Justin’s Cautious Investment Plan for a Billion. Will it Work?

TRANSCRIPT

Mike Pine: [00:00:00] Welcome to The Hidden Money Podcast. Kevin and I are super excited to have our guest here, Justin Freishtat. We met Justin a couple months ago at a real estate conference for multifamily housing.

He is not solely focused on multifamily housing. He's got a very interesting story. He has uncovered a lot of hidden money in his life and we'd love to get into that today. So thank you for being here, Justin.

Justin Freishtat: It's my pleasure. I'm excited to share some nuggets and connect with the audience.

Mike Pine: Awesome. Before we really get started into the meat of our podcast, give us a background on who is Justin Freishtat? Where do you come from? How did you get where you're at today?

Justin Freishtat: Yeah. So I was born in Washington, D.C. 36 years ago and growing up - athlete, very competitive, playing hockey all the way up through college, and I got to watch, from a business perspective, watching my father, being a serial entrepreneur, the ups and downs of making lots of [00:01:00] money, losing it, the setbacks that all of us entrepreneurs go through on our journey,

and I got that very lucky experience of going through that before I became an adult and got into the business world myself. So that was really beneficial to not have to learn a lot of these hard lessons as an adult, and I feel like that was kind of a springboard into not only being successful in business, but knowing what to do and what not to do when you actually get the money to go out and be an investor,

because it's a very different transition to be in the business world, and then be in the investment world, and you see a lot of entrepreneurs be very successful, make lots of money, and then they have to go fail forward with their investments, and oftentimes, it doesn't go very well.

So, that's what I tried to avoid was learn all those things in advance so that once I did have the money to go out and be a full-time investor, I'd know what to do with it, and... how to just protect it. That's first.

Kevi Schneider: A lot of our listeners could be more on the older side, and being 36, you have a very mature [00:02:00] mindset of protecting assets, and a lot of people in their thirties, especially twenties, are very aggressive.

Where do you fall on your investment style?

Justin Freishtat: Are you very aggressive at times? Are you conservative at times? Are you both, and you diversify to hedge that risk? It's a very interesting question because different people will answer that differently depending on your perspective on things. Most people would consider the space that I play in very aggressive, extremely high risk, and then they would consider things like dollar cost averaging into the S&P 500

very safe and not risky, but the way that I look at things is that if massive upside isn't there, I've already lost up front, so I've already risked the win if I take the conservative routes. And the other thing that can happen with traditional investments like stocks, every 10 years or so, we're getting a big correction, and negative compounding is something

people don't really talk about. Coming back from that, you got to go up. If you're down a ton, you got to go up twice as much to get back to where you started. So [00:03:00] in my mindset, it was always about how do we avoid negative compounding in any of our investments? Even something as simple as a life insurance policy that would pay you 6%, if it never goes down,

I think you win in the end versus trying to get 10-12 in the stock market, but suffering a 20-50% loss every 5-10 years. So I just looked at diversification and risk a little bit differently than most people. I'd rather spread out my investments in the private placement space- very slow, long money, very safe in things like real estate, but then have these very aggressive plays in IPOs, hedge-trading strategies...

and when you add the whole portfolio together, we're looking at a very low tax that we're paying, because even if you make great returns, if you only keep half of it, it doesn't really make sense. So it's about how much you keep and how that whole portfolio works together to be conservative, aggressive, and get a net result where you can beat the benchmark and not pay any taxes on it.[00:04:00]

Mike Pine: So you would agree with my financial advisor when I talked to him about the concept of diversification as we learned in school. Diversification means you just go pick a bunch of different buckets and areas and diversify yourself, but 99% of financial advisors say as long as you're putting each of your stocks in different industries, you're diversified.

My financial advisor said, 'But you're all in the stock market..' and then some financial advisors, 'No, we got some bonds too..' So they would say you can effectively diversify just with stocks and bonds, but those are just one market on Wall Street, basically, and he and I would say that's not diversification.

It sounds like you kind of agree, huh?

Justin Freishtat: Oh yeah! That's the traditional, 60-40 portfolio, whatever you want to call it. If you were invested that way the past couple years, you got crushed in stocks, you got crushed in bonds. That's not diversification to me, when everything's losing.

