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Chapter 5.5: Secrets of the Ultrawealthy ⠀吀栀愀琀 夀漀甀 䌀愀渀 唀猀攀 吀漀漀℀)
“the secret of the affluent” by the New York Times—and for good reason. I was introduced to this tool
by two of the wealthiest individuals I know. But you don’t have to be ultrawealthy to take advantage.
Many high-income earners, such as doctors, lawyers, and small business owners will find tremendous
value in the pages ahead, but those with as little as a few thousand to invest will learn how to create a
version of the structure that will provide all the same benefits. Here are the astounding benefits
available to all:
• unlimited deposit amounts (with no income limitations)
• no tax on the growth of your investments
• no tax when accessed (if structured correctly) and
• any money left over for your heirs cannot be taxed.
Let’s not just breeze over this as a pretty cool strategy. This is essentially removing part or all your
nest egg from the tax system entirely! Never again will you pay tax on growth of your investments
or the money you access within this structure. This is why the media sometimes calls PPLI the
“rich man’s Roth.” Consider this quote from the Wall Street Journal:
The main attraction: Because the investments are held within an insurance wrapper, gains inside
the policy are shielded from income taxes—as is the payout upon death. What’s more,
policyholders may be able to access their money during their lifetimes by withdrawing or
borrowing funds, tax-free, from the policy, depending on how it’s set up . . . One big reason for
the growth: In recent years, the Internal Revenue Service has issued a series of rulings and
regulations that have laid out more clearly what’s allowable and what’s not in private-placement
life insurance and annuities. That, in turn, has removed uncertainty among insurance and
By taking taxes out of the equation, the time it takes to reach your critical mass and financial
independence will be massively accelerated. No longer do you have to worry about how much of
your money will actually be yours to spend after the tax man takes his bite of your apple. In fact, one
of the biggest challenges in knowing how much money you will really need in the future is the
unknown of what tax rates will be for you in the future. Remember, taxes can easily be raised, and
suddenly the amount of spendable income you have shrinks. If you’re planning on a 50% tax rate, but
in the future taxes on the wealthy increase to 70%, or you’re currently at 30% and taxes grow to 50%
for your income class, the amount of money you thought would get you to financial freedom will no
longer get you there.
Let’s look at an example of how you can use this tool to achieve financial security or
independence in less than half the time. Or double the amount of spendable cash you have if you
keep the same investment horizon.
If you’re a high-end earner, like a doctor, dentist, lawyer, or small business owner, you may be
fortunate enough to earn $250,000 per year of pretax income. As a high-income earner, that means that
after tax (assuming a 50% combined federal and state rate), you will net approximately $125,000.
This is the amount you need today to support your current lifestyle. It’s your total spendable income.
Traditional financial planning would say you need to accumulate 20 times your current income,
or $5 million in critical mass, to generate $250,000 of pretax income (assuming a 5% withdrawal
rate). But if you aren’t required to pay tax, and the actual income you need is $125,000 without
taxes, you really need to accumulate only 20 times $125,000, or a total critical mass of just $2.5
million within this structure. That means you get to your goal 50% faster or you get twice the
spendable income if you reach your original goal of critical mass in the same time.
Now, if you make $50,000 a year, you may be saying, “So what? Isn’t that nice for the rich
man or woman?” Stay with me here while I explain how this works for the rich, and then I’ll show
you how to make this work for anyone who wants to get to his or her financial goals 30% to
50% faster—and all with the total support of the IRS, just as it supports 401(k)s or Roths.
ISN’T LIFE INSURANCE EXPENSIVE?
When my attorney initially told me about PPLI, I had an immediate aversion to the words life
insurance. Like most, I had been sold expensive “retail” life insurance in the past and wasn’t going to
be taken again.
She went on to explain, “Tony, this is not your typical retail life insurance. You can’t buy this off
the shelf from a salesman with well-coiffed hair and a gold Rolex. This is an institutionally priced
policy with no commissions, no surrender charges, or other nonsense you encounter from retail
agents. Think of it as an ‘insurance wrapper’ you are buying to place around your investments. And
because of the specific tax code, which has been around for many decades, all of your deposits will
be legally sheltered from tax in this insurance wrapper. They can be invested in a variety of different
funds, and you will not pay tax on the growth or when you access your cash if we do it right.”
