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I m excited to share with you the first audio chapter in my upcoming book, The Holy Grail of Investing, which will hit the shelves on February 13th.
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This book is the third and final in my trilogy of bestselling books on the subject of personal finance and perhaps the most exciting.
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Here s why.
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For decades, the biggest institutions and ultra-high net worth individuals have been generating extraordinary returns within alternative investments.
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Investments like private equity, private real estate, venture capital, and private credit.
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But most people are unaware of these opportunities or lack the access they deserve.
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In this book, I sat down with 13 of some of the most successful asset managers in history, collectively managing over half a trillion dollars.
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Many of them have generated north of 20% compounded returns for decades.
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We explore numerous alternative investment strategies, how to access them, and the core principles that have created their extraordinary success.
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So, pre-order your copy today at your favorite online retailer.
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And I have a special gift for those who pre-order the book now.
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Visit TheHolyGrailOfInvesting.com, enter your proof of purchase, and you will receive free access to my 7-part video series on business mastery.
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Let s dive into Chapter 1 now.
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Part 1, Chapter 1 The Search for the Holy Grail
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Over the last 10 years, I ve had the privilege of authoring two number one New York Times bestsellers on the topic of personal finance, Money Master the Game and Unshakeable.
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They succeeded not because I m the greatest expert in the field, but because I have one important thing, access.
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Over four decades of work as a life and business strategist have earned me personal access to many of the world s most brilliant financial minds, many of whom happen to also be fans of my work.
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From Alan Greenspan to Ray Dalio to the late Jack Bogle to Paul Tudor Jones and countless others, I ve had the pleasure of sitting down with these titans of investing to extract the tools, the tactics, and the mindset that anyone at any stage of life can and should apply in their quest for financial freedom.
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Their generosity of time and principles helped me form a trio of financial playbooks, and I really encourage you to read the others if you haven t done that already.
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Now, I began my deep dive into money mastery after the 2008 financial crisis, when the world s economy was on the brink of collapse due to the reckless behavior and greed of a relative few.
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Nobody escaped the economic pain, myself included.
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My phone was ringing off the hook as I tried to coach friends and family through job losses, home losses, obliterated retirement plans, and all my clients were affected, from the barbers to the billionaires.
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The storm tore through everyone s life with varying degrees of devastation.
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Never one to be a victim of circumstance, I thought I needed to do something.
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I decided to take immediate action to become part of the solution in some way.
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So I started out with a healthy dose of cynicism, and I set out to answer what I think is one of the most important questions facing a financially illiterate society.
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Is the game still winnable?
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In the post-financial crisis world, could the typical investor win the game of investing?
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Could the average person become financially free, even if they never sell a business or inherit a nest egg or scratch a winning lottery ticket?
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Well, I have to tell you, after interviewing over 50 of the world s most brilliant financial minds and boiling down hundreds of hours of interview recordings, the answer to this question was a resounding yes.
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Although the titans I interviewed shared very different approaches to investing, they all agreed on certain immutable laws and steps that investors need to take and avoid to win the game.
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Although there are many, the four of the most common principles among these greats were as follows.
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One, first, don t lose money.
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Well, that seems obvious, doesn t it?
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As Warren Buffett succinctly says, rule number one to investing is don t lose money.
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Rule number two is see rule number one.
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You see, most people don t realize if you lose 50% on a bad investment, you need to make 100% return just to get back even.
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One thing that almost all successful investors have in common is they know they re going to indeed lose at times.
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They re going to be wrong.
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Yes, even Buffett.
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To mitigate this, they never get too far out over their skis and risk too much on any one investment, which is what leads to the second critical principle.
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Number two, the core principle of asset allocation, i.e., spreading your assets among different types of investments with varying risk-reward ratios.
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I remember when I sat down with the late David Swenson, the man who took over Yale s 100-year-old endowment.
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It took 100 years for them to grow their endowment to $1 billion, and David grew it to $31 billion in three decades.
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He explained to me that your asset allocation accounts for 90% of your investment success returns.
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As you ll learn, the ultra-high net worth and the biggest institutional investors have a drastically different approach to asset allocation than the typical investor.
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And that s one of the great benefits you re going to get from this book, as I ll show you exactly what they do.
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Third, wherever possible, you have to look for opportunities for what s called asymmetric risk reward.
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Big word.
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Simply put, these investors look for investments where the potential reward far exceeds the downside risk.
