015: The Contrarian Investor Mindset with Codie Sanchez

Justin Donald: All right, Codie, it is so nice to have you on the show. I've really been looking forward to this for some period of time now. So, welcome.

 

Codie Sanchez: Well, thanks for having me. I'm stoked to be here. Let me bring down my mic. Look how professional I look now, huh?

 

Justin Donald: Yeah, that is a nice setup. I love the painting in the background. It's gotta be an inspiring setup that you've got there.

 

Codie Sanchez: Yeah, well, power of place and all that. If I got to work all the time, I might as well like where I'm working.

 

Justin Donald: That's right. Yeah. And to me, it's like a comfort thing. I want it to be comfortable, I want to be able to lounge, I want to be able to be in a space where I can be inspired but also comfortable enough to do any heavy lifting that needs to be done. So, that’s important.

 

Codie Sanchez: Totally.

 

Justin Donald: So, you and I have met through several people. I've been introduced to you numerous times. I've heard so many people have great things to say before I ever met you. So, your reputation really preceded you, when I was finally able to connect, and then it's cool being in an investor Think Tank together. And just hearing what you shared in our last meeting, I was like, Man, you have so many great ideas. So, I'd love for you to share kind of where it all got started, like how did you become this investor? And how did you move amongst the ranks? Like I could give you a formal intro, but it's fun hearing it from your perspective?

 

Codie Sanchez: Well, thanks. Yeah. So, I guess, it all started, I was a conflict journalist before Iran country and thinking or did the private equity deal or was in alternatives or did investment banking, any of that stuff? Really, actually, I did stories along the US-Mexico border which was wild, about human trafficking and drug smuggling and some of the worst things I think we could see in humanity, but why I thought it was so beneficial was, as a journalist, your most important trade is singular, it is your curiosity, your ability to ask questions and to kind of get to the root of the truth behind the narrative.

 

And as you know, as an investor, what's the most important thing? Asking the right questions. It's knowing, like, oh, what kind of liens do you have on those positions? Like, what's your history? Has there been any bankruptcy? It’s like, all these things, it's not really how intelligent you are, it's just how much can you uncover about a deal? And then, as you uncover those things, stack it on.

 

So, I think that was the biggest thing for me starting as a journalist, and I wrote a couple stories, had some success, but what I quickly realized, Justin, is I wanted to make an impact. And I thought that awareness would make an impact and I realized, it's not awareness that makes an impact. The only thing that really makes real change is whoever owns the greenbacks, it's the international language everybody speaks, and its currency. And I didn't understand money back then, like I didn't know about stocks, bonds, 401(k)’s, alternatives, none of it.

 

And so, I quickly realized the only difference between me last name Sanchez and a bunch of people across the border last name Sanchez was that I understood a little bit more the economic situation, I had a better economic situation than they did, and that if I really wanted to make change, I better understand this international language. And so, I sort of made it my mission to work through finance and climb through Goldman Sachs and Vanguard and State Street and all these companies building up my acumen with money.

 

Until finally, like one day, this is actually last year, which was decades after I started off in finance. I realized that in finance, we have the same, you probably feel similar, like when you first started making money. I remember one of my CEOs told me, Codie, just get rich quietly. And I liked it at the time because he was saying, like, don't buy the Lamborghinis, don't buy the stuff. So, he saved me a ton of money that way, but what I didn't like is if you and I just focus on getting rich, then we don't really enrich anybody, we just help ourselves.

 

And so, I started writing a blog last year called Contrarian Thinking about how to think critically in cash flow unconventionally because I wish they would have taught me this stuff in school and instead they taught me calculus or how to dissect a frog and last I checked, I haven't used that in 20 years.

 

Justin Donald: That's right. That's really incredible and I love it because you actually call yourself a reformed journalist and it's neat because you now have this perspective, this expertise in the investment world. You've worked for name brands, you've worked for the who's who, you've been able to develop the Wall Street perspective, and then you've been able to take away from that what was good and recognize what wasn't. You've been able to go down this road of Contrarian Thinking. So, you're using your journalism skills to write, but then you're doing more than just writing. It's a message that spans beyond just the content that you're printing because it goes into everything that you do, it goes into your investment style, it goes into your conversations, it goes into the influence you have on the various boards that you're part of and the various companies that you have an integral role with.

 

And it is so cool to see just what that currency of education, finances, whatever you want to call it, has done for you. It has given so much influence, it has given you a language to be able to communicate to so many people. And I think it is incredible. And you actually mentioned, I love that you talked about human trafficking and all that's going on. A lot of people think that this is only happening in third world countries, but I mean, this is happening here in the US, in every state. And it's really a shame, I think you know this that all the proceeds in my book, The Lifestyle Investor, are all going to charity and the group that I partnered with is called Love Justice International and they're just incredible. They're in 17 different countries and just do great work.

 

And I love that you see that, but you're doing more for it, you're educating, you're teaching people, you're teaching about money, you're teaching about how to get out of these situations and you're giving the gift of education, you're giving the gift of awareness, it's incredible.

