Among The Motley Fool's favorite pithy pieces of advice to dish out is this little gem: "When in doubt financially, do the opposite of your favorite athlete." But if your fave happens to be the Cleveland Cavaliers' LeBron James, you should make an exception.
In this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp discuss some of the many smart habits, thoughtful business dealings, and Fool-friendly fiscal moves that make James worth emulating in your personal financial life. But first, they consider the current outlook among financial prognosticators for the next decade, and offer you some advice on how to deal with their less rosy forecasts. They'll finish up with a very Warren Buffett take on March Madness and gambling.
A full transcript follows the video.
This video was recorded on March 13, 2018.
Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool.
Robert Brokamp: Hello, Alison!
Southwick: Hi, Bro! In today's episode, we're going to learn how to ball like [LeBron] and invest like [Buffett] with advice from both men that you can put to work in your life. We'll also talk about how saving more for retirement helps not in one but two big ways. All that and more on this week's episode of Motley Fool Answers.
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Southwick: So, Bro, what's up?
Brokamp: Well, Alison, as I often do at this time of the year, I've been gathering predictions for the future returns of various asset classes from various experts in financial services firms. In the industry these are called capital market assumptions and they're used by financial planners to put into their little calculators to determine whether someone is on track to meet their financial goals.
We know that all predictions are difficult and they're not going to necessarily come true, but you have to choose something. I do this about once a year. I'm not completely done, but I've looked through the capital market assumptions of several firms and here's generally the consensus. Again, these are longer-term returns, like over the next seven to 10 years. No one knows what's going to happen next year.
But, generally speaking, the returns have come down. The consensus, roughly, is that for U.S. stocks they expect about 5.5% a year. Non-U.S. developed-country stocks a little higher at 6.5%. Emerging market stocks at a range of 5-8%. Most people think emerging market stocks are going to do better than other types of stocks over the next 10 years, but there's so much uncertainty about that. That's why there's a range, there. U.S. bonds 2-3% and cash 2%.
You never really know what's going to happen with the stock market. You can have much more uncertainty about what people expect for cash and bonds, but the bottom line is for all of these, these are below historical averages. So, if you were to use a retirement calculator, you would have to assume lower returns. I think that's perfectly reasonable. What does that mean? It means you have to save more, which brings us to the next topic.
That is a recent article by financial planning expert Michael Kitces about basically the one-two punch that comes when you save more, because when you save more you have to learn to live on less. But if you are learning to live on less, that means you don't have to save as much for retirement to replace that income. It's something I've touched on before, but in Michael's article he actually provides some pretty helpful illustrations. Are you ready? We've got two examples.
Southwick: I'm ready.
Brokamp: All right, here we go. We're going to talk about Joe and Sally. They're both 35 years old. They both make $65,000 a year. Joe is going to save 15% of his income and according to Michael Kitces's calculations, Joe could retire at age 65 when you throw in the savings as well as some Social Security.
Now, Sally isn't going to save 15%. She's going to save 25%, but by doing that, she has to learn to live on less. What's the benefit of that? She actually could retire at 56; so, nine years sooner than Joe because she saved more, but she also learned to be happy with less, so her retirement nest egg doesn't have to be quite so big.
While I've talked about this before, I think it's helpful to have that type of illustration. In the article Michael emphasizes a couple of other things. First of all, for younger folks, as you get raises -- and most of your raises happen within the first 20 years of your career -- is to resist the temptation of what's called lifestyle creep, where as you make more money, you spend more money.
He actually touched on the strategy of every time you get a raise, you sock away half of it and you learn to live on only half, which is something we've talked about in previous episodes and that some of our listeners have done to a point where they're saving 40% of their income as they get in their later years.
Now for older people, he talked about how it's actually difficult to resist lifestyle creep if you're having kids. It's difficult. You need a bigger house. All kinds of expenses come with that. In that situation -- and he talked about this in a related article -- you have to resist this temptation again once the kids are out of the house and once the kids are through college. You're going to notice a lot more money that you don't have to spend.
