A long time friend of mine recently started asking questions about investing with us. He’s naive to the world of investing in private markets but has started to hear a lot lately about private investments. He asked me, “Are private investments right for me?”
I began my response by playing devil’s advocate. I started by describing the type of person private investments are ARE NOT right for.
PRIVATE INVESTMENTS ARE WRONG FOR THESE TYPES OF INVESTORS:
- Indecisive: Indecision is a symptom of a lack of focus or direction. Investors without clear financial goals or objectives will have no financial direction because they don’t have anywhere to get to. A directionless investor is an indecisive investor who is continually second-guessing their investment choices. Well-run private investments have defined investment objectives and offer a clear path, strategies, and plan for achieving those objectives in the particular asset class and market that is the focus of their business.
- Directionless: Private fund managers are laser-focused on what they want to accomplish with a clear investment strategy and defined roadmap for executing that strategy. The indecisive investor that continually second-guesses their own decisions will also second guess management decision making and will only be a fly in the ointment of these experts who are working hard to generate returns for their investors.
- Newshound: The newshound is short-sighted – easily swayed by today’s news, the latest economic indicators, cable, and Internet talking heads, and social media trends. The newshound has a hard time thinking for themselves and has difficulty separating fact from fiction. These types of investors are driven by emotion and not logic and their financial state of mind goes up and down with market volatility and the 24-7 news cycle.Private investments are very wrong for newshounds – the ones who score low on the finance emotional IQ spectrum. That’s because private investments are illiquid – meaning you can’t go in and out of them at will like stocks. Jittery investors – with no discipline and who don’t see long-term – will feel trapped in private investments because they don’t see beyond today.
- Rainbow Chasers: Private investments are wrong for those looking for that big, immediate payoff – that proverbial pot of gold at the end of the rainbow. Investors who aren’t interested in a cash flowing investment because they’re constantly looking to hit that home run will lose patience with private investments. They will end up losing the long game because they ignore the little things required along the way for winning. Achieving financial independence requires a big picture game plan – taking the single or double here and there. Isn’t it better to hit a home run with the bases loaded and score four runs instead of the maximum single run you can score if your only alternatives were to hit a home run or strike out? Private investments reward patience by rewarding investors in the short-term with consistent, reliable cash flow – like base hits in a baseball game. Private investments reward their investors long-term as well. After so many years, private investments reward their investors’ patience by giving them a big payoff at the end of an exit event – made possible from the appreciation and growth of the business or asset.
PRIVATE INVESTMENTS ARE RIGHT FOR THESE TYPES OF INVESTORS:
- Confident: It may sound like a cliche, but confident investors know what they want and they know how to get it. Confident investors were already successful in something before they started investing. They understand the value of having goals and a clear strategy for achieving those goals. They also know how to evaluate potential opportunities and their likelihood of success. They’re financially literate and know how to read financial statements and conduct due diligence. Private investments are ideal for the confident investor because of the transparency afforded by management and the opportunity for this type of investor to ask questions and vet the business strategy as well as management knowledge and expertise to align their investment goals with those of the company.
- Don’t go with the Crowd: These investors invest for the long-term. Because they’re in it for the long-haul, they’re unaffected by the masses. Because private investments are uncorrelated to the broader markets, these investors are more interested in the underlying fundamentals and long-term prospects of the business than they are in the latest market movements, fluctuations, or trends that are dictated by mob mentality.
- Interested in Building MSI (Multiple Streams of Income): Income is the key for these investors. They don’t speculate. They’re not interested in hitting that home run. They’re looking for consistent, reliable streams of income that can be reinvested for creating more streams of income – essential for building wealth.
- Non-Control Freaks: Because of their confidence, knowledge, and experience, these investors are happy to take their hands off the wheel and defer to the expertise of others. Control freaks will never be successful at creating multiple streams of income because there aren’t enough hours in the day for them to micro-manage multiple businesses. These investors have already done their homework. They’re confident in the fund’s management along with their vision and plan for achieving that vision. They know that deferring to the expertise of others is the only way they can create diversified multiple streams of income in a variety of markets and asset classes.
Private investments aren’t for everyone. It’s not a good fit for the typical retail investor that jumps in and out of the market looking to hit a homerun by timing the market. Private investments require patience and confidence and for those investors willing to stick it out for the long-haul, these investments will reward them with reliable, consistent income along with long-term growth and appreciation.