Pension Ponzi Schemes, Asset Inflation, War On The Middle Class, Bernie Madoff, Market Cycles, American Greed with Patrick Donohoe

Pension Ponzi Schemes, Asset Inflation, War On The Middle Class, Bernie Madoff, Market Cycles, American Greed with Patrick Donohoe

On today’s Flashback Friday episode, Jason Hartman talks to Patrick Donohoe of The Wealth Standard Podcast. They discuss Ponzi schemes, insurance policies, and pensions. Jason enumerates the common mistakes average retail investors make when investing in financial services. Patrick also explains how policyholders can reduce their risk and get investment money for cash-flow properties.

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Announcer 0:13
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Jason Hartman 1:03
Welcome to the creating wealth show this your host Jason Hartman with episode number 872 872. Thank you so much for joining me today, as we talk about a variety of things. And I’ve got none other than a returning guest, a client and a venture Alliance member, Pat Donahoe, here with me to talk about the biggest Ponzi scheme in US history outside of the Social Security system, which was actually bigger. And it was the inspiration for this one. Yes, that’s the one by Mr. Bernie Madoff who made off with billions and billions of dollars of people’s money. We’re going to talk about that we’re going to talk about real estate investing. We’re going to talk about one of the biggest industries in the world. The only industry that I know of that has what is known as a negative cost of capital and negative cost of capital. It’s an interesting idea. You know, most companies they got an expense Capital before they get it back. This one is the opposite. It’s kind of an interesting industry. So we’ll dive in and talk about that too. Did I? Did I tempt our listeners enough with a little bit of mystery there, Pat?

Patrick Donohoe 2:12
I hope so. I hope so. It was tempting to me to Yeah,

Jason Hartman 2:15
yeah. You didn’t even know. I was gonna say that. I did. Yeah. You know what industry I’m talking about, right? Don’t say yet. Make it a cost of capital. Give it away. Okay. All right. You do know, though. Okay. So you have, you’ve got an interesting article here, that was posted in our content Facebook group that the venture Alliance members are in, you know, it’s about made off called the US a giant Ponzi scheme. And you know, he’s right. But as the old saying goes that two wrongs do not make a right my mom you start with say that to me. two wrongs do not make a right. Tell us a little bit about this. You took a pretty deep dive into this topic, and I think it’ll be very interesting to investors.

Patrick Donohoe 2:54
Yeah, I did and the reason is, before the article was posted, I had already Knowing about this individual the one that was interviewed by this specific journalist and his name is Harry Markopolos and Harry Markopolos was the, really the central figure of a, of a documentary called chasing made off. And it was it was brilliant, fascinating, really, really well done documentary, and Harry Mark called couplets. Essentially. He he found out about made off 10 years in advance of made off turning himself in, and he had gone to extreme lengths to notify the regulatory bodies, notify investors, financial publications, and in the end, they didn’t listen to him and he had attorneys that were helping him he actually resigned from his position as as as a CFA a certified financial analyst with a financial institution because he was so adamant about getting the message out that Listen, this made off guy is crook, and he was trying to out him. So it’s a brilliant brilliant documentary. And so I knew about that kind of coming into this this article. But now Harry Markopolos, he is a essentially a freelancer, a contractor goes out and really analyzes companies and financial institutions with with the objective of doing the same thing that he did with Bernie Madoff, which is figuring out, you know, which funds are legitimate, which companies totally legitimate investment opportunities, and so forth. And he has made some pretty bold claims when it comes to a few banks, which he’s not able to give the details because of settlement issues. But also, he’s talking a lot about the pension system, specifically the municipal municipality pension issue that exists right now as well as the US government and the unfunded obligations that they have coming to them in the future. And the improbability of being able to actually fulfill on those promises. So he makes some very bold claim is it’s a fascinating article, but also there is a an audio interview attached to it as well.