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For example, my good friend, one of the greatest investors of all time, Paul Tudor Jones, tries to only place trades when he believes he has a risk reward ratio of five to one.
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What does that mean?
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He ll risk a dollar if he believes he can make five off of it.
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This way, he can be wrong more times than right and still succeed.
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Principle four, fourth and final is the principle of diversification.
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That s certainly not new, but you want to own a wide variety of investment types, from stocks to bonds to real estate to private equity, private credit, et cetera, across various asset classes, across different geographies, across different timeframes.
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My guess is, if you re listening to this book, you re not the average investor.
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You or your clients have likely accumulated enough of a financial foundation to move beyond these core tenets and add some additional fuel to your investing fire.
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As you ll hear in the hours ahead, alternative investments have generated outsized returns for the world s most astute investors.
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Let me give you an example.
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Between 1986 and 2022, private equity as a whole outperformed the S&P 500 by over 5 percentage points annually.
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In other words, the S&P is at 9.2% during that time, and private equity at 14.28% a year.
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That s a 50% greater return every year compounded.
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Private credit, an alternative to bonds, has generated two to three times the income yield of traditional bonds.
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It is undeniable that the smart money uses high-quality alternative investments as the engine for greater diversification and accelerated growth.
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This is what the titans of finance do with their own personal capital.
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I know because they ve told me over the decades I ve fostered ongoing relationships with these masters of the financial universe.
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And for this book, I decided we d interview a baker s dozen, 13 of the most successful alternative investment managers that have generated extraordinary compounded returns rarely seen by the general public.
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These returns are 20% or more compounded for decades, year after year.
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Who does this?
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Folks like Robert F. Smith, the founder of Vista Equity Partners.
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Smith is considered the most successful enterprise software investor of all time.
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He manages over $100 billion and generates outstanding returns relative to his peers over the last 22 years.
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Vista s portfolio spans more than 80 companies with 90,000 employees.
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Imagine that.
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In fact, as of March 2023, the portfolio companies that Vista owns generate over $25 billion a year in annual revenue.
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How about Bill Ford, a pioneer in the world of private equity?
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Ford has grown General Atlantic s assets under management from $12 billion to more than $80 billion and expanded the firm s global presence.
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Over its history, General Electric has invested more than $55 billion in over 500 companies within technology, financial services, healthcare, and life sciences.
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Then there s Vinod Khosla, a legend, the founder of Khosla Ventures.
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Vinod Khosla is a venture capitalist.
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His early-stage investments in disruptive technology companies have propelled him from being an immigrant with little means to a self-made multi-billionaire.
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He s famous for turning a $4 million investment in Juniper Networks into a $7 billion windfall return for his investors.
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Then there s Michael B. Kim, the godfather of Asian private equity.
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Kim has created the largest independent private equity firm in Asia, with a focus on China, Japan, and Korea.
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His astonishing success for investors has also made him South Korea s wealthiest man.
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And then, of course, there s David Sachs, the founder of Kraft Ventures.
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the co-host of the All In podcast, and an original member of the PayPal mafia with Elon Musk and Peter Thiel.
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Saksis invests in over 20 unicorns.
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He s a company that started with nothing and went to a billion dollars or more.
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Those firms include Affirm, Airbnb, Eventbrite, Facebook, Houselift, Palantir, Postmates, Slack, SpaceX, Twitter, and Uber.
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So these are the masters of the finance universe, and you can learn from many more.
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These are just a sample.
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These individuals play the money game at the highest possible level, yet they play the game with an edge.
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What is the edge?
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Access.
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Their status and professional networks provide them with an extraordinary access to unique investments that, frankly, 99.9% of people won t typically have access to in their lifetime.
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Perhaps even more compelling, they tend to perform well in good times and in bad times.
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These investors have shown over and over that while they re not immune to the ups and downs of the economy, they know how to thrive, not just survive, during the economic winters.
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Instead of being content to ride out the storm, they go shopping when prices are down.
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To them, a storm is an opportunity.
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It s one thing to make money when the markets rise.
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Anyone can do that.
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A rising tide lifts all boats.
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But to generate returns when markets are extremely choppy or scary, that s what separates the good from the great.
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One of the Hall of Fame players in the smart money game is my dear friend Ray Dalio.
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Ray is the Tom Brady of macro hedge fund managers, the GOAT.
