In today’s email:

• 2020: A look back at a few of the most interesting investing related developments from a wild year.

• 2021: How I’m thinking about investing in 2021 (asset allocation & my actual investments).

• The rise of alts: My belief that alternative investments will continue to rise in popularity and find a home in more retail investors’ portfolios.

• Early access to my new alternative investing community: I’m soft-launching a new investing community focused on alternative investments. Check it out here. If you’re interested in discovering and diligencing funds/deals in the venture capital, real estate, private equity or the collectible space, I think/hope it’ll be a helpful community. It is free (for now) and open to everyone (although accredited investors will benefit the most). P.S. Thanks to Curious Investor subscriber Pomp for re-tweeting and spreading the word about building it in public. 🙏

  

Investing related developments that I found interesting in 2020

Some large and seemingly small things that made me take note this year:

• 🏎️ Speed of both draw-down and market recovery

• 💸 Unlimited QE; Fed aims for 2%+ inflation

• 0️⃣ Near zero rates now and for the foreseeable future

• 🔮 Pull forward of the future in virtually all major aspects of our economy and society (e.g. ecom, healthcare, work, education, currency/money, and more)

• 📈 Legendary investor Jeremy Grantham notes a 90% allocation to VC + the rise of rolling funds giving more investors access to the venture capital asset class

• ₿ Bitcoin nears ATH. Institutions and big name investors seem to warm to BTC

• 🛡️ Vanguard announces product that will (eventually) allow retail investors to invest in private equity

Understanding the broad strokes of 2020 is helpful for me as I refine my asset allocation and think about investing in 2021. So what’s next after a wild year?

How am I thinking about investing in 2021

I can sum up my 2021 investing philosophy in two words:

OWN ASSETS!

My belief is that the next few years will be a phenomenal time for asset owners. Why?

• ✈️ Consumers want to CONSUME! Tons of pent-up demand for should drive the economy post-COVID.

• 💰 Personal balance sheets are strong. Consumers are sitting on cash they can use to consume. Check out this savings rate info to see what I mean.

• 🏛️ Janet Yellen running the treasury = market friendly policies.

• 💸 Material levels of inflation will cause asset prices to rise.

• 😑 TINA - “There is no alternative”. Cash locks you into a ~2% loss each year. Bonds yield nothing. Capital has to go somewhere; it will go into stocks and “alts” like real estate, venture capital, PE, and Bitcoin.

• 🔮 Pulling forward the future 10+ years should unlock greater innovation, efficiency, and growth.

The market conditions seem perfectly set up to reward asset owners. I realize an investment philosophy of “own assets” is far from earth shattering. And of course you need capital to own assets (that’s a whole separate topic).

That said, if you have a longish time horizon, good luck sitting on a bunch of cash and bonds. At least for now the 60/40 portfolio is dead. I suspect it’ll be far preferable to own assets that can appreciate and/or throw off income.

Obviously I don’t have a crystal ball and we could have always another black swan event like the pandemic. But as always, no risk no reward.

The Rise of Alternative Investments

One trend I see continuing is rise of alternative investments in retail investors’ portfolios.

What are alternative investments (aka “alts”) and why are they interesting?

Alts are essentially everything outside of public equities. Think real estate, venture capital, private equity, collectibles, and more. They tend to be illiquid and in some cases only accessible to accredited investors.

I’m not alone in seeing this trend. Austin Rief (co-founder of the popular daily business email Morning Brew) recently Tweeted the below:

And here’s Chris Powers (Real Estate GP at Fort Capital general partner and also host of a great podcast) on the rise of alts:

Alt investment interest is seemingly everywhere. Dru Riley at Trends.VC had a short piece on the topic recently. Lastly, there was an absolutely fascinating Invest Like the Best episode with Leore Avidar. The whole episode is amazing but if pressed for time start at the 26:00 mark. Stay to hear the story of Leore buying the $1.5 million Lebron rookie and his new platform called Alt. I’m really excited to see what Leore builds with Alt.

Why even bother with alternative investments?

In many circles it’s contrarian to recommend anything other than low cost index funds. And I won’t argue low cost index funds aren’t great (they represent my single biggest investment).

But for many investors, I believe alts are really compelling. Many individual investors just don’t know yet how big of role alts could play in growing & preserving their wealth and/or don’t know how to access these investments.

Alternative investments are interesting as they can accomplish a few things in your portfolio:

• Provide diversification

• Reduce volatility

• Potentially produce greater risk-adjusted returns

• Provide yield

There is a lot more nuance here I will share in a future post but in my view there are real benefits to investing into alts.

If you look at the behavior of some of the sharpest capital allocators in the world you’ll see they invest heavily into alternative assets. Consider Yale for example.

The Yale Endowment

Here’s Yale’s asset allocation for 2021:

Notice anything?

Yale has a HUGE allocation to alts. They aim for up to 50% in alternative assets. These guys and gals are no dummies and there is a reason they allocate in this manner.

As investing gets further democratized I increasingly expect sophisticated individual investors to start allocating in a way more similar to endowments and ultra high net worth individuals. Said differently, more entrepreneurs, doctors, lawyers, and other professionals will start investing into alts.

If/when accredited investor rules loosen an additional tranche of investors will likely enter the space. This will further enable regular people to “invest in our culture” via the securitization of things like trading cards, video games, shoes, wine, and lots more.

Introducing The Alt Investment Community

👋 Say hello to Alt Investment Club.

Invest Like an Endowment

My belief is more and more individual investors will try invest like endowments.

Historically this is near impossible given the resources, network, and access endowments and large allocators possess.

But the world is changing in such a way that investing like an endowment is both possible and potentially more necessary.

A few reasons why more people will invest like an endowment:

• Greater access to traditionally walled asset classes like VC. AngelList, via software and rolling funds has changed the game in this respect.

• The internet (Twitter/podcasts) is connecting some of the best investors of today with capital from a whole new group of individual investors. Access and networks are online versus in a physical location like Silicon Valley.

• The death of the 60/40 portfolio. The “40” will need to go somewhere and alts will play a role.

• Rise of new platforms like Alt for trading collectibles.

Both the infrastructure and access is starting to change as investing in alts democratizes.

Investing in alts is hard | The benefits of a community

You might be thinking investing into alternative assets sounds interesting but aren’t sure where to begin.

I can relate to that feeling. After I sold my small e-com business I faced this problem. I didn’t want all our capital sitting in index funds but I felt like a total noob trying to invest in private real estate, venture capital, and private equity funds.

I found two challenging parts about investing in alternative investments are

• Discovery: How do you even find a venture capital or real estate fund to invest in?

• Diligence: Once you find an opportunity how do you know it’s worthy of your hard earned capital?

Building a community helps solve those problems. I’m really excited about the potential of a great group of entrepreneurs, builders, and investors coming together to collectively help each other learn, grow, and create more wealth.

Sign up here!

I’m interested enough in the alternative investment space that I spun up a new community around it. I’d love to have you be a part of the crew! Here is the link:

alternativeinvestmentclub.com

The famed Tiger 21 is my inspiration with a more modern twist. I can promise we’ll never have a $30k per year member fee or a net worth requirement of $10 million. I do hope in time to have a great community of investors that help each other with deal flow, diligence, financial education, and anything else that lives at the intersection of life and money.

For those interested in alts please sign up (it’s free for now). My hope is the community helps you become a better investor and connects you to some incredible people.

My 2021 Asset Allocation

I debate even sharing this as I’m not sure how helpful it is but people seem to like this sort of thing.

My updated 2021 allocations are below.

If you jump into the community you’ll see I posted the spreadsheet that I use to track our asset allocation (as well as a host of other things I track to keep our financial health in order). Feel free to download and use if helpful.

Everything is different but nothing has changed

In many ways, nothing changes for me 2021. I made some tweaks to our allocation recently but it’s not that different from a year ago. Asset allocation isn’t something that should be jumping around wildly from one year to the next. Make a sound plan. Stick to the plan.

Target Asset Allocation - Q1 2021

Stocks: 50%
Real Estate: 20%
Cash: 10%
Venture Capital: 7.5%
Bonds: 5%
Micro PE: 5%
Crypto: 2.5% (80% BTC; 20% ETH) 

If you hop into the club you can see exactly what real estate, venture capital, and PE funds I’m in. I share the “why” behind my investment which may be moderately interesting or helpful.

Wishing everyone a great last month of this unforgettable year.