Compounded over time, the advantage of private placement life insurance is astounding. Let’s look at
an example of how the identical investment compares when wrapped inside of PPLI versus taking the
standard approach of paying tax each year.
Let’s take a healthy male, age 45, and assume he makes four annual deposits of $250,000 (for a
total contribution of $1 million over four years). If he makes a 10% return and has to pay tax each and
every year, after 40 years, his total account balance will be $7 million. Not bad, right? But if he
wraps the investment within private placement life insurance and pays a relatively small amount for
the cost of insurance, his ending balance (cash value) is just over $30 million! Same investment
strategy, but he is left with more than four times (or 400%) as much money for him and his
family simply by using the tax code to his advantage. (Please note that there are very strict rules
around the investment management, which must be done by a third-party investment professional, not
the policy owner.)
By the way, this same powerful advantage applies even to smaller investment amounts. This is
compounding without taxes! But then I wanted to know, “What about when I want to access my
TAKING OUT MONEY
The power of PPLI is that you don’t have to worry about what tax rates are in the future. During the
course of your investment lifetime, you will never again pay taxes on the gains that are within this
policy. But what if you need the cash? Well, like any vehicle in which the government grants the
benefit of tax deferral, you will have to pay tax if you take a withdrawal. But—and it’s a huge but—
you also have the ability to “borrow” from your policy. In other words, you can call the insurance
company and access your cash value, but it’s legally deemed and actually is a loan—and loans are
not taxable. You can repay the loans at a future date of your choosing or allow the life insurance
proceeds to pay off the loans when you pass away. It’s a legitimate loan, and it does get paid off.
One more huge benefit to stack on? Life insurance death benefit proceeds are income tax free when
your kids receive the benefit.
DO YOU QUALIFY?
In order to access PPLI, you must be what’s called an accredited investor 22 and the typical minimum
annual deposits are $250,000 for a minimum of four years. However, there is a “version” of PPLI
that is now available to nonaccredited investors with as little as a few thousand to invest.
Founded in 1918 by visionary Andrew Carnegie to serve teachers, TIAA-CREF “functions without
profit to the corporation or its shareholders.” It now offers financial services to the general public,
but TIAA-CREF’s unique not-for-profit structure allows it to offer a life insurance product with no
sales or surrender charges. The underlying investment options within the policy include low-cost
index funds (such as Dimensional Fund Advisors), which is in keeping with what we have learned
from many experts in the book. And the tax benefits are no different from what we have learned
regarding PPLI. Remember, being a no-load product with no commission, there won’t be insurance
agents knocking down your door to sell you this product, so you will need to visit its website
(www.tiaa-cref.org/public) and acquire it on your own or ask a fiduciary advisor to help guide you in
setting up a policy.
As a fiduciary, your representative cannot take commissions. If she is skilled in this area and has a
full understanding of how to set up this tax-efficient strategy, she will be doing you a great service.
Depending on your current tax rate, it could help you achieve your goals 30% to 50% faster with no
additional risk. Of course, if you are a Stronghold client, we have a team that can arrange all these
details for you.
THE “BILLIONAIRE’S PLAYBOOK”
What a journey we have been on! We conquered the jungle with Ray Dalio and learned how a
portfolio designed for all seasons has provided a smooth ride for nearly 75 years. We learned how to
create a guaranteed lifetime income plan and achieve upside without downside with income
insurance. And finally, we learned how a rare no-load life insurance policy can give us the equivalent
of a Roth IRA without income or deposit limitations. Now it’s time for the opportunity—the gift—to
sit down and learn directly from some of the most brilliant minds in the financial universe; to hear
what has shaped them into who they are today and what they would teach their children on how to be
successful investors. So let’s turn the page and meet the masters.
One more quick but important note about protecting your family: the wealthy are diligent about
planning to protect their families. One of the simplest things you can do to protect your family is
to establish a living revocable trust. The key benefit to using a living trust to own your core assets
(your home, brokerage account, and so on) is that if you pass away, those assets will avoid
probate—a costly and lengthy procedure of allowing the courts to sort through your assets (and make
everything public record). But unlike a will, a living trust can also protect you and your family
while you are alive. If you become ill or incapacitated, you can include an incapacity clause that
allows someone to step in and handle your bills and other affairs. Don’t let experts tell you that a
living trust costs thousands. You can get a template document for free by visiting
http://getyourshittogether.org. Chanel Reynolds started this nonprofit site after her husband was killed
in a bike accident, and she wanted to make sure that nobody else went through the same experience of
being unprepared. If you want to understand more about how simple and important living trusts are,
go to her site.