 

Codie Sanchez: Well, thank you. I've had fun doing it, too, I mean, I'm sure you feel the same way. It is super fun to get a chance to have somebody read a blog post and then they email you back that they bought a business or that they've hit financial freedom or that we started tracking with Contrarian Thinking that we've had 29 people start newsletters, 85 people start side hustles, that's a lot.

 

Justin Donald: A ton.

 

Codie Sanchez: These people buy businesses. And so, those wins, I think, actually ripple much further than just the employees that you and I could have or the investments that you and I can make. And so, that part's really cool. And I think it's all a lot easier to do than anyone ever told us.

 

Justin Donald: Yeah. Well, how did you break out of the mold, though, because most people, they get programming? Here's the financial education we want you to know because we want your money. So, let's influence the way that you invest and this is typical Wall Street, this is typical investment banking firms and these financial institutions that are powerhouses that have a certain message that they share and a certain strategy and a certain way to get access to your money to make you feel like this is the only way or this is the best way. So, how did you get outside of that? How did you get into alternative investing and Contrarian Thinking?

 

Codie Sanchez: Well, I think, the best thing that anybody can do at any time is learn to ask questions and get really comfortable with it. So, I first started out in the business at Vanguard, which is the world's largest asset manager now. And when I was at Vanguard, there was this Accelerated Development Program, which I also really recommend for anybody coming out of school. So, if you were this sort of, I don't know, elite performing group of people, they picked 12 of us across the country and we got to go into Vanguard and rotate through like 10 or 12 different business units. And so, I got to see sales and trading and alternatives and ETFs and whatever the case may be.

 

And one thing they did that I thought was so incredible is every single Friday, we would meet with one of the senior executives of the firm. So, what we're talking about, like we met with Jack Bogle, who basically created mutual funds and if you're in finance and I'm like, this stuff's cool. So, anyway, all these nerds got together on Friday, but we would get a chance to ask questions to these senior leaders. And there was like this price paid on who could ask the best questions. And I don't ever really remember that in college, like, I was a public school kid, my dad didn't get to go to college. I went to ASU, it was because it was free, because I got a scholarship there. And I was lost in the sea of 100,000 students.

 

And so, when I got to Vanguard and I started to be able to ask these questions, I realized the power of positioning the right one and how you can finagle it yourself when you can. So, I think that moment changed everything for me. And then, alternatively, the next lesson I learned was, I very quickly started to realize that, I threw my first protest when I was 15 against the school and called the radio stations. And I can't even remember what they were trying to do to us then, but I've always been a little bit of maybe a pain in the ass, you could say that here.

 

And so, when I was at Vanguard, what I didn't like is they wanted you to fit in this shell. Like, I don't really ever want to have to wear a suit again if I don't want to. So, they made you fit in the shell, I didn't like that very much and then, what I really didn't like is divorcing my profits from my activities. So, they just said, we're all in this together and we all profit if we all do it. And I said, No, no, no, no, I'm working 60, 70 hours a week, this guy's working 30, and my results are 40 times him. So, like, what's going on here?

 

And so, again, those questions got me to keep thinking. And then, so I thought, well, it must just be Vanguard. And then, I went to the next firm, which was Goldman Sachs, I thought, Oh, these guys are sharks, this is going to be great. They're going to teach me everything, we're going to go deep. And then it was in the middle of the 2008-2009 crisis and I got to see inside the panic and the uncertainty and how nobody knew what was going on. So, I started asking these questions like, wait a second, you guys are the smartest people in the world and you also have no idea what's going on. So, I went to an even bigger firm, State Street, and I thought, well, maybe these guys do, they created ETFs, they didn't also.

 

And so, as I went through these varying firms, I started to realize, okay, nobody actually knows what's going on in the public markets and I'm not even sure I believe that you can pick public market stocks and choose one over the other and when. And so, I can go out and build these products or represent them. And so, I started searching for alpha. I'm like, where can you actually find the return? And what I realized…

 

Justin Donald: And just so everyone knows, how would you define alpha? Because this is important, people hear this all the time and I think most people, they have glossed over look and they're like, what is it? Elaborate on that.

 

Codie Sanchez: Yeah, so alpha just means, so there's like the market return. So, if you say that the stock market makes, let's be generous, people say it makes 10% a year, but I don't think that's ever actually true.

 

Justin Donald: No, way on Earth it does. No way.

 

Codie Sanchez: No, because we don't even get that in fixed income these days. So, let's say that the market performs 4%, year over year on average, anything above 4% is your alpha. So, it's your outperformance is a fancy way of saying, but the funny part is usually, active managers charge you a lot for that alpha. You talk about this a lot in your book.

 

Justin Donald: Yep.

 

Codie Sanchez: And the problem is, instead of giving you more than that 4%, they charge you, let's say 2% and they take more of your 4% because they don't actually beat the 4% number. And that's when I realized, wait a second, there's got to be a better way to do this and I think it's private markets. And that's when I started going into alternatives. And it's just because there is less competition and less ability to commoditize the asset.