Thanks for reading and happy investing,
-Paul

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🧍 Who are you again? Hey my name is Paul. “The Curious Investor” is a newsletter where I write about investing and the intersection of life & money. In addition to investing, I spend a lot of time in the ecom world. I started and sold an ecom business and now help brands grow big on Amazon. Previously I was a CPA and spent a decade in corporate finance. Learn more about how I invest here. I recently started AltInvestmentClub for people interested in investing into real estate, venture capital, private equity and other alternative investments. Nothing herein should be considered investment advice.

I wrote briefly about rolling funds a few weeks ago in ‘My First VC Investment’. And Minal Hassan put out an excellent comprehensive post on them on her Substack a few days ago if you want to dive deeper.

Rolling funds are so hot right now even I can make tweets about them go viral.

It’s a strange feeling to bang out some quick thoughts while our three year old naps and then see that 374k people read said thoughts. ¯\_(ツ)_/¯

Why Rolling Funds Are Interesting

I love the concept of rolling funds as I think they will enable a new and more diverse set of venture capitalists (GPs). A more diverse group of GPs will result in a more diverse group of founders getting funded. That is a great thing for society.

Additionally, micro LPs like myself can start to play in the VC game. The capital from micro LPs will help give rise to even more GPs which will fund more founders. Also a good thing.

Let me briefly expand on these ideas:

Promotion allows a new wave of emerging GPs to go direct

506(c) is perhaps the linchpin of this whole operation as it enables public fundraising. Traditionally, VCs couldn’t solicit investment from the public. That has led to long and arduous periods of fund raising. Compare and contrast Elizabeth Yin’s 700 meeting journey to close a fund with Sahil’s notion memo and YouTube video journey:

I’ve read a ton of Elizabeth’s writing and she is phenomenal. But she had to walk a long road to raise Hustle Fund.

Now an aspiring GP can leverage her reputation and turn it into a fund. Sahil raised his fund in a matter of days. I suspect Sahil and his fellow early-adopters (Cindy, E, Ben, Tyler, Jason, Stephen and others) will be just the beginning and we’ll see a Cambrian explosion of new venture capital funds.

AngelList let’s GPs focus on what they do best

Another component enabling this innovation is the way AngelList takes care of all fund admin. This allows a new GP to get up and running quickly and focus on what is truly important: finding, funding, and helping great entrepreneurs.

From everything I’ve seen, the AngelList team has thoughtfully considered all facets of this process and built a great product. Kudos to Avlok, Sunil, Naval and the whole team for what they’ve built.

So to recap, we have a few important factors at play here:

• The power of a large and engaged audience allows one optionality to do almost anything (including raising a VC fund)

• 506(c) enables someone with an audience to publicly market a fund

• AngelList has built an elegant solution to manage everything so the GP can focus on doing what he or she does best (find and support great founders)

The net result of all of these ingredients is that we should see a more diverse set of GPs emerge that will back a more diverse set of founders. The future should be better because the rolling fund innovation. It’s very cool!

The Rise of the Micro LP

The rise of emerging GPs and rolling funds will give rise to another group: micro LPs. There are literally millions of small LPs on the venture sidelines whose capital will begin finding it’s way into venture.

I see the LP impacts as follows:

• Access: Due to Twitter/YouTube/506(c)/AngelList/etc, a small LP like myself can now more easily access the venture capital asset class. I LP’ed with Sahil after ‘getting to know him’ from reading his Twitter, checking out his Notion memo, and watching a YouTube video. One’s online reputation, social media, and the internet bridge the access gap between GPs and LPs. Podcasts will play a huge role too (Jason - would love to see a few rolling fund shows on TWIS!).

• Scale & Opportunity: As Brandon Williams notes, there are 13 million accredited investors in the US with venture only having a 3% penetration rate. It’s hard to validate the true figures but it’s certain only a small percentage of investors are allocating to venture. There is a massive opportunity here for AngelList and venture as a whole to pull in a big chunk of these investors.

• Re-thinking Asset Allocation: I plan to allocate 10% of our net worth to venture. Why? It’s a great way to gain diversification and place bets with uncapped asymmetric upside. I suspect many other investors will view the VC asset class similarly and want exposure. There’s also something I suspect many investors will find compelling about using one’s capital to fund start-ups versus plopping it in a boring index fund.

• Minimums: Rolling funds are much more in reach than traditional VC funds. Sahil’s minimum was $6,250 a quarter and he inclusively flexed below for some LPs. Instead of a typical $100k one time check, lower minimums and predictable quarterly capital outflows will make micro LPs happy.

• Indexing: The low minimums will allow an LP to invest across multiple GPs and get an almost index-like fund allocation to venture. If I LP in 10 funds I may have a slice of 300+ start-ups. This will be appealing to more traditional investors that are used to having a slice of 500+ companies in public markets. AngelList Access Funds is another solution here for investors that prefer a more passive approach.

The rise of the micro LP should result in the need for more GPs. And more GPs should mean more funding for entrepreneurs. It will create a virtuous cycle of sorts.

It will take awareness and education before serious dollars flow to venture but I suspect in 2030 the number of accredited investors with an allocation to venture will be far higher than 3%.

The next decade is sure to be an eventful one for founders, solo GPs, and micro LPs.

Check out my Twitter thread if interested in more thoughts on the impact to LPs.

P.S. Not sure if Soona coined the term “micro LP” but great name if you did!
P.P.S. “The Rise of the Micro LP” title was inspired by NBT’s excellent post.

My Second & Third VC Investments

It turns out that investing is addicting.

In addition to Sahil’s fund, I’m now a proud LP of Cindy Bi’s rolling fund. She has an awesome track record and hustles hard. She’s also very kind and helpful. Really excited to ride along with you Cindy!

I have another venture investment in the works but the docs are not yet final. It’s not a rolling fund either. More updates later on.

That’s all for now. These past few weeks have been an amazing learning experience. Thanks to everyone on Twitter who has engaged and helped me get immersed in this world. And as always, thanks for reading.

-Paul

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🧍 Who are you again? Hey my name is Paul. “The Curious Investor” is a newsletter where I write about investing, venture capital, and personal finance. In addition to investing, I spend a lot of time in the ecom world. I started and sold an ecom business and now help brands grow big on Amazon. Previously I was a CPA and spent a decade in corporate finance. Learn more about how I invest here. Nothing herein should be considered investment advice.

Writing words on the internet about investing is a recently found hobby that selfishly helps me clarify my thinking. I’ve only been at it a short while and am appreciative and mildly surprised that anyone would read these words or find them interesting. With that context, imagine my shock when Naval liked my tweet about last week’s post.

The internet is a most surprising place.

More VC thoughts… how to not be a dumb money LP

“If you can’t spot the sucker in the first half hour at the table, then you are the sucker.”
- Quote from Rounders

I used to play a lot of poker. There is a multitude of less-than-flattering names for weak or inexperienced players. Dead money. Donkey. Fish.

In some ways private investing seems analogous to poker. Shark GPs reel low information LP fish into fee heavy funds that the LPs don’t really understand. The best opportunities will often be quickly oversubscribed while the less-than-awesome ones will trickle down to the unsophisticated masses (I’m looking at you crowdfunded real estate).

That’s why, until now, I’ve steered clear of VC. My thinking was any VC fund that wanted me as an LP is probably giving me a strong signal I should run the other direction. I was the poker equivalent of dead money. Living in Minneapolis and having few Silicon Valley connections effectively eliminated the LP opportunity for me.

The exciting thing is that the internet is changing the game. Twitter and podcasts allow one to learn and build a network. And rolling funds may help unlock diversification of GPs, LPs, and companies funded. Here’s a good quote from Sahil Lavingia on the topic:

"I'm pretty connected, but unless you are in the right sort of conversations and WhatsApp groups, you just don't hear about this stuff," he said. "And I hope that this 'new model' of being super public and raising in public leads to a more diverse LP base. That's gonna hopefully lead to more diverse GPs from different backgrounds, and then I hope that leads to more diverse investments and more diverse founders, which will hopefully lead to more diverse employees. I think there is kind of this waterfall effect." -Sahil Lavingia in Protocol

VC as we know it may be on the verge of getting disrupted. And as a result, the game may now be playable by a wider group of people. Rolling funds fall under 506(c) which allows a GP to generally solicit and reach a more diverse LP base.

So, if I can play the game, I figure I should study up. See what success looks like. See who might be able to do extraordinary things. One good case study is Chris Sacca’s first fund.

