What is Fast FI’s Passive Money Machine?

I developed the Passive Money Machine concept in the trenches of small business acquisitions. 

The core of our Fast FI concept is that cash flowing small businesses offer such incredible returns that utilizing our Fast FI investing club, a small investor can achieve financial freedom in less than 5 years.

When I saw the returns I could earn buying existing small businesses compared to what people could earn in public markets, I was dumbfounded that no major investment books discuss it.

The question I’ve been working to solve is how can I open the world of small business investing to small investors as a passive investment vehicle?

The returns for small business investing are incredible (See my article on Beating Billionaires). The opportunity over the next two decades is unparalleled perhaps in the entire history of the United States. We’re seeing the largest generation in the United States retire and we’re at the start of a two decade buyer’s market in small businesses. That equates to a $2.4 trillion investing opportunity for the informed investor.

The problem is that small businesses are hard to manage and hard to turn into passive investments. To achieve this goal we have to get over a few hurdles:

1. Few people understand how to acquire a small business, turn it into a high return investment, and then make it a passive, safe, cash flowing machine. 
2. The few operators who do understand the process setup cash flowing small businesses for themselves or create a locked gate private equity firm that focus on institutional investors. It’s difficult to work with small investors so why not go for the big money if you can deliver big returns?
3. Investor accreditation and SEC rules put up even more walls to successfully opening small business investing to the small investor.

Although the skillset is rare and the problem is difficult, the opportunities are available in every local market across the United States. There’s no shortage of businesses in the $1 Million – $2 Million range that if turned passive would be game changers for small investors. 

The solution we came up with is Fast FI’s passive money machine built around an investing club. This solution fixes the problems above and more that I’ll discuss in this article.

Using economies of scale from this club, we can generate deal flow, acquire businesses, passive-FI them, and install an overwatch board structure that manages the downside risk. 

I can teach you an investing structure that offers: 

1. Investing returns that can beat Warren Buffett & George Soros (See my infographic here). 
2. Cash flow that can rapidly passive-FI your income in 5 years or less (I cover the math in this article on Fast FI’s Ultimate Guide to Financial Freedom).
3. A portfolio & an Overwatch Insurance methodology that manages risk to make it safe.

This investing club is designed to be a game changer for your life as investing in small businesses was a game changer for my life.

5 Years to Financial Freedom

Fast FI means under 5 years to financial freedom from start to end. High return small business investing can deliver on that promise whereas no other asset class I’ve discovered can.

Real estate generally offers ½ the return that you get from small business investing and therefore will take 2x as long to achieve financial freedom. If small business investing can get you there in 5 years, then real estate will take 10+ years. Also, you only receive that high of a return if you’re flipping houses which isn’t passive. I know, because I co-owned a house flipping business before I got into buying and merging small businesses. House flipping is time and capital intensive.

For index fund investing double that time again. Let’s estimate 20+ years if you’re a hardcore saver.

Sure, if you cut costs to the bone Mr. Money Mustache style then you can still retire early on a $30,000/yr passive cash flowing machine. However, you will still cut your journey by 1/3 (at least) if you choose to invest in small businesses versus index funds. 

That’s how the math works.

What Would Your Life Look Like?

What would a life look like if your money problems were solved?

Would you choose to travel the world? Perhaps you’d spend all day with your family making memories on the beach rather than sitting in a cubicle with poor lighting hunched over a computer. 

I escaped cubicle prison at 28, so I know the struggle.

Many people in our modern world have created their personal money machines by building businesses, investing in index funds, or building a portfolio of real estate.

The idea of a passive money machine isn’t new. The nobles of the medieval age were fundamentally landowners with real estate passive income. However, in our Fast FI club we’ve taken a unique perspective on financial freedom. 

We want to make financial freedom fast, easy, and safe. 

Let me explain our process.

We bring together the principles of private equity and the simple math of cash flowing small businesses to offer a built-for-you passive money machine.

Building your personal passive money machine doesn’t have to be something that takes decades. Many people have achieved Financial Freedom in under 5 years. 

