Investing in private placements is not for everyone. They may not be right for you. Let’s see if you relate more closely with James or Jimmy.
James and Jimmy are brothers, but the two couldn’t be more different when it comes to investing and even in their personal finances. Does that sound like you and your siblings?
James has been around the block. He invests with a long view and avoids the latest investment fads and trends. He doesn’t collect toys. He’s more interested in collecting wealth.
His credit cards aren’t sources of debt, they’re tools. He doesn’t speak in anecdotes and aphorisms – the language of the get rich quick circuit. He speaks in fundamentals and numbers. He’s developed passive streams of income, and that’s what gets his attention.
When seeking out investment opportunities, James is interested in knowing about the founders. He wants to know their track record. He looks at the numbers, the data, and market analysis. He does as much homework as he can on a potential fund and only asks questions when he needs to because he doesn’t want to get in the way of the people trying to make him money. He understands that their time is precious.
James has strong investment experience with a solid, focused investment portfolio that you would probably invest in if you had the opportunity. He prefers to make significant investments in just a few companies rather than spread his money around investing small amounts in many companies. He doesn’t make rash decisions based on the crowds of Wall Street. That’s why private placements are a perfect fit for his investment personality.
He’s not perfect, but at least he recognizes that. James can be prone to impulsive behavior, but he understands that in the long run, commercial real estate provides stable above-market returns, shielded from Wall Street volatility.
He loves private placements for the dual
benefits of income and appreciation.
And he actually appreciates the fact that his investment is illiquid because it protects him from himself and any impulse he might have to jump ship at the slightest dip in the road.
Jimmy, on the other hand, loves to join trendy investments early. He lives large and doesn’t have any passive streams of income. He makes an above-average income from his sales job, but he’s clearly living beyond his means.
He’s a regular on the investment seminar circuit and likes to be entertained. Jimmy is seeking to ride the next trend and recover from his last failed attempt to make millions in cryptocurrency. He shells out a lot of money to experts but unfortunately does not have the returns to show for it.
In reality, Jimmy is unfocused and indecisive. Patience is not one of his virtues. James referred him to possibly invest in a private placement because he had done his homework and felt the offering was solid. None of that matters to Jimmy.
He’s interested in two things – the rate of return and the exit plan. The higher the rate of return and the sooner the exit plan, the better. He’s a big talker, but he really hasn’t invested in anything new recently. He has a TD Ameritrade account with about $300,000 scattered across various trendy tech stocks that he moves around frequently, often for no particular reason other than it’s what everyone else is doing. His average return is well below the average for a sophisticated investor.
Jimmy is considering his first private placement investment.
Personality-wise, he’s impatient and desperate. As soon as he invests in a private placement, the next shiny investment fad will appear, and he’ll want to “take it down.”
Not All Created Equal
James is a patient, methodical investor.
Jimmy is a kite in a tornado.
Private investments are best suited for the sophisticated investor who is confident in their decision and sees the five-year investment as a commitment, not a hindrance. James is an investor with a long-term perspective, which most of us need to emulate. Jimmy, however, is a classic example of a poor fit for private placements.
Another cryptocurrency will rise again, and James will stay the course of his long-term investment plan. He wants passive income in real, tangible assets. He knows the rich have money but are not wealthy, and the wealthy don’t work for their money; they make their money work for them.
Jimmy will be begging to get out of a private placement early when the next crypto-coin rises from the ashes or whatever new fad presents. He’ll either get out too soon or stay in too long as many did with Bitcoin.
Are private placements right for everyone?
They are leveraged by the wealthy for long term income and growth. Sophisticated investors use private placements to grow their retirement accounts and build long-term generational wealth.
If you chase the latest fads, private placements are not for you. If you’re looking to generate truly passive income and you’re confident and committed to your investment decisions, then private placements could be a good fit for you.