regulatory capture and Citizens United letting money play a role in politics and policy, over the last 40 years, there’s been just an enormous leakage seeding of power capital influence from consumers and workers to the owners.
So what do you want to do as fast as possible, and it’s not easy, is have the discipline to move away from being the worst spot, the earner, to an owner. I mean, and this is hard. Try and put away a little bit of money and then go buy a rental unit, and now you’re an owner. And that house, if you’re working during the day, I did this, me and my wife bought our first rental home. She was working at Arthur Anderson. I had a startup. But every year, say you make $100,000 as an earner, you lose 20 to 30% of it. If you have $100,000 in equity in a home and it increases in value, you don’t pay taxes on it. It’s tax deferred. And if you sell it for less than half a million dollars, it’s tax-free. And if you own a stock, it’s tax deferred.
There’s this myth that the rich don’t pay taxes. The rich pay a lot of taxes. It’s the rich earners that pay all the taxes. That stat that says, oh, the top 1% of taxpayers pay 50% of all taxes, that’s true, but it’s misleading because the richest Americans don’t pay taxes because they don’t have taxable events. They don’t sell stocks. They don’t sell their homes. They take a very small salary and they let their assets compound. So you want to get as fast as you can, be focused, be an earner, save some money and just bust a move. And it’s hard and requires discipline and don’t order that coffee and don’t go to St. Bart’s. As fast as you can, get from being an earner to an owner. American tax policy has been taking money out of the pockets of earners and putting it into the pockets of owners for 40 years.
And being an owner can just be buying one share of Netflix, which is off 40% this year. Whatever it is, there’s different ways to be an owner, but that is how you get rich is by being an owner. Now, if you’re CEO of Goldman Sachs, fine, you make 17 million bucks, you pay 50% of taxes, you’re still doing just fine. Very few of us are going to be those high income earners. I’d be

Dave:
Happy to write that check. Yeah.

Scott:
Yeah, fine. Ownership. Just figure out a way, even if it’s buying one share at a time, to move from being an earner to an owner.

Dave:
I think it’s one of the biggest realizations I had. Whether you like it or not, not saying it’s right, but that just is. It is how the tax system is set up. It allows owners to compound their wealth either through lower tax rates for capital gains or like you said, deferrals on taxes, whereas there’s no cheating your income tax, you’re going to pay that.

Scott:
And

Dave:
So the faster you get to ownership, the faster you get to be a part of this rising tide, or at least the way that the American economy has trended over the last generation or two. But Scott, before we get out of here, I have one more question. You piqued my interest before. You said you thought that some of the things that we’re doing right now might take generations to resolve. And as someone who just had a child, I’m very curious, what do you think the big challenge is, and maybe if you see opportunity as well, coming for American society and the American economy in the coming generation?

Scott:
Well, look, I’m a glass half empty kind of guy. I struggle with anger and depression. I have a tough time being optimistic about stuff. I find there’s a lot of really good reasons to not be optimistic right now. I think our geopolitical policy is just planning economic IEDs everywhere. People think our largest trading partner is China or the U. It’s not, it’s Canada.

Dave:
Canada,

Scott:
Yeah. We sell about $900 billion of goods into Canada who could not have been a better neighbor, a better friend, a better ally, largest undefended border in the world. And they trusted us. They invested in this partnership. 70% of their exports come to America. And what did we do? We turned around and said, “I know for no real reason we’re going to declare economic war on you.” I think we’re in the midst of superpower suicide.
Post World War II, 80 years of prosperity through cooperation, by rebuilding Japan and Germany and largely being seen, and a lot of people push back on this, largely being seen as the good guys enforcing freedom of navigation with our Navy settling in US dollars, rule of law largely based on US contract law. We were the operating system for 60 or 70% of the world’s GDP. We have been so hostile, so sclerotic, so undependable with other democracies and capitalist societies. We are now going from a bipolar world where it was 70 / 30, us versus call it China, Russia, Iran, whatever, to 30, 40 / 30. And that is everyone from Brazil and South Korea to the EU are going to form their own relationships around us. And even if America returns to some level of economic sanity, I don’t think they’re coming back because they’re going to say, “Well, what happens when the next populous person props up and decides to change tariffs against us 17 times, which is what we’ve done with China?” So I am very skeptical of US markets for a while.
The counter to that is that with all these problems, the biggest wealth creation vehicle in history, AI, at least from an equity standpoint, it’s not only all happening in America, it’s happening within a seven mile radius of SFO international airport. So there’s something about American ingenuity and risk taking and capital formation that is still unparalleled. That’s the bull market. But the opportunity, I think, if I was advising a young person, again, it’s situational. If you’re young and you can get a college certification and get to a great platform, do it, get learning, get skills, get contacts, and then if you want to start a business, fine. But I still think the American corporation and certification, I’m a big fan of higher education. I think all the people shit posting higher education, that means their kid just blew the ACT or… It’s so in vogue now to say you’re not going to need higher ed.
Higher ed has never been more important. Anyway, I’m a big fan of higher ed, but I think an opportunity for a lot of young people right now is I think you’re about to see the largest disposal or fire sale of small businesses by baby boomers
Whose kids do not want to hang drapes. I had this guy in my house, my house in Florida, he’s the drapery guy and he hangs these beautiful gorgeous drapes and window coverings and he comes in and he steams them and he charges a lot of money. And I asked him, “What do you make?” He was very open with me. He’s like, “We do about a million and a half a year in business and we clear about six or 800 grand and I’m the owner and I have-”

Dave:
Wow, 50% margin.

Scott:
Yeah. Great margins, right?

Dave:
That’s unreal. Yeah.

Scott:
And I have five or six good people working for me who make good livings. Two kids, neither have any interest in the business because he was able to send them to elite schools like the University of Florida and SMU. And now those kids don’t want to be in the curtain hanging business. This is a guy in his early 60s, he might just close the business down. So I think there’s a lot of opportunity in these kind of small niche businesses for a talented greedy young person to go to find these people and say, “I don’t have any money, but I’m going to work with you two years. I’m really good. You’re going to see how harddworking I am and how responsible I am.” And then you’re going to sell me the business slowly.

Dave:
Like a seller finance deal. Yeah.

Scott:
100%. And for the rest of your life, I’m going to give you 5% royalty on everything.

Dave:
I buy it. I’ve been underwriting those businesses myself. I’m just super interested in it. And personally, I think we’ll probably hit a recession in the next year or so. I can’t predict it, but I think that’s going to be the impetus. I think a lot of these older operators, they don’t want to go through another cycle. They’re done. And so they’re going to start selling them at a faster clip at a time when there’s not going to be many buyers. And so if the buyers out there are going to have a lot of leverage, it does seem like a really good opportunity. Well, Scott, thank you so much for being here. This was a lot of fun. We really appreciate your time. Where should people follow you if they want to keep track of your work?

Scott:
Oh God, Dave, I’m everywhere. I’m like AOL in the 90s. If you stick my hand in a cereal box, you’re going to pull out some of… I’m ProfG or Prof Galloway on all the social media platforms. My most recent book is Notes on Being a Man. I have several podcasts, the Prof G Pod, Raging Moderates, Pivot, Prov G Markets. So yeah, I think the bigger challenge is to avoid me right now. So anyways.

Dave:
All right. Well, if you want to give people advice about where to not find you, we can also allow you to do that as well. Well, thanks again, Scott, and hopefully we’ll have you on again sometime soon.

Scott:
I hope so, Deb. Congrats on your success.

Dave:
Thank you. And thank you all for listening to this episode of the BiggerPockets Podcast. We’ll see you all next time.