Let me take a minute to tell part of my story, so you know where I’m coming from.

My Story

Hi, my name is Joseph Drups.

I personally quit my job at 28 to pursue financial independence which I achieved by the age of 30. I define financial independence as the point when your personal business or investments outside of working for someone else pay for your lifestyle.

I next stepped into financial freedom by the age of 33 when I had my lifestyle paid for with money left over to invest at less than 2 hours per week. I define financial freedom as that point when you have a work optional life.

I accomplished this 5 year feat by turning my first two businesses into passive income. 

Many people at that point sit back, kick their heels up, and write a book about their financial freedom journey. Sure, I took a few months to pursue my interests, but I soon realized I wasn’t ready to retire. Instead, I decided to double up, and bought another small business. Then I turned that passive, but I still wasn’t done.

My goal was to master the process of buying small businesses and turning them into passive cash flowing machines. I accomplished this by hiring and training incredible teams and supporting them with excellent processes.

I did it not once. Not twice. Not thrice… but 7 times by the age of 36. I’ve also co-owned a real estate investing and flipping business, operated my own digital marketing firm, and bought and managed digital real estate (my specialty) along with exploring many other investments.

Sure, I have some notches in my belt, but that’s not the point. I’m not here to brag about how my businesses have made it on the Inc 5000 list of fastest growing businesses in the U.S. two separate times, or to talk about the millions in revenue my businesses earn passively.

Ok, maybe I’m bragging a little.

BUT my main point is to simply say the lessons I’ve learned over the past 10 years would allow me to achieve financial freedom much faster and easier today than it did back then.

That’s why I founded the Fast FI investing club, and that’s the core of Fast FI’s investing approach. 

 If you’d like to learn more about my journey and get an overview of the Fast FI investing methodology I wrote an article summary of the best posts along with my origin story in my Start Here article.

Passive Money Machine: 7 Pillars

What is a Passive Money Machine?

The passive money machine has 7 core pillars:

1. 5 Years to Financial Independence: Our goal is to educate you on a process that allows you to achieve financial freedom in 5 years. We cover the math to retirement in our 3rd Catching FIRE article: Catching FIRE 3 – Fast FI – Ultimate Guide to Financial Freedom. Granted, not everyone can achieve the 5 year goal. If you’re in a debt hole or working a minimum wage job this isn’t the path for you. Start with Dave Ramsey’s Total Money Make-over. However, if you’re an accredited investor or a successful professional then financial independence is simply a matter of maximizing your investments, your cash flow, and your savings rate. That’s where we excel.
2. Investing Club – aka Pooling our Resources: Ultimately, investing in businesses is a team sport. We’re building a club to help its members achieve Financial Freedom from high return investing. We can accomplish this faster, together. The shared bargaining power of an aligned group of investors has multiple benefits: A) We can negotiate terms that enable us to buy financial freedom fast. B) We can cultivate a network of high level service providers to amplify our investments. C) We can develop shared resources that the group can utilize to help achieve financial freedom. D) We can tap into a shared deal flow of pre-vetted investments. 
3. Low Time Commitment: The passive money machine should run without your input. Let’s say 4 hours per week to set it up and less than 4 hours per month to keep it running. Don’t worry we’ll show you how.
4. High Return Investments: The passive money machine should provide a Fast FI return on investing. This speeds up your time to freedom. To put specific numbers on your suggested return, let’s say we’re shooting for a portfolio that can achieve a 32%+ return. However, there are different types of portfolios that you can choose based on your preferences and time horizon. Consult your financial advisor to determine the right strategy for yourself.
5. Cash Flow Investments: The 4th tenet is to focus on cash flow. Buying small businesses that offer cash flow fixes the problem of you gaining paper wealth that you can’t use to pay for your lifestyle. We’ll offer both growth and cash flow investing opportunities to support your goals.
6. Risk Reduction without Watering Down Returns: The passive money machine reduces risk by utilizing portfolio theory. The core of this tenet is that we want to build a set of 8+ high return, cash flowing assets that have uncorrelated market niches. This gets you 80%+ of the risk reduction while not watering down the return of your best assets. Risk reduction should be a free lunch, not a way to legitimize an investor’s mediocre returns (read more: Debunking Wall Street Wisdom).
7. Staying Power & Legacy: Our goal is to build a 80 year solution that will allow you to retire early and never worry about money again. After we accomplish that, we can work toward estate planning and a 80+ year solution that will take care of your children and leave a legacy beyond your death. This offers a multi-generational money machine and sets in place the mechanics to keep it running and growing.