Jason Hartman 5:02
Yeah, fascinating. Well, I just recently, as I mentioned before, on the show, watched the HBO documentary called The Wizard of lies with Michelle Pfeiffer boy hate. She’s gorgeous, but not in this movie she plays Ruth made off which he plays a much older person in the movie, along with Robert De Niro. And that was really good. You know, that’s fiction, you know, based on truth, obviously. But you know why? I think the first thing I want to kind of tee this up as we talk about it today, because first question is, you know, why is this important to the average investor who’s listening, right? And it goes back to what I talked about in my creating wealth seminar, which is the six ways I’ve identified for the US government and really every government around the world, pretty much almost every government to get out of the, quote, mess, unquote, that they’re in, right and and that is, you know, one of the Is to inflate their way out. And I believe that’s what’s gonna happen. I believe it’s the most likely way. I think it’s the least harmful way to get out of the mess. And it’s really a very good business plan, actually, I mean, I say that sort of tongue in cheek, because philosophically, I think it’s pathetic. But, you know, we hear, here’s the circumstance we’re in. And if I was, you know, running the government or any government or the Federal Reserve or any central bank, it’s exactly what I would do. It’s the least harmful, most palatable business plan. Okay. And it is a business plan. Let’s not deceive ourselves. That’s exactly what it is. It’s a business plan. It’s a very good deal for governments with debt. And pretty much every government has a massive amount of debt. And it’s a very good deal for investors who are here listening today. And and so, talk to us about what Harry discovered. I’m guessing he has a Greek background by his last name. and talk to us about what he what he says about the municipal government situation because folks, this is a big deal. Municipalities around the country are in trouble. So you have this this crisis it it all levels at the municipal level, at the state level, at the national level, and then at the level among nations globally. So let’s start with the municipal thing.

Patrick Donohoe 7:28
Yeah, it’s, it’s International, but I would echo just a few things that you said. Jason, before I comment on that. If you really were I had a huge breakthrough. This was years ago, when you came out with your 10 commandments of real estate investing. I think that there are there’s some very why and I’m not sure I don’t even know what that backstory is. But there are some very wise, there’s very wise guidance in there. And if you look at really the common ways in which Americans are are managing their finances, it violates almost All of them. And so you look at the situation that we’re in. And it shouldn’t be too surprising if you’re familiar with that. So I would look at, you know, the the pension system and, and his whole, you know, again, background in financial analysis, and it comes to what he discovered with Bernie Madoff, which is just the there’s no real, you know, rational way in which he could be achieving the returns that he was saying he was achieving. And so it really comes down to that same premise, which is these municipalities, or it’s, you know, it’s federal, it’s it’s state run as well and really be in probability based on a rational observation of what’s going on because to the average individual, if they’re promised a pension, that’s exactly what a pension is. It’s a promise it’s a contractual obligation that one party has to another and if you look at really pension systems of the past, they’re you know, the reason why companies go to you know, deferred compensation like A 401k is because with those type of benefits, the company is not on the hook for the outcome, whereas pensions they are. It’s a contractual obligation. So, companies have gone bankrupt in the past. And we’ve seen, you know, municipalities start to go bankrupt because of the obligations they have to their, their pension E’s. Right? So, you know, obviously, Detroit is a perfect, perfect example. So if you look at really the pension idea, the pension idea is essentially, that a company is allocating money to this side for the future. And they create a fund and the fund is based on the number of people that are in there, a mortality factor, which is, you know, when these people will pass on, as well as a rate of return. Okay, so you have all those different variables. And so what happens is, these municipalities are stating very high rates of return. Now, we’re not talking, you know, these aren’t, you know, maybe to you or me, they’re not, you know, really big returns, but we’re talking about billions and Billions and billions of dollars, right? If you had, you know, a couple hundred thousand dollars, it’s easy to get a 1220 30% return. But if you’re talking billions and billions of dollars, okay, they are overstating their ability to get a return. And they are stating 7% or 8%, which really shows that if they’re not able to achieve those numbers, which they’re not, then what’s going to happen is they’re going to default on those pension obligations. And so if you look at really the greatest bear run, this is a point that Markopolos makes in the audio interview, as well as the article is that since 2009, there has been this massive, massive bull run in markets and investments. And yet these pension funds are still underfunded, but not by you know, like 5% or 10%, by like, you know, 40 50% in some cases worse. So what that means is that, you know, they essentially have, you know, if it’s 50% underfunded, they have half the amount of money they need to actually pay out all the obligations that they owe to those that are going to receive pensions. So that’s the first thing that he claims is that, you know, there’s these pension funds are just not administered the right way. And they’re making very aggressive claims which are likely to, to not pay out especially if there is a correction. correction, the market, which also he says is an inevitability,