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For those who aren t familiar, Ray is the founder of Bridgewater, the world s largest hedge fund, $196 billion under management, with an astounding track record in both good times and in bad.
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He was one of the first who predicted the Great Recession and took advantage of it.
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In 2008, while the market melted down 37%, Bridgewater bucked the trend and gave investors a gain of 9.4% that year.
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Their pure alpha fund has averaged over 11% annually since its inception in 1991, compared to approximately 7% at the S&P 500.
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So needless to say, when you consistently beat the market by wide margins for more than 30 years, you become one of the most sought after hedge funds for the world s wealthiest.
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From sovereign wealth funds of the richest countries on earth to the most influential billionaires raised on speed dial to many of the world s most powerful.
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In some of our earliest conversations, though, merely a decade ago, he taught me what he considers the most important principle of successful investing.
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And when Ray Dalio tells you it s the most important principle, you listen up.
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It s a principle of diversification that s designed to maximize your rewards and minimize your risks.
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a principle that has guided not only his investing, but also my own personal investment strategy, and more importantly, provided inspiration for both the title and the content of this third and final book in my financial trilogy, is what Ray calls the holy grail of investing.
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A simple yet profound strategy that s rarely put into practice.
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I m going to tell you how it works.
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But first, it s important to understand that most traditional portfolios hope to reduce risk and maximize upside through the core principle of diversification.
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We all know it.
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Don t keep all your eggs in one basket.
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But unfortunately, this doesn t always work out as expected.
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That s because many of today s traditional investments are what are called correlated, which simply means they move up or down in unison.
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Correlation measures how much investments move together in the same direction.
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Positively correlated means they move in unison, while negatively correlated means they move in opposite directions.
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Then you have varying degrees of correlation, meaning they move together but not in complete lockstep.
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Let me give you an example.
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Stocks and bonds are generally uncorrelated.
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When stocks go down, it s helpful if bonds go up to give you some protection, and that s what most people bet on in their portfolio.
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However, correlations are always changing and can often throw some unexpected curveballs.
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For example, in 2022, stocks and bonds both dropped simultaneously.
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Therefore, there was no projection or diversification.
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While this is somewhat rare, it may not be an anomaly going forward.
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AQR, one of the world s most successful algorithmically driven hedge funds, believes that macroeconomic changes, such as higher inflation uncertainty, can lead to a reappearance of the positive stock bond correlation of the 1970s, 80s, and 90s.
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In August of 2023, a Bloomberg headline came across my screen that read, quote, bonds are a useless hedge for stock losses as correlation jumps, end quote.
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The article noted that the positive correlation between treasury bonds and stocks is at the highest reading since 1996.
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And it s not just stocks and bonds that have been shown to positively correlate lately.
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Publicly traded REITs, those companies that own and manage real estate portfolios, tend to have a strong degree of correlation with stocks despite being a different asset class.
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Between 2010 and 2020, REITs had an 80% positive correlation with the S&P 500.
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So here you are adding real estate to your portfolio, thinking it s a smart way to diversify.
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But in fact, if you re doing it through a REIT, your stocks are more likely to dance in unison.
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Now, to be fair, REITs performed quite well over the period from 2010 to 2020.
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But here s the key point.
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When stock came crashing down in 2022, REITs also took a tumble.
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So much for keeping a portion of your eggs safe and sound.
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Likewise, cryptocurrency, often touted by its supporters as digital gold and as a hedge against market volatility, has been moving in lockstep with stocks in recent years.
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In fact, in 2022, Bitcoin took a 65% plummet from approximately 47,000 to nearly 16,000.
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That same year, stocks entered a bear market and inflation took root.
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A Georgetown University study found that crypto assets followed the market s lead even more closely during periods of high market volatility, such as the COVID pandemic and Russia s invasion of Ukraine.
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Who knows how it will perform in the future, but it certainly failed as a hedge of protection most recently.
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The problem is that today, most traditional diversification strategies tend to involve adding more and more positively correlated investments.
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Some investors, knowingly or not, are not getting diversification in reality in terms of protection.
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They seem to have given up on finding uncorrelated investments to help manage big swings.
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In fact, one frightening headline recently came across my news feed.
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Older Americans, those in retirement or near to it, are foregoing bonds for protection and betting most or all of their future solely on stocks.
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Well, that s quite a gamble.
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The Wall Street Journal reported of the clients at Vanguard, quote, one-fifth of the investors, 85 years old or older, have nearly all their money in stocks, up from only 16% in 2012.