 

Justin Donald: That's right. And you and I were very much on the same page on this, Codie, because it's less volatile, without a doubt, there's more ability to control. You never have full control, but there's more ability, there's more resources at your disposal. There's information that you can get that's just not available to the public which gives you a competitive advantage and then, you can really work with experts in a specific trade or a specific place. In the stock market, you're working with people that their expertise if, in fact, they have it is over this huge stock market of all these companies and all these different industries versus in the private markets, you might be working with a specialist that only does multifamily in just this town with the same operator that has, like an incredible track record and you have all these details of past deals, and so, it's just a different game. And in my opinion, this is how you get ahead.

 

Codie Sanchez: Yep. I couldn't agree more.

 

Justin Donald: Yeah, it's great. And by the way, you have done wonders in your alternative investment portfolio. And I'm a huge fan of you and the work that you're doing and even in the space, like one of the companies that you work for is in the cannabis space. And this is such a huge emerging market, 25% growth quarter after quarter, I mean, this is a massive place. Now, that doesn't mean it's without risk. You can't just go put all your money on one company that you haven't done great due diligence on or even if you have, that doesn't mean that it's going to pan out, but there are ways that you can mitigate risks and still capture this huge growth. I'd love to know your thoughts there.

 

Codie Sanchez: Well, yeah, I mean, so I have realized, Justin, that I am not any smarter than anybody else. And the moment that I realized that in investing, I made a lot smarter decisions because what I realized is, I can't beat these hedge fund managers that are day in, day out, following everything in the market, they have algorithmic trading, whether they want to say so or not, they also have unfair insider advantages. And so, I was like, that's not going to be where I make my money. I didn't go to Harvard, I wasn't born into the elite, I'm not going to be able to beat them.

 

And there's actually like a huge ability of income producing and an exponential return when you realize something like that. And so, I said instead, how about I go to a market that's less crowded? Where can I go where there aren't a ton of people, because then I don't have to be the smartest person in the room, I can just be in a room with less people and more stuff? And so, I started off by going into emerging markets. So, I built out our business at First Trust, a couple billion-dollar business by the end. And I did it because in Latin America, they were not selling the type of investments I was selling at the time. And so, I had an unfair advantage.

 

Then, anything where you have that unfair advantage, you talked about this with mobile home parks and I've seen it in multiple different examples, anytime there's an arbitrage opportunity, meaning that what the world thinks something's worth and then what it's actually trading at is below that, at some point, eventually, the market’s smart, the masses are smart. So, they get down to the real value of it eventually. And so, that's happened a lot in mobile homes, it's happened in Latin America. So, they had taken away my margin. I always want a margin, I want lots of money coming to me if I can.

 

And so, I was looking for my next deal. I sold out a lot in America. And I went to start looking at the market, like, okay, where's the next emerging market that I can sort of get access to? And what I realized is cannabis is an incredible one because cannabis does not allow for institutional investors. You and I, we may have created some wealth, but we're not institutional investors. We can’t play with the big pensions and BlackRock and KKR, and all these huge firms.

 

And so, they come in to my segment and start buying up my assets, they always win, they can always pay more. And they cannot come into cannabis because it's an illicit market, still. And so, that's why you can get higher yields, you can get better deal flow, and you can have better returns because the big boys aren't there to compete with you yet. That won't be the case forever.

 

Justin Donald: Yeah, that's right. And it's an incredible space on many counts, I mean, I could go into various reasons why I like it as an investment. You touched on a few things, and I'll touch on that here in a moment, but one of the things that you said is, I can't compete with first of all, the institutional money that can kind of push people around, get whatever they want, but you're also not just competing against the best of the best, you're competing against the algorithms. You're just not going to win. You're competing against the fastest computers that exist.

 

If you haven't read Flash Boys by Michael Lewis, what an incredible book. I mean, all of Michael Lewis's stuff is amazing. He's one of my favorite authors. And I mean, that right there will give you some insight as to what really goes on and why you're at a disadvantage all the time, but let's talk about this cannabis market and let's lump in hemp and CBD as well, and it's funny, because CBD is federally legal and even though it's legal, you can't invest, like the institutional money is still not allowed and banks cannot get in because it hasn't passed all the regulatory, rigmarole that it has to, I mean, this is literally a federally legal industry where this industry still can't get institutional financing. And the same is going to be true eventually when everything is legalized, cannabis is legalized, but I love it because you can get such high interest rates in this space because there's no competition.

 

I mentioned this, by the way, in my book as well in commandment number 3, find invisible deals. And a type of invisible deal is emerging markets, like you said, Codie, but these entrepreneurs are really smart, they know they're building a big business, they know the opportunity is there. And what's great is you've got a lot of people that say, Hey, I'll take a high interest loan because I don't want to give up the equity or I don't want to give up as much equity, because they see the big picture. So, some people are like, well, aren't you taking advantage of them charging 20% or 25%? And the reality is, no, if their business takes off, like they think, the equity is worth way more.

