Infinite Banking for Your Investment Operation

Due to the unpredictability of public and private markets, investors, entrepreneurs, and business owners today struggle to find optimal investment allocations. There are numerous factors to consider: liquidity, risk, volatility, fees, taxes, inflation, and of course, returns. 

In Security Analysis, Ben Graham, the father of “value investing” and Warren Buffet’s mentor, stated, "An investment operation is one which, upon thorough analysis promises safety of principal and a satisfactory return." Graham carefully constructed this definition, and while he offered a detailed explanation in the book worth reading, we’d like to revisit to see how this applies today. Let’s break it down.

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Investment Operation

Graham wasn’t just talking about an investment, but an investment operation. Today, this applies more broadly than a retirement account of mutual funds, stocks, and bonds. Even non-accredited investors possess the ability to invest in other cash flowing investments like real estate or pursue business ownership. Additionally, the past few years have shown us that even the almighty U.S. economy isn’t immune to inflation, and therefore, non-cash flowing assets like precious metals and cryptocurrencies may also be worthy of investment if one’s goal is to retain purchasing power.

To clarify, Graham isn’t saying that investors need to diversify. Rather, he’s noting that portfolio managers and asset allocators should consider the implications of each individual investment within the context of the entire investment operation. Diversity is meaningless if the correlation of those assets is high, and while stocks and bonds were mostly anticorrelated (bonds increased when stocks fell & vice versa) for the first two decades of the 21st century, we’re now seeing stocks and bonds move together.

Volatility & Risk

In Graham’s later book, The Intelligent Investor, he introduced the allegory of “Mr. Market.” Graham penned Mr. Market as a highly emotional investor who frequently changed his mind about the value of businesses. One day he’d be highly optimistic, willing to purchase the business at a much higher price, and the next, he’d pessimistically discount the price of the business. The point is to show that the public markets are highly volatile, giving longer-term investors the ability to buy businesses at discounts or to sell businesses at premiums to their intrinsic values. In general, one might conclude that because of Mr. Market’s erratic behavior, volatility does not necessarily equal risk.

With that being said, investors, entrepreneurs, and business owners all need access to capital. If that capital is all tied up in assets that cannot reliably give you bids at your desired price when you need them, then volatility inherently becomes risky. This is why it’s critical to keep a portion of your investment operation in capital that can be accessed when needed, preventing you from selling undervalued assets at deep discounts. A perfect example of this was during Covid-19. A business owner who had his/her capital invested in the stock market may have been right about the long-term valuation of those securities, but an increase in working capital requirements, combined with the inability to consider the correlation of the entire investment operation rendered those investments incredibly risky.

Safety of Principal and a Satisfactory Return

Numerous legendary investors define risk as the “permanent loss of capital.” In most cases, this refers to a poor estimate of intrinsic value relative to the purchase price. However, as we mentioned above, if the need for capital requires liquidating investments below their purchase price, volatility can be risky for an investment operation. And the truth is, while many investment managers would prefer to hold cash to capitalize on market downturns, institutional investors and allocators constantly complain about higher-than-average cash allocations. This results in managers succumbing to the emotional demands, but investors need a safe place to build capital with little to no downside.

The U.S. Treasury would insist that the Treasury market is the deepest and most liquid market in the world. Investors who needed to build capital in 2020 or 2021 might feel differently. T-Bills and money market funds offered basically no yield until the beginning of 2022, which completely ignores skyrocketing inflation that ate away real returns. Investors in long-term bonds fared even worse after seeing a material decline in nominal values. Equities and corporate bonds are highly volatile, and real estate is less liquid. None of these are effective tools to build capital, and while long-term returns can be attractive if purchased at the right price relative to intrinsic value, they are highly inconsistent.

Effective Capitalization

Real interest rates have been kept mostly negative ever since the financial crisis, especially when we consider the actual rate of return you can generate in a bank account right now. Policymakers have effectively increased the time preference for money by punishing savers. However, without capital accumulation, we cannot invest.

Let’s talk about whole life insurance, which is the foundation for Infinite Banking. To clarify, Infinite Banking is NOT an investment strategy. It’s an incredibly safe capital accumulation strategy with an acquisitive purpose. Because of the business cycle and Mr. Market’s highly emotional behavior, attractive investment opportunities aren’t always abundant. Infinite Banking is an ideal capital accumulation tool because it provides a contractually guaranteed capital growth with no downside. Whole life insurance is an uncorrelated asset that rewards low time preference and gives investors optionality and control through all business cycles. Investors no longer need to choose between staying fully invested in risky assets or losing money from inflation. Infinite Banking pays you to wait.

Conclusion

If your objective is to retain more control of your investment operation, Infinite Banking may be a perfect solution. Separate yourself from the investment world chock full of irrational investment mandates that limit flexibility. Instead, opportunistically deploy capital when prices are cheap, and get paid to wait in the interim.

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