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The same is true for almost a quarter, 25% of those people, 75 to 84.
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Now, this abandonment of diversification is a high-stakes roll of the dice.
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But unfortunately, many Americans feel they have no choice when their diversified portfolios don t act their part.
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So what is the holy grail of investing?
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According to Dalio, the Holy Grail is a portfolio of 8 to 12 uncorrelated or non-correlated investments, which together will dramatically reduce risk without sacrificing returns.
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Dalio demonstrates that a portfolio structured this way can reduce risk as much as 80% while maintaining the same or similar upside potential.
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He puts it this way, from my earlier failures, I knew that no matter how confident I was in making any one better investment, I could still be wrong.
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And that proper diversification was the key to reducing risk without reducing returns.
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If I could build a portfolio filled with high quality return streams that were properly diversified, they zigged and zagged in ways that balanced each other out.
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then I could offer clients an overall portfolio return much more consistent and reliable than what they could get anywhere else.
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It sounds simple enough, right?
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There s one big challenge.
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Where do we gain access to so many high quality, non-correlated investments?
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Turns out access is the tricky part.
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And that s precisely why I wrote this book.
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The Billionaire s Playbook.
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Since embracing the Holy Grail philosophy, I ve developed a portfolio of publicly traded stocks combined with a large dose of unique alternative investments.
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For example, I m a fan of private real estate because it affords steady income and tax benefits like depreciation.
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I m a fan of private equity as nearly every great private company needs capital to grow, and private equity returns have consistently outperformed stocks quite handily.
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Private credit, when managed correctly, has proven to be a great alternative to bonds, especially at a time when rates are surging.
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I also sprinkle in some venture capital.
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It s higher risk, but it s always pushing the edge of innovation and disruption, which resonates with my inner entrepreneur.
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As you may already know, once you reach a certain net worth, the SEC invites you to a special club.
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They deem you an accredited investor when you achieve $200,000 in annual income and a million dollar net worth, not including your home.
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This affords you access to some, but not all alternative investments.
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The good news is this, at the time of this writing, there is legislation pending that will allow anyone to take a test to become accredited regardless of your net worth.
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More on this later in the chapter.
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Now, the SEC bumps you up to a higher level called qualified purchaser when you have $5 million in total investments.
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This opens up an entire universe of alternative investments.
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But here s the rub.
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Just because you qualify doesn t mean you can get in the door.
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In fact, many of the best alternative investments are closed to new investors or like a new limited edition exotic car, they sell out before they even hit the market.
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In fact, earlier in my investment career, I experienced this frustration numerous times.
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The truth is, there seems to be simply too much demand.
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In other words, too much cash looking for a home and alternative investments.
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And who seems to be first in line?
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Well, you can guess.
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The biggest check writing institutions in the world, the sovereign wealth funds, the college endowments, the mega family offices throw their weight around and elbow out the individual investor.
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My co-author, Christopher Zook, shared a funny anecdote from early time in his career.
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Quote, I ve been waiting for the facts all morning.
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Yes, this is more than 25 years ago in the days of the ancient facsimile machines.
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I d received a call that day before notifying me of the good news that my clients and I would be able to invest in a certain flagship private equity fund.
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We ve been trying for years to no avail to get access to this specific manager as every fund was oversubscribed.
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Now the time had come to find out just how much of an allotment we d be given.
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We were finally going to get into the cool kids club.
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My clients and I pulled together approximately $5 million of our own money to invest.
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Well, the fax machine began to make that unmistakable racket and spit out a thin paper scroll that fell on the floor.
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My heart sank as I read that our total allotment, a.k.a.
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our allocation, was a whopping $250,000.
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It was like getting a reservation at the best pizza place in New York only to be served a single slice to share with a crowded table of friends.
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An insatiable appetite.
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The appetite for alternative investments in the areas of private equity, private real estate, and private credit seems insatiable.
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According to research firm Prequin, in 2006, approximately $1 trillion was being managed by private equity managers.
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Today, there s more than $6 trillion allocated to private equity, with projections that the market will grow to more than $14 trillion by 2025.
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This great migration to alternatives seems unstoppable, as the smart money is clearly reallocating.
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Fewer public equities, more private equity.
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Less public creditor bonds, more private credit.
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Fewer public REITs, more private real estate.
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Now, my suspicions were confirmed by my dear friend and advisor, A.J.
