Great Families often have great fortunes attached to them. Rockefeller, Vanderbilt, and Rothschild are all family names that are well-known to most. However, great fortunes can also be much more stealthy and still be substantial. We don’t need to compare ourselves to the .00001%. Imagine the good that you can do for generations of your family, your community, and causes you care about with a net worth of $10 million or more. I’m a working stiff, so I know that I’ll never be in the same category of the Rockefellers, or even more modern day, the Zuckerbergs or Gates. However, do I think it’s possible to have a net worth of $10 million, $20 million, or more by the time I reach my late 60s or 70s? Absolutely! In fact, I’m planning on it.
Once you’ve covered your basics and have your F-You money either in place or a well-constructed plan to get there, you can begin to look for and fund investments in your Get Rich account. Your financial basics and your F-You money need to take priority; they are your financial fortress after all. But once those are in place or nearly so, it’s time to step out on the ledge, have some fun, and take some risk. Your Get Rich money is your financial legacy, and if you’re successful, it will help get you to the point of having a major impact on your family and those around you.
First though, let’s get one thing straight: your Get Rich account is still an investment account! It’s a high risk, hopefully high reward investment account, but an investment account nonetheless. This is not a gambling account. The goal is to get multiples on capital (multi-baggers) as opposed to investing for an 8-10% return like you are elsewhere. We’re looking for investments that can return three, four, even ten times our money over the medium term (5-15 years). These come with far greater risk, but because you have your financial fortress in place, you can take that risk. The Get Rich account allows you to expand your financial kingdom; it does not allow you to buy lottery tickets haphazardly.
Investing versus Speculating
Given how important this is, it’s worth restating: your Get Rich account is for investing and not speculating. There is a difference, and it’s big. High risk investing is slow, methodical, and well thought out. Speculation, on the other hand, is often done quickly and without much thought. Investing is based on fundamentals and a coherent worldview, whereas speculation is often based on hearsay, or a “gut feeling”. I’m a big believer in following your gut, but it must be done in the context of a broader investment process and have some evidence behind it.
Investing makes money based on the change in value; speculation makes money based on the change in price. These are two very different things as price is what you pay while value is what you get. They are often not equal. High risk investing requires a lot of research and even some level of expertise. It tends to be in areas where few investors play because of legal complications, difficulty in sourcing investments, or it’s too far off the beaten path. Often, these investments tend to be illiquid (not easily tradeable). Upfront work, such as legal, structuring, and ensuring proper alignment of incentives can be quite a bit higher than just opening your Schwab account and hitting “buy” or “sell”.
Your Get Rich account is not an account to go out and blindly buy lottery tickets with. Do the work first. Investing tends to be longer-term in nature and is the process of buying something at a price below its value. Speculation is the opposite. Follow Benjamin Graham’s definition: “The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.”
Nearly any investment is suitable for your Get Rich account. Just because you have the capacity to take a lot of risk does not mean that you have to take a lot of risk. If you’re uncomfortable investing in any of the below- don’t. While I believe that this account is a good place to take some well-thought out risk, if you don’t have the time or inclination, sticking with index funds and other similar investments is perfectly reasonable. While I wouldn’t recommend just keeping this account in cash or Treasury Bills, only take on the amount of risk that you feel comfortable taking.
With that said, let’s briefly take a look at some higher risk, higher potential reward investments that would be appropriate for your Get Rich account:
- Venture Capital: Venture capital is equity financing capital to start-up and early stage companies. A typical company will go through several “rounds”, starting from seed or angel rounds, and moving on from there. Each round sets a new valuation (typically higher, although you occasionally see a “down round” with a lower valuation) for the company. Each round is generally thought to be less risky, as the company continues to grow and show progress towards earning profits.
For example, let’s say you invest $10,000 in an initial seed or angel round (a seed round is normally employee capital and an angel round is third party investors, but the two terms are often used interchangeably) at a valuation of $500,000. Congratulations, you own 2% of the company! If the company does well and continues to grow, it may need more capital and raise a new round of financing (Series A). Let’s say that the company raises $1 million at a $10 million valuation in the Series A round. Congratulations, you still own your 2% and your seed investment is now worth about $200,000 (it’s technically worth a little less than that, but that’s getting into the weeds). You could likely participate in the Series A round if you like, which would be akin to buying the same stock, just at a higher price – you get fewer shares for the same dollar amount. Note that this doesn’t mean that you can necessarily sell your 2% share at this point, as that comes at later rounds, or when the company is acquired or has an IPO.
Venture capital can be invested in through a limited partnership (LP) with a venture capital firm, or directly with individual companies. Direct investments can be made if you have a connection and invest with the company personally, or through one of the online platforms like Angel List. With an LP structure, a manager makes decisions about companies to invest in (although they often have a better sourcing network than you or the platforms, so there is value there), take a management fee, and get paid an incentive fee (called the carry, or carried interest) based on the profits of the entire fund. Having the incentive fee on the entire fund instead of investment by investment is better for the investor, as it balances out the winners and the losers (you pay less in fees). Angel List, on the other hand, charges a carry on each investment, but you get to choose what to invest in versus leaving that for a manager. It’s a trade-off. Direct investing would obviously carry no fee, but you have to find the deals yourself.
