The Greatest Driver of Wealth Creation | Erik Averill, Justin Dyer | AWM Insights #69
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Episode Summary
In the past year, we’ve seen a boom in entrepreneurship – with more businesses being created in 2020 than any other year in history, companies going public, and as of July 1st, the Mets paid Bobby Bonilla another $1M and we saw that now NCAA athletes are able to make money off their name, image, and likeness.
What do all of these have in common? They all tie back to the greatest driver of your wealth: Human Capital.
In this week’s episode, Erik and Justin discuss how to invest in yourself, control what you can control, and leverage the 3 pillars of Human Capital over the course of your career with the aim of attaining your financial goals and increasing your overall net worth.
Episode Highlights
(00:46) The News You Should Know: Bobby Bonilla Day, ByteDance platforms to reach 4M users, LegalZoom IPO, and NCAA NIL.
(4:06) What is Human Capital?
(5:03) The return on your Human Capital
(8:23) The 3 pillars of Human Capital
(11:09) Should you try to find the next Tesla?
(14:23) The “Aha Moment” professional athletes have
(17:07) “What makes me valuable?”
+ Read the Transcript
Erik Averill (00:00):
Hey, everyone. Welcome back to AWM Insights. It is Erik and Justin today. Brandon is already playing hooky down in there for the 4th of July weekend in Coronado Island. Definitely jealous of him, sitting here in hot zona. But excited to be back with you guys. And if it's your first time listening each week, we cut through the noise of what Wall Street is selling you to bring you the knowledge, skills, and access to the information you need to invest like a pro. And so today we're going to tackle one of our favorite topics here at AWM, which is human capital. We believe that you yourself are the greatest driver of your ability for wealth creation.
Erik Averill (00:46):
But before we do that, let's jump into some stories that we're hearing in the marketplace. First, a story out of the sports world. Every July 1st people are talking about Bobby Bonilla. Most people are like who's Bobby Bonilla? He is a former major league baseball star that the New York Mets, every July 1st, pay a million dollars. Back in 2000, they reached an agreement that to buy Bonilla out of his contract, that they agreed to pay him a million dollars every year for the next 25 years. And so must be nice to grab that check on July 1st for Bobby Bonilla.
Erik Averill (01:25):
The second main story in the sports world is the NCAA finally, July 1st marked for the first time ever that collegian athletes are able to make money off of their name, their image, and their likeness. And that translates straight into the next topic is TikTok. So TikTok, as everybody knows, is this massive platform known for these short videos and they've announced they are changing their platform instead of just 90 second videos, they are going to a full three minutes.
Erik Averill (02:01):
So it's going to be interesting to see how that changes the algorithm, how it just changes the way that the platform is used. Are we going to see it more like YouTube. But from an investment standpoint, the reason we bring it up is TikTok is actually owned by a company called ByteDance and full disclosure, this is one of the investments inside of the venture fund that we are a part of. And so ByteDance was in the story of the news all through the Trump presidency, as this was a potential company that they were going to ban because of the ownership ties to China. The fascinating thing about ByteDance and TikTok that most people don't know is, it is the only social media platform that is allowed in both China and the Western world. So Facebook, ban from the beginning in China, Snapchat, banned in China. But TikTok has a sister company. So they believe that they're going to be the first social media platform to reach four billion users. And so from an investment thesis, obviously very interesting for the size of the platform.
Erik Averill (03:12):
And that brings us to our last story in the news is LegalZoom files for their initial public offering. So they're going public. For those that are unfamiliar with LegalZoom, it is, hey, you can go get your access to legal information online without dialing up that expensive attorney. But why it's in the news is 2020 was the biggest year, the largest year of entrepreneurship in the United States. So more businesses were started last year than any year in the history. And 10% of those companies used LegalZoom to start their company. And so the thing that all four of these stories have in common in some form or fashion, it all ties back to human capital, your ability to generate value through your own self.
Justin Dyer (04:06):
So this is what I love about our approach. You guys talked about financial structure, human capital is a critical piece of that financial structure. And we're really unique in how we think about this. So what is human capital? It's pretty easy when you take a step back, it's your earning potential over your lifetime, brought back to a present value amount. So, whatever it is, you're going to earn a million dollars for the next 10, 20, 30 years ideally. Then you bring it back using a math equation, pretty simple equation. And you say, well, that, let's just say it's over 20 years, that $20 million per year is worth X amount today. It's exactly the calculation that the Mets did when they were figuring out whether or not they would agree with Bobby Bonilla and pay him that million dollars per year, every July 1st.
Justin Dyer (05:03):
But it's incredibly important to think about because the return on your human capital can be substantial if you think about it the right way. How do you think about that? Right? You can be an entrepreneur. You could be a professional athlete. You could be an executive, you could be a founder. And those are all types of human capital. You're getting paid for providing a service and you're realizing a return on your human capital in the form of money, of your compensation. And so what you're doing in that sense, is you're converting human capital into financial capital, and we really focus on that transition or that bridge, if you will, and maximizing those two things together. So your maximizing your human capital over your lifetime, whether that includes your personal brand or the company you own and figuring out, do you invest in this particular product, or do you try and go down this particular market segment, whatever it may be, right?