Lowercase Fund I - a $100k LP check returns $25 mil

As best I can tell, Chris Sacca’s Lowercase Fund I is the best performing venture capital fund of all time. It was a tiny fund (raised under $10 mil) and focused on early stage investments. I’m not privy to any info not available on the internet but Sacca said on the Tim Ferriss show they were at 250x. Said differently, a $100k LP check would have returned $25 million. Dang.

Sacca hit on multiple unicorns at an early stage. And then he was able to follow-on as well as scoop up secondary. The most notable names in Sacca’s fund were Uber, Instagram, and Twitter. Not a bad roster.

Maybe Sacca was an outlier and no big conclusions can be drawn. But I suspect there were elements present that may play out again (albeit updated for 2020). History rhymes but doesn’t repeat.

A few notable characteristics of Chris Sacca and his Lowercase Fund I:

• Micro fund (<$10 mil)

• Very well connected in the valley

• Builder and businessperson at heart

• Had great mentors to teach him about the VC game

• Possessed unicorn radar; seemed to see the future

• Went from being an angel to raising a small fund

• Only got involved in deals where he could personally impact the outcome

Sacca 2.0 | Ingredients for the next superstar GP

“Skate to where the puck is going, not where it has been.”
- Wayne Gretsky

I can’t think of a more overused or cliched aphorism but here we are. As an LP I might as well aim high and try to find the next Sacca right? But the next Sacca probably won’t be wearing western shirts or running the exact same play that Sacca did. Instead we must head to where the metaphorical puck is going!

Here’s my rough sketch of Sacca 2.0:

• Has an audience and is phenomenal on Twitter and/or podcasts

• Fast moving solo GP with a micro fund (<$15 mil); track record as an angel

• Well networked, well liked, and truly helpful (high helpfulness to check size ratio)

• Built something before

• Backed by high signal investors

• Strips away much of the nonsense of traditional VC

• Increased transparency and openness around thesis and track record

• Twitter handle is three characters long (only partially joking)

What’s different?

In my view the big difference from a decade ago is Twitter. Twitter changes the game in many ways. Having a strong personal brand plus a large audience is like possessing a cheat code. Twitter can help with deal flow, it can help generate buzz for portfolio companies, it can help raise capital, etc. What founder won’t reply to my DM when I have 100k+ followers, have built something meaningful before, and can wire you funds in the next few days? Podcasts can play a similarly powerful role.

What’s the same?

A lot probably remains the same. Lived experience building something helps sharpen one’s judgement. People judgement and ‘seeing the future’ judgement seem like eternally important drivers of success in the early stage venture game.

Exceptional judgement paired with a strong personal brand (with Twitter being a big part of that) feels like the type of profile we may see for the next superstar GP. Being truly helpful and helping impact outcomes will never go out of style either.

The search for the next Sacca | Who fits this profile?

Finding ‘the next Sacca’ is my gimmicky shorthand for finding an early stage GP that has a chance to do something big while still being accessible to solo LPs.

Against my better judgement I’m going to name a few names I find interesting that check many of the boxes noted above. There are probably 50+ other investors that fit this loose and unscientific criteria as well. Any omissions are attributable to my own ignorance and not malice! These are simply a few investors that have popped on my radar. It’s a non-comprehensive list of people I’ve come across on Twitter/podcasts/YouTube/newsletters that sparked something. All have an audience and put out high signal info.

Here they are in no particular order:

Sahil Lavingia
Ryan Hoover
Harry Stebbings
Brianne Kimmel
Nikhil Basu Trivedi
Jeff Morris Jr
Li Jin

To be clear, this is definitely not investment advice. I’m not even certain who from this group has raised, is raising, or will ever raise. It’s just my personal watch list of interesting and smart early-stage investors.

Why are these folks interesting to me?

Sahil has built a great business, is awesome on Twitter, and is trailblazing with his rolling fund. Ryan built an amazing product that naturally connects him to founders (Product Hunt) and seems incredibly kind. Harry’s story is so inspirational and he seems destined for big things. Brianne appears to have her pulse on the future and be truly helpful to founders. Nikhil is an incredible writer and thinker. Jeff Morris Jr seems to truly understand product and growth. Li seems extraordinarily bright and well versed in a space that appears primed to boom.

Above all, each of these investors seem like someone a founder would be happy to have as an ally on his or her cap table.

The internet is magic

I’ve learned a lot from all of these people via the magic of the internet. It’s a pretty cool thing that LPs, GPs, and founders can come together online to help fund and build the future. Give these investors a follow on Twitter and support their journey. You never know, maybe in ten years one of them will be a judge on Shark Tank :-)

Have a good week!
-Paul

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🧍 Who are you again? Hey my name is Paul. “The Curious Investor” is a newsletter where I write about investing and personal finance. In addition to investing, I spend a lot of time in the ecom world. I started and sold an ecom business and now help brands grow big on Amazon. Previously I was a CPA and spent a decade in corporate finance. Learn more about how I invest here. Nothing herein should be considered investment advice.

If you don’t know Sahil, here is the cliffs notes version of his bio:

• Employee #2 at Pinterest

• Left Pinterest to start Gumroad where he raised money from some of the biggest names in VC (you can read his thoughtful reflections on failing to build Gumroad into a billion dollar company here)

• Has a large and engaged following on Twitter (110k followers)

That fact I’m a LP in a new fund isn’t particularly interesting.

What I find interesting (and hopefully you will too) is a few aspects of the process that led me to become a LP in Sahil’s fund and what that means for other small/solo investors. Here are the highlights which I’ll unpack in more detail below:

1. How I found Sahil’s fund (hint: thanks Twitter!)

2. The ‘diligence’ process (hint: thanks YouTube & Notion!)

3. The concept of emerging solo-capitalists (hint: thanks Substack!)

4. The benefits of rolling venture funds (hint: thanks Angelist!)

5. The democratization of of venture investing (hint: thanks internet!)

#1) How I found Sahil’s fund

On Friday I saw the following Tweet:

I’ve heard Sahil on a few podcasts and found him to be a smart, thoughtful, and interesting guy. Since I’ve been looking to allocate a few bucks to venture, Sahil’s tweet sufficiently hooked me.

Time to do a little diligence…

#2) My due diligence process

Until a few years ago I didn’t even know what a ‘LP’ was and certainly didn’t know anything about performing diligence on a fund.

Through some practice I’ve developed my own little diligence process. Generally that process is to try and understand the people behind the fund. Obviously the thesis is important, financial models can be important, etc. But at the end of the day all that stuff can be dressed up and manipulated. Generally you’re betting on a person and their track record versus whatever fancy deck someone walks you through.

My diligence for Sahil’s fund was quick:

• I watched this YouTube video

• I read this Notion memo

• I re-familiarized myself with Sahil’s background

The internet allowed me to pretty quickly ‘get it’. I saw his Tweet Friday and by Saturday I was good to go.

#3) Solo Capitalists

A couple weeks ago Nikhil Basu Trivedi put out a newsletter called The Rise of the Solo Capitalists. It’s a really good read if you’re interested in venture.

The short version is the next wave of VC rock stars could come from small, nimble, and actually useful to founder GP who have their own brand. Nikhil calls these solo GPs ‘solo capitalists’. Sahil fits that description.

Here’s an excerpt from the post…

The Biggest Threat to Venture Capital Firms?

I was on a phone call with a very sharp LP several months ago who brought up the solo capitalists and posited that their rise may be the biggest threat traditional venture capital firms have seen in a long time.

Why?

The importance of an individual's brand has been steadily increasing in venture capital for quite some time. Founders are more often than not picking an individual partner who they want to work in a financing round, based on the relationship built with them, and based on their brand and expertise, instead of the firm's.

So it's a logical next step that the firm is the individual, and the brand is the individual, which is the case with the solo capitalists.

Solo capitalists can make much faster decisions than most traditional venture partnerships. Founders only have to interface with one person, which can have its benefits.

Solo capitalists can be more flexible on ownership, on structures like board seats, and more creative in terms as a result of being sole decision-makers.

And because it's unlikely that their fund sizes can balloon dramatically in size, the solo capitalists may generate higher multiple returns on their funds.

I found the argument pretty compelling.

Another aspect that makes this interesting for solo LPs is you might actually have a chance to get in the game. Big name VC’s won’t even reply to your email when you’re looking to put in a small check. They don’t need your $100k.

But solo capitalists can start small and raise a fund off of Twitter and their network. These emerging GPs starting their first micro fund can be a great match for a small time solo LPs.

With regards to Sahil, I especially like he doesn’t have some goofy logo or fancy fund name. It’s beautifully void of the usual b.s.