In addition, if you want assistance, you can always find an expensive attorney, but you can also use
LegalZoom and set up one for as little as $250 with the help of its attorneys
I’m including this reminder for you here because even though this book is not designed to be an
estate-planning tool, one important responsibility we all have is to make sure that whatever
wealth we build, however large or small it may be, our families benefit from it and don’t get
stuck in a legal process that drains the gift from our heirs. As you begin to succeed, please seek
out quality assistance when thinking about estate planning, but in the meantime, don’t wait to set up a
living trust. Everyone needs one.
22. In order to qualify for private placement life insurance, you must be an accredited investor. This means you must have a net worth of
at least $1 million (not including the value of your primary residence), or you have an income of at least $200,000 each year for the last
two years (or $300,000 combined with your spouse).
INVEST LIKE THE .001%: THE BILLIONAIRE’S PLAYBOOK
MEET THE MASTERS
There are not more than five primary colors, yet in combination they produce more hues than
can ever be seen.
—SUN TZU, The Art of War
Four years ago, I began an amazing journey to find a way for individual investors like you to take
control of your money in a system that seems rigged against you. I vowed to bring you the best
possible information from the most knowledgeable and influential experts in the world. What a trip
it’s been! Since then, I’ve interviewed more than 50 self-made billionaires, Nobel Prize winners,
investment titans, bestselling authors, professors, and financial legends, asking them some of the same
questions you’d ask if you were in the room with me. Here’s a sampling:
“What is your competitive advantage in investing? What sets you apart? What insights have
allowed you to dominate the markets decade after decade?”
“Is the game still winnable? How can individual investors thrive in the volatility of today’s
“What are the biggest challenges around the world and what are the biggest opportunities for
And, perhaps the most important of all, “If you couldn’t leave any of your money to your children,
but only a portfolio or a set of financial principles to pass on to help them thrive, what would it be?”
Their answers excited me, shocked me, sometimes made me laugh. Other times they moved me to
tears. It was beyond any university education one could imagine. It was the ultimate PhD in investing,
straight from the trenches. Where my “professors” were moving markets and shaping the world
economy while they were coaching me one-on-one.
My mission has been to synthesize the best of all they’ve shared into an integrated, simple 7-step
financial blueprint. One that you could use in a practical way to move from where you are now to
where you truly want to be.
I wish I could bring them all to you, but their voices are all captured in these pages, whether quoted
directly or not. The amount of time I’ve spent with each of them ranged from the more than 20 years
I’ve counted Paul Tudor Jones as my dear friend and client, to an informal 20 minutes with Warren
Buffett, whom I grabbed for a short conversation in the greenroom while we were filming a series of
segments together for the Today show.
Most of the interviews were scheduled for an hour or less but turned into three- and four-hour
sessions. Why? Because each of these financial giants was interested in going deep when he or she
saw that I wasn’t there just for some shallow questions. My mission to serve you, the individual
investor, moved them. They were all incredibly generous with their precious time.
The diversity of conversation was extraordinary. I had the privilege of bringing together some of the
most brilliant financial minds in the world. One of the more interesting encounters occurred at my
financial conference in Sun Valley, Idaho. I interviewed Larry Summers, formerly the US secretary of
the Treasury, director of the National Economic Council, and advisor to President Obama in the midst
of the world economic crisis. We talked about what was done and what needs to be done to turn
around the US economy. Publisher and former Republican presidential candidate Steve Forbes was
listening to Summers and raised his hand with a question. You can only imagine the respectful
“sparks” that flew.
Another moment: when I learned that Carl Icahn had been a fan of Jack Bogle’s for years, but they
had never met. I had the privilege of introducing these two titans. Between them, they have more than
a century of investing experience. Jack invited me to join them for the meeting, but I was out of the
country. Wouldn’t it have been amazing to be a fly on that wall when they finally met?
The crazy part is, after all the time I’ve spent with each of these experts, you’ll see only five to ten
pages for each interview as opposed to the average 75-page transcript. To keep this section under
9,000 pages, I’m including highlights from just 11 of the interviews. Well, 11 plus one bonus. Even
though he’s passed away, I couldn’t leave out the interview I conducted with Sir John Templeton, one
of the greatest investors of all time and an extraordinary soul.