Justin Dyer (06:17):
Those are all questions that tie back to your human capital. You're then able to harvest hopefully, a financial gain from that human capital. And then where we focus on the investment side of things is taking that financial capital that's been harvested if you will, and investing it in a way that will continue to meet your priorities, your goals. Investing it so you'll have a maximum impact throughout the rest of your life. And hopefully you're lucky enough to also have multi-generational wealth. We talked about that a lot and plenty of our clients have those goals and expectations in mind. So it's unique, but it's incredibly powerful to take a step back and say, okay, well, it's not just all about my financial capital today. Yes, that is important. But your human capital, in most cases, in many cases with the clients we're dealing with, is arguably more powerful than the current financial capital you have in play. Not always the case, but it generally is.
Erik Averill (07:26):
Yeah, absolutely. I think that's such a huge point, Justin, because it goes back to one of the key principles for successful in investing is control what you can control. It's why we harp so much on financial structure, right? These are things, minimizing taxes, doing forward-looking tax planning,
Justin Dyer (07:47):
Totally.
Erik Averill (07:47):
Is something that is within our control. Our human capital is in our control. And so when we look at this, it's interesting. We have a whole podcast dedicated to this topic, right? The Athlete CEO podcast is all about how do we help you increase the value of yourself? And on first look, you might be like, what is this financial company doing? Well, the reality is, is we're saying, hey, what can you control? The best chance that you can set yourself up for to achieve your priorities is to make yourself more valuable. And there's three pillars of that.
Erik Averill (08:23):
The first pillar, it's your physical capital. So for the athlete, this translates very quickly, right? If I can run faster, throw harder, tackle quicker, all of these things, right, shoot a basketball. There's a sports world that will pay me for that. Going back to Bobby Bonilla. The interesting thing in the Bobby Bonilla thing is if you stop on face value, it's like, oh, great. I wish I'd have a million dollars a year for the next 25 years. The reality is, is that multi-billion dollar business called the New York Mets, they looked at that situation and they said yeah, Bobby, we'll pay you that because we understand financial structure. We understand that a dollar today is more valuable than paying you a dollar down the road. So we'll pay you $25 million over 25 years because the net present value is far cheaper today. So the New York Mets made a very savvy business decision by doing that.
Erik Averill (09:18):
It's not Bobby Bonilla took advantage of the Mets. It's the other way around. That's the only reason a multi-billion dollar company does that. And that goes to financial structure. The second pillar on your human capital that is absolutely in your control, your intellectual capital, your mental capacity, right? So this is education. This is whether it's through college, or a trade school, or your own gift of the internet, is you literally can now create a skill set and a tool by learning online. Right. We've heard this of the creator economy, the topic that we've heard so much last year, right? They're a creator. They've started a podcast now, or they've started a digital company. You literally need a computer, an internet connection. And with Shopify and all of these, Spotify and all these different companies, you can now take what is in your head, turn it into a product and now people are going to pay you for that.
Erik Averill (10:16):
And then the last part of your human capital is your ability to leverage relationships. And so that's your social capital. And so when we, as an investment team, sit down with you, as we say, you know what? I can't control what's going on in the public stock market. You can try and win the lottery of cryptocurrency. These things that you're literally are hopes and wishes that when you wake up in the morning, you've got no control if AMC is going to go through the roof or it's going to go through the floor, but what you can control is yourself.
Justin Dyer (10:48):
Totally.
Erik Averill (10:49):
And so what is your plan to make yourself more valuable? And then when you go to convert it into income, you've created value. So either an individual or a company are going to pay you for that. Don't stop there, ask the question. It's not what you make. It's what you keep. How do you structure it in the most advantageous way for yourself?
Justin Dyer (11:09):
Totally. And here's a little anecdotal example. People, I mean, it seems like, don't think about capital overall in this way. Right? We get so myopically focused on the next meme stock, the next Tesla, whatever it may be. And I was talking to a founder, probably, I don't know, six, seven months ago, actually, of a company. This guy, he started a couple of companies, had some success, but what he's done with his financial capital is he's reinvested it in his business. So he doesn't have a lot of liquid money. And we were talking and he says, aw man, I heard this story about a friend of mine. He tripled his money in Tesla. He's like, can you do that for me? I'm like, man, you're thinking about that the wrong way. That's effectively trying to play the lottery, right.