#4) Rolling Funds

I subscribed the Sahil’s fund via Angelist like you’d subscribe to Netflix. And there is no Fund I, Fund II, Fund III, etc. Instead the fund rolls on and on. As long as I’m subscribed I get a slice of any deal in that quarter. It’s a pretty unique model and better for both GPs and LPs in my opinion.

Here’s a few of the GP highlights from Angelist:

The biggest friction for fund managers is the process of big-bang fundraising. Here’s why:

1. Fund managers need to raise their entire fund's capital in a short period of time. This type of big-bang fundraising is stressful. Some fund managers take longer than expected to complete the raise, causing them to lose out on great investments.

2. Fund managers can’t raise additional capital during their most marketable moments, like portfolio markups. This causes them to miss out on closing new LPs until their next fundraise, which can be 2-4 years later.

This recurring nature of capital commitment allows fund managers to:

• Raise a fraction of a traditional fund and start investing in startups right away

• Leverage portfolio markups to accept new capital, anytime

• Continuously increase the fund size so they never need to raise another fund again

For LPs it’s a win too. Instead of sitting on cash wondering when you’ll get the capital call, you instead know exactly when and how much is going into the fund.

#5) The democratization of VC

Access to the best VC funds has typically been reserved for the well networked insiders.

The most interesting thing about solo capitalists, rolling funds, and the internet in general is that it levels the playing field. The best VC funds of tomorrow could be from the solo capitalists.

And the capital could come from almost anyone (hopefully the accredited investor rules change to allow greater access for everybody). I’m here in the midwest with zero connection to Silicon Valley. Yet thanks to the internet I can get in the game.

Being a person of the internet can open up all sorts of opportunities. It certainly creates possibilities for creators and those with an audience. If you have the distribution the product will follow whether that’s a book, album, or even VC fund.

It also creates opportunities for smaller investors; if you have a bit of capital you can find a home for it more easily.

I’m excited about the future of VC investing for small solo LPs and emerging solo capitalist GPs. Capital can better flow to people and projects that can build a brighter and more interesting world.

As always, would love to hear you thoughts. I’m still very much learning about this world so hit me up with any thoughts or comments.

-Paul

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🧍 Who are you again? Hey my name is Paul. “The Curious Investor” is a newsletter where I write about investing, personal finance, markets, and financial independence. In addition to investing, I spend a lot of time in the ecom world. I started and sold an ecom business and now help brands grow big on Amazon. Previously I was a CPA and spent a decade in corporate finance. Learn more about how I invest here. Nothing herein should be considered investment advice.

• $10 million or more in investible assets

• $30k to pay the annual membership fee

Easy peasy right?

TIGER 21 reportedly has over 750 members. $30,000 annual fee x 750 members = $22,500,000. That’s a pretty nice recurring revenue number for essentially running a forum/networking site for the uber wealthy. Gets my wheels turning on related business ideas but that is a topic for another day.

I’m not a member of Tiger 21 (I wish) but one interesting thing they do is publish their members’ asset allocations. It’s fun for a money nerd like me to look at the $10 mil plus crowd and see how they allocate.

Here is the asset allocation report from Q1 of 2020:

A couple takeaways:

• Diversity: In my view, once you’ve won the game the goal is largely not to blow yourself up. To that end, I think it makes sense to see a relatively large cash allocation (12%) and a pretty even split between public equities, real estate, and private equity. Having cash plus a lot of diversity helps insulate against wealth-killing tail risks.

  • Sidenote: I’d love to see this chart for 20 and 30 something’s as I suspect crypto would register much higher.

• Fixed Income: In investing you’ll often hear of the 60/40 portfolio. The thinking is 60% equities provides enough allocation for growth while 40% in fixed income provides plenty of buffer if/when things go south. Another (more dated) rule of thumb you’ll sometimes hear is ‘hold you age in bonds’. If you’re 40, you’ll have a 40% allocation to bonds. Interesting to see such the super wealthy have such a low allocation to fixed income. I’m in a similar spot with a target allocation of 10%. Seems consensus is moving this direction given expectations around monetary policy and our low interest rate environment.

Anything you find surprising or interesting about how the super wealthy allocate? Reply and let me know.

AltaFox takes on Collector’s Universe

I came across Connor Haley and his hedge fund (AltaFox Capital) awhile back and was really impressed. He’s young (not even 30), smart (magna cum laude from Harvard), has an interesting thesis (under-followed micro-caps provide an alpha rich environment), and isn’t afraid to make bold moves (i.e. going activist).

Recently, AltaFox took an activist position in a company called Collector’s Universe (CLCT). CLCT is a sports card grading company. It turns out sports cards have boomed in recent years but CLCT has been pretty complacent in both innovation and basic public company blocking and tackling.

From Connor’s write up:

The current Board has not shown a willingness to engage with investors. CLCT has no sell side coverage, no investor presentations, no dedicated IR contact, does not give formal guidance or have a clear longterm plan, and does not even attend major small-cap investor conferences as close as 30 minutes from its headquarters. Alta Fox plans to rectify CLCT’s history of shareholder ambivalence and lack of transparency.

This is interesting to me on two levels:

• First, imagine being in your 20’s, raising millions of dollars of LP capital, and taking early on in the life of the fund taking an activist position. That’s not something you see every day.

• Second, it will be fun to see if Connor can pull it off. If so, I suspect he’ll go from under-the-radar fund manager to rising star.

Thanks for reading the curious investor. If someone sent this your way, or you haven’t done so yet, sign up below so you never miss an update. Thanks again. ✌

-Paul

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🧍 Who are you again? Hey my name is Paul. “The Curious Investor” is a newsletter where I write about investing, personal finance, markets, and financial independence. In addition to investing, I spend a lot of time in the ecom world. I started and sold an ecom business and now help brands grow big on Amazon. Previously I was a CPA and spent a decade in corporate finance. Learn more about how I invest here. Nothing herein should be considered investment advice.

• 📉 Market recap

• 💻 Ownership & $20k in a month on YouTube

• 👨‍💻 Scott Galloway talks re-allocating his portfolio

• 📈 Three stocks on my watchlist

Last Week In Markets

📉 Last week: The S&P dropped 5% in it’s worst week since March. And volatility is back. On Thursday alone the DJIA was down ~7%.

Here are the most common reasons I heard mentioned on why the market had a rough week:

• Fears of a COVID-19 second wave

• Tepid comments from the Fed

• Retail investors over-heating the market

• A normal pullback

My sense that there is more downside than upside in this market at the moment. That said, I’m not a market timer so I’m just rolling along with my plan. It helps to recall that old Peter Lynch sentiment…

Time in the market is more important than timing the market.

Ownership & Freedom

I came across Erika Kullberg in a Facebook group this week. She’s a lawyer who just got traction on YouTube.

The results are pretty wild: she’s made $20k in past 30 days from her videos.

I’m supposed to connect with Erika in the next week or two so if I learn anything interesting I’ll share in a future newsletter.

Trading time for money & trading money for stuff

Most of my 20’s and early 30’s were spent in the following cycle:

• Trade time for money

• Trade money for stuff

• Rinse/repeat

Working for someone else’s bottom line and being a good American consumer is fine and good. But it doesn’t tend to build a lot of wealth. At some point you need to own something. Ownership can come in different shapes and forms:

What can you own?

• 💼 Your own business

• 📈 Someone else’s business (public or private)

• 🏢 Real Estate

• 🙂 An audience

• 🕒 Your time

2020

One of the cool things about living in 2020 is that you don’t need huge capital to start the journey to owning something. Erika did it with a camera, internet connection, and a few video editors she hired from the Philippines. My Amazon business was started with $5k.

We face a lot of challenges as a society but one positive I see for our era is that ownership is more in reach than ever before. You can start a media company with nothing more than an internet connection. You can start an ecom business with a few thousand dollars.

In addition to lower capital barriers, change itself is an opportunity. Tech moves so fast and disrupts things; often these disruptions provide opportunities for small fish (e.g. Shopify, Amazon FBA, TikTok, potentially Snap minis, etc).

With some mix of luck and hard work these capital light businesses can generate real money. And that real money can get pushed into assets like real estate or stocks. Accumulate enough of those assets and you can have what we all want: freedom.

So my advice to my younger self: own something!

Scott Galloway talks re-allocating his portfolio

Scott Galloway is an interesting guy. He’s started and sold a few businesses, is a professor at NYU Stern School of Business, and does a lot of podcasting/writing about tech.

Prof G said something on his podcast this week that caught my attention: he’s considering re-allocating his portfolio from big tech to a new class of disrupters.

