An overview of a once-off-limits asset class … the mindboggling return potential … how to get started today
In today’s Digest, we’re doing something different.
We’re tackling the world of private investing.
We’ll dig into “why?” momentarily, but let’s start with the more relevant question…
What’s in it for you?
In short, the potential for a lifechanging financial windfall.
The private investment world offers returns that can dwarf anything you’d ever see in the public stock market.
Instead of investing in something traded on, say, the Nasdaq, and hoping for 40%, 75%, or even 100% returns, private investing can return a 2,000%, 3,000%, or 4,000% winner…or even something vastly bigger.
And to be clear, I’m not pulling these multi-bagger returns from thin air. They’re actual returns generated by a 35-year private deal investor named Cody Shirk, who I had the pleasure of interviewing last week.
Here’s Cody’s path from rags to riches in his own words:
I grew up in Malibu. I’m not wealthy. I grew up in a trailer, so I didn’t come from money at all.
I became a firefighter in Santa Monica and made surprisingly good money for a blue-collar worker. I wanted to put my money to work, so I decided to learn investing. I did the whole newsletter world and read all the books.
But with stocks, the takeaway seemed to be “I can probably get rich by the time I’m 50 or 60.” And that’s a great route to go, but I’m more impatient. I like to attack things.
So, I started diving into the whole private equity world.
Fast-forward a few years, and Cody now runs a private investing group, having done deals all over the world. He also has a growing list of 1,000%+ winners under his belt – and keep in mind, they didn’t require decades to develop. In fact, one of Cody’s most recent 30X-winners took less than one year.
Now, let’s back up a moment…
Why are we focusing on the world of private investing in today’s Digest?
Because private investments offer potentially vastly greater returns, along with the safety benefit of added diversification. And today, the long-time barriers to being a private investor have been removed.
As recently as just a few years ago, this world was reserved only for the wealthy. No longer.
Thanks to Securities and Exchange Commission regulatory changes (RegA+ and RegCF), even investors of limited means can now access this asset class.
Back to Cody:
If you look at the elite, wealthy part of society, almost all of them gained the majority of their wealth from starting or owning a private company or investing in private companies.
With new RegA+ and Reg CF fundraising opportunities, investors no longer have to be accredited to participate.
With the growth of Crowd Funding platforms that are offering real equity in promising companies, investors now have a completely new option to allocate a portion of their capital to opportunities that can provide life changing returns.
A $5,000 investment that gives a 20x return in a couple years can provide a larger return on investment than most people make in a single year. Furthermore, the annualized return on these kinds of investments can be in the hundreds of percent.
Circling back to our earlier question, what’s in it for you?
The potential for vastly outsized returns… an earlier retirement… that new boat… the first-class trip to Italy… You name it.
So, in today’s Digest, we’re going to feature sections of my interview with Cody. It offers a fantastic introduction to the world of private investing from one of the most knowledgeable, experienced private investors out there.
If you’re serious about optimizing your portfolio returns and diversifying your wealth, this is the Digest for you. It’s a bit longer than usual, but I believe you’ll find it’s well worth your time.
Let’s jump in.
***Tapping into the elite world of private placement investing
Jeff: So, Cody, big-picture, why should our readers care about the world of private investing?
Cody: The goal of investing is to maximize your returns. And in order to do that, you obviously have to balance risk with opportunity.
The majority of people are focused on the stock market, which is fine, and then they have diversification through precious metals and whatnot. But if you want to get a balanced portfolio that has growth, you need to include private investing.
Traditionally, that’s been unavailable because of SEC regulations with the accredited investor requirement. But due to recent changes, it already has changed, it’s now accessible.
There’s the Reg A and Reg CF fundraising routes that people can invest in now. So, for the average investor, they need to be looking at this because it will provide outsized returns, which will increase the overall returns of their total portfolio.
Jeff: So, perhaps the biggest draw to the private market is the returns then. Are they really that much better than what you’d find in the public stock market?
Cody: Absolutely. As a public market investor, you’re not going to do consistent 10X and 20X returns. That’s just not going to happen, especially as you start to scale up.
And if you do pull that off, let me know, because you’re either the best trader ever, or you’re massively wealthy.
Jeff: But my impression of the private markets is that, in order to land those monster returns, you have to put money into lots of deals that won’t really go anywhere.
I’ve even heard that about 80% of private deals may lose money, about 15% or so will okay, meaning double your money or less, but it’s only a handful of deals that will be monster, skyscraper returns, pulling up your entire portfolio average.
Cody: That’s exactly how it works. How it plays out is different because it’s an emotional roller coaster through that whole process.
There are two downsides with private investing. One, is that you can lose your entire investment within a single allocation. You invest in a company, the company goes bankrupt, you’re done. That’s scary for a lot of investors to think about.
The second thing is there’s no liquidity. So, you put your money into a company and you cannot get your money back until there’s a liquidity event. That event is typically an acquisition or going public. Having no liquidity is also scary.
But investors need to understand the potential payoff. That windfall liquidity event in a private company can have a 10X, 20X, 30X or more return.
And what you asked “do 20% of the companies have monster returns? Do 10%?” It’s smaller than that. Maybe 1 out of 10, 1 out of 20.
But that one win, that big return is so enormous, that it overshadows all the losses you have in other private companies.
Jeff: It seems like it’s imperative then that you grab that one monster return to average out all the ones that don’t go anywhere. So, in your experience, what is the smallest optimal portfolio size that’s required in order to be able to have a relatively high chance of capturing that huge returning investment?
Cody: It should be a rolling number if that makes any sense. So, let’s say you have $100,000 in an investment bank account. And let’s assume that you’re working, so you’re always resupplying this account.
You should be allocating $1,000 to a private deal every time. You fund a deal, but then your active income replenishes it. So, as soon as you’re able to invest more, you do so.