 

And so, this is just a great way, it's that arbitrage that you mentioned, where you have an advantage for a certain period of time and that window is probably short. And when I say short, it's years, we're going to get three to five years, probably. And so, there's an arbitrage opportunity there, just like you said.

 

Codie Sanchez: Yeah, I think you nailed it. I mean, in the cannabis space for me, I think the lesson for people to learn here is what you talked about, which is anytime that there's a new emerging market, how I like to think about it is, being on the cutting edge is a little bit like opening a dark room and having to run across the dark room and the light switch is on the other end of the room that you only flip open as you open the door and enter the next dark room, where you got to run all the way through it to get to the light switch at the other end.

 

And so, a lot of the entrepreneurs and investors in these spaces, you know you're kind of onto something when people are like, Oh, no, I wouldn't do that. Or what, mobile homes? What, weed? Like, those are triggers. Like when I was going into Mexico and Brazil, people are like, what, drug cartels? So, anytime you have those little people that are telling you no, that's just a little off, I don't think so, it doesn't mean they're always the right deal, but it's a sign. I always think when people say you're not supposed to, you should probably look into it.

 

Justin Donald: That's right.

 

Codie Sanchez: And so, I think that's the key with these emerging markets and cannabis being one of that.

 

Justin Donald: And that's, by the way, a great indicator that it's not mainstream yet, I don't want to be in the mainstream. Whatever everyone else is doing, I want to be running as fast as I can in the opposite direction. So, I mean, the majority of people are not in a good financial position. So, if the majority of people are investing in a certain way, which we all know what that is, it's very common. And I'm not saying that investing in the stock market's bad and in fact, over the long haul, it should be a good investment, but it's unpredictable what's going to happen over a period of time, and to have all your assets in one basket, to me, that's really risky.

 

So, if this is what most people are doing, if most people are investing in 401(k)’s and in qualified plans, where there's no utility in their money, they can't get access to it, most people don't self-direct it, so this is what they're doing, I'm running literally the opposite direction. I want every alternative option and opportunity that I can find, again, for more control or more influence finding that arbitrage. People all the time talk about how, oh, there's so much risk. No, you can structure deals in the private markets that eliminate that, I mean, first of all, you can reduce most risk, there are ways that you can eliminate all risks. It's unbelievable. And I know that you have familiarity with that.

 

Codie Sanchez: Oh, yeah. Well, I mean, the thing is that I think people say that your network is your net worth and I think there's truth to that, but I really think that it's a knowledge exchange. The only reason that your network is really important is because of the knowledge that you can glean from them. It's not who they are, it's what they know. And so, the part that I've found fascinating is how easy it is to structure deals, but again, we don't learn this stuff in school. It's why I started Contrarian Thinking because I sat there to myself, watching in private equity how for years and years and years, people would, in private equity what we do. We buy businesses with other people's money, all day long and then we lever those businesses up. And then we sell them for massive multiples and then we make all the money, we return, obviously, money to our investors, and then the business moves on to somebody else.

 

And I remember thinking only, like maybe three years ago or something, I started thinking, well wait a second. So, the model is, we find a business, it's kind of undervalued or a little bit turned around-y, it's a cash flowing profitable business day one. We get a loan on the business, we profit millions of dollars on day one of an acquisition, and then on top of it, we lever it. So, we've profit tens of millions of dollars. Why couldn't you take this and do this at a smaller scale?

 

And what was amazing to me is how long it took me being in private equity to realize, wait a second, I could structure these exact same deals for myself, just unfortunately, I don't have hundreds of millions of dollars to play with, but I could structure them for myself and then, I could reap the rewards of this. And so, I think it's again, just asking the questions of when you see people making money and when you see people asking questions or staying away from asset classes, ask yourself the question, how could I play in this space? And can I mimic what they're doing, but on a smaller scale for me? And that's pretty much where most of my best deals start.

 

Justin Donald: I love it. And I'd love to hear more. You don't have to give all the specifics or give any names, you can if you want to, but you and I we think very much alike and that's why I'm so excited to have you on here today. I'd love to know any more of the specifics that you've done, like, how have you protected your investment? How have you extrapolated cash from a business which by the way, is brilliant because you don't pay taxes when it's alone? If you sell equity, if you get someone involved and there's a sale, you owe taxes. If you take a loan against it, there's no tax, so that right in a way, is like a brilliant way to do it, then there are ways that you can leverage it as you talked about. So, I'd love to know more of the mechanics that you've used. I'm sure our listeners would be interested as well.

 

Codie Sanchez: Totally. Well, some of them are really simplistic, like the first time I did a deal, I didn't know very much about how to do deals individually at the time. So, the very first time I bought a business for myself, I went the standard way, I did an SBA loan from the Small Business Association. So, SBA loan, so loan you up to 90% of the asset price of any business. So, if you, Justin, want to go buy a laundromat for $100,000, they'll give you $90,000. And you can go and buy that laundromat and put 10% down.

