About a decade ago, billionaire Kyle Bass bought nickels for his kids.
A lot of nickels.
Reportedly, the stockpile of these coins, which are still in storage, totals $1 million (and more than 100 tons!).
Bass bought the nickels as an investment for his kids… an investment that would teach them a valuable lesson. At the time, Bass said:
“I was teaching my kids the value of hard money versus paper money, versus the printing press, and explaining to my kids what the central banks were doing by printing money and how there is no other free call option in the world other than owning a nickel. On the downside it’s always worth a nickel, and on the upside it’s always worth where nickel and copper trade.”
I’ve made some similar “safe” investments for my children as well, though I don’t think I have Kyle beat when it comes to his nickel hoard.
Instead, I have made investments in some real estate, small coin collections, and other unique collectibles.
While I think these safe investments are great for kids because of the fundamental lesson behind them, they are highly unlikely to produce exponential returns. When my kids are old enough to appreciate these investments, they likely won’t be worth that much more than they are now.
That’s why I’m also investing in private deals for my children. Of course, they have no idea that I’m doing this (they’re both under five). But I’m sure they’ll be very happy when they find out what I’ve been up to.
In today’s Venture Capital Digest, let’s take a closer look at what I’m talking about, and how you can do this for your children.
Or for yourself…
How to Kick Compounding Into High Gear
Everyone knows the power of compounding. Warren Buffett calls it the eighth wonder of the world.
You can see the proof of that in Buffett’s empire of investments. Virtually all have grown exponentially, especially in the latter half of his life as compounding kicked into high gear.
While we all generally understand the concept of compound interest and how important it is, the importance of the vehicle into which we invest our principal is less understood.
So, let me drive home this point home…
Let’s assume that you start with a portfolio of $5,000 and you put $1,200 into that portfolio each year ($100 per month). Over the course of 20 years, the total amount of money you’d have, without any interest, is $29,000.
$1,200 × 20 years + $5,000 = $29,000
Now, if we take that same portfolio approach and apply it to the stock market, the numbers are much different. The 100-year average annual return of the S&P 500 is around 10%, which means that if you started with $5,000 and added $1,200 per year, you would end up with $102,429.
Considering that we’re starting from just a $5,000 starting point and making minimal monthly contributions, that’s a big number.
Let’s do that calculation again, but this time applying venture capital-style returns.
More Money for Less Work
Annual VC returns are 14.8% (as determined by the National Bureau of Economic Research). So, if you started with $5,000 and added $1,200 per year, in 20 years you would have $199,290.
That’s nearly twice as much money.
We started with the same amount of total principal invested… and just tweaked our investment strategy. Thanks to that extra 4.8% interest per year, we stacked up almost $100,000 more in total return.
Now, most people would say something like, “But, I know nothing about private investing, and those historic returns are only made by professional VC managers.”
While it’s true that investing like a VC takes work, it’s not much different from investing in the stock market
Just like any investment, you have to do research, understand market trends, and pursue investments that have a realistic chance of making you a profit.
As long as you stay disciplined, investing in private companies is no more work than investing in public companies. In fact, I’d argue that it might be a little less work.
With private investments, all you have to do is your upfront research. Once you make your investment, you just wait for a liquidity event. You don’t have to keep checking the stock price and stress yourself out over daily fluctuations.
So, if it’s the same amount of work to invest in private companies as it is to invest in public ones — and private companies offer a superior return — then it’s obvious what investment class you should be investing in for your kids…
Here at Venture Capital Digest, I’ll be covering everything you need to know to get started in private investing.
On the date of publication, Cody Shirk did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
By focusing on megatrends that will shape the future, Cody Shirk uncovers generational wealth in the private investing space. To make sure you never miss Venture Capital Digest, click here to subscribe.