If you want to unlock the wealth building power of Pre-IPO investing…
There’s one important thing that “smart money” does that “dumb money” doesn’t…
And if you don’t know what this one thing is, you could wind up missing out on potentially big gains.
What’s the secret?
Managing Money, Time, & Energy
As a quick recap from Part 3 (which you can read here)…
- A game is a form of art in which Players gather (1) Information and make (2) Decisions in order to (3) Manage Resources… through the use of (4) Game Tokens… in the pursuit of a (5) Goal… in the face of (6) Opposition.
- The biggest problem you’ll face is finding great deals (Sourcing), deciding which ones to invest in (Selecting), and how much to invest (Supporting).
- The more due diligence you do, the higher your average return will be. 20 hours of due diligence produced 5x greater returns according to one study.
- Most investors struggle with deciding when to exit a position. Longer hold periods are often associated with greater returns.
With that in mind, let’s talk about the big elephant in the room…
What is the major difference between “dumb money” ametur investors and “smart money” professional investors?
In a word, it comes down to the ability to Manage Resources.
More specifically, their Money, Time, and Energy (more on this in a moment).
And to be even more specific, managing their Emotions and Belief Systems.
We can observe this across four primary factors:
- Goals: What is their “reason why” for investing?
- Investment Style: What types of investments (or trades) do they like to make?
- Investment Process: How do they answer the question “is this a good investment?”
- Risk Profile: How much risk are they willing to take?
When you look at the typical “dumb money” investor, there’s one major thing we know to be true…
Regardless of how much money they do (or don’t) have, they are very emotional when they invest.
Most of their decisions are based on instinct, “gut feel”, or pure fear/greed…
And for the most part, this means their Goals are based around short term gains and speculation (i.e. gambling).
They’re influenced by the promises of big returns in a short period of time, persuaded by fear-based claims, and tricked by artificial scarcity.
They’re constantly jumping from shiny object to shiny object, and typically think in time horizons of days, weeks, and maybe months.
As a result, their Investment Style is entirely reactive.
New investment opportunities show up in what can essentially be called a “random” basis. In effect, they are evaluating each investment decision on a 1:1 basis…
In practice, this means they ask questions like “Should I invest in [XYZ]?”
Which, by itself, is an impossible question to give a simple “yes/no” answer to.
Why? Because in order to answer that question, there needs to be some sort of Investment Process…
And the reason why “dumb money” loses more often than they win is because they don’t have any process at all (or they don’t consistently use one).
They’re overly reliant on “hot tips” or “advice” from largely unqualified sources…
And they don’t do any due diligence on the recommendations of so-called “experts.”
When we look at the overall Risk Profile “dumb money” is taking, it’s almost always a LOT more risk than the “smart money” does.
Because risk doesn’t come from the investment itself… it comes from the investor not knowing what they’re doing.
And if we come back to our core thesis of The Great Game of Pre-IPO Investing…
- Most unsuccessful investors live in a constant state of fear. They are afraid of money, they are afraid of taking risks, and they are afraid of losing.
This fear is driven by the inability to control their emotions when investing.
Without a clearly defined process to guide investment decisions, they essentially invest a random amount into random opportunities based on the stock promoters ability to get the greed glands pumping.
Additionally, they are easily shaken out of their positions because they are nervous “ticker watchers” and have the tendency to buy-high when the market is in euphoria… and sell-low when they can’t stomach the draw downs and volatility.
- Successful investors, however, live in a constant state of confidence. They see investing as a winnable game and they have fun playing it.
And they can do this for a variety of reasons.
When it comes to their Goals, they are focused on long-term gains and capital preservation.
Why? Because they know that mathematically speaking, compound interest is the secret to getting rich.
If you’ve ever talked to any financial advisor, chances are, you’ve been told about the importance of starting early and letting compounding do it’s thing.
But here’s the problem with compounding…
The human brain is wired to see things linearly – meaning, they take where they are right now and project in a straight line into the future.
But investors understand how to think exponentially – meaning, they understand that a small amount that is consistently compounded over time generates huge returns.
Assuming an 8% compound interest with no losses, Investor 1 invests $5k/year from age 25-35 and no more after, crushes Investor 2 who invests $5k/year from age 35-65, with ⅓ the capital invested.
With this in mind, they want to get their money into a compounding wealth vehicle as soon as possible…
Let their winners run for as long as possible…
And not screw things up by incurring unnecessary fees and taxes that come from trading.
As a result, their Investment Style is proactive.
As Charlie Munger once said: “Focus on the task immediately in front of you and control spending.”
That’s why “smart money” does whatever it takes to resist shiny objects that get thrown at them by the financial media.
Instead, they look for an opportunity where they have an edge, and then continue to gain Information so they can increase their edge.
This narrow focus on a specific niche gives them a huge advantage…
Instead of evaluating each investment opportunity on a 1:1 basis, they are comparing it to every single other opportunity they have access to!
And this forms the basis of their Investment Process.
They want to understand their Opportunity Cost.
They know they only have a finite amount of Money to invest, and they want to put it to work in the best opportunities.
Plus, because they are focused on certain niches, they can say “no” to deals faster which helps them manage their Time and Energy.
To reference the key insight from Part 3, investors who do 20 hours of due diligence see a 5.9x greater return over investors who don’t…
And with 40 hours or more, they see a 7x increase in potential returns.
CAPTION: Spending time on due diligence is significantly related to better outcomes.
To be fair, professional investors are professionals for a reason: they put in a full-time effort in search of market beating returns.
And we totally understand…
You probably have other things you’d rather be doing than managing your investment portfolio full time.
But if you’re serious about playing The Great Game of Pre-IPO Investing…
You need to learn how to manage your Money, Time, and Energy so you can handle your own investing activity…
Or at the very least, learn enough so you know whose recommendations to trust (and can quickly analyze any opportunity you’re presented with).
Yours for investing equality,
Jordan Gillissie – CEO