Jason Hartman 11:18
right? It is inevitable. And, you know, the pension thing is pretty much I mean, folks, if you have a pension or if you took your job or your career based on the concept, I’m sure in part based on the 401k, the 401k jail that you’re in, by the way, if you want to look at an interesting very old video I did that was really widely viewed and traded around even before social media type in 401. k jail for one, or getting out of 401k jail kind of interesting, short little video. But, you know, it’s basically a sales job, right? It’s essentially what happened is you were being pitched by a Someone that was selling you something, and they were selling you as part of your job perks a pension. Right? And it’s important to remember that, you know, these pensions really have to be like, divided up and, you know, between defined benefit plans. And that’s what just sunk the the American auto companies for a long time, right defined benefit plans versus defined contribution plans. There’s a difference, you know, and this is what the, you know, the left wants and every country you you know, every democratic country, you know, that’s the left leaning they want, they want defined benefits, rather than defining their contribution. It’s sort of you could even play that on a much bigger level than with pensions and just society in general. And so, you know, this is a sales pitch and it can’t, these are promises that can’t be kept. They’re just not going to be kept. And so, of course, you’ve got to be self reliant, and you’ve got to do your own thing and do your own plan. So that you don’t become victim of this, and you don’t have this huge expectation and you get to the time where you can start, you know, benefiting from your pension in 10 or 20 years, and you’re like, left with way less than you thought, you know, that’s, that’s the likelihood. It’s just whether even if it’s Social Security, which is another form of a pension, right, it’s just not going to be there for you. And even if it is, it’s going to be inflated away. Okay, you’re going to get paid in inflation, debased dollars. Well, what’s

Patrick Donohoe 13:30
already happening, Jason is is there’s and this is what’s really scary is that you’re seeing a lot of precedent being set in the legal system as far as what municipalities can do. So there’s a few in California, that essentially they were able to not have to go bankrupt per se, but kind of negotiate payouts and then there’s a few loopholes. There’s always a loophole legally, right with with some things, there’s so many laws that are out there, but it’s, you know, one of the things where those type of actions are taking precedent to a very widespread epidemic, I would say because this is these are, if you look at the health of the pension system, right, it is in very poor health over, you know, across all all 50 all 50 states, right, there’s some that are obviously better than others, but really, really looking at some they’re in bad shape, one bowl in one bear market, one correction could start to wipe out a lot of these, I think what you’ll see is as one goes down, the other start going as well as the snowball effect. So I would say that those that really have a pension, it is not a permission slip to, you know, to not have responsibility and not do something else. If you have a pension great, but pay attention to it understand where their assets are show up to meetings, I would say start to question question and even if it’s a corporate pension, so that’s and although a lot of that documentation is is available to the public, but I would say is you know, really understand what you have as opposed to trusting that you know, a municipality or a government or a Company long after you’re not working with them has your best interest in mind, which is very, very seldom

Jason Hartman 15:05
very seldom is it ever that way. I mean, yeah. Is it ever that way? Okay. So, talk to us a little bit about you. You said something interesting, Pat, you said that it’s based on the pensions are based in actuaries. And part of the problem is, although it’s a great thing, but part of the problem is people are living too long, right? Social Security, that’s the problem. I mean, the Social Security system was designed when people would live an average of like four years into retirement. Right. And, and so, one of the things that’s kind of interesting is that, you know, these life insurance companies, right. I mean, they have, they use actuaries to rate their policies, and you know this better than any guests I’m ever going to have. So, I would argue that their policies might be kind of a bargain because they don’t really think They’re going to have to pay death benefits very soon. Is that it? Tell me about that thinking in your industry.

Patrick Donohoe 16:06
Well, and this is one of the this is one of the points that that Markopolos makes right at the end of the interview, he talks about the the insurance industry, and it’s a very loosely regulated in industry. So it’s a state regulated industry. And you have these huge, massive kind of international groups, right, that are, you know, involved with, you know, the US market. So, and what I would say is that, yeah, and insurance companies, you have kind of a brilliant, almost perfect math as far as when a group of people is going to pass on, right. And it’s the only, you know, it’s the only guarantee in life. And so it’s one of those things where they have enough data and they share a lot of data to where they know you know, if it’s a group of 1000 people exactly when every single one of those people is going to pass on. So that science is is very accurate these days. Looking at it. Really, you’re right, the Social Security system, pension systems, what they’re what they’re doing is they have all of those numbers. What they’re doing, though is they’re overstating the rate of return, okay? Because they want to have that money for themselves. Because if they overstate the rate of return, they’re not going to need as much money to pay out in pension. So what you see happening is whether it’s municipalities or corporations or whatever, or the government perfect example, they’re essentially taking that money and, and not putting as much as they should into those funds. So the insurance industry, it’s, it’s really, it’s fascinating. We can go up on a lot of tangent tangents here, but you have kind of a publicly traded insurance company and then you have a private mutual company, publicly traded companies, they are all basically held to a quarterly standard. Okay, so the decisions that they’re making are meant for shareholders and those shareholders want to see the health of the company on a quarter quarterly basis, so it’s almost impossible for insurance. runs companies to make long term decisions. If they’re publicly traded, and you’re gonna, you’re seeing a lot, a lot there right now. So,

Jason Hartman 18:06
this is one of the things that, you know, I hear from people all the time, is that when they, you know, entrepreneurs, when they have a company and they go public, it gets all screwed up, because now you’ve got all the Wall Street motivation and you’ve got to, you’ve got to serve too many masters, right, you know, you, you know, it the company, a lot of them say it, whether they work for it, or it was their company. You know, it was a great company to work for. I loved it, I felt like we were on a mission, we were doing good things, we were changing the world. And then we went public. And then you know, man went down the tubes.