Mike Pine: It's not diversification when everything's losing. I agree. There's some hidden money in that nugget

right there, man.

Kevi Schneider: Yeah, and that's why real estate, and I love that you have a little passion for it here, is [00:05:00] because you can diversify even in real estate. You can get different pockets in the country. You can get different areas, different economic areas where there's, if you want a vacation rental, you can get a long term rental, you can get a multifamily complex, and if you have a bunch of beach properties, it just takes one hurricane to wipe you out.

So maybe you have a mountain- you could diversify in there, then you could diversify in your actual portfolio. So I love that outlook to be holistically from a big standpoint, taken care of and diversified.

Justin Freishtat: Yeah, and what you just said is exactly how I diversified my multifamily portfolio. The way I looked at it was, I loved real estate. I loved multifamily. It's one of the most stable recession proof asset classes to be invested in for the long term. It's worked forever. It'll probably work forever.

But the way I looked at it was- okay, I'm going to be a limited partner on all these syndications. I'm not going to be doing the real estate. I don't have time for it. I'm not interested in it, and I really respect these amazing operators- I want to put my money behind them. [00:06:00] So the one thing I didn't do, I didn't put all my money with one operator - spread it out amongst a bunch of different operators.

I didn't put all my money into one concentrated area of the country- spread it out across different markets, and then also, I didn't put all my investments in one asset class- some of it's in A class, some of it's in B class, some of it's in C class. So the way you think about it, is like- Okay, I'm going into real estate.

I love this asset class, but how do I spread it out and mitigate it across all different markets, all different levels of classes, and then different operators, so that something goes bad in one investment or one operator, it doesn't kill the whole portfolio.

Kevi Schneider: That's great.

Mike Pine: So, in order to invest and diversify, you've got to have some capital to start with, right? and I think our listeners, we probably have a whole cross-section of listeners- plenty have capital to invest right now and are looking at different investment strategies, but then we have a lot of people that are starting to trying to build up their capital so they can go deploy it in investments, so the [00:07:00] capital will work for them.

Without getting too personal, Justin, how did you start building your capital? For the guy that's only 36 years old, you've got a lot invested. Where did that come from? How did you do that? What got you started and what did you learn?

Justin Freishtat: Yeah, in the beginning, I feel like every investor probably goes through this learning cycle. You make your first couple thousand dollars that you don't need, and you want to start investing. I have my three months of overhead covered, now I can go start being an investor,

and you don't have to make a lot of money to get to that point. I was making $60,000 a year in my early twenties when I made my first investments, but the thinking was so small. It was- Okay, I have a thousand dollars to invest. I'm going to put it in the S&P 500, and now I'm obsessed with it. I'm looking at it all day.

It's going up 1%, down 1%. We're talking about $10-100. I think this is a mistake we all make in the beginning, and think about the financial propaganda out there from acorns. Invest the pennies when you [00:08:00] charge like, the pennies- Robinhood like, we'll give you a free stock.

It's a dollar. We're being programmed to have a very, very small lid on when we should start investing, and the truth was, you can't really go be an investor until you make a lot of money first. So, if you've got $5.000, $10,000 to invest and you put it in something really risky like Bitcoin, and it goes to the moon and at 3 Xs, Congratulations! You have $30,000.

It's still not life-changing money. So in the beginning, I think you should.. it depends what type of investor you want to be. If you've got big dreams like I do, and you want to play in the private placement space, where you have to be an accredited investor, where the minimums are $100,000, if your vision is that big, you've got to have the mindset- I've got to learn how to earn first.

So if you got $5,000-10,000, I would reinvest it in yourself- marketing in your business, go into a conference where you're going to meet your next business partner, however you're going to get ahead to get your [00:09:00] income up. That's what I would invest in first. Now, if you don't want to go down that road, then yeah, do all the traditional stuff-

work your 9-5 dollar cost average into the 401(k). That's a strategy that will work for that person, but if you've got bigger dreams, you're going to have to delay your investing in terms of real estate, all these different things- that capital needs to be reinvested into yourself until you're at least making $300,000 a year,

because you got to be an accredited investor to play in it, in the space where you can get real returns, where you can get closer to the inside.

So if that's what you want to do, I would be putting cash into a bank account. Let it sit there until you got a $100,000 to deploy, and then you make your first big boy investment.