Like all experts, the money masters you’ll be hearing from in these pages have different views of
what the near-term future might hold, and they have different opinions on which investment vehicles
they favor most. Some are short-term traders; some like to hold long term. Some think the index is the
way to go, while others swear you can make more money in arbitrage. So even though they disagree
sometimes on tactics, we can applaud how often these money masters take different paths to the same
And one thing is for certain: all of them are great leaders. Take the exceptional Mary Callahan
Erdoes, who leads 22,000 financial professionals, including some of the finest portfolio managers in
the world, overseeing an astonishing $2.5 trillion in assets for J.P. Morgan Asset Management. Or
Chuck Schwab, who transformed an industry with his obsession to serve and protect the individual
investor—building a company with 8.2 million client brokerage accounts and $2.38 trillion in assets
served by 300 offices around the world.
The pages ahead will show you that there are many ways to win—many ways to succeed
financially and become wealthy in the world we live in today. Even though each of these financial
legends has a distinct approach, I found that they share at least four common obsessions:
1. Don’t Lose. All of these masters, while driven to deliver extraordinary returns, are even more
obsessed with making sure they don’t lose money. Even the world’s greatest hedge fund managers,
who you’d think would be comfortable taking huge risks, are actually laser focused on protecting
their downside. From Ray Dalio to Kyle Bass to Paul Tudor Jones—if you don’t lose, you live to
fight another day. As Paul said, “I care deeply about making money. I want to know I’m not losing
it . . . The most important thing for me is that defense is ten times more important than offense . . .
You have to be very focused on the downside at all times.” And this statement comes from a guy
who’s made money for his clients for 28 consecutive years. It’s so simple, but I can’t emphasize it
enough. Why? If you lose 50%, it takes 100% to get back to where you started—and that
takes something you can never get back: time.
2. Risk a Little to Make a Lot. While most investors are trying to find a way to make a “good”
return, each of these hall of famers, without exception, looks for something completely different:
home runs! They live to uncover investments where they can risk a little and make a lot. They call
it asymmetric risk/reward.
You’ll note how Sir John Templeton’s path to great gains with the least risk was not by
buying the market but by waiting until—as the 18th-century English nobleman Baron Rothschild
put it—there is “blood in the streets,” and everybody is desperate to sell. That’s when you pick
up the best bargains. Paul Tudor Jones, on the other hand, follows trends in the market. But, as
he says in his interview, he doesn’t make an investment until he can potentially get a return of at
least $5 for every $1 he risks. And that, he says, is a $100,000 MBA in a nutshell! In Kyle
Bass’s interview, you’ll learn how he figured out how to risk just 3% to make 100% returns.
And how he parlayed that victory into more than a 600% return!
3. Anticipate and Diversify. The best of the best anticipate; they find the opportunity for asymmetric
risk/reward. They really do their homework until they know in their gut that they are right—unless
they’re not! And to protect themselves, they anticipate failure by diversifying. Because in the end,
all great investors have to make decisions with limited information. When I interviewed Kyle
Bass’s former partner Mark Hart, he told me, “A lot of brilliant people are terrible investors.
The reason is that they don’t have the ability to make decisions with limited information. By
the time you get all the information, everyone else knows it, and you no longer have the
edge.” T. Boone Pickens says it this way: “Most people say, ‘Ready? Aim! Aim! . . .’ But they
4. You’re Never Done. Contrary to what most people would expect, this group of achievers is never
done! They’re never done learning, they’re never done earning, they’re never done growing,
they’re never done giving! No matter how well they’ve done or how well they’ve continued to do,
they never lose their hunger—the force that unleashes human genius. Most people would think, “If I
had all this money, I would just stop. Why keep working?” Because each believes, somewhere in
his or her soul, that “to whom much is given, much is expected.” Their labor is their love.
Just like these money masters invest in different ways, they give back in different ways. They
share their time, they share their money, they create foundations, they invest in others. Each of
them has come to realize that true meaning in life comes from giving. They feel a responsibility
to use their gifts to serve others. As Winston Churchill said, “We make a living by what we get.
We make a life by what we give.” What unites them is the ultimate truth that life is about more
than what you have. It’s really about what you have to give.