Resist the temptation to spend that on things on vacations, vacation homes, and boats, especially if you're behind in your retirement savings. Instead, you should use all that money and shove it all into your retirement accounts. And if you do that for the last 10 or 15 years of your career, because you no longer have to pay for the kids, you're going to be in pretty good shape.
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Southwick: There are countless stories of athletes making millions of dollars and then falling victim to bad people or blowing it on their own bad decisions. According to Sports Illustrated, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce within two years of retiring. Within five years of retirement, an estimated 60% of former NBA players are broke.
There are a lot of stories we could talk about that are cautionary tales. Instead, let's talk about an athlete who is setting a good example not only for his peers but also for us, as well, and that's LeBron James.
Now, I know you guys are huge Sportsball fans like I am, and I also know that my endorsement is probably very ringing; but, it's not enough, so let's look to Warren Buffett. Warren Buffett considers LeBron a real friend. It's true they actually hang out. He says, "He's savvy. He's smart about financial matters. It's amazing to me the maturity he exhibits." If you don't believe me, at least believe Warren Buffett that LeBron's good with money.
A caveat -- I know very little about professional sports. I know the rules of basketball, and a few names sound familiar. I know LeBron is good at basketball, but now you're all going to know that he's good with money, too. So, if I get anything wrong related to basketball, don't email me. I don't care much. That's fine.
Some background. LeBron James was born in 1984 in Akron, Ohio. His mom was 16 years old and she struggled to raise him on her own. Between the ages of five to eight, they moved 12 times.
Sometimes, they didn't know where they were going to sleep that night or where they were going to get their next meal. The kid showed early promise in basketball. He was touted as one of the best six graders in the country, .which is insane.
Brokamp: Who was out there rating sixth graders?
Southwick: Who's scouting sixth graders? Well, someone was doing it. LeBron in an interview with 60 Minutes said that right around this time -- sixth, seventh, or eighth grade -- his coach had a huge influence on him and one thing the coach told him was that you should use basketball as a vehicle to get to where you want to go. And at the time, LeBron said he didn't really know what he meant, but looking back on it, he said, "Wow. We didn't let the game of basketball use us. We used it."
His high school team went on to win the National Championship in 2003, just a few months after he was voted Most Likely to Succeed by his high school graduating class. He was the first overall pick in the NBA draft. He signed a multimillion dollar contract with the last- place Cleveland Cavaliers, and even though he was an honor roll student and a smart cookie, in addition to being a gifted athlete, any 18-year-old with a ton of money is a dangerous prospect.
Long story short, he plays for Cleveland. He plays for Miami. It caused some controversy for some reason I can't be bothered to understand. Don't email me. He goes back to Cleveland. All told, in his career he wins three NBA championships, three NBA Finals, and he's named MVP for three of those NBA Finals and he's a four-time NBA MVP. I don't know. It has a lot of letters, but...
Brokamp: He's good.
Southwick: He's good. So, yeah, he's good, but he's also really savvy with money and while you can never learn to play ball as well as LeBron, you can maybe learn some money lessons, so here we go. Are you ready for the first lesson?
Brokamp: I'm so ready.
Southwick: LeBron is not paying for it. In 2015, he inked a lifetime endorsement with Nike that was worth north of $1 billion. Forbes estimates his net worth is $400 million. Despite all that, Dwayne Wade declared LeBron James the cheapest guy in the NBA and LeBron had to agree.
He doesn't turn on data roaming. He does it by apps. He still listens to Pandora with ads. In the interview he said, "I'm just not paying for it!" He insists that he drives a Kia to work and even sometimes rides a bike.
What's his biggest money regret? Buying a house in Las Vegas when he was in his early 20s. I guess they had their training camp out there and he thought, "Well, I'll just buy a house." But James said of his younger self, "Who buys a house in Vegas?"
His frugality is apparently rubbing off on his teammates. A shooting guard for the Cavs, Iman Shumpert, told the site Wealthsimple that the whole team is actually surprisingly frugal.
LeBron's production company, along with JPMorgan also produced a show about athletes and the lessons they learned about money, which is pretty cool, because they talked about their mistakes and stuff. So, yes, he is frugal, but he does also own a bunch of nice cars and other toys, so I don't think he is suffering.