Patrick Donohoe 18:43
Wall Street, Jason, you know, this, and this is another tangent, but if you look at, you know, really those that ever win with Wall Street with the stock market, it’s those that you know, either do reverse mergers and go public again, or they are entrepreneurs that you know, gain venture capital. On the venture capital groups kind of pushing them to the public. They’re the ones that always win, okay? Or sophisticated traders that have a lot of knowledge. It is not the retail investor, retail investor always loses. However, these other groups would not be able to make their billions if there weren’t if there wasn’t a demand from the retail investors that come through mutual funds, and ETFs and other you know, other types of funds that typically will come through American savings like middle class, upper middle class savings. So it’s fascinating because you have, essentially, you know, part of our financial services industry, a huge part of it preying on the retail the retail investor.

Jason Hartman 19:39
Oh, praying is an understatement. You know, where are all the clients yachts? Yeah, absolutely. No question about that. Okay. Well talk to us a little bit about the insurance industry if he would, you know, any more interplay between this at any more, you know, suggestions for investors of ways they can protect themselves from Some of the problems and you know, maybe if you want to identify other parts of the Ponzi scheme that Harry brought out, I mean, we sort of went down the rabbit hole into just one, which is the pension thing, because I think that affects most of the listeners, you know, in one way or another. Okay. So if you don’t think that affects you, and you’re thinking, Well, I’m an entrepreneur, I don’t have some corporate pension, and I don’t work for the government. Oh, no, it affects you. Because guess what’s going to happen? The government is going to have to bail out some of these plans. And or it’s probably Endor, it’s probably both, and some of them are just not going to be able to pay, and that’s going to change the composition of the economy. Okay, because there will be more people retiring into much lower economic standing than they expected. And those people are a rental market for you. And so that’s going to change things. And I, you know, I think you’re just going to see people in many ways moving down. It’s kind of a weird time, Pat, you know, Like, I think that you’re gonna see a lot of people moving down, you’re gonna see continue to see a concentration of wealth, you’re gonna continue to see this like attack on the middle class. But at the same time, technology is making things so much better, that that extra money if you will, created in the market or saved by individuals and companies, due to the deflationary effect of technology goes into assets and investments and that increases asset prices and creates asset inflation at the same time you have, like consumer and labor deflation. I mean, I was just looking at a list of four SAS software companies Okay, SAS is s a s software as a service, which is you know, most software companies are now SAS companies, you know, you hardly ever buy a disk and, you know, put it in your disk drive your CD ROM or whatever and download it onto your computer. You know, most of it is a software as a service where you just go visit a website like property tracker, and your software as a service, right? Where it’s, it’s being managed online, a subscription based model. And, and you know, the revenue per employee of these companies is astronomical. Okay? And why is the revenue per employee so high? It’s technology. Okay. You know, I’m in one of these companies was making $530,000 per year per employee, that is incredible. per employee type revenue. I mean, I remember years and years ago, Google was doing like 270,000 per employee. I have no idea what it is today. But, you know, that could never be achieved before. All that technology became available. I mean, revenue per employee in the past was, you know, you’d hope to get three times their salary, right. It’s just mind boggling. The efficiencies created by technology.

Patrick Donohoe 22:54
I would say that you’re you’re right on that point. And you’re also right and the other point where you have asset inflation When it comes to all the different forces that are occurring, and I think one element of that asset inflation is that you have, you know, the whole business cycle theory from, you know, the Austrian School of Economics, which is you have this central central bank trying to increase aggregate demand. And what it does is it really creates an imbalance in the in the economy because you have more money chasing fewer things. And so it has created, you know, some asset bubbles and a lot of different a lot of different areas, which really masks over some of the inefficiencies and issues. And who knows what’s what’s going to happen. I mean, that Markopoulos one of the points that he made, and he’s not able to talk about the details because he’s, you know, under a settlement agreement, but there are some banks that he looked into and really called called them out, which threw up a bunch of red flags and of course, he probably went to court and there was some, you know, settlement arrangements and non disclosures and so forth. But But I would say that right now, if you really look at you know, what your what you are specifically doing you If you’re an entrepreneur, if you’re a business owner, if you’re a real estate investor, it doesn’t doesn’t really matter, because in the end all of us have customers, okay? If you’re, if you own rental property, your customer is your tenant. If you’re an entrepreneur, if

Jason Hartman 24:13
you’re an employee, your customer is your boss and the company’s customers.