• Why is Galloway moving out of big tech? The law of big numbers. In essence, how can Amazon (at $1.3 trillion in market cap) double or triple? While still good investments, growth becomes challenging when you’re so big.

• Where is Galloway re-allocating to? He’s bullish on a “disrupter class” playing in traditional industries that have been weakened by COVID. In addition, these disrupter class companies have the following traits:

  • Access to cheap capital

  • Clean sheet design

  • An embrace of technology

  • Younger employee and consumer base

• Galloway mentioned three names he likes:

  • AirBNB - asset light with continued growth in supply and demand

  • Lemonade - disrupts the fat and happy insurance industry

  • Public - not an old stodgy name like Vanguard or Schwab but not so gambling feely like Robinhood

• How to invest? None of these are public. You can buy on secondary market or wait for IPO.

Stocks on my watch list

Here are three companies I’m watching. If these get a bit cheaper I’ll likely add them to my fun money portfolio:

SNAP

I’ve been stuck in the middle on SNAP for awhile and as a result have watched it more than double.

The good:

• As we’ve seen time and time again, attention can be monetized. 229 million daily active users is pretty remarkable… that’s a whole lot of attention. Even with the rise of TikTok, it still feels like SNAP is the preeminent platform for Gen Z

• Snap minis are receiving a lot of buzz and have a chance to be a game changer for the platform

The bad:

• Facebook will attempt copy anything that catches at SNAP potentially leaving them with no moat or durable advantage

• TikTok steals users’ attention. Thus far SNAP’s growth has remained and engagement has not been hurt but feels like an underlying risk. It was two years ago Kylie tweeted the below (which thus far has not come true) and it took a billion off the market cap of SNAP.

RDFN

Huge TAM in an industry ripe for disruption. COVID accelerating future and RE will be no exception. Great user experience.

TCEHY

Gaming + social + cloud in a huge market. Big tailwinds in a big market.

Thanks for reading the curious investor. If someone sent this your way, or you haven’t done so yet, sign up below so you never miss an update. I love hearing for readers so hit reply and say hello if you haven’t done so before. Thanks again. ✌

-Paul

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🧍 Who are you again? Hey my name is Paul. “The Curious Investor” is a newsletter where I write about investing, personal finance, markets, and financial independence. In addition to investing, I spend a lot of time in the ecom world. I started and sold an ecom business and now help brands grow big on Amazon. Previously I was a CPA and spent a decade in corporate finance. Learn more about how I invest here. Nothing herein should be considered investment advice.

• 💸 A fifteen million dollar personal finance blog is up for sale

• 💻 My blog fail and Forbes article

• 🥾 Taking VC $ vs Bootstrapping

• 📈 Charts. “V” for Victory?

• 🚀 Buffett Rocked by Robinhood

  ---

1 Man. 10 Years. $15 Million?

Check out this listing for a personal finance blog that just popped up on QuietLight Brokerage.

Key points…

• Guy starts blog in 2009

• He aims to work three hours a day on the blog

• A decade after starting out, his business makes over a million a year and he lists it for sale for $15 mil. Pretty sweet.

From the listing:

In the case of this seller, he has a goal of working 3 hours per day. He rises early to put a couple of hours into writing and various other updates that need to be done on the business. In his words, he has been “a one-man band” since the beginning and he’d like to spend more time with family and mainly focus on writing.

I didn’t sign the NDA to get more info on the listing but speculation on the internet is that it’s for a popular personal finance blog called Financial Samurai.

Putting one foot in front of the other

A 9.5x multiple is really rich for a content site. Not sure it’ll get close to fetching that price. I suspect the angle is that the new owner can come in and monetize the site up with credit card affiliate offers as they’re highly lucrative. Perhaps a strategic buyer will see value but I’d guess strategics already were floated this before it went live on QLB.

Either way, kudos to the man behind the Financial Samurai. With nothing more than bits and bytes on a personal computer he’s created a business that will sell for millions. Reminds me how powerful putting one foot in front other can be when you’re lined up at the right target.

My Blog Fail

When I sold my business I spent some time trying to figure out “what’s next?”.

After some deliberation, one of the “what’s next” things I settled on was starting a blog. I’m fully aware to many people “starting a blog” sounds like a very last decade thing to do. But I like to write about personal finance & investing and thought I could run the same play that many others were having success with.

So how’s it been going?

Not so good. To date, consistent traffic to the site I built (WealthFam) has been minimal. The returns on my time and money are most certainly negative at this point. I’m not totally resigned to walking away from it but I’ve come to the realization I have some challenges with the blogging business model.

My challenges with blogging:

• Blogging essentially requires you to write for content aggregators (i.e. Google & the algorithm) as opposed to a person

• Blogging doesn’t have an immediate feedback loop. It takes a long time to rank in search results and in turn requires major persistence even when rewards are years away (if ever)

• Blogging requires content creators to do annoying stuff like courting backlinks from high authority sources

If you’re just blogging for fun most of those challenges fade away. But if you want to make a business of blogging you have to factor in all of the above.

Substack = going around the aggregators

Ben Thompson was on the “Invest Like the Best” podcast this past week. Awesome episode from a really clear thinker. Ben’s built an influential and lucrative content business analyzing tech by going around the aggregators via his newsletter (Stratechery). If readers like his work they buy a subscription. And if they don’t they can fire him and unsubscribe.

The big challenge with this model is finding an audience but to me it resonates more deeply than trying to write everything with Google in mind. I still think blogs are powerful but am more eyes wide open now than before.

My Q&A in Forbes

Back when I was dipping a toe into the backlink game I got connected to a Forbes writer. They were interested doing a feature on my story of building a business and hitting FI.

Check it out here if interested.

The easier path to wealth… venture startup or bootstrap startup?

This thread from Andrew Wilkinson received a lot of buzz on Twitter with the likes of Chamath Palihapitiya, Paul Graham, and Ben Evans all weighing in.

The question: If your goal is building wealth would you rather take VC money or bootstrap and compound your own capital?

I’m generally with Andrew and Chamath on this one. My own business likely would have been a venture flop and flamed out leaving me with nothing. Taking my initial $5k and compounding it while owning 100% was the right play for me.

Fun thread if you’re starting a business or just want to see a good debate about venture vs compounding your own capital.

Yawn… S&P 500 Almost Flat YTD 🥱

What a boring year in the stock market right? Year-to-date the S&P 500 is down a mere 1.9%. When you factor in dividends the S&P is down even less.

It almost feels jarring to see the market rocket higher while we face a global pandemic, massive unemployment, a recession, and civil demonstrations about racial inequality. It can feel like the market exists in an alternative universe to what we see on Twitter day after day.

Here’s the S&P YTD chart where you can see the V shape in full effect.

S&P 500 YTD Chart - V for Victory?

As this piece from the New York Times mentions, the markets only care about one thing: profit.

”The stock market judges many things,” said Edward Yardeni, the economist, who runs an independent market research firm on Long Island. “But morality isn’t one of them.”

“If you want to find morality, don’t look at the stock market,” said Richard Bernstein, who runs his own investment firm in Manhattan.

The market is focused, as always, on one paramount concern: profit. That may well be repulsive in a moment of intense and widespread human suffering, but it is consistent.

Time will tell. Is this the ‘V’ for Victory and it’s off the races for the roaring 20’s 2.0? Or are we hitting the midpoint of a ‘W’ shape with more pain ahead? I’ll keep one foot in each camp with a mix of equities and cash.

Markets: What I’m Watching For This Week

• Fed Meeting: This week the Fed meets for the first time since the US started to reopen. The meeting begins Tuesday with a statement out Wednesday afternoon. If investors like what they hear from Jerome Powell we could easily go green for the year on the S&P. I doubt JP will want to do anything to disrupt the market and, given there are still major concerns about the underlying economy, I think the odds are good the market hears what they want to hear come Wednesday.

• Continued rotation into cyclicals: The reopening stocks have been flying lately as tech has lagged. BRK.B was my latest add in my fun money portfolio as I sensed this rotation would occur at some point but I’ve been surprised as how fast and how strong the rally for re-opening names has occurred. If we stay on track with re-opening and COVID data doesn’t surprise it seems likely this rotation will continue.

Buffett getting rocked. Robinhood rocking.

Take a look at the five most popular stocks on Robinhood:

Notice anything interesting? Airlines make up two spots on the top five list. Note: to see the full list click here.

Airlines have been on fire lately as the market has rotated into re-opening stocks.

Buffett Flops Again

If you can remember all the way back to April, you might recall Buffett dumping his entire stake in airlines.

