BAM - Brookfield: Why I Trust The Buffett Of Money Managers And So Should You

2023-11-11 07:45:00 ET

Summary

• My family is dealing with a lot of medical crises, just like millions of Americans. Times are tough, and we have to focus on just pulling through right now.
• But we're still planning for the long term, and that means I still max out my retirement accounts each year with $66K.
• When the medical crises are over and it is safe to do, I intend to invest my entire retirement savings and $2.5 million in future contributions, a total of $2.64 million.
• That money goes into a single company, Brookfield Asset Management Ltd., the Buffett of alternative asset managers.
• Brookfield has delivered Buffett-like returns for 38 years; the current CEO has done even better for 23 years, and Howard Marks and Mark Carney are their industries' Charlie Munger and Jamie Dimon. All 3 work at Brookfield and 4 A-credit ratings tell me there is only a 2.5% chance that Brookfield is an untrustworthy company. Whether you want 20% annual Buffett-like returns for the next 2 years, 20 years, or, like me, the next 40 years, Brookfield is who I trust with millions of my hard-earned savings.

My family is having a rather tragic year in 2023: brain cancer, thyroid cancer, liver and lung cancer.

Heart disease, stroke, kidney stones, diabetes, and numerous emergency room weekends are the order of the day for the Galas family in 2023.

I've appreciated all the love and emotional support so many of you have given me this year. I've heard from numerous people about their own struggles with health crises, including one tragic but heroic man whose entire family (seven people and counting) was killed by diabetes. Still, he refuses to give up the fight and has cured his disease with diet and exercise.

Sadly, one of the worst parts of medical emergencies is the costs. Even with insurance, the bills can be outrageously high, far more than most families can afford.

My father just shared with me his insurance policy from work. He has to pay $1200 per year, with a $3,000 co-pay and $3600 for the first $5,000 in treatments. And even above that, when theoretically any additional costs are free, he's faced insurance company pushback and usually averages $6k to $ 10k per year in out-of-pocket health costs.

And that's just for him, and by American standards, he's very healthy!

My sister is a nurse, and her thyroid cancer is going to cost at least $15K out of pocket. She has great insurance by American standards.

My family is most worried about the potential return of my grandmother's brain cancer, which might potentially cost as much as $600K.

That's why my family has circled the wagons, and our entire life savings now looks like this.

My Family Hedge Fund Today

We're stacked to the rafters in risk-free cash and risk-free bonds to hedge the recession the bond market is 99% certain is coming next year.

We have over half a million dollars in managed futures because when bonds and stocks fail, managed futures are the only thing that tends to make money.

The rest is invested for the long-term in almost 500 of the world's best companies, including the dividend aristocrats and the one company I trust with 100% of my retirement savings.

What Our Goal Allocation Is (When We Can Afford It)

If we weren't going through medical hell right now, this is what we'd own, but we have to save up $700K in cash as fast as possible and wait to see what happens with my grandmother's brain cancer.

But let me share with you why Mr. Risk Management is investing 100% of his retirement savings ((IRA)) into one company as soon as my family's medical situation allows.

Why My Retirement Accounts Are All In On Brookfield Asset Management Ltd. (BAM)

According to UBS , the average strategic asset allocation for a family office is:

• 31% to equities
• 15% to fixed income
• 19% to private equity
• 13% to real estate
• 9% to cash
• 7% to hedge funds
• 2% to private debt
• 2% to gold and precious metals
• 1% to commodities
• 2% to art and antiques
• Less than 1% to infrastructure.

The richest people in the world, those who built empires by founding companies and want to ensure their families never go the way of the Vanderbilts or most other billionaire families, are 46% invested in stocks and bonds.

If you include cash as the 3rd asset most people use, that's 54%, with 46% into alternative assets, including physical assets like infrastructure and real estate and private credit and equity.

This is a world of opaque facts and even more opaque valuations.

This is the realm of the billionaire venture capitalists like Mark Cuban, Howard Marks, Ray Dalio, and George Soros.