Brokamp: And he's generous with his money, as well.
Southwick: Oh, we'll get to that. Supposedly he spent $171,000 one night in a Las Vegas nightclub... Let's have some fun with math, shall we, Bro?
Brokamp: Let's do that.
Southwick: So, if his net worth is $400 million (according to Forbes), LeBron spending $171,000 on a night out is the equivalent of someone with $1 million net worth spending... Do you want to guess?
Brokamp: No.
Southwick: $427.
Brokamp: Not the worst thing in the world.
Southwick: Not the worst thing.
Brokamp: I've never spent that much in a night, but that's all right.
Southwick: Really?
Brokamp: A night on the town?
Southwick: Not on a birthday party? A party? You've never spent $427 on a party?
Brokamp: No, no. If you consider taking the family to a Broadway play, or something like that, certainly it has cost that much.
Southwick: Absolutely. I mean, it's not like he's doing this all the time. I assume it's a special thing to celebrate something. Anyway, so you're spending just as bad as LeBron. As a night out in Las Vegas. Way to go. But except for it's a Broadway play with a 12-year-old.
LeBron watches what he spends, but I think he also spends on things that really matter to him, and we just got done talking about the importance of watching what you spend.
Brokamp: Exactly. I know that Sports Illustrated article that you cited previously, and it goes through many instances of people who made millions of dollars, but then spent millions more. In the end you've just got to live below your means if you want to build your wealth.
Southwick: The next way you can invest like LeBron is that LeBron thinks long term. Here's a direct quote. He said, "I know that once I get off the floor there's going to be more of my time spent off than on. So, from age 9 to -- if you make it to 40 -- that's 31 years of your life. But from 40 to 85 or 90 -- hopefully I'm lucky to get to 90 -- that's 50 years. I still have to live life beyond the hardwood." And this is going to come up a lot in the other points, is that he is always thinking long term in his money decisions.
Here's one we can debate the value. Supposedly he spends $1.5 million a year on taking care of his body. This includes personal trainers, chefs, equipment, all that kind of stuff.
Brokamp: Well, I don't know where the money is going to. Obviously, it's an investment that has paid off. For every year that he is able to play, it's worth millions of dollars to him. It sounds like, from a pure financial standpoint, it probably is a good investment, but I don't know exactly what's going into that.
Southwick: The calculations? According to his coach, despite being 32, he has the body of a 19-year-old.
Brokamp: Well, that sounds pretty good.
Southwick: So, where are your [...]?
Brokamp: In the trunk.
Southwick: Oh, that's bad. Your laugh was kind of creepy, and then you had to say that. The body of a 19-year-old. Heh heh heh. That sounds pretty good.
Brokamp: I mean, he's a handsome man, but I'm happily married, so I didn't mean it in any way like that.
Southwick: That's kind of what it sounds like, though. And then you have a body in the trunk? It's crazy to me that even as an 18-year-old at such a young age, he's been thinking the long term and the long haul and life beyond basketball. Put the smartest 18-year-old, drag him into this studio, and they're still pretty dumb. No offense, 18-year-olds, but I was you once. Pretty dumb.
Brokamp: I don't know enough about his life story to know what he attributes that to. I do know that he really never knew his father. His mother struggled. He saw that and he, at one point -- I think it was on Instagram -- thanked his dad for not being in his life, because it drove him to success. And especially when you look at a sports career, on the average it's two to three years. You have to be planning for beyond that. Kudos to him for first of all being able to do it for as long as he has but thinking of the fact that it's possible that in any given day, you can have some sort of career-ending injury, and he's thinking beyond that.
Southwick: The next lesson. LeBron is a businessman and a business man. As he once said, "The first time I stepped on the NBA court, I became a businessman, and this is a great opportunity for me." Soon after he signed with the Cavs -- remember, he's 18 years old -- Reebok invited him to their offices and offered him a $10 million endorsement deal and said, "You can take this right now. Just promise us you won't talk to Nike or Adidas." They literally slid him a check worth $10 million across the table.