 

So, I did that on the business, but the business at that time was a business that I didn't even really have the 10% down. So, what I didn't realize at the time that I would do now is layer/stack different types of debt on top of it, I didn't really think about that or know you could do it at the time. So, I raised the 10% from a few other people, friends and family around. Now, the annoying part about that and why I wouldn't do that again, is that then, you have these investors that want their money out and you got to structure it and you got to update them. And for a small investment in a family-run plumbing business, like that probably wasn't really worth it, but that's how I did it the first time, an SBA loan. And I was like, amazed, I was like, wait a second, you're going to give me $500,000 for a business that I have no idea how to run, I thought that's incredible.

 

And so, the SBA does that all day. And then on top of it, I realized, wait a second, I'm a Latina, and a woman. So, I can get grants for the business, like, you'll just give me money and I get to keep them from local municipalities and counties and governments. So, you can just go to your local, you can either go to your Hispanic Chamber of Commerce, which is what I did for a couple businesses, you can go to your local, state county, or city specific Small Business Association, and they'll give you free money.

 

So, like anytime you're starting a business, in my mind, now, I would never just start a business cold, I would always buy something I would structure something so that the startup on day one is profitable. And I would definitely start by going to the SBA first and I would say what can you structure for me? Can you give me a loan upfront? Okay, what do you have to have? What grants are there available? Is there any special circumstance right now? And believe it or not, the guys at the SBA, they're like, so bored, they don't have enough going on, people don't come to them with this stuff, so like, leverage them. It's like, if you've ever gone to a tourism center in any city everywhere, they're like, oh, come in, please. We're so bored. And actually, your local congressman or representative will help. So, I try to always know who my local congressman is because I want them to tell me about free money that's coming. So, that's one of the first ways I did it.

 

And then, the second deal that I did, I really like asset heavy businesses, actually. So, assets being like, a dumpster truck delivery business, where like, you're just picking up trash from a bunch of different centers, and they have these trucks that are worth 50, 60, 70, 80 thousand dollars. And for every truck that's worth X, you can get a loan for that amount. And so, I started understanding about equipment loans. So, those were some ways where I actually invested directly in the business.

 

And then, what happens? And Justin, you're at this stage, where people come to you with deals and they want your expertise and maybe your network, and they also might want your money. And that's where the real scale happens because then you get money for nothing, at that point.

 

Justin Donald: Yeah, that's when it really gets fun. I have some thoughts about that. I mean, it's great. At first, when I started advising and consulting entrepreneurs and business owners, I spent a lot of time doing it, I really tied my time to it. And I always tell people, if you need money, money's cheap, that's the easiest thing. Don't just take money, like if you're taking an investment, you got to get more than just the dollars, more than just the capital, you need expertise tied to those dollars, but it's interesting now, I just had a company not too long ago that the founder said, Hey, we realize you're busy, we realize you probably won't even entertain us, asking you to be on the board and anything like that, but we have an ask of you and the ask is simply your network. We're not even asking you to invest in the company. We will give you equity, if you just give us access to your network. We could literally never talk and you can just email us the people that we need connections to.

 

And I was like, hey, that sounds like a great deal. And I write about this in the book, where I used to exchange advisory for time. Now, I exchange advisory for either capital and my network or a combination because that's just a fun way to do it. So, it's exactly what you said, but I also want to piggyback on a few things you said because I, too, have done the SBA loan route, which I think is a great way to start. You have to jump through more hoops, especially if your down payment or your equity injection is coming from other investors, you got to season all the funds and the bank wants you to report where it's coming from and they need to see 60 days or 45 days. So, there's a lot of hoops you got to jump through.

 

But here's something a lot of people don't know, the bank, the SBA, so part of what happens to the SBA, it takes longer and part of that is because the government is guaranteeing part of this loan. So, something goes bad, the bank's not out all the money which is nice. I feel like you can get some leniency on some stuff. They have strict guidelines on many things, but like you said, they want the business. Now, they're going to ask you to personally guarantee the loan. A personal guarantee, like this is a negotiable thing. People don't realize this, bank, like every term with a bank is negotiable.

 

So, when I want an SBA loan, I go to a whole bunch of banks and I say, compete, I want the best deal. It's not like there's a set SBA loan term sheet. Every bank can do different things. And so, you put them up against each other, you get them competing, you get the best offer, and I let them know upfront, hey, I'm looking for someone that's going to do a great job and I am shopping it, but I want you to know I'm loyal and when you do right by me, I will come back for more business. And I have a great reputation for that.

 

And so, when you think about then the component or the piece of personally guaranteeing it, one of my most recent deals I did, I was able to structure it so that even though I was the capital partner in this deal and even though my net worth was infinitely higher than my partners, I was able to structure my personal guarantee to just be 20% of the total. And then, what I do is I negotiate from there for it to fall off each year. So, as we perform well, I negotiate, Hey, let's cut that in half. Okay, this year, let's fully remove it. And I want to encourage anyone who has an SBA loan to do that every year.

