Story Time: Your Family & 401k’s
My mother has been saving money her whole life for retirement. Each and every month she puts a portion of her income into her 401k.
This is the dream that’s been sold to us over the years:
Work hard, be “smart” by investing into your 401k and you’ll be taken care of.
This is utter BS!
First, let’s be honest. You’re investing in mutual funds and other instruments that are managed by other people in your 401k, right?
Oh, and have you ever realized that the reason these “investment plans” are marketed is to generate billions in cash for underperforming mutual funds that add no value whatsoever to our economy and our country?
You’d be better off just throwing all your money into an ETF (Exchange Traded Fund) that tracks the S&P500. Why? Because investing in the market as a whole gives regular market returns.
Check this out:
The average mutual fund (supposedly managed by industry experts) returns to investors is close to 2% less than the market. In an average year, about 80% of funds perform worse than the S&P500 because of the fees and their inability to invest well.
Read more details here: http://www.fool.com/school/mutualfunds/performance/record.htm
This is absolutely shocking.
But it makes sense. Mutual funds are marketed so heavily because managers profit from fees and not based off of performance.
My Story: Why I Refused to Accept 10% Returns
I come from the world of finance so I guess you can call me more “sophisticated” than others. But it’s shocking how this financial world is also filled with scammers and uneducated investors who know zilch about how to achieve abnormal returns.
In my circle, 10% returns would be a sin.
But then again others get excited (greedy), try to replicate it and have 50% loses. I want to get you angry and unwilling to accept sub-standard returns, but be careful.
I came out of this world of supposedly “abnormal returns” from hedge funds and private equity firms. Yet, I couldn’t tell my parents how to get 15% or even 20% returns. I couldn’t create a superior investment plan.
I couldn’t even do it myself…
The problem was I didn’t even have an access to these returns myself. I couldn’t invest as an analyst at a Private Equity Fund whose owner was on the Forbes List. I was too low on the corporate ladder. My $10,000 or $20,000 that I wanted to throw in at that time would just have been too much paperwork. I could have gotten $50,000 together or would have loved to throw a part of my salary into the fund that I was working but it was forbidden.
Lesson Learned: Normal Individuals Don’t Have Access to 20%, 30% & 40% Superior Return Investments
A “sophisticated investor” is someone who is defined as follows:
- An individual with a net worth of $2.5 million
- An individual that’s earned more than $250,000 in the past two years
You have to be classified as a “sophisticated investor” to buy into “non-disclosure” or “non-prospectus” issues such as pre-IPO securities. What’s more, a “sophisticated investor” could invest in traditional private equity funds, venture capital funds and hedge funds. Some of these funds won’t even consider you unless you can commit at least $1,000,000 in capital or more.
Check out a simple definition here: http://www.investopedia.com/terms/s/sophisticatedinvestor.asp
“Wait, so if you don’t have money you can’t make money?”
Yes, it’s a vicious cycle.
I don’t have access to top hedge funds or private equity funds. Which means, I had to make money first before I could get access to private deals.
Long story short I did the following:
- Started my online business
- Quit my job
- Had my first taste of good cash
- Started a few more online businesses
- Made more money
And add 60-80 hour weeks into that and you get the picture.
At a certain point, I told myself that it’s time to get into investing again. Because investing is one of the best ways to scale my wealth.
So I started thinking, “Why not do Private Equity with Internet Businesses?”
If you’re unfamiliar with “private equity” and “private equity investments”, they consist of:
- An individual or a fund (pooled capital) buying a company
- Restructuring it by adding value (aka increasing profits)
- Either holding onto it for a steady stream of cash flow or exiting out of it at a higher price
And then just rinsing and repeating this cycle.
I knew there were probably between 40 and 60 individuals on the Forbes list that became billionaires from private equity investments. But up until that point, I never heard of anyone doing it with Online Businesses aka Internet Businesses aka Websites.
The Passive Income Website Investing Journey Begins
I opened my eyes and I found brokers, I found deals and I was utterly lost because of the overwhelming amount of information that came my way.
The main thing though that shocked me was the level of return.
Right now, I’m looking at a deal at around $1.1 million. This deal has a stable cash flow of $357,000 per year.
Let’s do the math assuming there’s NO increase in value:
Return = Annual Profit / Total Investment = $357,000 / $1,100,000 = 32.5%
If this doesn’t get you excited then I don’t know what will.
Let me mention that this site requires almost NO work. It’s extremely passive. And I’m not talking about some scam passive income business. I’m talking about a site that is monetized via Adsense revenues – where you earn from ads Google put on your site.
Content are already in place. The owner over the past year hired someone only twice to put additional content on the site. There is no staff. Nothing.
Let me also mention that this is not a deal for $1,000 that returns 30%. Anyone can buy a site for $1k and get 30% but this is a sizable deal at $1.1 million. Which means, even if you have $10 million to deploy you could maintain returns around this level.
There are other opportunities out there with 40% or more ROIs but the reason this one is slightly lower is because it’s passive. Other opportunities might require maintenance of software, active sales, etc.
But still I was a bit lost in the beginning because I review a handful of deals a day. There were so many opportunities I didn’t know what to do and it was easy to get excited. And getting excited can lead to dangerous website buys that might lead to losses.
Once again, be careful.
Passive Income Website Investing Versus Traditional Investing
US Checking Accounts average: 0.40%
US Savings Accounts average: 0.1% to 1.11%
Real Estate (without taking into account leverage) Average from 1978-2004: 8.6%
Stock Market Averages from 1978-2004: 13.4%
Website Investing averages 34.6%
(For this calculation, I took an average deal multiple of 2.89x which results in the return above – assuming the online business profits do not improve at all)
Why Buy Websites?
Reason #1 – High Returns of 30% or More
I showed you above how this works. The returns are stellar.
Reason #2 – Passive Income
If you invest with a fund or you select very hands-off deals then the income can be passive. Your returns will slightly suffer but it’s worth it in exchange for peace of mind, good returns and stability. Be careful, though, as things could go south and you NEED to know how to fix it.
Reason #3 – Relatively Low Competition
These returns are still high because no one knows about this asset class. It’s crazy but ask anyone these three questions:
- Have you heard about stock investing?
- Have you heard about hedge funds?
- Have you heard about website investing?
I’m telling you, 50%-60% of people will say “yes” to “a”. Unless you live in New York or London, it’ll be closer to 80% for “b”. And depending on how many people you ask, most likely 0% will say “yes” to “c”.
It’s a massive opportunity but you can lose your shirt if you don’t know what you’re doing. Which is why I want you to read about the risks as well right here.
I’m sure I might have an option trader or two here. My buddy makes 3 to 5% a month (compounded annual rate of 42% to 80%) so I do have an overview of other possibilities to make good returns. But I couldn’t sit in front of a computer screen all day knowing I’m not adding any value to the world playing a zero-sum game.