Mike Pine: That's great.

Kevi Schneider: Yeah,

that is good, and I like how you phrase it to invest in yourself because in your twenties, I started right out of college, we had a matching at my first accounting firm and it was like a 3% match or something like that, but I did that and I got up to [00:10:00] $20,000 in that account.

I thought I was killing it at the age of 25- I was I got $20,000, but I can't touch it, but now that it keeps growing, and it keeps compounding, and that $20,000 has... that was almost 15, 16 years ago. I mean, it was pretty good... at that time. But my best returns was me working my butt off at the firm, and growing in the 'up the ladder', so to speak, getting my salary increase.

That's the biggest ROI I've ever seen is investing in a CPA certification, progressing in my career, just working hard, getting that earned income, and now it's to a point where you're- Yeah. 15, 20 years later, okay, now I've worked so hard, now it's time to play a little bit in a wise way, because

as a CPA, you get to see everyone play the game for a long time, and you're typically not going to be able to play yourself until you reach a certain level. So you know what to do, you just need the resources, you just know what to do, and so I love how you've put that and I would totally agree with that.

[00:11:00] So where do you find yourself going in your next step? I guess, you are managing some hedge funds, you're also investing yourself. Where do you find your passion between the two? I mean, you could love both equally, and being a limited partner in a syndication deal doesn't take any time.

You got to vet the deal, you got to understand what you're investing in, but what really gets you motivated every single day when you wake up, because you have so many buckets you can go to?

Justin Freishtat: Yeah, it's very interesting because.. and this is something in the beginning, I feel like the guidance is just not very good out in the marketplace. People want to follow their passion, they want to do what they love, and I did the exact opposite. I did what was necessary to get me to the place where I could go do what I love, which I'm actually doing now, which is working in the hedge fund space. Having meetings with really high level people, we're raising [00:12:00] millions of dollars in less than 30 minutes on a Zoom meeting, it's exciting. It's the world I always wanted to be in, but I knew in order to get to this world, I would have to become successful in something that would get me here first.

Building that organic food company, as great as the mission was, my dad and I grinded that thing out for over a decade. Barely. I mean, we weren't making a lot of money and we were working around the clock. I would go 60, 70 days without a day off to make this business work, and I hated it, but I knew that it was a bridge to what I actually wanted to do.

And that's something.. if your passion is music, which it was for me, I went to college as a music major

and realized..

Yes. And the realization was- what am I going to do with this? Am I going to be a music teacher? Music's my passion, but I also like nice things.

I like lifestyle. I like flying first class, I like this stuff. So it was- [00:13:00] Okay, I'm going to have to do something I don't want to do for a good chunk of my life, but then I'll be set up to do whatever I want for the rest of my life. So that's what that 10 years was, and I just think you have to be willing to do that,

if you want to go... even if your passion is just to sit around and play guitar, you can't do that if you have to grind it out every day at your job. It's just not a formula. So do something you hate that pays really well, get invested correctly, and then go do whatever you're passionate about for the rest of your life.

Mike Pine: That is a great nugget of wisdom right there that I'm sure so many people wish they would've followed before they realized they were in their late forties, and not exactly where they want to be.

Justin Freishtat: Yeah.

Mike Pine: What're you doing in music these days?

Justin Freishtat: Absolutely nothing. That's what's so funny. I'm such a 'all in' kind of person. Literally, the guitars just sit there, I haven't touched them in years. I either got to be all in on it or I just can't even do it at all. So, I'm now in a place where all the vehicles are set up at [00:14:00] Kerns Capital.

We see the runway to a billion, and I'm just not going to slow down right now. It's just too premature.

Kevi Schneider:

Mike Pine: So following your passion and your trajectory to where you've gotten to today, you got out of school, you realized you needed to invest some in yourself to get some capital so you could start growing. You and your father grew this incredibly amazing company and had a really successful exit just recently, but then you got all this capital.

You got to figure out what to do with it, and you've taken a very interesting track, I think now. You're a managing partner to a hedge fund now, right?

What got to that? And tell me about this hedge fund, and why hedge fund?