“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way,” he said during Berkshire’s annual shareholder meeting Saturday, which was virtual this year. “I don’t know if Americans have now changed their habits or will change their habits because of the extended period.”

Buffett has had a rough go recently. Here are a few notable misses:

• Kraft Heinz

• Occidental Petroleum

• Airlines

• Banks

Airlines and banks have both bounced back big since Warren sold out of his positions. Buffett may have bailed near the bottom but guess who jumped in? Retail investors.

Retail investors nail the bottom

That’s a wild chart. Twenty-something Robinhood traders beating up on Buffett isn’t something you see everyday.

What does it mean?

Investing is hard and even the legends don’t bat 1.000.

More broadly, to me, something feels a little too exuberant in markets at the moment.

It’s an interesting moment in investing culture. We’ve got Robinhood traders, Davey Day Trader, and the Wall Street Bets crowd playing loose and fast and seemingly outperforming Buffett and other legendary investors.

It feels a bit like when Bitcoin rocketed to $20k a few years ago. There was so much FOMO, so many new people getting into it. That same feeling of gambling and speculation gives me a bit of pause on where we sit right now.

That said, I wouldn’t bet against this market as it seems to be climbing the proverbial wall of worry. The momentum feels strong. And we’re still in a TINA environment. Yield is hard to come by. The money has to go somewhere.

Moments like this are why it’s never a bad idea to have a plan around asset allocation. Sticking to your AA takes a lot of the emotion out of the equation. I’m glad to have some cash on the sidelines in case things get weird.

Funny Investing Tweet

Pretty pretty good…

Thanks for reading.

-Paul

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🧍 Who are you again? Hey my name is Paul. “The Curious Investor” is a newsletter where I write about investing, personal finance, markets, and financial independence. In addition to investing, I spend a lot of time in the ecom world. I started and sold an ecom business and now help brands grow big on Amazon. Previously I was a CPA and spent a decade in corporate finance. Learn more about how I invest here.

I came across Moses on Chris Powers’ “The Fort” podcast (episode I | episode II) and loved everything I heard. You know how sometimes you hear someone on a podcast and you just vibe with them? That was me listening to Moses.

What Moses does is really interesting. We get into it below but he runs a unique play when it comes to real estate. How Moses does it is equally interesting. Many of his investors found Moses from his blog and Twitter. I suspect many of them see what I see: a thoughtful, smart, and straightforward guy.

If you’re at all interested in real estate I think you’ll learn something from our conversation. We talk about the reasons to invest in real estate, the power of Twitter, and real estate related business ideas for enterprising entrepreneurs.

Quick Note: this newsletter is about investing but it feels wrong not acknowledging the events occurring around the country. I live in Minneapolis not all that far from 38th and Chicago where George Floyd lost his life. We looked at sending our son to the daycare a few blocks away. To see a human being treated the way George Floyd was treated right here where my family calls home is shocking and devastating. It’s been a sad and hard week. RIP George.

The Curious Investor is a newsletter where I write about investing, markets, and personal finance. If you want to stay in the loop, please subscribe below.

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7 Questions With Moses Kagan

Paul: My sense is most people think investing in real estate is an intelligent thing to do but if asked couldn't really articulate why. What's appealing to you about real estate investing? Why should investors think about allocating to real estate? 

Moses: I don't think all, or even most, investors should allocate to real estate. For the vast majority of people, particularly younger people, I think Warren Buffett's advice to be 90% low-fee S&P 500 / 10% cash is the right call.

However, for people who have a lot of assets, real estate does offer some benefits alongside a public equities portfolio, namely: Cash generation; ability to utilize cheap long-term leverage; extreme tax advantages; returns theoretically benefit from illiquidity premium (though see below).

Just don't invest in real estate, of any kind, if you might need the money back quickly.

Your real estate private equity strategy is wonderfully unique as compared to most other real estate private equity firms. Give us the highlights of your strategy/philosophy and why it's a fit for you and your investors.  

In the simplest possible terms:

• Standard RE PE strategy is to buy with a ton of leverage, fix quickly, and sell

• This maximizes pre-tax IRR (basically, return to your equity over time), which is great if you're a non-tax payer like a pension fund or endowment

• For a tax-payer (like a high net worth or family office) this is sub-optimal, because:

  • High leverage introduces a lot of risk of being forced to sell at inopportune times

  • Going in and out of deals imposes large transaction costs

  • Capital gains taxes eat a lot of the profits; and

  • You miss out on the chief benefit of well-located, income generating real estate, which is steady, long-term, tax-free compounding

• Many wealthy families understand the above, and therefore tend to buy good stuff using reasonable debt, operate it well, and hold it forever, refinancing to pull capital out as appropriate

• Our strategy is to replicate this, in Los Angeles multifamily, for our LPs

Real estate investing has it's own language and math. The result is that it can feel intimidating to outsiders. When I started RE investing I was Googling every third word the sponsor was saying. And then I was totally lost in big fancy models in the data room. Even when I looked at my own deals around town I didn't have a good framework for how to analyse them. All that made me gun shy early on.

You said something on a podcast recently about the inputs you use and the math you do. It was beautifully simple. Can you boil down the numbers that really matter and explain how you think through if a deal makes sense economically? 

The math almost couldn't be simpler:

(forecast annual rents - forecast annual expenses) / (cost to buy + cost to rehab) = unlevered yield.

If the unlevered yield is 200-250 basis points over the interest rate at which you think you will be able to borrow on the asset, buy. If not, don't buy.

The reasoning is a little more complicated:

1. If you use the above equation (which ignores debt), you can tell if you're actually adding value: If the unlevered yield in your project doesn't materially exceed the cap rate at which you can buy stuff, why are you doing the project?

2. For apartment buildings in LA, loans mostly aren't interest only - they amortize over 30 years. So, the cashflow cost of borrowing at, say, 4% doesn't feel like 4%... it feels more like 5.7% due to the amortization. So, if you have a 200-250bps premium, the more you borrow, the better the levered yield will be on whatever capital remains in the deal

3. If, as is the case at this exact moment, the debt market is messed-up and you can't get the loans you usually get, it's not so bad. You sit there and collect your premium unlevered yield until the debt market heals.

I know a lot of people with the means and desire to invest in real estate but they aren't sure how to dive in.

Hypothetical situation: I've got $50k to allocate to real estate but not sure where to put it. I could buy a buy a duplex to rent out, put money into a crowdfunding site, drop it in a REIT, or become a LP with a private equity group. How would you help me get clarity on where to begin?

Again, I don't think most people with $50k to invest should really be looking at private real estate at all. There's just too much chance they will need the money for some emergency. They should be in public equities.

If you've got more like a spare $100k+, then things get more interesting. I don't think it's crazy to just go buy your own deal, particularly if it's nearby and you can really keep an eye on it. That's what my parents did, for example (they had probably 10-12 units at various points). The real cost to this strategy is your time... if you have a particularly highly-paid profession, I think it's kind of a waste to spend your hours tending to a little fourplex or whatever.

The reason we have to do such complicated stuff to buildings is that our hurdle (implicitly) is: Can we deliver to our LPs, net of fees and promote, returns in excess of what they could do by buying their own buildings in LA? If we don't, then we cease to exist.

You started with $0 AUM. Today you have $110 million under management. That's a heavy lift and a downright beast move to pull off. What were the key ingredients to hitting that level of success? 

High pain tolerance. (Wish I was joking.)

It was a very long slog, involving: being broke, a ton of sleepless nights, lots of hustling, adding far more value to other people than we were able to extract for ourselves, etc.

I was raising the capital all along and I am not what you would call a good, conventional fund-raiser. I don't play golf and my parents aren't super-rich. So I started a blog and wrote every day and, eventually, luckily, very smart investors started to find us.

We did the same small deals we're doing now: $2MM here, $5MM there. I remember thinking, when we had like $20MM in AUM, that that was a large number and imagining what it would be like to have $100MM. Then, one day, we woke up, and we were past that.

I learn more from Twitter and podcasts than anywhere else. You're an essential follow and have developed a very strong Twitter game. Any general thoughts on Twitter? How do you use and get value from the platform? Has it helped attract LPs aligned with your philosophy? And how did you grow you following?

Thanks!

Am so angry at myself for not recognizing the value of Twitter earlier. I think it's very well suited to someone like me, because I love to read & write.

Have benefited in two key ways:

1. Obviously, we have attracted a lot of interest from capital providers. We're already putting out a significant amount of money from LPs we met there, and I expect we'll add materially to it over time.