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Gupta.
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A.J.
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 s represented my family for 15 years.
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And by way of background, A.J.
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is the former now retired chief investment strategist for one of the largest independent investment advisory firms in the U.S.
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with approximately $200 billion in assets under management.
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He sold to one of the larger private equity firms, and now he runs Robbins Gupta Holdings, our joint family office.
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One day, AJ handed me a report from KKR, one of the world s largest private equity firms.
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They d recently conducted a survey in which the world s wealthiest family offices, endowments, and pension plans all gave a peek under the hood.
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I was really surprised by the survey participants  willingness to share their current asset allocation.
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That s like gold.
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It bears repeating that our asset allocation, how much we choose to invest and which asset classes, is the greatest driver to our investment success.
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This is a universal truth among every single investor I ve interviewed over the past two decades.
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As I scoured over the KKR report, this was the most shocking statistic I saw.
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Check this out.
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Ultra high net worth families, those with $30 million and much more, have nearly 46% of their assets in alternative investments, with only 29% in publicly traded stocks.
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Now you can see this chart in the PDF included with this program.
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It s labeled alternative investments as a percentage of total asset allocation.
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Alternative investments used to be kind of a side dish in a portfolio.
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Now they re more like the meat and potatoes for the wealthy.
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And get this, of the money these groups had in alternatives, more than half, 52%, was invested in private equity, with a balance nearly equally divided between private real estate, 25%, and hedge funds, 23%.
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Now, why this profound shift towards alternatives?
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Well, these tea leaves don t take much reading.
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On a global level, private equity, listen to me now, private equity outperformed the public markets in 35 of the last 35 years, between 1986 and 2020.
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That s extraordinary.
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If you want to put your money someplace, something worth looking at.
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In the PDF included with this program, you ll find a chart labeled performance of private versus public equity.
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As you can see in that chart, as an entire asset class, private equity produced average annual returns of 14.28% per year over the 36-year period ending in 2022.
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Contrast that with the S&P 500 public stocks that produced just 9.24% per year.
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That s more than five percentage points greater each year, compounded.
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That translates into runaway compounded growth.
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To put this in perspective, between 1986 and 2022, if you d hypothetically invested a million dollars in the S&P 500, it would have grown sizably from a million dollars to $26,310,000.
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Not too shabby.
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But if you took the same $1 million and you d put it in private equity, it would have grown to $139,604,000 with private equity.
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Keep in mind, these returns are the average per private equity industry as a whole, but many of the firms have achieved far greater returns than that.
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As you can see, private equity performs well in good times, but it s also weathered many a storm.
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When we look at the recent history, there have been three major market downturns and subsequent recoveries.
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The internet bubble bursting of 2001, the Great Recession of 2008, and the COVID pandemic of 2020.
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In all three cases, the peak to trough declines of the S&P 500 were far steeper when compared to private equity.
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A study by Wall Street behemoth Newburger Berman summed it up nicely, quote, private equity historically experienced a less significant drawdown and a quicker recovery than public equities in all three downturns, end quote.
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Case in point, in 2021, on the heels of the pandemic and the global supply chain crisis, private equity during that horrible time had one of the best years, producing pooled returns of 27% that year.
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That just slightly blowed the stellar performance of 33% in the year 2020.
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Private equity heavyweight Bain Capital wrote, quote, private equity blew the doors off in 2021 as trillions in pandemic related stimulus produced a historic surge in deal making and exits, end quote.
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Now this explains the massive shift in private investments.
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They simply offer a greater opportunity set.
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You have to fish where the fish are.
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Increasingly, companies don t need to go public like they used to.
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They can get access to the capital without dealing with the barrage of legalities and procedures that come with becoming a publicly traded firm.
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In fact, according to the Financial Times, the number of publicly traded U.S.
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companies has fallen by nearly half to 4,400 since the peak in 1996.
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That s just 4,400 companies for investors to consider, and we all know many of them are mediocre at best when it comes to profitability, growth, and future prospects.
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In fact, in 2009, 81% of public companies were profitable post-IPO.
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By 2021, only 28% were profitable post-IPO.
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By contrast, there are tens of thousands of private companies growing, innovating, and disrupting.
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When you look at the total value of publicly traded companies globally, you might be shocked to learn that the value of all companies held by private equity funds dwarfs public stocks by a ratio of 4 to 1.
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Now, this is not to say that public stocks don t have a role in our portfolios.