My family hedge fund is very simple, run on the principle that Leonardo da Vinci discovered centuries ago.

Simplicity is the ultimate sophistication" - da Vinci.

67% stocks and 33% hedges is the Sortino-ratio optimizing asset allocation of the last 50 years, according to Nick Maggiulli of Ritholtz Wealth Management.

• Chief data scientist and chief investment officer.

So my family has built our personal ZEUS Income growth portfolio (the target one) with 33% 5-star rated ETFs, 33% my highest conviction world-beater stocks, and 33% hedges (the best hedging strategy of the last 50 years, bonds + managed futures).

Historical Total Returns Since 2007

There is a 93% statistical chance that this portfolio will beat the S&P 500 (SP500) over the next 50 years and a 98% chance it will outperform a 60/40, and around a 95% chance of beating a hedge fund like the one Ray Dalio founded.

But in the single-digit chance of failure, I want my retirement dreams to be in the hands of the world's best hedge fund managers.

And despite what some shorts have been saying recently about how Brookfield Asset Management Ltd. is running a multi-decade con on income investors, I am as certain as any human can be that Brookfield is a safe place for all my retirement funds.

Why I'm Investing $2.6 Million Into Brookfield Asset Management

As a small business owner, I am fortunate to save $66,000 annually in my retirement accounts and reduce my tax bill by $30,000 annually.

• savings that would normally be invested into my family's ZEUS hedge fund.

I'm 37 years old, and under the Secure 2.0 Act, starting in 2033, the required minimum distribution, or RMD, for retirement accounts begins at age 75 .

That means my retirement savings of $130,000 will be joined by $2.51 million in inflation-adjusted dollars by age 75.

• $2.64 million total lifetime investment into my retirement funds.

Currently, the bond market estimates long-term, 30-year inflation at 2.4%.

Analysts estimate BAM's long-term growth rate at 12.7%, below the 15% to 20% that management is guiding for in the medium-term or the 16% 20-year guidance from legendary CEO Bruce Flatt (more on this later).

But let me show you what the inflation-adjusted income and retirement savings magic of Brookfield.

This is all inflation-adjusted. So $2.6 million in inflation-adjusted savings turns into $102 million in today's dollars at age 75.

It throws off $29 million in total dividends, including $4.3 million per year by age 75.

And remember, this is all inflation-adjusted. Here is what analysts expect in nominal terms (not adjusting for inflation).

In nominal terms, my retirement savings should be worth around $200 million, and be throwing off $8.5 million per year by the time RMDs kick in.

What if my family hedge fund fails? What if I achieve just 60/40 level returns, like Ray Dalio or David Swenson at Yale?

In that case, my retirement savings will save me and become 75% of my inflation-adjusted net worth.

What is the base-case for ZEUS? 11.4% inflation-adjusted returns. Which looks like this by age 75.

So that's about $300 million in inflation-adjusted net worth, generating $12.5 million in annual dividend income.

• Can you see why I'm excited about becoming an effective altruist and helping donate billions to charity over time?

In the base-case scenario, $100 million of that $285 million net worth would be Brookfield Asset Management or 35%.

• 65% my own hedge fund
• 35% Brookfield as a backup.

Ok, I'm sure you're wondering, "Why on earth are you so confident that Brookfield can deliver on the 16% to 17% returns that analysts expect and 20% that management is guiding for?!"

That's a great question, and here's the answer.

Why I'm Trusting 40% of My Family's Future Fortune To Brookfield

There are many short and bearish articles about Brookfield right now, including those who think Brookfield's entire empire is a Bernie Madoff-style Ponzi scheme about to come crashing down.

Do you know why Bernie Madoff's Ponzi scheme was the biggest in history? Because it lasted the longest at 17 years.

Do you know the statistical probability of a con like that lasting for 17 years? About 10%.

• 9% that a con can last 20 years
• 3% chance it can last 30 years.