So how will the Billionaire’s Playbook serve you as an investor? It means that you can sit by my
side as I ask 12 of the greatest minds in finance how you can uncover your own path to financial
freedom. You’ll gain insight into how they became the titleholders in the field of finance, and how
you too have to stay alert and be ready for anything that happens. You’ll learn investment strategies
that will prepare you for all seasons, for times of inflation and deflation, of war and peace, and,
as Jack Bogle puts it, “times of sorrow and joy.”
CARL ICAHN: MASTER OF THE UNIVERSE
The Most Feared Man on Wall Street
Question: When is a single tweet worth $17 billion?
Answer: When Carl Icahn says Apple is undervalued and announces he’s buying the stock.
Within an hour of Icahn’s tweet in the summer of 2013, Apple stock had jumped 19 points. The
market got the message: whenever the billionaire businessman takes an interest in a company, it’s
time to buy. Four months later, Time magazine put his face on the cover with the headline “Master of
the Universe.” It went on to say that he’s “the most important investor in America.” That’s right. In the
past four decades, Icahn’s ventures have earned 50% more than that other investment icon, Warren
Buffett. A recent analysis by Kiplinger’s Personal Finance shows that while most people think of
Buffett as providing the greatest returns through time, if you’d invested with Icahn in 1968, in 2013
you would have had a compounded return of 31% versus Berkshire Hathaway—Buffett’s company—
with “only” a 20% return.
Icahn’s business skills have made him one of the richest men in the world—at last check of the
Forbes list, he was 27th, with a net worth of more than $23 billion—and he’s made billions more for
ordinary shareholders who invest in his diversified holding company, Icahn Enterprises LP
(NASDAQ: IEP), or own stock in the companies he targets. The secret to his success? Even his
critics will tell you Carl Icahn doesn’t just look for opportunities in business—he makes them.
But most outsiders still think of him as a Wall Street caricature, a ruthless vulture capitalist who
pillages companies for personal gain. When you Google the term corporate raider, Icahn’s name
autofills in the search bar.
But Carl Icahn is challenging that creaky old stereotype. Icahn thinks of himself as a “shareholder
activist.” What does that mean? “We go in and shine a light on public companies that are not giving
shareholders the value they deserve,” he told me. His obsession, he says, is to stop the abuse of
stockholders by improving corporate governance and accountability—which makes American
companies stronger and therefore the American economy stronger.
The New York Times describes him this way: “By rattling corporate boards, mounting takeover
efforts and loudly jostling for change at companies, he has built a multibillion-dollar fortune,
inspiring fear among chief executives and admiration among his fellow investors in the process.”
Icahn buys up shares of top-heavy or underperforming companies and then puts them on notice that
it’s time to step up their game—or face a proxy fight for control of the board.
He sees himself in a battle with those who use the coffers of public companies to enrich themselves
at the expense of the shareholders. “Tony, people have no idea how they’re getting screwed,” he said,
adding that average investors aren’t aware of the abuses that go on behind the closed doors of
boardrooms. But part of the problem is that shareholders don’t believe they have the power to change
things because they don’t think like owners. Icahn, however, knows the power of leverage—and he’s
not afraid to use it.
$24 BILLION FOR COCA-COLA MANAGEMENT
An example of the kind of action that public company boards take that outrage Icahn can be found in
his recent criticism of Coca-Cola. Coke was planning to dilute the company’s stock value by issuing
$24 billion in new, discounted shares. The reason? To finance huge compensation packages for top
management. This would weaken the retirement investments of ordinary investors, including teachers
and firefighters, because so many people have Coke stock in their retirement portfolios.
Icahn wrote an editorial in Barron’s blasting the company for the scheme, and calling out Warren
Buffett—Coca-Cola’s single largest shareholder and a board member—for not voting against the
move. “Too many board members think of the board as a fraternity or club where you must not ruffle
feathers,” Icahn wrote. “This attitude serves to entrench mediocre management.”
Buffett responded that he had abstained from the vote but was opposed to the plan, and that he had
been quietly talking to management about reducing its excessive pay proposal—but he didn’t want to
“go to war” with Coke over the issue.
In contrast, Carl Icahn is always ready for war. He’s been in the trenches many times before,
making runs on companies as diverse as US Steel, Clorox, eBay, Dell, and Yahoo. But this time was
different: instead of Icahn, a younger fund manager named David Winters was buying stock and
leading the charge against Coke’s management. To the dismay of overpaid CEOs everywhere, a new
generation of “activist investors” is taking up the fight Icahn started decades ago.