Alternate Thoughts on Investing in Alternatives

Navigating Investments in Uncharted Waters

This week, our exploratory voyage ventures into the realm of investing—a domain where the size of one's nest egg often dictates the journey's relevance. While this subject may resonate more with some than others, fear not if it seems beyond your current purview. Next week, we'll delve into a universally engaging topic, guaranteed to spark interest across the board. Promise! -JR

Warren Buffett's journey to becoming one of the greatest investors of our time is a story not just of financial acumen but also of seizing opportunities in a scarcely understood marketplace. In the era when Buffett began trading public stocks, the landscape was vastly different from today's information-rich environment. Access to trading was not as widespread, and the tools for understanding market dynamics were rudimentary compared to the wealth of data available at our fingertips today, thanks to platforms like Google. Buffett's brilliance lay not only in mastering this thinly traversed investment terrain but also in his strategic move into the insurance business, which further capitalized on his deep understanding of these market opportunities. This approach formed a sort of flywheel, propelling him to unprecedented heights in the investment world.

But do we all aspire to be Warren Buffetts? Perhaps not entirely, yet there's undeniable value in tracing some of his footsteps to potentially replicate his 'unfair' advantage. This raises the question: should we emulate Buffett’s initial stock-picking strategies, such as value investing and a buy-and-hold mentality? While these principles still hold merit in today's market, I propose that the real key lies in finding a modern parallel to Buffett's early playing field—a niche where knowledge is scarce, and the right connections make a significant difference. Today, this space is epitomized by the realm of startup businesses, a sector humorously yet accurately portrayed in the 'Silicon Valley' TV series. Despite the JOBS Act, this arena remains largely the domain of the accredited investor. It's a world devoid of an open market, limited in open data, and seemingly impenetrable for those looking to start investing.

So, let's delve into this topic with some broad strokes. We'll explore the nuances of sizing investments, identifying promising opportunities, and understanding where to focus our attention in this rapidly evolving landscape.

Before we dive into the nitty-gritty, here's a lighthearted but necessary side note: The insights that follow should be enjoyed like a fine wine at a comedy club – with a pinch of salt and plenty of smiles. This is not financial advice, but rather a buffet of thoughts served up for your intellectual and entertainment pleasure only. So, while you're welcome to feast on these ideas, remember to consult your financial chef (a.k.a. a professional advisor) before cooking up any investment recipes in your real-world kitchen!

The Art of Measured Investment: Why Less Can Be More

"Regret" is a term often whispered in the corridors of the investment world, usually in hushed tones of missed opportunities. But here's a provocative thought to ponder: You'll seldom rue the day you underinvested. Picture this: a bolt of financial lightning strikes, illuminating an investment you made. In that electrifying moment, you might kick yourself, thinking, "If only I'd invested more in that venture!" But, my fellow investors, this is a classic case of hindsight bias - using today's revelations to critique yesterday's decisions.

Remember, the investment landscape is as vast as the ocean, brimming with uncharted opportunities waiting to be discovered. A significant return from a single success isn't just a triumph; it's a learning moment, a chance to hone your investing acumen. It's not about what you missed but about the questions you ask next, guiding you to similar, if not greater, opportunities.

However, let's turn the tables and consider the more frequent and less discussed scenario: the sting of overinvestment. This is where the real heartache lies. It's easy, and perhaps a tad unfair, to judge our past decisions with the crystal clarity of the present. Yet, in the grand chessboard of asset allocation, the most grievous error is not a missed checkmate but rather losing your queen - investing too heavily in a single move. A substantial loss in an overleveraged venture can lead to a dangerous game of mental catch-up. Instead of strategically building on your portfolio's stronger suits, you're left scrambling to recoup losses, a task akin to filling a sieve with water.

The crux of savvy investing? Think small. Calibrate your investment not just by your current capital but by weighing future opportunities you aim to seize. Size your stakes in such a manner that if they don't pan out, your reaction is a calm, collected shrug rather than a frenzied panic. This approach isn't about being timid; it's about being strategically shrewd. By keeping your investments measured, you free yourself to navigate the unpredictable tides of the market with agility and grace.

The Power of Meaningful Relationships in Investing

Let's talk about a critical aspect often overlooked in the investment arena: Relationships. Yes, it's worth repeating - relationships.

Consider this: investing isn't akin to running a hedge fund, where you're playing with other people's money and reaping management fees. For most of us, investment isn't our day job. It's not about echoing (or contradicting) the likes of Jim Cramer (cue a light-hearted nudge at his track record) and winging it on a whim. Yes, there might be times you dabble in trading, plunge into startups, or flirt with cryptocurrencies. But fundamentally, it's about steering your portfolio's ship while juggling your primary profession, or even in the serene waters of retirement.

Now, circling back to our initial point, investment isn't about being a serial suitor, chasing every alluring tip that winks your way. It's more about forging meaningful connections with people and institutions who outshine you in the financial realm. Investing with them over time is key. And yes, diversification is the name of the game – not just in your portfolio, but in your network of relationships too.