These 7 pillars are the core of a successfully managed passive money machine. If you’d like to learn more, check out our 3 part article series: The Ultimate Guide to Financial Freedom: Catching FIRE.

The Fast Lane of Investing: Fast FI’s Passive Money Machine

The Fast FI methodology came out of my pursuit to maximize investing return while managing risk. Let me walk you through my perspective on investing, and why I ended up founding the Fast FI Investing Club.

When you start from the point of a small investor looking to build a passive money machine, you have a set of practical investing options you can pursue:

1. Public Market Investing: You can invest in the stock market, ETFs, mutual funds and index funds. 
2. Real Estate Investing: You can invest in single family rentals and grow your portfolio into duplexes, then apartments & multi-family complexes.
3. Small Business Investing: You can combine investing with skill acquisition to go after entrepreneurship by founding or partnering with other people to grow a small businesses. You can launch franchises, start a business from scratch, or buy a small business.

Although there are other asset classes, they mostly branch out from these three starting points.

Public Markets: A Loser’s Game

The first thing I studied when learning about investing was the stock market. I became a student of Benjamin Graham and Warren Buffett among others. What I realized was the stock market was historically overvalued, and even if it were at its average value, 16.9 PE, the historic yield of stocks were about 5.9%. The return you get beyond that is fundamentally betting on an increasing stock price compared to earnings. 

Increasing asset prices is the definition of a bubble. Therefore, when “experts” quote a 9%-10% return on index fund investing, they have baked into the pie a historically unprecedented growth in PE or price of the stock compared to earnings. They don’t realize that we’re at the end of a long debt cycle which has boosted stock prices to incredibly high valuations.

In short, stock market investing is a bad bet.

Benjamin Graham, Warren Buffett, Peter Schiff, Ray Dalio and other “stock market investors” got personally rich off of a very different type of investing then what a small investor can do in the stock market. Generally, investors building funds get rich from taking management fees from managing funds, not actually investing in the stock market. 

Alternatively, people like Benjamin Graham and Warren Buffett were often using the power of a fund with $50+ million dollars to select small pink sheet stocks and force management to return cash reserves or similar strategies. Ray Dalio and John Bogle founded businesses that offered investing services and they made their money through growing their businesses. 

They’re personally wealthy through investing in their small business and growing it into a large business not so much through the actual investing process they’re selling. Sure they all were invested in stocks, but that’s not how they became wealthy. Later they used stock market investing to perpetuate their wealth.

This isn’t something small investors can replicate to achieve strong returns (think greater than 20% ROI). Public markets in general are awash with money because of how liquid they are. They’re also historically overpriced, and provide a low yield compared to private market investing.

That gives us a good rule of thumb for investments:

Fast FI Rule 1: Avoid the stock market and public markets in general. They offer low yield and a lower return than many private market investments. 

Author’s Note: I do believe the stock market is a reasonable way to initially learn about beginner investing and index funds are the simplest way to invest for people who are happy with a low return. Also, once you’re a deca-millionaire and have financial freedom, the stock market might be a reasonable option for a percentage of your income when you’re not looking to maximize the return on your investments.

Figure 1: Historic S&P 500 Price to Earnings Values vs Average

 Note: The dark gray line in the graph above shows you the historic average PE from 1900-2023 which was 16.9 PE.

The above graph proves my point with PE valuation. This figure graphs the historic PE valuation with the solid gray line being the average PE throughout history. Notice how the stock market has remained above that line since about 1990 and has never recovered from the 2008 peak? 