 

And another great thing you can do is you can give an update once a month to your lender of here the pros, here the cons because when they feel in the loop and they know what's going on, like this is what's happening, they begin to trust you. And that's a great way to earn their trust, earn their respect and negotiate away from that personal guarantee.

 

Codie Sanchez: That's such a good point. And it's really well taken because I feel like what people don't realize is everything in life is negotiable, especially in financial terms. So, people will come to you, and I made this mistake so many times, Justin, when I was first investing, like it's so painful for me to think about how many term sheets I didn't read, how many term sheets I read, didn't understand all of them and still signed it, how many times I didn't have my own attorney review it, how many times the deal I had my attorney review it, I looked at it, but it really wasn't beneficial to me, it was like an equity deal with a maybe I'll pay you back at some point in the future if this really wins, and I just signed as it.

 

And as I've gotten older and done more deals, one of my mentors at Goldman used to say, you never invest in a first-time fund manager or investor because they have to lose anywhere from 500,000 to $5 million of somebody's money before they actually understand what they're doing. And I think that's so true. So, if you treat it like a game and you just have fun negotiating every time, you're like, I don't know, like, if you just ask yourself every single step of the process, does this term benefit me? Does this term benefit me? Does it? Does it? Does it? Does it? And if it doesn't, you just go back and you bother him about it. And it's amazing how much you'll get with the uncomfortable questions.

 

Justin Donald: Oh, yeah. And they'll move, they'll budge, if they want your business enough. I mean, they really will. You made some really good points here, Codie. And one of them, it's funny, you said don't invest with a first-time fund manager, but here's the other thing, once they get good and they have experience, then they jack up the fees, they increase their carry, they increase the admin fees. So, you want to be careful of that. So, you actually want to find the sweet spot in the middle, they've got experience, but they're not a household name yet, they haven't made it so you can get the good fees.

 

And then, another thing that you talked about is having your attorneys look at the documents. The attorneys will find things that are just like, if you are not an attorney, you won't read what it is the way that it means, like I've read contracts a ton and I'm not going to say I'm anywhere close to the smartest person in this, but I'm far away from the least smart person. So, let's just call me in the middle. And holy cow, is there stuff that is spelled out that my attorney is like, do you know that this is what that means? And it's like, no, there's nothing that would ever lead me to believe that that would mean what you just said it means.

 

So, you have to have an attorney, your own attorney and don't just trust the bank's language. The bank's language is in their best benefit. And they always want to negotiate, they always put in their prepayment penalties and you got to negotiate those out and they put in all this basically baloney, you really have to negotiate. And most people think that a term sheet is a term sheet and you just sign it, exactly like you said, Codie. I will tell you nine times out of ten, you can negotiate that term sheet and you can completely recreate in your favor just terms that really work.

 

Codie Sanchez: Yep, I totally agree. And I think a lot of the reason that people don't do it is because they're not an investor for a living. It's why people follow people like you and me. I mean, I get people on Contrarian Thinking because they want to make money, but we're busy, we're inundated with so many different things. We trust our financial advisors, we trust the people to do the things by us that they say they're going to do. And we don't realize that, it's much easier to keep the money you make than it is to make the new money.

 

And so, I understand why people are not combing through legal documents and taking the time. It's the same thing with, like, my tax strategist. In fact, I think we use the same person. And for so many years, I had only a tax accountant, I have somebody that actually checklist off my accountants and did my taxes and did the work. And only a few years ago that I realized, wait a second, he's an executor, he is not a strategist. And so, there's a difference between the two.

 

And so, the real wealthy people, they have both, they have somebody that thinks about their strategy, be like a chief strategy officer and then, you have somebody who's your chief financial officer who executes the financial strategy. And you need the same thing with taxes because unfortunately, one of my other favorite mentors, Nely Galan, first woman CEO of Telemundo, I was like, give me your one piece of advice that you wish you would have done when you were 20. She was like, read tax law every single year, read the new tax code. And I was like, Nely, never going to happen, never going to do it. No way. And she's like, well, then hire somebody to do it for you because what you pay them, it will return two times, two or three, no matter how much money you make. And I think she's right.

 

Justin Donald: There's no doubt. And if you look behind me, I've got tax-free wealth up here. And I think that it's not an incredibly difficult read, like a lot of the tax books out there. It's Tom Wheelwright, who's part of the Rich Dad Poor Dad network and that is a great overview on taxes. And though the tax code changes every so often and with different presidencies and different people that are running the government, it's important to know kind of the foundational aspects of tax code and the fact that even on the IRS website, it says, too, that you don't need to pay more than you owe. It's about what you should pay, not more than you need to pay.