Patrick Donohoe 24:16
Yeah, exactly. And so I would say that really looking at how society operates, when it’s something affects your customer, you know, it may not directly impact you, but it indirectly impacts you. So I would say that just being being versed, you know, following your first 10 commandment, which is just the education side of things, is really understanding how economies work. What signals are where you see opportunities, because I think looking at really where we’re at, he points this out, too. There’s going to be a correction. Okay, things right now just don’t make much sense in a lot of different areas. You see signs, I mean, the pension industry is, you know, in the trillions as far as how big it is, if there’s a massive correction there, then the ripple effect is going to be huge. And that’s either going to work You know, wipe some of what you’re doing out or is going to give you amazing opportunities and you need to understand really what happens and then what actions you should take in order to be on either you know to be on the good side of those you know that have that Fallout and that’s where I would say comes really to to to that education side things that’s one thing that Markopolos said is that right now? He’s not investing in anything. He has everything in cash. And I find that fascinating because that’s

Jason Hartman 25:27
risky. If you asked me Well,

Patrick Donohoe 25:28
it could be but it depends on your your objective, his objective with cash isn’t just to hold cash is objective with cashes when there’s a correction, that is when there are amazing opportunities that you can capitalize on. I think that was his that was his point. And, you know, good good friend of ours can Ken McElroy, you know, he started to be kind of blowing whistle on some types of investments that he’s out of really trying to stay on the sidelines, hoard cash for another correction, and I’ve seen you know, just this past. I think there’s a couple of weeks ago, I saw this huge kind of apartment investing mastermind group, there were just hundreds and hundreds and hundreds of people trying to figure out how to invest in multifamily investments. So it just shows you that there. It’s interesting. You have kind of the guru side of things that understand economics understand numbers, they understand the rationality of it all. But then you also have those kind of who have been waiting on the sidelines for so long, coming in right at the end, where maybe there’s going to be a correction. So it’s really it’s really interesting, Jason, where you have tons of opportunities that could potentially happen because of it all.

Jason Hartman 26:32
Okay, so So first of all, I want to say, good luck timing the market. I just don’t know anybody, you can really do that. But But, you know, certainly the voters and I say that in a positive way. And in many ways, the vultures who have a bunch of cash when you know, the, when the crap hits the fan, you know, they can go in and buy a pass as cheap, but they never know how much cheaper it My goal, right, it’s like really hard to time that. And but you know, that notwithstanding I’ve talked enough about the myth of market timing before the I want to talk about the cycle that you just alluded to Pat, about how, really it’s the middle class investor that always buys in at the end, like if you were just picture everybody in your mind, a, you know, a chart where you see it go up, you see it go down, you know, it’s like a bunch of little mountains, right? And peaks and valleys, peaks and valleys, you know, high points and troughs, right, and you picture this chart. And what happens is at the bottom of the cycle, and so we’ll call it in general real estate. Now, of course, to do this properly, you need to segment this between linear markets, cyclical markets and hybrid markets. Obviously, if you listen to the show, you know enough about that, but but let’s just talk about real estate generically as every uninformed person that’s talking on CNBC and giving stupid sound bites does, right? So they’ll say, Well, you know, the the trough the valley was in 2008 2009. Okay? And now it’s 2017 and so there’s been a big upsurge, right? But what happens to everybody the psychology of investing in any market, whether it be stocks, real estate, gold, Bitcoin, aetherium, whatever, it doesn’t matter what it is any asset class out there, okay? is always that the the, the sophisticated investor will charge in with cash they have or access to credit or capital of some sort. And, you know, at that trough, they’ll buy up assets, okay, now, they never know it might go lower. So they couldn’t they make mistakes too, of course, otherwise, you know, everybody would just give their money to them and they always win, but it’s just not that way. And so Then, as the conversation starts and the news hits the media of, Oh, you know, people are buying again, people are making money, people are coming into the market and markets going up, right? The Dow hit a record high, blah, blah, blah. And then, you know, as that as you start to get near the summit near the peak, right is when the vast majority of the middle class kind of like uninformed investor dives in. And we’re always talking here about cyclical assets, not the linear assets, because those don’t behave in this way. Okay. But then they get in, and then the peak happens, and they bought an asset and it fits in real estate that wasn’t sustainable because it didn’t produce cash flow, and it never made sense and they violated commandment number five, Thou shalt not gamble, right? And then the asset started to go down in value. And then they’re thinking, Oh, what should I do? What should I do? What should I do? I’m just going to be strong and disciplined that I’m going to wait And then it keeps going down in value. And it keeps going down in value and there’s the sell off, right. And then they finally because they never followed commandment number five, they never bought an asset, where they put themselves in position where they had staying power. They’re basically forced to liquidate the asset at the, in the valley at the trough, okay? And it’s like, that pattern just repeats itself. You know, folks, if you want to see this, you just get a little older, just get a little older, which is pretty much guaranteed for everybody. Right? And, and you’ll see it, you know, the pattern, it just happens every time. It’s so reliable, right. Any thoughts or comments on that? know for

