If you’re feeling overwhelmed by all of the crowdfunding deals being thrown your way…
And you’re looking for a simple shortcut to avoiding the “get rich quick” hype and finding deals with a real chance of going all the way…
Today, I’m going to reveal the one thing you need to understand about being a successful investor…
Power Laws
Most people think in linear terms. They take where they are right now and project out in a straight line.
For example, to double a cake recipe, you need twice as much flour. To drive twice as far will take twice as long.
Linear relationships, in which twice-as-big requires twice-as-much, are simple and intuitive.
But investment returns aren’t linear… they are exponential.
In his seminal book, Zero to One, Peter Theil writes…
The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
This implies two very strange rules for VCs.
First, only invest in companies that have the potential to return the value of the entire fund.
This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.)
This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.
This phenomenon is called the Power Law… and it’s the unfair “law of the universe” that defines our surroundings so completely that we usually don’t see it.
Most investors think gains will be relatively evenly distributed across companies in any given category…
Bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or even 4x.
With this notion in mind, investors randomly select a “diversified” collection of losing investments.
This is because venture returns don’t follow a normal distribution overall.
The #1 and #2 companies (or brands) are often worth more than #3-10 combined.
It’s like the 80/20 rule… but in reality, it’s more like the 95/5 rule.
That’s why it’s critical as an investor to understand not only how markets form…
But how companies can create, control, and defend those markets for maximum returns.
This, in turn, means the management team also understands what those levers are…
And the ability to efficiently deploy capital to generate the biggest possible impact with the least amount of effort.
When it comes to a complex system – like a high growth startup – small changes (the input) can cause sudden and large results (the output).
And as an investor, we need a simple mental model that helps us understand where these potential levers in the business are…
Along with how the company can exploit these opportunities to accelerate their growth.
But this thesis – only invest in companies that have the potential to return the value of the entire fund – brings up two important problems we as individual investors have to contend with…
#1) Most investors do not understand how Power Laws work
On a regular basis, I engage with our subscribers and here is the general notion I get…
A LOT of people write in to ask for what essentially amounts to a surefire way to pick huge winners and never lose money.
To be clear. There is no free lunch in investing. If you’re looking for moonshot gains, it’s a high-risk high-reward proposition.
So, the idea that you’re somehow going to find a way to both get outsized returns for minimal risk is just lunacy…
And by the way, this is the reason why most retail investors are easy prey for “get rich quick” scams.
That’s not to say professional investors don’t get fooled by “too good to be true” investment opportunities…
But the major difference between average investors and top performing investors?
They’re not focused on their loss rate. They’re focused on their chance of hitting the outlier that delivers the 10x+ return.
Remember: only invest in companies that have the potential to return the value of the entire fund.
That’s why top investors have an institutionalized process that helps them source, select, and support their investment decisions…
And this, in turn, helps to minimize risk while maximizing the total return of the portfolio.
The key word here is portfolio.
When you manage a portfolio, it means you’re now running an investment business… and if you want your business to be successful, you have to be focused on generating “money in the bank” returns… not just paper gains!
Which brings us to…
#2) Most retail investors do not have a process for building a diversified private market portfolio that helps them reach their financial goals.
Even worse, most retail investors don’t even know what their financial goals really are.
That’s why I’m excited to announce…
We ran a similar workshop in October 2020.
And based on attendee feedback, it was an absolute steal of a deal.
That’s why we’re not surprised to hear feedback from our students who told us…
“Having the investment policy statement is key to keeping from getting hypnotized by the potential of the [deal].”
-Doug L
“I feel more confident in scrutinizing investment proposals on my own and I do not let the FOMO influence my actions. My position sizing has also changed dramatically.”
-Carlos S
“I feel that I’ve become a better educated investor, who now knows what to look for and what questions to ask.”
-Vincent R
After nearly six months of working with our initial cohort of students…
Building new investment tools to help simplify and streamline due diligence…
Decoding the legal jargon hidden inside the forms every issuer must file with the SEC…
And doing dozens of live deal reviews where I analyzed real deals submitted by our students…
We’ve decided to make a major update to our core training program and host our second “Private Market Investing” Workshop.
But before I schedule the program, I want to make sure we have AT LEAST 500 Equifund subscribers who want to join our next cohort of students.
If you’re interested, please go here and fill out this very short questionnaire.
Sincerely,
Jake Hoffberg – Publisher
Equifund
P.S.
Venture style “moonshot” investing isn’t a good fit for everyone.
Some investors are cashflow focused and prefer investing in safer, income producing investments (like debt)…
Some investors are thrilled with earning a ~15% return every year and have longer investment horizons…
And some investors are more concerned with wealth preservation and transfer.
But the point remains the same; stop trying to “get rich” and start focusing on “building a portfolio that helps you meet your financial goals.”
Have questions about building your private market portfolio?
If so, go here and fill out this short form and I’ll do my best to answer them as part of our regular email newsletter.