Justin Freishtat: Yeah, the pandemic is the reason why the business got sold. It blew the company up. Everybody was scared to go to the grocery store. We were perfectly positioned to just swallow market share, so that's what led to the exit. It was not something we were planning, and I had [00:15:00] to on a dime, think- Oh wow! This transition's going to be in a year.

I got to figure out what I'm doing like, completely different. So what I did, kind of how I met you at the Multifamily Wealth Conference, I just started going to high-end events, masterminds, started networking, figuring out what people are doing out there, and through that process is how I met my partner, Cody Kerns.

He was testing these algorithms and he was launching his hedge fund, and I invested in it before it even launched, and then once it launched, I just started raising capital for him without him even asking, because that's just one thing is when you see the path, and someone's ahead of you in the process, in the food chain, you don't ask them for a job, especially at this level. When we're talking hedge funds, you got to provide value when someone's not asking for it to put yourself on the map, and that's what I did, and he was like, 'Wow! I'm going to bring you in and make you a partner, and we're going to grow this thing together.'

and we've been off to the races ever since. But [00:16:00] the hedge fund for me is the dream job. I mean, I've always been super passionate about investing. Even while we're growing a food business, I'm usually deep in CNBC articles or whatever, I always wanted that, but I was not the the traditional kid that was good at school, that was going to go get an MBA from Wharton, and then go to Wall Street.

It just wasn't my path. So to be able to get into this world later on in my career, right now, really is the dream, and we've got some really excellent connections and proprietary strategies that are absolutely dominating in the current market space, where with interest rates going up and the Fed balance sheet coming down-

I mean, real estate's going through a tough time, stock's going through a tough time, bond's going through a tough time, so it's very hard to find a place where you can get good returns right now, and our strategies are killing it. So it's just a beautiful thing that we're growing, and we're coming up on the one year mark right now, and we've got 20 million under management, and we just bootstrapped that -

[00:17:00] just three guys raising capital.

Mike Pine: And remind us again of what your average monthly return's been over the past year.

Justin Freishtat: Yeah, so the target is 2-4% net return monthly to the investor partners, to our LPs. It's just been unbelievably perfect market conditions for our strategies. We've been averaging about 5% a month. So last year, even though we only had six months from July to the end of the year, if you annualized it, we did 62% last year,

and I don't think there's very many things out there that did that, so..

Kevi Schneider: No,

Mike Pine: Not even what I invested in did that, I promise

Justin Freishtat: Yeah, and this year so far, we're up over 20% year to date, and that's net of all the fees, splits, costs, to run the fund. That's what our investor partners have been getting.

Now as we get bigger and we get more diversified, we don't want those returns. It's too risky to produce that.

So now that we're over 20 million, we've deployed into some other [00:18:00] hedging strategies. Just like with the real estate, what I was saying is you don't want it all with one operator, one part of the country. We're starting to diversify this fund, so we're making the expectation, moving forward, 2-4%,

but it's going to be much safer and less risk involved.

Kevi Schneider: So how does that look from a tax standpoint for your investors? If they're receiving a 20% ROI in the first Q1, or the first half of the year, how does that affect their tax situation, and do you all advise on the tax side of things, or do you just have each of your investors have their own counsel, kind of thing?

Because if someone's investing a million bucks with you, this is significant returns that could really impact their tax situation.

Justin Freishtat: Yeah, and we have several seven figure investors, and we are not investment advisors. I cannot give financial advice of any kind. Everyone that comes in with us is a partner in this 506(c), and I can tell people what I do personally, what my CPAs do for me, but at the end of the [00:19:00] day, they've got to go talk to their advisors on their situation and figure that out.

So that is one thing about high frequency trading, which is what we do. We're in and out of these trades daily, so it's going to be taxed at the highest bracket,

but it's considered passive. So a logical thing for me to do was look at what my gains are, and then go make a multifamily real estate investment towards the end of the year in that calendar year,

and if it's a development deal or a value add deal, I'm getting somewhere around 60 -70% of my initial investment as a passive loss on paper in year one, and to this day have not paid a dollar of taxes on my hedge fund gains.

Mike Pine: Legally, you haven't done that. Let's stipulate that legally that is an awesome, awesome area of hidden money in the tax code right there. So your hidden money is in finding offsets to your passive income through passive deductions that aren't cashflow losses, but are taxed deductions.