And here he is an 18-year-old kid. He thinks, "If this guy is willing to give me $10 million, who's not to say Nike or Adidas won't give me $20 million or $30 million?" And throughout his life, he has continued to bet on himself longer term versus getting that short-term money today.
Another example is how he looks at endorsement deals as partnerships and not just about shilling products and how he's betting on himself. It's not unusual for celebrities to invest in restaurants. Planet Hollywood, anyone? It seems like every athlete has invested in his cousin's restaurant. LeBron was an early investor in Blaze Pizza. It's like Chipotle meets pizza. You point at stuff and you're like, "Put that on my pizza," and then they fire it up really quick.
Anyway, when his endorsement deal with McDonald's was up for renewal, instead of taking the $15 million, LeBron opted to endorse Blaze Pizza for free. According to Business Insider, he now owns 17 Blaze franchises. The company sales rose 83% last year to $185 million and are projected to hit $1.1 billion in 2022. His initial investment of $1 million is now worth $25 million, according to ESPN. LeBron says, "You started from the bottom and you created something that you can look at and say, 'Wow! We did that. We did that, and we own it. That's a really cool thing. And if it doesn't become successful, then I can only blame myself.'"
There's a phrase by Warren Buffett that we really love here at The Motley Fool. In fact, we have it up on the wall in our Buffett conference room and that's, "I'm a better investor because I'm a businessman and I'm a better businessman because I am an investor." I think that really gets to where LeBron is when it comes to a lot of his business dealings. He approaches them as being a partner. He approaches them for the long term. But he approaches them as being a larger part of his overall brand, and life, and what he wants to be and do, as opposed to just, "Yeah, give me some money and I'll say whatever you want to the camera."
Brokamp: Yes. And this is a point Buffett often makes -- and we do here at The Motley Fool -- in terms of when you invest. You look at yourself as a part owner of that business. And it's true. I own shares of Starbucks, so I am a legal part owner of Starbucks, and it does make you look differently at the investment rather than just a number that goes up and down in your bank statement or your brokerage statement.
Southwick: Particularly with the Blaze Pizza investment, you can tell he's really proud of it. You can tell he's proud that he made this decision to not promote McDonald's. I don't know where the stock price is lately. I know for a while it was not doing well. Then back this company that he really believed in, really loved their product, and he feels like he is part of the success of this company and not just throwing money at a problem. Are you ready for another lesson?
Brokamp: I am.
Southwick: LeBron diversifies. There's his paycheck for playing basketball. It's not too shabby. There are his record-breaking endorsement deals. He's invested in restaurants, football clubs, and start-ups. In fact, he earned $30 million from investing in Beats Headphones.
And he's also a movie star. The New Yorker said that he was the funniest person in Amy Schumer's movie Trainwreck. Did you see him in Trainwreck?
Brokamp: I did not.
Southwick: Rick's shaking his head. He was funny.
Rick Engdahl: He was very good.
Southwick: He was very good in Trainwreck. He also has his own production company for movies and TV. They've created content for Netflix, NBC, HBO, and yes, they are even working on a remake of the Kid 'n Play movie House Party. Do you remember that movie?
Brokamp: Oh, yeah.
Southwick: Of course, you do. You've talked about this a lot on the show -- the idea of thinking about where you are bringing in money. Whether you can make money on the side. Like side gigs are such a big thing right now.
Brokamp: And it doesn't have to be necessarily something outside of your employer. You could be doing more stuff within your company. You could be looking at where you could add the most value to your employer and then making that known. You have your human capital.
And he has his human capital -- that's playing basketball -- but then he's parlayed that into investment capital. Think of your human capital. How can you enhance that? But then it really has value once you use that to invest in other businesses.
Southwick: And going back to the advice from his coach when he was a kid about using basketball to get someplace. Getting to basketball is not the end. It's using basketball to get someplace else. That is really the goal.
Finally, LeBron believes in education. He was drafted out of high school to the NBA, which means, of course, he didn't get his college degree. Remember how he said he was an honor roll student? So, he intends to return and has already signed up at the University of Akron. He just needs to find some free time. He is particularly fond of math and history.