There is always a 3% chance that any asset manager is running a con, but for context, the risk of nuclear war with Russia is 2.5%, according to Goldman Sachs.

And that's not just now, with the U.S. and Russia at proxy war in Ukraine.

According to Goldman, the risk of nuclear hellfire killing you and everyone you love is 10%, but outside of this current conflict, there is a 2.5% chance you will die in a nuclear apocalypse.

• 2.5% is also the risk of Costco (COST) or Amgen (AMGN) going bankrupt over 30 years, according to S&P.

Keep those numbers in mind: 10% and 3%.

Historical Returns Since 1985 (38 Years Exactly How Long Until Age 75)

In the last four decades, Brookfield's average annual return was 19%, and over time, 15% to 17%.

BAM is the Buffett of alternative asset managers (hedge funds), and the chance that a con artist company could deliver these returns is 3%.

What about Bruce Flatt, the legendary CEO who took over in 2000? For 23 years, here are Bruce Flatt's returns.

Historical Returns Since 2000 Under CEO Bruce Flatt

Bruce Flatt has spent a quarter century leading the Berkshire of hedge funds in delivering Buffett-like returns for investors. At a company that's been doing that for 38 years.

And he's said that Brookfield sees a clear path to 20 more years of similar returns.

That's about 60 years of 15% to 20% annual returns. No other asset manager in the world can do that other than Buffett, and he's said he won't be able to recreate that in the future.

Don't Forget About Marks, Carney And Rating Agencies

There is a 9% chance that Bruce Flatt is a con artist. Out of every 11 parallel universes in one of them, Brookfield has been running a trillion con job.

And in 91% of them, this is a wonderful asset manager that's built a $1 trillion empire on doing right by customers by managing risk and reward better than anyone.

Let's consider some additional reasons to trust Brookfield isn't a Mega Bernie Madoff.

Mark Carney is the Chair of Brookfield Asset Management and Head of Transition Investing ." - Brookfield Asset Management (emphasis added).

Who is Mark Carney?

Mr. Carney is an economist and banker who served as the Governor of the Bank of England from 2013 to 2020, and prior to that as Governor of the Bank of Canada from 2008 until 2013. He was Chairman of the Financial Stability Board from 2011 to 2018. Prior to his governorships, Mr. Carney worked at Goldman Sachs as well as the Canadian Department of Finance." - Brookfield (emphasis added).

Mark Carney is one of the most respected living central bankers in the world and has spent his entire life proving himself a paragon of financial ethics and sound risk management.

Guess who else is part of the Brookfield team? Howard Marks, founder of Oak Tree Capital, master of private credit markets.

In 2019, Brookfield bought Oaktree, but after a year-long due-diligence process in which Howard Marks went over Brookfield with a fine tooth comb to make sure he wasn't selling his company to someone who wasn't as ethical and trustworthy as he was.

Bruce Flatt is the Warren Buffett of hedge funds, Howard Marks is the Charlie Munger of private credit, and Mark Carney is the Jamie Dimon of central bankers.

And all 3 of them are leading Brookfield.

Imagine a company run by Warren Buffett, Charlie Munger, and Jamie Dimon.

Imagine this company had spent the last four decades delivering some of the greatest investment returns in history for investors.

Imagine that this company had 1000 institutional clients, including sovereign wealth funds, pension funds, university endowments, and family offices representing the richest families on earth.

Now imagine this company has not one, not two, not three, but four credit ratings from the four largest rating agencies on earth.

(Source: S&P, Fitch, Moody's, DBRS.)

All rating agencies have risk models that include the risk of corruption. All four estimate the chance that Brookfield is running a trillion dollar scam at 1 in 40, the same risk of nuclear war.

Oh, but wait, there's more.