Private Market Investments

Thomas Stanley who wrote the books The Millionaire Mind and The Millionaire Next Door said based on his company’s survey of millionaires that only about 10% of people primarily made their wealth through real estate and an additional 10% of wealthy people made their wealth in the stock market. Alternatively, 80% of wealthy people made their wealth through owning their own business or entrepreneurship.

I’ve been a partner in a house flipping business, acquired, merged, founded, and run 8 small businesses, and I’ve been a student of investing for my entire adult life.

Based on the projects I’ve been in and the investments I’ve seen, I put together a list of what returns I expect to make from different passive private market assets.

The tricky thing about private market investments is that the returns you make are correlated with your skill, network, and how you deploy your resources. That means if you’re bad at flipping a house you’ll lose money. If you’re good at it you can make a better than average return. However, in general, I believe I can achieve (and other smart motivated people could achieve) the following average returns passively from the below asset classes. 

Figure 2: Private Market Benchmarks

There’s a trade-off in passive versus active management and the level of return you can get. For the sake of this discussion, I’ve limited my estimates to (mostly) passive investing. That means having a property management firm run your rentals, using real estate syndications, and working with operators who run the small businesses that you’re investing in. For house flips or BRRR, there’s still an active portion of project managing contractors at the beginning of the flip, but then you can turn the project passive after the work is complete. 

The Fast FI small business investing methodology is at the top of the list of high return investing options.

Fast FI Rule 2: Setup high return investments that are run by skilled operators with a track record of success.

In my article, 32% Return – The Investing Strategy that Beats Billionaires and the follow-on Beating Buffett Portfolio Guide, I outline in more depth the Fast FI investing methodology that I’ve developed over the last decade.

I’ll drop a summary of the process in here so we can add the Fast into our Fast FI discussion. However, before we get to a longer discussion of the Fast FI investing solution, let’s cover the basic benchmarks for other investing options.

Public Market = Low Returns

First of all, I touched briefly on this before with the stock market, but public market returns in general are low compared to quality private market investments.

You can skim this chart or look up the current numbers yourself, but one of the best options for passive public market investing is index fund investing with an average long-term return of 9%-12% depending on what period you look at.

Figure 3: Benchmark of Public Market Returns

Perhaps you’ve been taught that these low returns are what you should expect from your investments. 

However, comparing the public market benchmarks to the private investing options I listed above shows a stark contrast. You probably haven’t seen this laid out clearly since the numbers are hard to come by and not published by the stock market brokers, 401K advocates, and fund manager peddlers. I included the same table below for reference. 

Figure 4: Private Market Investment Options

Author’s Note: The Small Business Syndication model assumes static growth, but becomes significantly better with even a moderate 10% growth rate.

If you want to take the public market investment options I listed above and construct some common portfolios, those returns fall even further. In figure 4, I walk through the portfolio returns achieved in private versus public market investing.

Author’s Note: The All Weather Small Business Portfolio is our Fast FI’s ideal construction of a portfolio based on investing in a basket of high return small businesses. You can read more about this strategy in our Beating Buffett: Fast FI Portfolio Guide (Download Here).

Figure 5: Private Market Portfolios vs Public Market Returns

Above, I outlined the suggested small investor portfolios provided in interviews by the famous investors: Ray Dalio (All Weather Portfolio), David Swenson (David Swenson’s Portfolio), Warren Buffett (60/40 stock to bond and index fund Investing) and others.

As Nobel Prize winner Harry Markowitz said, “diversification is the only free lunch” in investing. However, when you look at the common portfolios assembled to buy down risk by money managers (See Figure 4: Public Market Portfolio Estimates), they don’t look like a free lunch at all. Many cut your long-term returns in half.

The problem is that these portfolio theories have been based in assets like bonds, government securities, and related low performing public market investments that have in recent years achieved virtually no return in inflation adjusted terms. If you believe as I do that the government understates inflation, most bond and similar public market asset classes in recent history may have negative real yields.