So you're taking the [00:20:00] money that you're earning in the hedge fund and turning around and investing it in other passive activities that provide you offsetting deductions. That's pretty awesome.

Justin Freishtat: Yeah, that's exactly it, and I actually did it a little backwards. I was investing in real estate before the hedge fund, so I had been stacking up these passive losses that I couldn't even use, because I just didn't have other passive income, and that's what led me to look into other things like oil and gas and put a sizeable personal position in Kerns Capital to create the passive gains, because I knew I had so many losses stacked up from cost segregations, the depreciation, all the CapEx on these projects flows through.

So, I've probably got another year or two before I even need to make another real estate investment because I've got those losses stacked up that are going to take care of the gains.

Kevi Schneider: Yeah.

Mike Pine: That's great.

Let's talk about the power of compounding real quick when you're saving in taxes. So if you hadn't [00:21:00] invested in assets that offered you reductions in taxable income, that basically saved you from having to pay taxes, your earnings would've been subject up to 37% federal tax. So for every

thousand dollars you made in tax, you would've had to spend 370% to send to the federal government for every thousand dollars of income, and that would leave you a much smaller nugget to compound over the next few years, or over the rest of your life, but by saving that in taxes, instead of only having 63% to be able to reinvest the next year and earn compounding on, you have 100%.

We need to do that in our bonus material, Kevin, and show a white paper or a graph of the difference in compounding over 10 years if you can have tax mitigated investments. It makes a huge difference, and thanks for sharing that. If you can get that in your portfolio, listeners, that will make a world of difference.

It will snowball your financial freedom much faster than someone who's paying 37% [00:22:00] tax every year.

Justin Freishtat: Yeah, and just to follow up another strategy, because what I just gave you is the passive way to take care of it, but if you've got big active income, the way to get mitigated on that in real estate, is if you can get on the GP side of the deal. Now, you're using all that loss on the active side.

So there are ways to do this passively and actively, to completely legally reduce your taxable liability, and still get the cash flow. Just to be clear, when I say $60,000 loss for $100,000 investment, that's a paper loss. That thing's still cash flowed. Every month.

Mike Pine: Awesome.

Kevi Schneider:

Mike Pine: Proactive is the key. Notice that Justin pointed out, he's got losses already prepared for next tax year. He's planning ahead and again, those are tax losses, not cash losses. So by proactively planning you can make tax be a leverage opportunity for you versus a detriment to you, where you find out from a CPA on April 15th you owe a bunch of money that there's [00:23:00] nothing you can do about it because it's too late.

Kevi Schneider: Yeah. And Justin, tell us a little bit about that, because you are saving significant amount of taxes. So instead of owing $100,000 in tax, you're saving $100,000 in tax. So have you felt that power of tax savings and snowballing your own investment portfolio?

Justin Freishtat: Oh yeah, it's been massive. There's so many things here, because for a long time the way our business was structured is, I was at W2, so I was just getting smoked in taxes, and I knew it, and I knew I had to get out of that. So one of the big transitions was

go into an LLC structure, where now I own my business and I'm getting paid through that structure now. Instead of using after-tax dollars to make your investments, you can use pre-tax dollars to make your investments. Also before, if you're W2, and they take it out of your paycheck, and then you want to go on a business trip, it's a lot [00:24:00] harder to write it off, whereas if you're getting all of your cash, and I'm an LLC- now, the travel, like all these other things, entertaining clients, all the business expenses, it's coming off that top line. That's reducing my taxable exposure as well,

and really, it allows me to reinvest in the business a lot harder because you're basically going to pay taxes or you can reinvest it in your business.

Mike Pine: So that's a big hidden money concept that you just uncovered right there- using pre-tax dollars to fund your investments, to fund your business expenses. What you're basically doing is allowing the federal government, by following what Congress has asked you to do, you're allowing the federal government to subsidize your business investments and your financial growth.

That's huge. That is hidden money right there. You could either pay all your taxes on what the government lets you keep, try to invest, try to grow a business in, or use the hidden money in the [00:25:00] tax code to get the government's blessing basically, to say- Hey, I'm doing what you've asked me to do, Congress. You're giving me the incentives, you're giving me the tax deductions.

I'm going to use that to grow my business, to grow my portfolio, which is ultimately going to grow the economy and your portfolio. That's awesome.

