This is the culmination of our three-part series on the habits of the wealthy. The final installment deals with finding opportunity and adding value, building passive income, co-investing with other families, and treating your portfolio like a business. Enjoy!
Part 1: Finding Opportunity and Adding Value
Looking for discounted investments? Then don’t look to the stock market. Whatever the price of a stock is on the day you’re looking to buy or sell, the assumption is that the market factors all the relevant information about value of that stock into the current price. In the public stock markets, price almost always reflects value, and ALWAYS reflect the value the market perceives or believes.
By contrast, when it comes to certain private investments, there is a much less comprehensive and sophisticated system for valuing and “pricing” investments that are not frequently transacted, and thus it is possible to acquire assets at attractive discounts that allows the overall value of your portfolio to grow more quickly.
HGTV has popularized a common form of this value-add approach: house flipping. House Flipping is simply acquiring (often at as much as a twenty or thirty percent (20-30%) discount), rehabbing (adding 5-10% in value), and then selling the home for more than acquisition price plus the rehab costs. By identifying an undervalued asset and adding value to it, you’re able to create a significant amount of income or increased net worth.
And this approach isn’t just for real estate…Let’s say you invest in a private offering with a company that provides a proprietary, FDA-approved, technology for easing chronic pain. By investing in that business and its infrastructure, you play an important role in adding value to patients’ lives while adding wealth to your balance sheet.
Takeaway: When growing the value of your portfolio, look for opportunities that give you the ability to add value, and you’ll often find these in the private market.
Part 2: Focusing on Passive Income
Earned income comes from work; passive income is created by exchanging your dollars for more dollars. The hallmark of passive income is that it’s income that regularly comes in (monthly, quarterly, or annually) based on an investment choice you made at some point in the past.
Part of the process of amassing wealth and keeping it is that you do the heavy lifting once and get paid continuously. When we retire, we hope we’ve accumulated enough wealth to kick off the income we need without having to work for it. What the wealthy know is that, first, they never really “retire,” and second, it’s good to create passive income sooner than what we normally think of as retirement age…and then continuously add to it…
Examples of passive income, for now and for the future
One way to create passive income now is via investing in a private debt opportunity that has a fixed payment and a long-term payment period. This allows you to enjoy the income by only making the investment selection one time while the income continues to flow from it for many years.
Passive income doesn’t always come in the form of regular payments. Think not only of systematic income but also of other opportunities that allow you to make significant chunks of future income. An example of planting seeds for future harvest could be making a private equity investment in a growing business that has the potential for a large liquidity event in the future, such as some type of public offering.
Takeaway: Seek to create as much passive income as possible now, before retirement, whether via investments that spin off regular payments or those with future upside.
Part 3: Grow with Those You Know
Going it alone, in business and investing, means that you’re limited in your own available capital, time, and expertise. Partnering and/or co-investing within trusted relationships can help you grow your wealth exponentially because you’re leveraging others’ capital, expertise and investment opportunities.
These relationships aren’t easy to find and develop, so being in an environment with other high net worth and sophisticated investors that are experienced can go a long way in helping grow your wealth via shared ventures.
For example, let’s say you’re a real estate investor who finds that this sector is too expensive at the moment. Investing in real estate in a “frothy” market just doesn’t make sense to you. So what can you do? How about partnering with another family with expertise and opportunities in, say, the healthcare or energy sector? Co-venturing with this family allows you to get your capital deployed into another sector, and it’s common for the other family to reciprocate as your preferred sector comes around and becomes a little more desirable to acquire, particularly as their sector becomes too frothy for them. Co-investing across market sectors is a great way to avoid yield drag in your preferred sector.
Takeaway: Don’t go it alone. Find and develop trusted relationships, particularly ones that allow you to diversify into private opportunities in other sectors.
Part 4: Mind Your Own Shop
Look at the highest net worth families in the country, and you’ll find that their wealth originates in ownership of some kind of business. Not everyone wants to run his or her own business, but what I’m suggesting is that you should mind the business of your wealth.
View your wealth like a business and run it as such.
Even if you don’t have direct experience running a business per se, find groups and develop relationships with those who do. I believe that part of the appeal of our Mile Marker Club to its constituent families is that it makes these connections easier to create.
For more on this approach, see last month’s newsletter HERE.
Takeaway: Treat your wealth like a business.
I hope this series on the successful habits and behaviors of the high net worth in this country can provide a guide as you think about your wealth. A big part of success with the accumulation and preservation of wealth involves right action based on right knowledge.
As always, thank you to all of the high net worth families who continue to engage the Mile Marker Club and Heritage Capital USA. We appreciate the opportunity to co-invest alongside you, and we look forward to continuing to work for you to find off-market, multi-sector opportunities to grow our mutual wealth.
Wishing You CONTINUED Success,