Brookfield Is A Master Of Long-Term Risk Management

There are no risk-free companies, and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

BAM Risk Profile Summary

• regulatory risk in the dozens of countries in which it operates (120 years of experience, the most of any asset manager)

• interest rate risk (its projects are financed with non-recourse self-amortizing debt)

• operating risk: if projects fail for any reason (such as drought hitting hydropower projects), then BAM "gives up the keys" to creditors, but cash flow for BAM would be reduced

• M&A risk: Brookfield is frequently making acquisitions to expand its offerings (like insurance service in 2022)

• currency risk: BAM operates all over the world

• Corruption risk: 2.5% risk that Brookfield is the largest scam in financial history.

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Long-Term Risk Management Analysis: How Large Institutions Measure Total Risk Management

DK uses S&P Global's global long-term risk-management ratings for our risk rating.

• S&P has spent over 20 years perfecting its risk model

• , which is based on over 30 major risk categories, over 130 subcategories, and 1,000 individual metrics

• 50% of metrics are industry specific

• this risk rating has been included in every credit rating for decades.

The DK risk rating is based on the global percentile of a company's risk management compared to 8,000 S&P-rated companies covering 90% of the world's market cap.

BAM scores 77th Percentile On Global Long-Term Risk Management

S&P's risk management scores factor in things like:

• supply chain management

• crisis management

• cyber-security

• privacy protection

• efficiency

• R&D efficiency

• innovation management

• labor relations

• talent retention

• worker training/skills improvement

• occupational health & safety

• customer relationship management

• business ethics

• climate strategy adaptation

• sustainable agricultural practices

• corporate governance

• brand management.

BAM's Long-Term Risk Management Is The 171st Best In The Master List 66th Percentile In The Master List)

(Source: DK Research Terminal.)

BAM's risk-management consensus is in the top 34% of the world's best blue chips and is similar to:

• Johnson & Johnson: Ultra SWAN dividend king

• Federal Realty Investment Trust: Ultra SWAN dividend king

• Illinois Tool Works: Ultra SWAN dividend aristocrat

• Merck: Ultra SWAN

• Texas Instruments: Ultra SWAN

• McDonald's: Super SWAN dividend aristocrat.

The bottom line is that all companies have risks, and BAM is good at managing theirs, according to S&P.

How We Monitor BAM's Risk Profile

• nine analysts (up from 5 on December 20th)

• two credit rating agencies

• 11 experts who collectively know this business better than anyone other than management

When the facts change, I change my mind. What do you do, sir?"

- John Maynard Keynes.

There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead, we always follow. That's the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.

Bottom Line: I'm Investing $2.6 Million Into Brookfield In My Retirement Account...That's How Confident I Am In This Company

According to the best available data, there is a 1 in 40 chance that Brookfield is a $1 trillion scam that will one day topple and shake the foundations of the financial world.

That is the same risk of nuclear war, and it's a risk I'm comfortable ignoring and recommend you do the same in your life.

• I guarantee the world doesn't end; if it does, we'll be too dead to care I was wrong;)

This means a 97.5% chance that Brookfield is the real deal.

Imagine a Super Berkshire run by Buffett, Munger, and Jamie Dimon.

Now, imagine that they were accused of corruption.

How much sleep would you lose over that?

Thousands of people are all in on Berkshire and sleeping like babies. While I will never be all in on Brookfield, I will eventually have approximately 40% of my net worth (and my family's wealth) invested in Brookfield Asset Management.

While you can never be 100% confident about anything in life, I can say with "I'll die on this hill" confidence that Brookfield isn't a scam. I'm willing to risk millions on the proposition that the world's best hedge fund managers will be able to generate market-smashing returns from assets that you and I will never otherwise have access to.

BAM isn't a screaming bargain like REITs, utilities, or yieldCos like BEPC or BIPC.

But it's the ultimate Buffett-style "wonderful company at a fair price" and still offering 20% Buffett-like annual returns for the next two years, and management says the next 20.

And this is the Buffett of hedge funds, who has never done anything that might indicate its anything but a paragon of financial ethics and virtue.

For further details see:

Brookfield: Why I Trust The Buffett Of Money Managers And So Should You