Patrick Donohoe 30:41
sure. Yeah. And I would say that’s where, you know, I look at my experience during 2008 2009. That was kind of my first, you know, taste of when things don’t go the way that you planned. And I know that there are many who have gone through multiple cycles. I think those that have gone through those cycles are the ones that really kind of understand those trends. Now I agree with you. It’s one of those one of those things where you can’t perfectly time a market. But I would say that the those that I invest with and the kind of personal philosophy that I have, which is why do i do business with you? It’s because you’ve been through those cycles, you understand the dynamic? And it’s not that, you know, in a perfectly timed things nobody does. But with you, you and me, we look at really, what’s our goal? Like, what is our What’s our path? What are the returns? What do we really need? What is it we know, when we put cash up when we make an investment? Okay, what do we need, as far as a return is concerned? How do we measure that, that’s where, you know, if you do have that education, you’re not gambling, and you are able to make investments that you know, really fit within what you’re trying to do. Now, typically, at the top, you know, it’s not worth investing in a property where you know, or an investment that’s going to, you know, potentially lose money and it’s paying you five or 6%, right, that doesn’t make much sense, right. So it’s If it’s paying double digits and you really need to know how to you know understand a property understand markets, which you do, and then put your capital at you know, you invest you invest that, but really looking at most individuals, it becomes very trendy thing where they trust another person and know the performer looks amazing. There’s like, Oh, yeah, you’re performing looks awesome. Let’s do this deal. Without proper due

Jason Hartman 32:20
diligence, trusting people just think for yourself,

Patrick Donohoe 32:24
for the ones that always screw everything up, not the actual investment or underlying idea.

Jason Hartman 32:29
No. So one thing that’s also interesting is that, you know, I think part of the psychology of the investor is, is that that’s to blame. One other component of it is that they’re, they’re trying to get an investment that where they hit a homerun and you know, stop trying to hit homeruns just hit a double get to second base, right? And and, you know, or even first, right, just get, like, just get good returns, invest for yield Let a little time go by and before you know it, you’re going to be rich. Okay? You know that everybody wants to, oh, I’m gonna buy you know, Bitcoin or aetherium, or gold or silver or, you know, this stupid apartment complex that is completely a dumb investment right in a cyclical market or this massively overpriced house in LA. And you know, the greater fool theory, no matter what I, you know, says no matter what I pay, some greater fool will come along and pay more, you try to hit a home run, you just got to stop doing that, you know, that’s basically a symptom of greed Stop being so greedy. That’s what I’d say to investors just get a good yield. And you know, the same works as a seller, right? You know, whenever you do a deal, you got to leave As the old saying goes, leave a little meat on the bone for the next guy, right? Because if you don’t, you know, you’re just you’re trying to hit a home run again. And they’re just they’re gonna figure out a way to weasel out of it. All Okay, as I’ve always said the best deals, whether they be in real estate or anything else never close, because usually someone wises up before before, it’s time to bring your money to the closing table. And they realize either I paid too much, or I sold too cheap. And regardless of what side of the table you’re on, and what the asset is, you know, usually someone wakes up. And that’s just how it goes.

Patrick Donohoe 34:22
I do think if you’re, you know, you’re in everyone’s in a business, everyone invest and sometimes they’re, they’re two different things. But I say in the end, really your your reputation, what you do the value provide to others is, is the most important thing that you can control. And I would say that, you know, in business, that’s one thing in real estate, it’s a it’s another where you’re right now we’re becoming this very open, transparent society, where if you do not have an equitable type of transaction, you know, you’re not going to be gaining that that good, that good reputation. So, I would say that, you know, our market is also becoming just the free market in general is becoming this you know, kind of not policing service, but this accountability service where, you know, we we do have some negative outcomes if we don’t do the right thing if we don’t provide more value than what we take in as profit and money, right? Yeah,

Jason Hartman 35:13
yeah, no, absolutely. And that’s, you know, that’s a good thing. I mean, no matter how good this one below, anybody is in, and if they think they’re gonna get a home run, believe me, you know, down the road a little bit, you’re gonna want to do another deal, and reputations gonna really matter. So, yeah, good point. Good point, Pat. give out your website and tell people a little bit about your podcast, if you would. Sure. So

Patrick Donohoe 35:38
the website is a couple of websites, but the main company is a paradigm life dotnet but for your listeners, we know we create a website called beer bank calm, which they can go then go visit. And the podcast is the wealth standard. And it’s just the world standard calm and the podcast really Jason it’s really, really have necessarily a primary focus. Obviously, we are in I’m in the insurance industry, and we have a very well,

Jason Hartman 36:06
yeah, you had me on your show. So you know, there was no focus. Tangent alert tangent.