 

Don't be so conservative that you don't take the full write-offs that you're entitled to, because the tax code is written in a way that is a map for how to pay the least amount of taxes which is an incentive plan from the government on how to prop up the government best, how do you stimulate more jobs, more housing, agriculture, solar, all these things that the government wants that they know is good for the nation, and they'll say, hey, if you do these things, we'll take care of you, we'll give you these perks, we'll give you these benefits. And most people look at tax code, like, Oh, I have to do this and if I don't, I'm going to get taxed and I need to be super aggressive here. No, be really aggressive on what they want you to do, so you can save money.

 

Codie Sanchez: 100%, and I mean, when you think about it, we threw a revolution for what? A 30% increase in tea prices. It is really important that if you are earning the money, you get to keep the benefits of the money that you earned. And I'm a big believer, and the best thing that we can do for our country is employ more people and consume more things that we think matter in the world and build things that matter, the government is meant to be there to help as guard rails. It's basically like bumper rails at the bowling alley, but they aren't there to take the money that you earn and do whatever they want with it all the time.

 

And so, I think you have like a moral imperative to figure out taxes. And what's amazing to me is, you understand the difference between the wealthy and those who don't have wealth or even those who are quickly rich, and that is that they understand things like taxes or they have people around them that really do, that they understand things like the contracts or they have people around them that do, that they understand things like processes, SOPs, standard operating processes, accounting, all the boring stuff that doesn't sound like building the next Tesla is the stuff that over time creates real wealth. And so, I think you can just work some time in your calendar twice a year, you think about these strategies once a quarter, whatever the case may be, your life is really going to change.

 

Justin Donald: Yeah. And hire the best of the best, it might sound like it's expensive. And I can assure you that I have paid more than most people do for the legal professionals in my world, but I can also assure you that I have saved infinitely more than the dollars that I have spent hiring them, number one, in actual taxes and in generating more income, and then, number two is the education I get from that one instance that I can now carry with me in every future deal, every future tax return, every future opportunity.

 

And that's what my 10th commandment is, is that every dollar gets a return and it's all about hiring great professionals, people that are way smarter than you that are just the utmost expert at their craft, and learn from them because I think it's really important, I tell everyone, when I do interview them, and by the way, I treat my advisors like the lenders where I interview a bunch of people and I figure out who I'm going to work with the best, who I'm actually going to enjoy talking to, but one of my rules is, Hey, I can hire anyone to get this done for me. What I'm looking for is the person that's going to explain why you do it the way you do. I want to understand your why behind it. I'm not just paying you to get it done.

 

Codie Sanchez: I like that. I'm going to start asking that question.

 

Justin Donald: So, that one's really fun. And so, you're spot on and we've got a bunch of people that are in our network, I believe we do work with the same tax strategist and I'm thrilled. And he has been just an unbelievable gift and resource to me, I've learned so much from him, and so many others, I mean, my attorneys, I've got an attorney that specializes in, well, one of the things I tell people, if you're going to get one attorney and you don't know who to get and you want to play in the world of business, you want to play in the world of investing, to me, the most logical place, the best all-around fit, in my opinion, and this has been proven out through enough deals, is someone that specializes in bankruptcy because if they know bankruptcy, they envision every deal as if it's going to fall apart and they can protect you every step along the way. And they put the deal back together and you've got all your assurances in place and they can contractually protect you.

 

So, a lot of people, they go into a contract thinking that they have these protections, but it's not documented properly. So, you need someone that can do that. And then, from there, I've got my contract attorney, I've got my real estate attorney, I've got my specializations as I need them, but my go-to, my default is in the world of bankruptcy. And I also want someone like that because their whole worldview is this thing's going to fall apart, let me tell you why and where and how, and let me protect you every step of the way. And basically, they say, don't invest in this. And so, the whole time, it's like, I have to prove why I should invest in this deal.

 

Codie Sanchez: I love that. It's so funny because on our investment team, we have one of my partners, Tiffany Liff is a longtime turnaround or bankruptcy specialist. So, she's done senior secured lending, has done it for Cerberus, lots of the biggest guys out there in the world and that's exactly why she's perfect on the team. She's the no guy every single time. No, no, no, these guys are going to screw us, not going to happen, this deal’s crap, every single time. And so, we have to sort of prove that any deal is going to be good enough for Tiffany. So, we call her the mama bear, but the part that I think's brilliant about it is, most firms and cannabis got really burned, like last year during the downturn. And don't get me wrong, like you've said it before and I'll say it too, everybody's going to lose money at some point in some deal in investing. The goal is that you have enough diversification that your winners offset your losers.

 

And so, in 2019, when cannabis had a downturn, the reason that we fared really well and our returns have been some of the strongest in the industry, if not the strongest, is because of Tiffany, because when she structured the deals, every deal we have has financial oversight, it has opt-out provisions. It has milestone-based financing, meaning like we only give them money if they hit certain things. It has D&O insurance in case there's fraud from any of them and has all of these protections that allow us to do things that anybody can do in any deal if you know how to structure it.