Having a financial behemoth like JP Morgan or Goldman Sachs as your exclusive guide might seem tempting. However, I challenge you to broaden your horizons. Endeavor to end each year with a sense of profound gratitude for the varied individuals and institutions in your life. These connections should not only support but amplify your pursuit of financial freedom, guiding you to realms of fiscal success you never imagined possible.

Navigating the Sea of Probabilities: Spotting Potential Giants in their Infancy

Ever wondered where small investments and impactful relationships converge? Let's dive into this intriguing intersection. Central to this exploration is the VC power law, an axiom suggesting that a select few investments often drive the majority of returns. It's a universal principle, transcending sectors and geographies. Picture this: a few standout investments, the stars of your portfolio, compensating for numerous underperformers. Imagine casting a wide net in the vast investment ocean, hoping to reel in that elusive, portfolio-defining whale.

Now, you might fancy your investment skills are sharp enough to bet it all on what seems like a sure-shot whale. But here’s a reality check: your odds of making that perfect catch are only slightly better than stumbling upon a minnow destined to transform into the proverbial Moby Dick. The smarter strategy? Gather a school of promising minnows, navigating the sea of probabilities. This approach significantly tilts the odds in your favor.

So, how does one spot these potential giants in their infancy? To borrow wisdom from Peter Diamandis, "Want to be a billionaire? Solve a billion-person problem." Your quest isn't for the local pizza shop; it's for ventures with the potential to scale massively. How to sift through these opportunities? It boils down to two filters: either the business operates in a domain where you sense the potential intuitively, or you have unwavering trust in the person behind the deal, ideally someone who's both invested significantly and has a track record you've witnessed firsthand.

There are sectors I instinctively pass on - real estate, food and beverages, payments, e-commerce, finance. Why? Simply because I lack the insight to evaluate their market need and scalability. Sure, this strategy might mean missing out on some whales, but that's a trade-off I'm willing to accept. Early-stage investing is all about potential, akin to betting on the jockey rather than the horse. While occasionally I invest in businesses whose concept I'm excited to see realized, such instances are exceptions rather than the rule.

Crucially, my ability to discern the synergy between the jockey and the horse hinges on comprehending the 'why' of the business. If the fundamental reason behind a venture eludes me, particularly in markets outside my sphere of expertise, I consider it a signal to step back. In realms where my understanding is significant, the 'why' becomes not just a factor, but the linchpin of my investment decision. Without a clear grasp of the underlying purpose and vision of a business, no amount of charts, in-depth research, or optimistic projections can compel me to invest. This steadfast rule ensures that I commit only to those opportunities where I fully understand and believe in the driving force behind them. For me, the 'why' is not just part of the evaluation - it's the cornerstone that either solidifies my interest or decisively leads me to pass on an investment.

Time: The Silent Yet Steadfast Ally in Your Investment Odyssey

As we reach the end of our explorative journey, let’s pause and acknowledge a silent yet steadfast ally in your investment odyssey: Time. Time is the secret ingredient in this complex recipe – it’s your companion through trials and triumphs. It allows you to stumble, to discover vibrant paths and dead ends, and most importantly, to evolve into a savvy investment maestro. Patience is key, especially when success might be a distant beacon, three to twelve years away, glowing brighter until that potential return on investment lands in your bank account.

Speaking of destinations, the celebrated haven for startup investments is AngelList. But tread your own path; it might not be your cup of tea. Competition exists, and it’s worth your while to scout around. Just before the final click to publish this post, I encountered a "Deal Sheet" newsletter announcement – consider this not as an endorsement, but rather as an example of exploration within an ever-expanding cosmos of possibilities. Find a platform that resonates with your investment persona. Do you have direct deal flow and struggle with the size of the investment? Consider rallying a group through an SPV (Special Purpose Vehicle). Yes, you could go solo here, but remember, in today's interconnected world, there are startups designed to assist with this. Take a glance at PIN and Sydecar, just to name a couple.

Craving an unfair advantage? Leverage the skills that fueled your success to mentor others. This isn’t about selling services; it’s about nurturing success as a mentor and reaping the rewards as a part-owner. Collaborating with exceptional people running funds or SPVs? Sometimes they need guidance too, especially when starting. Conversely, if they’re miles ahead in expertise, they can serve as invaluable advisors, helping you piece together the puzzle before committing your funds in ventures they are not leading.

A word to the wise! Diving deeply into startups as a key component of your investment portfolio introduces the complexity of K-1 forms come tax season. For the self-filers among us, there comes a tipping point where going it alone loses its luster. Those who enlist professional help might notice the cost of such services climbing, or find themselves in search of someone with the specialized expertise required to navigate these waters. Invariably, embracing extensions may well become part of your annual tax strategy, so it's prudent to plan with this in mind.

Remember, this is not a one-size-fits-all 'how-to' guide. Your journey will carve its unique path, distinct from mine or anyone else's. Embrace this opportunity to shape both the future of the world and your personal legacy. Make your mark, if you choose, in the exhilarating world of creating and investing in the future.