Theoretically, you could do 10 deals a year for a total of $10,000. The next year you should be doing the same exact thing. You should be continually doing it.
Jeff: So, it’s less of a static, one-time thing where you take a massive lump sum of investment capital and spread it out over various deals. It’s more of a continual process that you make habit. It’s just a part of your monthly investment regimen.
Cody: Exactly. It’s almost as if you’re paying into an insurance policy. So, however much money you have on hand, you reserve that money. And when you find the opportunity, you put your capital in and then you save back up. But you do this without going over a 1%-of-your-net-worth amount allocated per deal. You do that for safety.
Jeff: So, let’s back up a bit. You were a firefighter who decided to get into private investing. How did that happen?
Cody: Being a young kid, I realized that I couldn’t break into the private investing world because you needed an Ivy League education, or some sort of family connection, or a secret handshake with Sequoia or Benchmark. None of which I had.
So, I went out into the world. I ended up going down to Central America and South America. I started doing deals and I started doing investments in small agricultural companies. I did a bunch of real estate, all through Europe and Asia.
I did all sorts of stuff. For example, I put $10,000 into a hot sauce company in Columbia and ended up doing really well. It was a 3X or 4X return.
Eventually, I came back to the U.S. and with more real-world experience, I started my own private equity firm with a partner of mine, and we’ve done well over a dozen deals. When I say deal, I’m saying over a million dollars invested into a company. We’ve done everything from cannabis to Biotech, to regular tech, all kinds of different things.
Jeff: Let’s try to make this as beneficial and actionable as we can for our readers. How can they start getting involved today?
Cody: My answer is probably not what most people want to hear, but there is a good part to it.
The answer is, you do not want to jump into this, like, “All right, I’m doing this. Let’s go full bore.”
You do not want to do that. You want to ease into it. You want to start in the shallow end and just slowly walk to the deeper water.
The best thing to do is start browsing. There are a few private investing platforms I’d recommend – WeFunder, Republic, and SeedInvest.
Those three platforms are fun. You can literally go browse through deals just as if you were looking at a magazine with cool bicycles or something. Think of it as window-shopping, looking at what kind of deals are out there.
Look at what companies are raising money. One of the very interesting things about the private markets is that typically the private markets represent the newest trends. Whether it’s longevity, crypto, AI, 5G, or any of these internet-of-things type trends, the private market is where those things are happening.
So, just go on these platforms and window-shop.
Spend time researching the founders. Who are these people? Where are they from? What’s their track record like? Where did they go to school? Did they even go to school? That’s something you can just search on LinkedIn, super simple.
Then look at their idea. Does it sound promising? Are there competitors? Just very simple stuff like that.
I’d say after a considerable amount of time, let’s say a month or so, you can start to pick some deals. You could say, hey, I really believe in this deal.
Of course, every private investor or fund always has a specific sequence of things they want to do in order to do their due diligence. Everybody’s different.
Jeff: Again, thinking about the readers, are there any immediate red flags you would suggest they should look for that would immediately disqualify a potential investment?
Cody: Valuation. Let’s say you have $1,000 to invest into a company. If a company is already valued at $100 million, basically your $1,000-part of the $100 million is going to be very, very small.
So, in order for you to 10X your investment, that company has to sell for $1 billion dollars. 100 million times 10 equals $1 billion.
This sounds like a silly exercise, but it’s something that I still do. I’ll look at valuation immediately and say, is this worth my time? Is there really that much upside?
Jeff: It’s funny how you casually mention a 10X return. Most investors in the public markets are thrilled if they can get a 1X, or 100% on their money.
Cody: I get it. But if I’m going to do an investment, I’m not getting pumped over a 30% return over however many years. If I’m going to be doing the work, if I’m going to be working hard to really figure out what investment is the best, I want something that has huge potential.
Jeff: What is a reasonable suggestion for the amount of time for capturing these monster returns?
Cody: The industry standard is three-to-10 years, and essentially what that means is that the average company will exit somewhere in that range.
Now, that vastly changes depending on what industry you’re focused on, depending on who the founders are, depending on how fast their funding has been.
Plus, the past couple of years have seen very quick exits, meaning the path from initially funding a company to going public has been very quick, so investors have had a lot of liquidity.
I’ve had some investments this past year that have exited in less than six months. 10-20X returns in less than six months. And that’s typically unheard of, but we’re in a market right now where there’s some very interesting things going on.
Jeff: Cody, we’re running long so I need to wrap up. What’s one of your most recent, big wins?
Cody: I invested while MindMed was private. MindMed is a psychedelics company and they’re now valued at – I don’t know where the market cap is at. It’s well over $1 billion. Let’s just say their market cap, or their valuation, was not close to that when I invested.
That was around a 30X or 40X. It’s been very, very good. I definitely should have put a lot more money in.
Jeff: And how long did that take you?
Cody: Less than a year.
Jeff: That’s unbelievable. Congratulations.
Cody: Thank you.
Jeff: Cody, thanks so much for joining us. I hope we’ll feature you more in the months to come.
Cody: That’d be great. Thanks for having me.
***As we wrap up, I’ll point you toward Tiger 21
It’s a network of wealthy entrepreneurs, investors and executives with an average of $100 million in assets.
Want to see how they invest?
Below, you’ll see that their second biggest allocation – bigger than what they invest into public stocks – is private equity (the single largest allocation, which is real estate, barely beats out private equity).
But this asset is no longer reserved for just the ultra-wealthy. You and I can now participate, even with limited means.
Check out the platforms Cody referenced in today’s Digest. Familiarize yourself with deals. Get the lay of the land. As your financial situation permits, begin investing.
This asset class is where the real wealth is made.
Have a good evening,
Jeff Remsburg