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They absolutely do.
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And they are an important ingredient in many Holy Grail portfolios, mine included.
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Stocks allow anyone and everyone to become owners of our economy, not just consumers.
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You can own Apple, not just an iPhone.
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And stocks allow us to access thousands of global companies doing business in numerous geographies with the ability to buy and sell their shares at the click of a button.
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There is no competition between public equity and private equity.
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they re complementary.
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In fact, numerous studies have shown that adding private equity to a typical stock and bond portfolio has the tendency to not only reduce volatility, but also increase your returns.
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This is what it s all about.
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Reducing risk, volatility, while increasing returns.
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Democratization.
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In addition to the many trillions already flowing into private markets, regulations are now being loosened.
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Soon, hopefully, average investors will be able to invest in private markets through their 401k plans.
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That could add more rocket fuel to an already soaring industry.
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And here s the best news of all.
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As I mentioned earlier, it s always struck me as unjust that only those with enough net worth can participate in high-quality alternative investments.
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Heck, many wealthy individuals became wealthy by selling a business.
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That doesn t mean that they re a sophisticated investor.
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On the other hand, there are plenty of folks with smaller checkbooks out there who have the desire and intelligence to play ball in private markets.
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It s my humble opinion that if someone is smart enough to understand the risks, they too should be able to join in.
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Luckily, Congress agrees.
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At the time of this writing, the House of Representatives has passed a bipartisan bill that ll allow anyone, even if they fall short of the wealth requirements, to become an accredited investor if they pass the test.
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My hope is that by the time you re listening to this book, the legislation will have become law and everyone will be able to access these great opportunities.
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As the bright future of alternative investments began to take shape in my mind, my instinctual question was, how can we participate in this broader trend of trillions of dollars seeking out alternative investments?
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How can we ride this wave, this tsunami, beyond just being content with getting access to a handful of opportunities?
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It turns out many of the best and brightest financial wizards have already figured out a way.
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And I assure you, most people have never heard of it.
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My big breakthrough.
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As many of you know, I ve been coaching my dear friend Paul Tudor Jones for over two decades.
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Paul is considered by many to be one of the top 10 hedge fund managers in history, as well as one of the most incredible philanthropists.
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His Robin Hood Foundation has donated more than $3 billion towards fighting poverty in New York City.
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Nearly a decade ago, one of Paul s former partners, who has since launched his own successful fund, and I were having this conversation about alternative investments.
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And I was commiserating over the common challenge of not being able to get into some of the greatest investment opportunities.
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Getting an allocation in a highly sought after private equity fund is kind of like the wealthy person s version of getting past the velvet rope at a hot new nightclub.
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More often than not, people are left out in the cold, cash still in hand.
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Buddy to buddy, he decided to divulge what he does with a good chunk of his personal money.
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My ears immediately perked up.
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Here was a top pedigree fund manager about to tell me what he does with his treasure, like Tiger Woods telling you where he gets fitted for golf clubs, better take note.
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He explained he personally uses a firm out of Houston, Texas that was taking a slightly different approach.
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Texas, I thought?
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A guy from Greenwich, Connecticut would be using an elite firm from Wall Street, from London, from Singapore.
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But like most brilliant financial folks that breathe rarefied air, he was the kind of guy that finds the opportunity in the road less traveled.
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He spent the next hour educating me on one particular approach that sounded like an exact answer to my question.
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How can one participate in this seismic shift towards alternative investments?
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As I scribbled notes as quickly as I could, he explained that instead of fighting to get into a fund as an LP, a limited partner or investor, there was sometimes a way in which one could join up and become an owner of the entity, the firm itself that s managing the fund.
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In other words, the GP or general partner.
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The general partner is the actual operating company, also known as the asset manager, who manages the underlying investment funds people are trying to get into.
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And the GP is typically owned by the founder of the company and the C-suite employees.
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One can actually buy a piece of the firm itself and become a GP, a general partner, I asked, somewhat baffled.
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He nodded with a grin of a tenured veteran.
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This was a paradigm shifting moment for me.
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After all, many of the financial titans I d interviewed became multi-billionaires by owning their own asset management firms and thus being the general partner.
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It s no secret that the highest concentration of billionaires on the Forbes 400 are not from big tech or oil and gas.
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They are the moguls of private equity, private real estate, and private credit.
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These are the financial masterminds that often generate massive wealth for their clients, known as the LPs, and for themselves, known as the GP.