Justin Dyer (11:59):
That's a low probability outcome. Yeah. Maybe we can find that, but we're not going to invest money or our resources to try and find the next Tesla. What we would do in that situation is say, hey man, no, you're more valuable in thinking about your business, in increasing the value of your business. You can far eclipse any return you could get in Tesla, or Bitcoin, or whatever, if your focused on your business, you understand those risks. And then to your point Erik, thoughtfully harvest the returns from that into financial capital, invest it in a wise way. And investing is a key word, not speculating there. Right. Invest it in a wise way. So you're harvesting the fruits of your labor, so to speak and have that liquid well-diversified financial portfolio that supports your priorities. Right.
Justin Dyer (12:56):
And it was kind of like this aha moment. He was like, oh yeah, that makes a ton of sense. I need to focus everything, all my time, energy, efforts on my business, maximize this business. And then thoughtfully take the financial returns from that. Instead of just worrying about chasing the next speculative thing, whatever it may be, crypto, stock, et cetera, et cetera, that the financial media is trying to pedal.
Erik Averill (13:22):
Yeah, And this is so helpful because you and Brandon have talked about this ad nauseam on previous podcasts, right? Can you ascertain a value of the thing that you're going to invest your money into? And so being a independent firm that we are, right, we talk about being open architecture. What that means is we have no incentive to try and prioritize what investment that you should put your money into. And so, we love real estate when it makes sense. We love private equity when it makes sense. We love venture capital when it makes sense as far as asset classes. Obviously, we prioritize the public markets. But when we're making decisions, what we're not doing is saying, we love a certain asset class. We're saying what's the potential internal rate of return that I can earn? Because we're completely agnostic. To us, it's A through Z, it's saying what one has the highest expected return given the information that we have.
Erik Averill (14:23):
And for so many business owners and for so many professional athletes, the answers yourself, it's that human capital. It's the aha moment for a professional athlete to understand that if I actually prioritize my biomechanics and I pay $10,000 to hire somebody that can help me be more efficient in my movement, that's going to translate into higher contract value. And so everybody likes to talk about, oh, that's the professional athlete. The truth is, is no matter what job you have, or if you're self-employed, you can increase your intellectual capacity, right? I heard this devastating stat the other day that less than 30% of individuals read four books per year. And it's crazy. I think it's some crazy stat, like 50% of people don't read at all. And then they complain about not making money. And so we just really encourage you to think through, how can you make yourself more valuable in the future?
Justin Dyer (15:33):
Yeah, it's excellent. And then, like I say, the financial capital piece of it is important, but it's the two of these things together and maximizing them and converting your human capital into financial capital in a super logical prudent way that really sets you up for the highest probability of success, again, to meet your priorities, right? That's what we go back to. I'm sure most people don't want to be a business owner or lead a company for their entire life. They're definitely those people that are going to die at their desk for sure. But we think about it in broader terms and say, okay, well in most cases, your priority is going to be to retire, or to give back, or to invest your money in a way that again, goes towards the next generation, or whatever the case may be, right, there's a priority or set of priorities that's incredibly important.
Justin Dyer (16:34):
And thinking about how your human capital, financial capital support those priorities is really what this whole financial structure conversation is about. And again, it's something that I just absolutely love and is super unique to how we approach this whole kind of financial conversation. Most people are just like, well, what's your risk tolerance? Let's put you in a 60, 40 portfolio. Great. See you next quarter, or next year or something like that. And it just is, it's weak, right? It's empty, I guess you could say. So.
Erik Averill (17:07):
Yeah. I love that. And we'll close out here in a few minutes. But that point of we really coming in as a comprehensive family office, right, where we look at everything is completely integrated. One of the main skill sets that we have to teach, not just the next generation who's going to inherit money, but every single one of us is, it's a skill set to learn how to earn money, right? So we want to empower our clients to say, first and foremost, everybody listening to this podcast should be able to answer the question, what makes me valuable? It's an interesting view. Instead as an employee feeling like, oh, I'm underpaid, can you answer the question, what makes me valuable and provides a return on investment for the company that is providing me a guaranteed paycheck? We talk to our athletes about this, whether it's going back to TikTok, right?
Erik Averill (18:09):
We saw these college basketball twins. The first day the NIL rules came out, is they get this huge sponsorship from Boost Mobile because they've got over a million followers on TikTok is they understand how to create value so that when they go to a company. The reason Boost Mobile is doing that deal with those twin girls is because they think, hey, we're going to pay you whatever, $100,000. We're going to put advertising on your TikTok channel. You're going to send customers back to us and we're going to make $500,000. It's a good investment. And so I just really challenge you as we close out is take some time, just a pencil, pen and paper and ask yourself, what is my value to provide to a company or to individuals that they want to transact and do business with me? And then take it step further. How do I make myself more valuable?
Erik Averill (19:08):
And so here's the big takeaway. You are the greatest driver of your net worth. You are the greatest driver of your wealth creation. And so I'd mentioned the Athlete CEO podcast. You guys should head over there, check it out. You can find it on our website. Of course, you can head over to awminsights.com and access all of this in the show notes. But until next time own your wealth, make an impact, and always be a pro.