 

And so, I'm the same way. I have a Chapter 11 guy that I focus on, focus with in some of the deals that I do. And then, I also think for people having an employment attorney is really important, too, because most people make their money from W-2 income but never understand their employment agreements, especially a lot of people now, the top earners are in tech, and tech payouts are largely stock and equity agreements which really are just like an investment agreement, except the company is writing all of the terms that derive 90% of your income. If you think about it, it’s kind of scary, actually. So, I think more people should have an employment attorney for their W-2 who actually looks at their contracts and negotiates on their behalf, but that's scary and again, people think that they shouldn't ask the questions.

 

And I always frame it as, like, especially if people are listening, they don't have the position of power, where you're like, I have the money, I'm coming in, I'm doing this, we're doing it my way. I always started out by just playing the naive card. So, I’d just be like, Oh, man, like, I don't really understand this term. Can you explain to me what this means? Oh, wait, I'm sorry, can you walk me through the contract? This is the first time I've done it. Do you mind? And so, anytime you can come from that position, they'll tell you a lot and they won't feel like you're attacking them, you come from a place of like naivete or ignorance, but what you really get in is all the information you need without them feeling like you're a threat and that can be really beneficial if you're not in the position of power.

 

Justin Donald: That's right. And those are negotiable, too. People think that you can't negotiate on an employment contract, you most certainly can and you want to be careful, too, because anything that you create on their time becomes that company's property. And so, there are certain things that you want to be very careful of when you do it, whose time you're on when you do it, who's going to own the rights of it. I've got several examples of people that created very lucrative products that these companies have used. And whenever they go to leave, the company wants to claw those things back and hold on to them.

 

And so, there are definitely provisions, there's a lot that goes into it, but yeah, first, it's one of those things that’s uncomfortable. You're like, oh, I don't want to spend the money, it's so expensive. And I was there too, but it's some of the best money I've ever spent. And so, now, it's funny, it's like a total paradigm shift, it's like, I get to spend this money because I know the return is going to be way greater in the long run than whatever the monetary cost is in the short run.

 

Codie Sanchez: It's such a good point. And just like two seconds on that, I would also say, it's fun once you understand these terms, like the first time you do a call with an attorney, it's kind of brutal, same with the first time you do a tax call, but then you start being able to have a conversation like we're having now with other people. And you're like, Oh, so is your accountant an EA or like, no, and you're like, wait, what's an EA? Like, oh, well, that allows them to represent you in front of the IRS.

 

And so, like these things bring you to a different table as a dealmaker that most people never get to in their lives. Some of the best investors that I know were attorneys because they know how to have conflict without letting it get emotional and because they understand contracts and structuring and because they realize the whole world is malleable based on how we structure the deal. So, I love David Osborn, our mutual friend. I loved his line, which is, you can either have your price or my terms, or my terms and your price.

 

And I always want your price and my terms if I have to have a preference between the two, because I'll pay a price that you think for just about any deal, as long as I get to set the terms upon which I pay it because you can pull that price down 50 ways from Sunday. And nobody's looking to mess with anybody or like, take an unfair advantage of people, but you do have to realize that you are the only person that's really going to care about your financial freedom and your finances, nobody else will. So, if you don't protect yourself, then your money is exposed.

 

Justin Donald: That's right. That's so true. You're spot on. And I love that, control the terms. The terms matter so much. And it's one of the things I try to really spend a lot of time on in my book in The Lifestyle Investor is how to negotiate terms and what to even negotiate. A lot of people are like, well, I don't even know what to do. Well, let me break it down. I'll give you every term that you need to negotiate, at least attempt because whatever they present you is already good for them and it's likely not good for you.

 

So, any adjustments that you make, it doesn't mean that they're not going to accept them, it's already weighted in their favor. Most of the time, in terms of sophisticated investors, they're expecting you to come back with negotiations. They've already built in a buffer for that. So, if you don't, you're really losing out. So, you've got to come back and really get the terms that you need and deserve.

 

Codie, this has been just a tremendous time. You are a wealth of knowledge. You are incredibly gifted and you're very articulate. You're very good at taking a little more complex topics and simplifying them in a way that people can understand, in a way that people can implement in their own life. So, I want to thank you for that. And I also want to find out from you, where our listeners can learn more about you.

 

Codie Sanchez: Well, thanks. I think the best place to go is probably contrarianthinking.substack.com. So, that's my newsletter, it goes out once a week. Each week has sort of a mental framework and idea and then, a way to act on it. So, the idea is that we think a little bit and we earn a little bit each week and hopefully, you do it in ways most people don't talk about.

 

Justin Donald: I love it. That is so cool. Well, to all of our listeners, I just want to encourage you again, as I do every week, take action, take one step towards financial freedom today, whatever that might be. And maybe it's signing up for Cody's newsletter, maybe that is reading a book, maybe that's having a coffee with someone that has some expertise and a topic that you want to learn, maybe it's hiring professionals that we've spoken about here today. There's no right or wrong answer, the goal, the mission is to just take some form of action one step because small steps over a period of time equal a lot of distance traveled towards a life of design, not default. So, thanks for listening and we will see you next week.

[END]