The LeBron James Family Foundation is primarily focused on education and he has pledged $41 million to helping at-risk kids from elementary school up to college stay in school. James has said that it's the most important professional accomplishment of his life.
Aside from the traditional sense of education, he also makes a point to learn from business experts. He's been seen dining with Carlos Slim. Like I said, he's a friend of Warren Buffett, Bill Gates, Steve Ballmer. CNBC asked Buffett to give LeBron advice for what one should invest in next. They cut to a video and someone's like, "What should I invest in next?" And Buffett said -- so boring -- "Make monthly investments into low-cost index funds and hold for the next 30 to 40 years." So, what's good for LeBron is good for you, too, according to Warren Buffett.
Brokamp: That's true, and we'll touch on that a little bit later.
Southwick: And, of course we, here, at The Motley Fool really love continuing education, and we really love learning from other people, too.
Brokamp: Right. And for me that goes back to the whole human capital part, and that you look at ways that you can enhance your career, diversify your income, get designations or advanced degrees that matter. Don't just get a degree and pay thousands of dollars for something that doesn't matter. But depending on your field, getting some sort of extra skill or certification actually will do a great deal for opening opportunities for you, or even just meriting higher pay.
Southwick: I also like the idea that he's using his stature as a great athlete to be able to pick up the phone, call Warren Buffett, and say, "Hey, can I take you out for dinner?" He's broadening the company that he's keeping in order to learn from these other experts. These entrepreneurs. These businessmen. I wish I could just drop Warren Buffett an email and hear back from him.
Brokamp: Not everyone can do that. That's true.
Southwick: No, not just anyone. Some of us are luckier than others. Spoiler! A spoiler for later in the show! My closing thoughts, here. I think the biggest takeaway is yes, he's good with money, but he also works really hard.
He works hard at being the best athlete he can be, he works hard at managing his money the best he can, and it's mind-boggling. I'm sure he watches Game of Thrones like the rest of us, but it made me think about what opportunities I've wasted or how I could have maybe used my time for education, investing, or family. Yes, he's a successful athlete, actor, philanthropist, and investor.
I have several half-finished knitting projects and a thriving orchid.
Engdahl: And the body of a nineteen-year-old.
Southwick: I wish. Oh! But I do have this podcast, and I do have you guys as friends, so I'll put that in the win column for me.
Brokamp: That's true.
Engdahl: Something LeBron doesn't have.
Southwick: Right. He doesn't have you guys as friends, or a somewhat-thriving podcast that receives postcards from people around the world.
Engdahl: Although I imagine if he wanted to start a podcast, he could probably pull it off.
Southwick: Aw! Oh, ho, ho, ho. Yeah.
Engdahl: And if he wants me to produce it, I'm available.
Southwick: No, you're not! Traitor! Oh, that's fine. I'd leave me for LeBron, too. So, there you go. Some money lessons from LeBron James. You'll never be able to ball like him, but you can try to manage your money like him. You could do worse, for sure.
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Southwick: It's March Madness time and we're all excitedly filling out our brackets in order to win $100 in the office pool. How hard could it be? Do you know what the odds are for getting a perfect bracket?
Brokamp: Incredibly low.
Southwick: The odds are 1 in 128 billion. Now if the games were all 50-50 toss-ups, the odds would closer to 9.2 quintillion, according to a mathematics professor at DePaul University. That's 18 zeros.
Let's say you're the third-richest man in the world. How do you play that bet? In previous years, Buffett's offered $1 million a year for life to Berkshire Hathaway employees if they just get the Sweet 16 correct. Not even get a perfect bracket. The conciliatory prize is $100,000 to whoever gets the farthest. Roughly 100,000 Berkshire Hathaway employees participate every year. That's a pretty large pool of people. Still, according to FiveThirtyEight.com, the odds of getting the Sweet 16 right are one in 9 million. So, it's a pretty safe bet for Buffett.
March Madness is interesting and everything, but Bro is actually going to talk about a more interesting bet that Buffett made that you probably heard a little about.