- Small, Private Business: These investments are similar, but different from venture capital. Venture capital is typically very early stage. Investing in private companies can be done at any stage of their life. Most of these investments will likely be local, which is both a pro and a con. It’s a pro, because you are close to the action and can monitor your investment, but can also be a negative if there is geographic risk that affects both your investment and your job. These investments are done by owning pieces of an LLC, LLP, S-Corp, or C-Corp. You’ll need to work your own personal network, or work with a business broker to find opportunities. Be careful with brokers though, as they often want you to buy or sell the whole company. You may be okay with that, but if you don’t want to be the one actually running the company, make sure that you either own just a piece or can hire a management team.
Beyond business brokers, there are alternative platforms like Netcapital or Circleup. These work in a similar fashion to the venture platforms. As an alternative to equity, you can also make debt investments by extending loans to these companies. FundingCircle and ApplePie are two online platforms to do so.
- Value-Added or Development Real Estate: Cash flowing real estate, such as a multifamily apartment building or an industrial warehouse, are great investments for your F-You fund. They often won’t make you multiples on your money though. Real estate developers and investors make their big bucks by doing either a value-add investment or a development. In a value-add play, you buy an underperforming asset for cheap, do the work necessary to fix and reposition it, lease it up, and then sell it as a cash flowing asset. In a development project, you’re often building something new from the ground up.
For example, let’s say you notice an underperforming office building in a great part of town. It has so-so tenants, is only half occupied, and needs some work. You’re able to buy it cheap, because the net operating income is low and the current owner is tired of owning it or looking to retire. Then, you make the necessary improvements, find some new and better tenants, get it fully leased-up, and sell it to a long-term buy and hold investor. Making several times your money, if done correctly, is not unreasonable in a short period of time (possibly only several years). Of course, numerous real estate investors have lost their shirt trying to do this, so do your homework and only invest when you find an excellent deal.
Real estate is one of the easiest private investments for a non-professional to get into. Anyone can buy a building if they have the money and financing to do so. However, if you’re uncomfortable going solo, you can also invest in a private fund structure, similar to venture capital funds. The upside is a seasoned pro who just needs more capital to do larger projects, while the downside is having to pay management fees and carried interest. Because of the explosion of alternative investment platforms, you can also invest deal by deal with someone on a platform like RealtyShares.
- Distress Debt: Did you ever wonder what happens with the debt when someone defaults on their credit card or a company goes bankrupt? Well, you can buy that debt, often at pennies on the dollar, and try yourself to collect what is owed. There are several ways to invest in distress debt: public bonds of distressed companies that you buy through your broker, tax liens, real estate notes, or defaulted mortgages or credit card debt. If you are interested in this space, there is a great book by Michael Pellegrino called “How to Invest in Debt” that I would recommend. Each of these separate investments have their own legal quirks, and there are rules and regulations that must be followed meticulously. This is not for the faint of heart, but could be an interesting side career or second career if you really enjoy it. People who invest in this often find that they really enjoy playing the game and it becomes more than just an investment for them
- Stock Picking: I highly recommend simple, efficient, and cheap index funds for retirement and F-You account investments. Focus on asset allocation at the 10,000 foot level, and don’t worry too much about how Apple is doing relative to Coca-Cola. However, if you want to try your hand at stock picking, your Get Rich account is the place to do it. Here is where the warning about speculation versus investing comes most into play. Remember that you are still investing your money for the future, not going to a casino.
There are different strategies for all different kinds of stocks out there. I won’t spend too much time here, because stock-picking is one of the most written about (if not the most written about) investing topics there is. The nice thing is, unlike most of the above investments, the costs to buy and sell stocks is tiny. You can pretty much buy or sell any stock in the world for only a couple bucks in brokerage costs – amazing!
I’ll only add a few choice words here. Big stocks can still equate to big returns – you do not have to focus solely on small caps or emerging market stocks to get big wins. Focus on the combination of fundamentals, story, momentum, and execution by company management before making a decision. I personally prefer to look at fundamentals and other qualitative aspects as a long term holder; however, momentum is real and matters for both entry and exit points. Finally, just be careful, especially if you have the personality for things like gambling, because stock trading can often lead to negative habits.
Build Your Fortune
With your foundation of a funded or nearly funded F-You account, you can live your life knowing that you’ll be able to survive and thrive regardless of what happens to your job. However, if you continue to work, as many do, you can now use that extra investment capital to build your Get Rich account. Get Rich money can be invested in higher risk, but higher rewarding opportunities. It can help create a significant family fortune that you can use to help your family members, or to support causes that are important to you. Investing for higher returns does not mean gambling or speculating – it’s still investing. Venture capital, private small companies, real estate deals, distressed debt, and stock picking are all avenues to generate significant returns on capital. They can often lead to significant losses as well, but with your basics already taken care of, you can handle that risk.
Keep building my friends.
Инвестирование или спекуляция