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These are the people that have mastered the game of money and managed tens or even hundreds of billions.
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These are the people that, given the opportunity, I want to sit shoulder-to-shoulder with as partners.
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Could it really be possible that I could own a sliver of their business of managing money, especially as trillions are flowing into alternatives?
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The answer, it turns out, is yes.
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The world known as GP stakes has become increasingly popular among big institutional investors over the past decade, but it s only beginning to see mainstream coverage.
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A story in the Wall Street Journal summed it up with a headline, quote, buying stakes in private equity firms, not just their funds pays big, end quote.
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Why does it pay big?
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The clients of these firms, the investors, also known as limited partners, pay the GP at least two different fees.
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First, they pay a management fee that is typically around 2% per year for all the money they invest.
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Second, if the investment fund performs well, the firm typically gets 20% of the profits.
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So for top-tier firms that make investors happy, the firm itself is a wealth-building machine for its founders and owners.
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As my brain worked to process what I just learned, I launched in a game of 20 questions.
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He boiled it down for me, explaining that becoming a minority or passive owner in an asset management firm, a GP, has three distinct benefits.
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First, there s cash flow.
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Predictable income is a wonderful thing.
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If you run a business, you know how rare and wonderful it would be to know it in advance.
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You ll have stable, predictable income or revenue for years to come.
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Welcome to private asset management.
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A typical asset management company, a GP, manages numerous funds on behalf of the investors or LPs.
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The investors often agree to lock up their investments for longer periods of time in exchange for the potential of outsized returns.
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That creates a long-term horizon for the manager, giving them plenty of time to make the best possible decisions.
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While putting the investor s money to work, the manager s entitled to a management fee, again, typically 2% per year of all dollars invested.
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When investors agree to the specific lockup provisions, typically between five and 10 years, the asset manager knows they ll generate predictable and contractually secured management fee revenue throughout that period.
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That translates into reliable cash flows for the owner of the firm.
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In this case, that includes you and I. Even better, these steady streams of income will also rise as the firm increases the amount of money it manages.
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Secondly, you get a piece of the profits.
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As mentioned, in exchange for making their investors money, the general partner receives a handsome percentage of the profits, typically 20% on all the capital they manage.
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This is known as carried interest or the performance fees.
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Making money on other people s money while still giving them great benefits is a win-win situation that can create outsized returns for the GP.
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That s us again.
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Third, you get amazing diversification.
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In the wise words of Nobel Prize laureate Harry Markowitz, quote, diversification is the only free lunch, end quote.
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Owning part of an asset management company gets you tremendous diversification.
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Why?
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Because a typical firm manages numerous funds.
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Each of those funds has a unique start date, or what s called a vintage, which means they re spread across various market and economic cycles.
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Beyond that, each of those funds contains its own portfolio of companies and investments spread across various industries, various sectors, various geographies, and stages of growth.
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This is diversification at the highest level, which is what we want for a Holy Grail investment portfolio.
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And then there s the fourth and final overarching benefit.
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Sometimes a private asset manager will go public or be sold to a larger firm.
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Well, in this case, the owners, with whom you and I sit shoulder to shoulder, we re owners as well, receive a multiplied return on the profit or equity upon sale of that firm.
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There are a lot of additional benefits that you ll learn as you read on.
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But needless to say, at this point in my conversation, I was leaning forward in my chair.
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It all sounded very appealing and honestly a little too good to be true.
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I couldn t help but wonder, why in the world would a private asset manager sell a stake in their business?
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Is the answer, you need to meet Christopher Zook.
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Houston, we have an opportunity.
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I was taken aback when I first met Christopher because the first thing he told me was that he was inspired to start Cass Investments more than 30 years ago after listening to my original personal power cassette series, Cass Those Ancient Cassettes.
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It was 1991 and he was working for a major Wall Street bank at the time.
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He listened to my audio program and decided to draw a line in the sand, and he told his wife that within 10 years, he would launch his own firm.
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In 2001, true to his word, he launched Kaz Investments, only to be greeted by the post 9-11 bear market.
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But as you ll learn, Christopher is not easily discouraged, and he s an incredibly effective hunter of opportunity, regardless of the market conditions.
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In addition, he s extremely well-respected in the world of alternative investments.
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In fact, in 2019, the Texas governor appointed him to the state s Pension Review Board, where he serves as the chair of the investment committee.