Think about that a second. You’re pay the debtor to take your money.

Private market portfolios on the other hand routinely outperform public markets. The pinnacle of private market investing is small business cash flow investing which dominates the other asset classes in the height of returns it can achieve.

This is where Fast FI’s passive money machine really accelerates versus alternative investments. The key in diversification is to develop multiple streams of income from uncorrelated asset classes.

Well guess what? Each small business operating in a different market is largely uncorrelated. This is another reason why small business cash flow investing is so powerful. 

Think  about it. 

Public market indices move together in lock step based on the interest rate, liquid money supply, and other factors like cash flows form other countries. The fact that investors treat an index fund as a single investment and not a bunch of individual stocks means all those stocks are now correlated. 

This happens because the assets are highly liquid, meaning people can move cash easily in and out of the public stock markets. These preconditions all leads to highly correlated movements in the price of public market assets. Despite you owning a basket of 1000+ securities, from a risk standpoint an index fund operates as 1 asset. Oftentimes, in a crisis all liquid assets get sold leading to all liquid, public market, and common investments moving in tandem, aka correlation. 

You have to get to about 8-10 uncorrelated assets to get approximately 80%-90% of the benefits of diversification depending on the asset’s risk profile. Despite public markets growing more correlated, more risky, and more inflated, private small businesses are largely uncorrelated, low PE ratio (or high yield, ~33% ROI versus stocks at < 5.9%), and have management risks that can be managed with let’s say, an investing club 🙂 .

Small businesses are in the exact opposite position of many public market investments. They have an illiquid market. That means people can’t move easily in and out of the assets. This also means they offer stable asset prices and uncorrelated investments. 

Each small business in a different market acts as an uncorrelated asset. 

Therefore, to manage risk, we want to build toward a basket of 8+ high return, cash flowing small businesses that fund the lifestyle of your dreams. This allows you to focus your money on high returns rather than diluting your investing across the average of correlated, low yield public markets.

If you want to learn more about basic portfolio building, I’ve put my thoughts into a free resource you can download here: Beating Buffett – The Fast FI Portfolio.

There’s one more point I want to cover to explain why this opportunity is so powerful.

$2.4 Trillion Dollar Opportunity

The opportunity over the next two decades to purchase small businesses in the United States is one of the best investing opportunities of our lifetime.

I don’t think I’m overstating this. 

According to the CGK, baby boomers consist of 74,102,309 people whereas the following generation, Gen X, represents 49,151,059 people. There’s a gap of 33.7% of the population between the two generations. 

Let’s run the numbers.

Here are the key points:

• 72.6 years Avg Retirement: According to the SBA, business owners on average retire at 72.6 years old. That means from 2018 through 2038 there’s a buyer’s market in small business acquisitions. 
• ½ of Business Owners are Over 55: Half of all business owners in the U.S. are over age 55 according to the Census Bureau. That means they’re all looking to retire and sell their business in the next decade or so.
• 33.2 Million Small Businesses: Finally, there are 33.2 million small businesses in the United States according to the United States Chamber.
• 33.7% Gap: As I mentioned above, there’s a 33.7% gap between the population of the Baby Boomers and Gen X.
• $2.4 Trillion Opportunity: At the average revenue for small businesses in the U.S., that equates to a $2,384,000,000,000 opportunity. Where else will you find a positive demographic trend, returns over 30%, and a passive cash flowing solution? I think you can see why I’m so excited about the Fast FI investing opportunity.

Compare that opportunity to the over-valued stock market which will have retirees in the U.S. cashing out over the next 20 years and moving to more secure investments and fixed income alternatives. That means falling valuations in the Stock Market, falling returns, and all that happening while small businesses are selling for bargain bin prices. 

We’ve covered a lot in this article, and you can probably see that I strongly believe in the possibility of Fast FI’s passive money machine to fast track your path to financial freedom. 

Are you interested in learning more?

Discover more about how to build your own passive money machine with our Fast FI investing club by clicking here: Fast FI Investor Club – Build Your Passive Money Machine.