2. Less obviously, but maybe more importantly, is that Twitter has exposed me to some incredible thinkers about investing, in general, and real estate, in particular. Without meaning to leave anyone out, @keithwasserman, @pinkpoloshorts, @mattlasky, and @chrispowers have all expanded my concept of what is possible, where to find opportunity, how to run a firm, etc.

What problems in the real estate space exist today that need solving? We have a lot of entrepreneurial readers always on the lookout for new business ideas. Understanding problems to solve just might get a few folks pumped to go build something in the space. 

In no particular order:

• Marketing of available units / spaces is broken. There's no great way to centrally post ads and track in-coming leads & conversions. There are some companies working on this.

• The commercial loan market is a huge opportunity. It used to be that you had a relationship with your bankers. This is less true now; the market is to a large extent intermediated by loan brokers, many of whom do a good job. Someone is eventually going to create an online marketplace for these loans and make an absolute fortune - the market is many, many, many hundreds of billions of $$ and the take-rate for loan brokers is like 0.5-1%.

• Market for subcontractors is broken. If you scratch the surface with almost any GC, you will see that they work with the same few subs over and over. There are good things about this (trust is really important), but there is no way that what the GCs are doing is optimal... there are definitely subs out there who would do as good a job for less money or a better job for the same money... the GCs just have no way of figuring out who is good.

What is best way for people to get in touch or follow along with you? 

Twitter is great: @moseskagan 

Am pretty good at responding to emails, too: moses@adaptiverealty.com

🙏 Thanks to Moses for participating.

“the curious investor” is a newsletter by paul andersen. topics include investing, markets, and personal finance.

paul is an ex-cpa who was escaped the corporate grind by starting and selling an ecom business. check out the first issue for a breakdown of how paul invests and his current asset allocation.

👋 say hi on twitter here.

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In today’s newsletter I want to share a simple overview of how I think about investing and building wealth.

I’ll share a peek behind the curtain: what I’m invested in, my asset allocation, and more.

But first, for any new readers that don’t know me, a brief introduction:

Who Are You?

• 👨‍💼 Ex-Cube Dweller: I’m a former CPA that worked in accounting and corporate finance for a number of years at places like Deloitte, PepsiCo, & General Mills.

• 💻 Business Starter: Corporate life left me feeling empty. And on top if that, it didn’t result in much wealth creation. I was thoroughly freaked out that my next 20 working years would be the same as the first 10 and decided the best odds for an escape was to start a business. I started small and put one foot in front of the other.

• 🛒 Business Seller: Long story short, my business grew from an initial $5k to a seven-figure business which I eventually sold. It was a life-changing blessing. You can hear the podcast version of my story on the My First Million podcast here.

• 👪 Investor/Consultant/Parent/Human: Now I spend my time parenting an amazing little person, doing e-com consulting for brands that want to get big on Amazon, and investing. I have a considerable amount of freedom which is all I ever wanted. I’ve always been a stock market junkie and investing nerd so it’s been fun to have the time and resources to focus on this hobby.

How Do I Invest? 📈

I’ve never had a financial advisor (too much of a DIY control freak for that) but if I did my first question would be “what are you invested in, why, and how has it performed relative to the market?”. Spare me the hard sell and glossy handouts… just give me the cold hard facts!

So likewise, if you’re going to read my writing where I opine on a variety of money/investing/market topics, I suppose it’s only fair I share how I invest. Selfishly this serves as a way for me to get more clarity on my own thinking, philosophy, and strategy.

I was listening to a great video featuring Gavin Baker the other day. He said a lot of things that stuck in my mind (you can read my summary via this thread) but my favorite was about the search for truth.

Investing, much like life, is all about searching for truth. It’s balancing conviction and flexibility. And as Gavin went on to say, humility and flexibly are key ingredients to being a good investor. That probably applies to being good at life as well. Stay humble. Stay flexible.

This newsletter series is my search for truth so thanks for joining me on the ride.

Disclaimer: I am not a professional trader/advisor and nothing in this issue or future issues should construed as investment advice! Factors like age, risk tolerance, preservation vs accumulation, financial goals, and more can have a big impact on how one might allocate their hard-earned personal capital. Know thyself and do your own work :-)

Lets Talk $$$ + Our Asset Allocation

Should we be more open about money?

People talk a lot about money but they never really spill the beans and truly talk about money. For a variety of reasons talking about money is a taboo subject. I’m not ready to advocate that we all reveal each and every detail of our financial lives but a little detachment from money and open sharing might be healthy. We can learn, grow, and hopefully find some truth.

I suspect most of us are seeking the same things: security for our family, freedom to live life on our own terms, and to realize our version of purpose, happiness, and contentment. Money is just the means to reach our desired ends.

Educating ourselves and our children about both the fundamental principles and psychological aspects of money and investing can do a lot of good. I learn best when it’s active learning. Listening, sharing, collaborating, and evolving my thinking. Money matters are often so guarded and that can be to the detriment of learning. So here’s my attempt at being a bit more open in hopes we both learn something from it.

Thanks for allowing that preamble! With that, lets talk about money.

Asset Allocation - May 2020

One of the most important decisions a business will make is how they allocate their capital. A family or a person is, in essence, a micro-business entity with revenue, expenses, and balance sheet. It’s equally true that one of the most important decisions to be made is how to allocate your personal or family capital.

Without context it’s impossible to have a strong opinion on if an asset allocation is appropriate. Goals, age, risk tolerance, and a host of other factors impact allocation decisions. Context, nuance, and the ‘why’ matter a lot when it comes to allocation.

I’ll share additional thoughts on our ‘why’ but first here’s the breakdown of how our personal capital is allocated (the “% of Total” column” versus what I’m targeting (“Target Allocation” column):

Pie Chart of Investments:

Thoughts on Asset Allocation

Until my mid-30’s I never bothered to track asset allocation. I was just trying to earn a bit of money, pay the bills, and hopefully watch my 401k grow. After selling a business and having a kid I realized it was probably smart to become more thoughtful about our finances. If you’re single and childless in your 20’s you can recover from big swings and misses personally/professionally/financially. Your 30’s with a kid feels a lot different (for me at least). If you don’t have a simple Google doc where you track you asset allocation I’d recommend creating one. It’s well-worth measuring.

Today I’m feeling a push/pull tension between safety and growth. When the market got smoked in March I was happy to have a relatively sizable allocation to cash. But now that the market has shot up I’m feeling regret that I didn’t deploy more of that cash into the market. You know logically you have to take risk to generate returns but risk sure can feel pretty uncomfortable in the midst of a big draw-down.

My goal or ‘why’ with our allocation is to have a mix of growth and preservation. The stocks will hopefully provide growth while the cash & bonds (and to some extent the RE) provide more stability and security.

At the end of the day my feeling is that we all have to find an asset allocation that allows us to sleep at night. March wasn’t fun but I was never laying in bed in a cold sweat. I suppose this means our asset allocation is at least somewhere close to where it should be.

PORTFOLIO BREAKDOWN

Now that I’ve shared our allocation to each asset, I’m going to further break-down the components of each one and the role they play. What is inside the stocks allocation and why? How do you invest in real estate and why?

STOCKS

It’s crazy you can click a button and own a slice of a company. That’s just mind-blowingly insane when you think about it. And even wilder, with a click of a button you can own a slice of 500+ companies.

Stocks will be my top allocation for a long time. If you’re long human progress, technology, and innovation, then I think it stands to reason you want to own businesses that participate in that progress and ever increasing economic development.

When it comes to stock ownership I’m partial to passive management. The smartest people in the world have trouble consistently beating the market over time. Not only that, there are fees and tax disadvantages of active management. So the majority of our stocks are in Vanguard index funds (VTI and VXUS to be specific).

Here is the breakdown of our stocks bucket with more commentary after the chart.

May 2020 Stock Allocation By Type

Our Stock Allocation

• INDEX FUNDS = 75%+: Set it and forget. Chances are you’ll beat the smart money. Why index funds? Minimal fees. Max liquidity. Market returns. I expect index funds to always be my top allocation bucket within stocks. We’re 70/30 between VTI and VXUS which is a US index fund and an international index fund respectively.

• ACTIVE MANAGEMENT = ~15%: I surprised myself in choosing to become a LP in an actively managed hedge fund. Why did I do it? Two reasons: 1) Edge. I believe the fund manager has a true ‘edge’ that will allow him to generate alpha 2) Diversification. The fund is focused on small caps. Increasingly, index funds are driven by a relatively small number of stocks (Amazon, Microsoft, Google, FB, etc). Having a manager sifting though great businesses in the small and microcap space felt like a good diversifyer from indexing.