Patrick Donohoe 36:13
And that’s really for me, you know, I started the podcast like 1010 years ago, and I’m not obviously nowhere near, you know, the amazing amount of information you have. But I did it because I like to talk about, you know, what my philosophy is, I think it’s valuable to to other people. And so we do, we do cover a variety of topics, but you and I see eye to eye and a lot of different a lot of different issues. But I would say that, you know, we’re in the insurance industry, our focus really is to just show you know, how a unique type of insurance policy plays a role with all of your investing just to improve everything. And so we do focus on all that a little bit. But for the most part is just really helping individuals understand the you know, the comprehensive nature of our economy of our society, looking at trends, being aware kind of going to your one of your first commandments, which is just Education becoming aware understanding how things work and know for yourself as opposed to, you know, having to rely on the hyperbole that’s out there.

Jason Hartman 37:08
As I always say, become commandment number one, thou shalt become educated and become educated so you can be your own best advisor. Okay, so that, you know, you can be your advisor, right and not somebody else. Listen, you know, you may have listened to all 871 prior episodes of this show. I know a lot of you have, and thank you for being addicted. So I appreciate that. But you know, don’t make me your advisor. Okay, just make me the catalyst that makes you think, okay, Think for yourself. And, you know, that’s what our clients are doing. And, you know, think, you know, not everything I say makes sense. Okay, I make mistakes, too, you know, so, you know, we just want to think and learn and grow. But, Pat, I gotta ask you in an important question before you go, and I know we got to wrap it up. But I always like to whenever I’m in a deal, I always want to look at the counterparty side, right and I didn’t realize Do that earlier, when we kind of talked about the longevity thing and how, you know the will these death benefits on life insurance policies play out, but I, I baited people at the beginning of our talk today with the only industry in the world that I know of that has a negative cost of capital. And that industry, by the way is the insurance industry. Okay, so what I mean by that is, look, insurance is the one thing in life that you pay for before you ever use it, and you might buy it and never use it. Okay? Whereas everything else, you know, if you want to buy a widget, if you want to buy an iphone, apple had to spend a fortune in research and development and in production, cost manufacturing and marketing to get you to buy that iPhone and then they mark it up, right. And so that that’s the way normal businesses work, but insurance is really unique, okay, and it’s got that negative cost of capital. It’s a very unique model. So I always like to ask like what’s in it for the insurance company, right? What? So talk to us about that for just a moment, we’ll wrap it up?

Patrick Donohoe 39:04
Well, I would say this, this comes to really any any company, you know, private company or public company where they, they have the fiduciary responsibility to their owners. Right. So that’s what why companies have boards, right? So if you look at, you know, a board of a publicly traded company, that the decisions that they make the executives that they appoint, it’s for the best interest of the shareholders, right? So all the decisions they make kind of go through that, that kind of, you know, that filter. And so the same thing with you know, because there’s publicly traded company, publicly traded insurance companies and private insurance companies. So for the publicly traded ones, they’re looking out for the best interest of shareholders. And then you look at the private side of things, and they also are run in a similar manner where they have a board and they make decisions for the owners of their company. And for mutual companies, which are the companies that we we work with, it’s for the best interest of The specific policy owners that own them. And that’s why if you look at the their activities, and you look at what they’re investing in, they’re very conservative, they’ve been very consistent over the course of time. Because they are beholden to really the promises that they that they make when it comes to the policies that they issue. And then for specific policy owners, the profits associated with their activities are distributed on a pro rata basis based on the you know, the ownership of, of you know, of the company, which is based on the policy owners specific type of policy and amount of policy.

Jason Hartman 40:36
Okay, so talk to us about how that works. Like if someone buys a policy, and then they borrow you know, 75 or 80 or 90% of that money right out of the policy almost immediately, and then they go buy real estate with it or you know, that you know, that can be a pretty good deal because they still got some other perks and they basically pay back the policy premium, but if they a lot of people Don’t do that, right. And then then the insurance company goes out, and they invest that money. And I mean, you know, like, kind of give us a little bit of an idea of what their books look like, like how, how much? Are they really making a good profit office deal? And in what areas? Are they making the profit is the people that don’t borrow back from their policy? Or do they just get some? And I hate to almost say this, but some collateralized debt obligation in order to make those loans to let people borrow from their policies.