Brokamp: Yes! There's a bet that just closed -- I guess that's the term you could use -- this year. Buffett talked a bit about it in the recent annual letter, and he also talked about it last year as it was closing.
What it came down to is back in December of 2007, Buffett bet that a simple S&P 500 Index fund would beat a collection of hedge funds. The amount on the line was $1 million and both sides of the bet chose their respective charities. Buffett chose Girls, Inc. of Omaha, which runs educational, recreational, and mentorship programs for local girls ages five to 18.
His aim, according to the recent annual letter was to "publicize my conviction that my pick, a virtually cost-free investment in an unmanaged S&P 500 Index fund, would over time deliver better results than those achieved by most investment professionals, however well regarded and incentivized those helpers may be."
Now, someone else did take him up on the bet. It was a company called Protege Partners. It's a financial advisory firm. They don't actually manage the money. They pick managers. So, up against the S&P 500 Index fund, they chose five funds of funds, which is basically a hedge fund that then chooses individual hedge funds. All total, it was an S&P Index fund up against 200 hedge funds.
The first year was 2008. That was the year the market crashed, so the S&P 500 went down 37%. In that year the S&P 500 lost to the hedge funds, and to a certain degree that's what you'd expect. That's where the term hedge fund comes from. It's supposed to be a hedge against something like an overall market decline. That said, they didn't make money. They all lost money, too. They just didn't lose as much as the S&P 500.
Then, the next nine years the S&P 500 beat the average return of all five funds of funds. For the total period, which just closed out at the end of 2017, the total return for the S&P 500 was 125% annualized at 8.5%, so keep that in mind. It returned 8.5%. That's lower than that 10% you always hear about. It wasn't a great 10-year period to be invested in stocks. It was below average. Still, the funds of funds -- their average annual return ranged from 0.3% to a high of 6.5%. And all along the way...
Southwick: That's net of fees?
Brokamp: That's net of fees, and that's really one of Buffett's main points, because all along, while these folks are underperforming the market, they are, on average, earning 2.5% a year. So, even though they're losing to the market, they're making tons of money.
And that, in the end, was the main point for Buffett. In fact, he closed it out by saying, "Performance comes. Performance goes. Fees never falter." As you mentioned earlier, the S&P 500 Index fund is what Buffett recommended to LeBron James. It's in his will as what he recommends for his wife if he predeceases her. He thinks most people should have at least some of their money in an index fund.
Southwick: Bro, you're not going to want to talk about this, but you just got an email from Warren Buffett.
Brokamp: I did, actually. It's in response to something he put in his letter relative to this. He talked about how the S&P 500 had an advantage because, just in general, the market goes up. And he had this sentence in his letter. It said, "In 100% of the 43 10-year periods since we took control of Berkshire, years with gains by the S&P 500 exceeded lost years."
For an article I was trying to break up the 10-year periods, and it didn't quite coincide with what he said, so I just emailed Berkshire Hathaway [and asked] at what period Mr. Buffett is starting and that part about years of gains by the S&P 500 exceeding lost years. Some people interpreted it as meaning that the S&P 500 made money over every 10-year period, but that's not true. There are times it didn't. I was just confirming that what he means is that the number of years that it made money exceeded the number of years where it lost money. And I broke it up for an article.
Of those 43 10-year rolling periods, 19 periods had nine up years and only one down year; whereas something like eight had six up years and four down years. Regardless, I just wanted to confirm that I got that right, and I got emailed back from Warren Buffett confirming it. He doesn't do emails, so it had to come from one of his assistants.
The most interesting part about that is he added "I thought about illustrating my point with the period from my initial stock purchase in the first quarter of 1942, exact date unknown. All 67 of the subsequent 10-year periods have had more plus than minus years. Quite a tailwind for my investing lifetime."
Southwick: Quite.
Brokamp: Quite.
Southwick: All right, that's the show. It is edited balleringly by Rick Engdahl. He makes the worst faces every time I come up with my adverb for the week -- like I've punched him in the face. The show is edited -- no, we're going with that.
Brokamp: We're going with that. Love it.
Southwick: The show is edited balleringly by Rick Engdahl. Our email is [email protected]. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!