• FUN MONEY = <10%: Much of my senior year at UW Madison was spent playing poker. Was this the best ROI of my time and energy? Probably not but it sure was a lot of fun. Picking stocks is the same sort of dopamine hit for me. Index fund investing might be prudent but it is especially exciting or fun? Nah. It’s boring which is kinda the point. So enter my Fun Money portfolio where I pick stocks. In March of this year I broke down and started buying individual names again. But I made a rule… no more than 10% goes to the fun money portfolio. So far I’m beating Mr. Market which is probably the worst thing that could have happened to me in the long run due to my newfound overconfidence in picking winners.

FUN MONEY CAPITAL PARTNERS, LLP 🤑

As mentioned, in March the siren song of stock picking just got too strong. I do my research and hope to choose winners but either way I can’t blow myself up with a 10% allocation.

Here are my stock picks and results thus far:

I went heavy tech in March and it has paid off as tech has roared back. As a counterbalance I have added some non-tech names like Berkshire, Altria, and Wells Fargo. Those have been slow to bounce back but I believe are strong holdings over the long-term. I intend to hold most positions for at least a year and more likely five years or longer.

Researching these companies and making investments has been incredibly fun. I plan do more and more of this as process results in good learnings and thoroughly enjoy it.

How do I pick which stocks to invest in?

The underlying principle is that I copy smart people. How? I primarily do three things:

• Looking at the 13F of great managers on Whale Wisdom (e.g. I mentioned I respected Gavin Baker’s thinking before… here is his fund’s 13F from 3/31). I’ll look for patterns, themes, or commonly held names.

• Listening to a lot of podcasts (mentioned below) and hearing opinions on names, trends, industries, etc

• Scouring Twitter and getting ideas and thesis’s from smart investors

I let all that info bounce around in my head, write down my ideas in a spreadsheet, and then act accordingly. When the draw-down hit in March I already had a lot of comfort in the video game stocks, FB, TWLO, and the other names. So while it wasn’t especially comfortable buying into a nose-diving market, I had strong conviction in a couple years those names would be up significantly. These are great businesses with macro-tailwinds that will continue to print money for years and years to come.

I’ll share my names on my watch-list, new adds, and more in future updates.

Note: share price data as of 5/25/20

REAL ESTATE

We have a sizable allocation to real estate. Why?

Why real estate?

• Diversification: Real estate certainly isn’t an uncorrelated asset but it does provide diversification from stock investments

• Tax advantages: There are some tax advantages to owning real estate. Opportunity zone real estate investments made sense for me given I sold a business and incurred capital gains. I don’t know if the legislation is good public policy but if you have cap gains it’s worth checking out as it’s a once-in-a-lifetime type of program that allows for tax free gains.

• Income + Growth: Good real estate can throw off healthy cash flow similar to a bond. That income each quarter will help to cover our expenses. Additionally, over time good real estate tends to rise in value and result in appreciation. So I like the mix of current income plus long term growth and preservation that real estate provides.

When it comes to real estate there are a variety of choices on the menu:

• Multi-Family

• Single Family

• Office

• Retail

• Industrial

• Workforce Housing

• Student Housing

• Self-Storage

• Manufactured Housing (Mobile Homes)

My RE Investments

I’m an LP in a few different real estate funds. The investments are primarily multi-family with a little bit of manufactured housing.

Each fund I’m in has 7+ properties inside it. So 4 funds x 7 properties per fund = 28 assets I have a small slice of. They’re all US based and in cities like Charlotte, Houston, Nashville, Charleston, and LA. It helps me sleep at night knowing there is a lot of geographic and manager diversification versus having the entire allocation in a small handful of properties and markets.

Why multi-family and manufactured housing? To me, those are the lowest risk areas of real estate. We all need somewhere to live.

Office will likely have lasting challenges with the rise of remote work (although I tend to think the doomsday predictions about the destruction of office are overdone). Retail faces a continued headwind of ecommerce. Student housing will likely change as our education system changes and second tier universities go bust. Each class of real estate is facing it’s own set of challenges due to the virus and it’s knock on effects. Like the stock market, there is nowhere risk-free to hide!

Multifamily clearly has risk too, especially if enough people change their preference from urban living to suburban or rural. But net net I think multi-family is one of the safest places in real estate to put capital.

Why not just buy my own real estate?

• I’m not handy. Each generation loses something I guess. My grandfather could fix anything. He worked on airplanes in WW2 and owned his own service station where he repaired cars. Growing up (and to this day) I’m in awe of the life he lived and the real skills he had. My dad is very handy as well. I am not handy. Basic fixes require watching a YouTube video countless times and still have a low success rate. All of this is to say managing a rental property and doing little fixes just isn’t a competence for me.

• I’m lazy. I really don’t want to fuss with managing tenets, collecting rent, calling contractors, etc.

Being a passive LP and letting someone else manage the real estate works best for me.

Smart person to check out: Moses Kagan - If you’re looking to learn more about real estate search for Moses’ podcasts appearances and give him a follow on Twitter. He articulates the concepts of RE clearly and is a straight shooter.

CASH

“Cash is king” Unknown Attribution

“Cash is trash” Ray Dalio on 1/21/20

So which is it? Is cash king or is cash trash?

Both are true in their own way. For a family experiencing a job loss, cash most certainly is king right now. Same thing for a small business. If you have zero revenue and only a month of cash the outlook isn’t pretty. When you need it, cash is everything.

The other side of the coin (bill?) is that cash is a depreciating asset. Each and every year it loses ~2% of it’s value. If we allocated all our personal capital to cash we’d experience a slow decay in our purchasing power. Take that out long enough and one’s wealth is greatly diminished.

So there’s a cash dance we all have to do… have enough to get us through but not so much that it drags our wealth down.

BONDS

I largely view bonds in the same light as cash (especially in today’s low interest rate world). They’re safety asset. If the market has a major draw down I can convert bonds to equities. Given monetary policy and the low interest rate environment we have a lower allocation here than you might see some experts historically recommend.

We have most all our bond holdings in one Vanguard fund (BND).

PRIVATE EQUITY | VENTURE

I recently signed docs for my first private company investment. More to share down the road on that.

Why am I considering investing in a PE fund or venture? The thought process is largely the same as the reason to invest in stocks. It’s compelling to own good businesses that generate cash over a long time horizon. Start-ups and many small business obviously don’t have as clear of line of sight to becoming ‘good’ businesses but if they do the returns can be out-sized.

My goal here is not only to generate returns but also learn. When you’re an LP you get access to smart people and see behind the curtain of how businesses work. It can allow you to become a smarter investor or operator, grow your network, and inspire new business ideas you might not otherwise thought about.

CRYPTO

As Chamath says, BTC is schmuck insurance. I agree with the sentiment and have 1% of our portfolio in crypto. I’ve read a lot of about BTC and get the thesis but I’m not an expert in monetary policy or blockchain/crypto at large.

My reasoning (for better or worse) is largely that a lot of people much smarter than I have a some level of allocation to crypto. So I think it makes sense to allocate 1%. If BTC goes to zero it won’t change my life. And in the chance BTC realizes it’s potential I’ll participate and won’t be on the sidelines.

My Favorite Investing Resources 📚

Twitter - probably THE best place to learn about investing and to get stock ideas. There are loads of smart investors on the platform. A few of my favs are Gavin Baker, Dan McMurtrie, and Ben Carlson.

Pro tip: I enjoy looking at the ‘likes’ of smart people on Twitter to see what thoughts and ideas are resonating with them. To find new people to follow I’ll look at who they are following, sample the feed, and follow those that seem interesting.

Podcasts - Invest Like The Best is an absolute must listen. I also enjoy the Meb Faber Show, Capital Allocators, The Acquirers Podcast, and Venture Stories.

Bogleheads - A great forum of primarily passive (index fund) investors. Whenever I’m searching for almost any personal finance of investing topic I’ll add ‘bogleheads’ at the end of my search. E.g. “Life insurance bogleheads”, “car insurance bogleheads”, etc. A lot of practical investing and personal finance learning can be done here.

Alt Investment Club - Coming December 2020… I’m building a community of investors to help discover, diligence, and access alternative investment deals (e.g. real estate, venture capital, micro PE). If that sounds interesting to you apply for free membership at altinvestmentclub.com.

Thanks for reading!

-Paul

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Investor 📈 | Ex-CPA 💼 | Started & Sold Ecom Business 🛒 | Dad & Husband 👪

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