Patrick Donohoe 41:32
Yeah, no, and that, you know, we can go off on a tangent with a lot of the publicly traded companies and their exposure to the derivative market. There’s some exposure right now. And there’s been there was exposure during 2008 2009. That’s why, you know, some of the biggest companies in the world almost went under and needed a bailout. Specifically, there’s a few there’s a few others. And that was, again, it goes to those are publicly traded companies. There. Again, their fiduciary responsibilities to shareholders and they’re trying to appease this, you know, really quarterly standard when it comes to the returns are getting and their profitability and so forth. Okay? So if you look at the companies that we use, you know, a couple of them had, you know, zero losses across the board during that whole mess and they actually were able to capitalize on incredible real estate deals, incredible, you know, busy business type of deals with debt associated with, you know, large corporations and so forth. So it’s, it’s one of those things where, you know, if you do have a conservative mindset, and you’re looking out for the best interests of these long term obligations, you’re you are able to weather storms, and capitalize, capitalize on them. So again, I’m going to go to the loan side of things that you talked about. So you got to realize that when you when you give money to an insurance company, okay, they’re promising you certain things in return for that money. And one of those things is a specific you know, cash amount that they will give back to you. If you end up canceling the policy. And so looking at another thing that they will give you as a loan against that amount of money. Now the loan side of things didn’t exist in the beginning of these type of policies. It didn’t occur until about 100 years ago, where, you know, the farming industry really had this kind of this harvest season. And that’s the only time that they made any money, but yet they weren’t. They were saving and putting money with insurance companies in these type of vehicles. But because they didn’t have liquidity, it really hurt their farming. So what they did is they really kind of went to these insurance companies and figured out ways in which the insurance company could lend them money to, you know, to just, you know, throughout the season until harvest, and that’s really where the insurance companies looked at and said, Okay, yeah, we’re not going to be able to invest this money, but we are charging interest on it. And that interest comes to us and becomes a part of our revenue stream. That’s the case today. So when you take a policy loan, right, it’s not necessarily taking money out of your cash. Value account, it is borrowing directly from the insurance company, your collateral is the actual cash value. And when you make a new and you make an investment, you put money into a property or a downpayment and you’re receiving you know, returns there, that you are on the hook, you have the obligation to pay back that loan with interest. And that interest becomes part of the revenue stream and an income to to the insurance company part of their, you know, part of their profitability.

Jason Hartman 44:29
Yeah, it’s an interesting business for them because basically what they do is they have that negative cost of capital, some people don’t take any money out, okay? So they can just invest all of that. But if people do they can basically become a lenders they like become a bank without even having a bank charter, okay, in a way or they become a lender, and but they have a bit of that money that they can still use to invest and pay to run their business and their administrative fees. So yeah, that’s an interesting industry.

Patrick Donohoe 44:59
Yeah. And he also looked at the Adjust insurance in general, it’s you know, these are these are very small these type of policies are a very small percentage of their business, gave them the lion’s share their business is, you know, company company pensions, right. It’s, it’s it’s disability insurance. It’s you know, term and traditional life insurance, long term care. And I mean, there’s a lot of different parts of the business that is also revenue to the bottom line. It’s not just these these policies or there’s a smaller percentage. So

Jason Hartman 45:32
good stuff, Pat, thanks for joining me today and talking to us about good old Bernie Madoff, the pension Ponzi scheme, what it means to investors market cycles, gosh, we covered a lot of stuff. So

Patrick Donohoe 45:44
that was awesome. We did know it was a fun fun conversation. Thanks for having me on. Jason.

Jason Hartman 45:48
Good stuff. Hey, it was a pleasure and to all our listeners, go to Hartman education comm slash contest that’s Hartman education comm slash contest. I know it’s not the Jason Hartman, calm website this time, I wanted to have you go over there and see the new contest. We’re running for an Amazon Echo. And you can talk to Alexa and do all kinds of things with her. It’s pretty cool. I love those things I’ve got. I’ve got three of them in my house now. So they’re pretty great. And Alexa just yesterday ordered me an Uber and Oh, wait, she’s gonna think I’m talking to her now. So go to Hartman, education, calm and enter to win an Amazon Echo and take advantage of that. Hartman, education calm. And then of course, our main website is Jason Hartman, calm. All right. Happy investing everybody. We’ll talk to you on the next episode. Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice or advice of any other specialized area. Please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.