How is it? Tell us about the methodology. How are your trades different from other 'hedge funds' out there? What are you using to drive your strategy, and how is it making 2-4% a month?

Justin Freishtat: So, it's a blended return, amongst several different strategies. So one strategy of ours being, we are young, we're about to be a year old, and we wanted to leverage bigger funds that already have the infrastructure. So just like people can come into Kern's Capital as an LP, at the next level there's fund to fund.

So we landed an LP position with Forte Capital Group. Their entire biggest business [00:26:00] segments across all their funds is 17 billion. They have massive resources that we don't have. So instead of trying to do everything yourself, why not allocate some of the capital that we raise to some of the people who are the best in the space at what they do?

And they have the capacity for massive amounts of research, technical analysis, all that stuff. So we put some of the money over it at Forte, and they're doing swing trading in equities. Swing trading is basically based off fundamental and technical analysis.

You buy a stock for a swing to the upside, and then you sell it. So they've got all their parameters, stop losses in place, hedges, to make sure that everything's protected. That's part of it. And then our very aggressive strategies are in the FX space. So this is where we have manual traders and we're using algorithms to trade currency pairings.

So the manual traders are doing it off of deep technical analysis as well, some of the best people in the world at this, [00:27:00] and then the algorithms are identifying based off of myriad of factors and placing high frequency trades, and that's based off of order flow and predictability, lag times and brokerages around the world,

there's a lot that goes into being able to predict with pretty high accuracy where a currency pairing is going to lean and then you're in and out of it very quickly. So, one of the algorithms that we've used has a 1.3% max drawdown. So theoretically, if you lost every trade in a day and your worst case scenario, you're losing 1% of the account.

Something bad could happen geopolitically, and you could lose 5-10% in the stock market like that, so these are the protections that are in place when you're in alternative investments. These returns sound very impressive when you are conditioned for what the public has access to,

but there's people who are flipping land and making a couple hundred percent return a year. We just did an SPV- this [00:28:00] is the other side of Kern's Capital, our private equity. We're also limited partners of the Innovation X Fund at Forte Capital Group, excess of a billion under management, and they specialize in pre- IPOs,

some of the biggest names that you've heard of going public. They were in Uber, Spotify, Lyft, Airbnb, Stripe, they're in the Stripe IPO coming up, and we just did our first SPV with them- special purpose vehicle, and it's a company called Flexport- $6 billion in revenue this year.

It's a global behemoth- they operate in 116 countries, 10,000 customers. They're a logistics company, like a FedEx or a DHL, in that space, and we were able to acquire through Innovation X, $50 million worth of shares as a group from a distressed fund that needed to liquidate.

So having the access to Innovation X- they're on the inside, they were able to scoop up these shares at a massive discount, and we were able to grab some of them because we're limited partners. [00:29:00] So to give you the details on the deal, on the money, we're getting these shares at 1 times sales, the public market pays 4.5 times sales,

and it's expected to IPO in the next 12 to 24 months. That'll be a 4-8 X gross, before all the expenses and splits, so that's going to be way bigger than our fund one annual average. So it's about opportunities. It's about access. Innovation X's track record over the last 10 years on IPOs- they're averaging 80% a year.

Mike Pine: Incredible.

Justin Freishtat: Justin, thank you so much for joining us on today's podcast. You had just been a tremendous, not only wealth of knowledge, but an inspiration too for anyone who's looking to invest. Think outside the box a little bit, start to look at your portfolio from a different angle,

Kevi Schneider: and it's not just stocks and bonds and your 401(k) that can get you there... it could get you there, but it's not going to be life changing, and it's not going to be something that you could [00:30:00] really be passionate about. So Justin, thank you so much. If you could just tell the listeners one more time where they can find you.

Justin Freishtat: Yeah, it's been great. I really enjoyed this and you can find me at toptierhuman.com - that's my personal website, and then Kerns Capitals' website is kerns.capital, and on all the social medias, Justin Freishtat- it's a tough one. I'll spell the last name- it's F R E I S H T A T.

Mike Pine: There you have it. Justin Freishtat, thank you so much for joining us. Truly enjoyed it and look forward to speaking to you again soon, Justin. Thank you, sir.

Justin Freishtat: My pleasure.

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