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Caz Investments is not your typical investment firm.
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A refreshing candor and a get-your-hands-dirty work ethic are reflective of its deep Houston roots.
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Under Christopher s more than two decades of leadership, they ve forged their own unique path.
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They had to, because Christopher knew that in order to compete with the big institutions, he needed to rethink the old stale model.
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Over more than two decades, Christopher and his team have built a network of high net worth families that bind together as what he calls an individual and use their collective purchasing power to negotiate access to unique investment opportunities.
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Once again, access is the name of the game when it comes to alternative investments.
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And Christopher explained it to me this way.
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Our role is to wake up each and every day and curate exclusive opportunities for our network of investors to consider.
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They can always choose to invest or pass.
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In return, our investors have agreed to lock arms as a unified front.
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We pool our money for each new opportunity and write a single check that ll move the needle as much as any major institution.
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Today, the firm has more than 3,000 high net worth clients across the globe, as well as numerous investment advisory firms who participate in their curated opportunities.
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The firm has grown to be one of the top 200 allocators of private equity investments worldwide, ahead of major institutional investors like the endowments of Columbia, Duke, and even MIT.
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Over dinner, Christopher briefed me on the numerous investment opportunities that have been funded by his network over the two decades.
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I have to say, I was thoroughly impressed at the scope of timely and thematic opportunities the firm brought to its network, from shorting subprime mortgages during the housing crisis, to energy opportunities during the oil crash, to buying fractional interest in the NBA, NHL, and MLB teams.
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This list goes on and on.
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But it s in the world of GP stakes where Kaz has grown to become one of the biggest players with ownership in more than 60 prominent private equity, private credit, and private real estate firms that span the globe.
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After extensive due diligence, I became a client.
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And my family office partner, AJ Gupta, joined the CAS board.
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Over the years, the more we spent time with Christopher and his team, the more we fully appreciated his firm s method of reviewing more than 1,500 opportunities each year, only to invest in a handful of the very best and most timely investments.
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The team at Kaz was instrumental in helping me assemble my own personal Holy Grail portfolio.
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I decided I wanted to amplify Christopher s voice and wisdom within my network, and Christopher offered us the opportunity to join a few dozen others in becoming minority shareholders in Kaz itself.
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I m not actively involved in running the business day to day, but I m passionate about being armed with the knowledge about these investment trends, how and where the smart money is moving, and how to capitalize on timely opportunities.
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Let s spread the word.
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In the middle of 2022, the world was undergoing a major sea change as the era of zero interest rates came to an abrupt end.
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Persistent inflation, a supply chain crisis, the Ukraine-Russia war, and numerous other factors were sending ripples throughout the markets.
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I reached out to my Rolodex of financial titans, many of whom we interviewed for this book, and none were fearful.
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In fact, they were excited.
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They sensed the opportunity.
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For example, while bonds were crashing, rising rates were actually helping private credit firms, some of which I own a GP stake in.
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And they were making substantially higher returns because the rates they charge adjusted upward.
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Prior to the rate hikes, many businesses were accustomed to paying 5% to 6% to private credit lenders.
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Once rates took off, those same businesses were required to pay north of 11% on the loans adjusted by the current market rate.
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Think of this, same borrower, same loan, but with a huge surge in profitability for the lender, which I was one of them as a GP.
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I recall sitting on my back patio, staring out at the ocean one day, feeling so grateful for the principles that Ray Dalio and numerous others had taught me along my journey.
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Grateful for the strategies that I was deploying in my own Holy Grail portfolio.
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Grateful for the platform I have to share all these insights that I ve learned from my access.
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And in that moment, I knew that Christopher and I needed to write this book.
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There was simply too much important and empowering material for us to share, too many interesting strategies to be revealed and explored, too many voices of seasoned and successful veterans that needed to be heard.
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So I picked up the phone, I told Christopher that we needed to write this book for two reasons.
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First,
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Between the two of us, we have unique access to many of the most brilliant and successful minds in the alternative investment space.
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Folks like Barry Sternlich, founder of Starwood Capital.
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Sternlich has built a global real estate investing empire that spans 30 countries with more than $115 billion in real estate assets under management.
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or folks like Will Van Loo, the founder of Quantum Energy, one of the largest private energy investors with an astounding track record, despite investing in an asset class that s usually very volatile.
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Speaking with him was incredibly interesting, especially considering the world s focus on renewables and the opportunities they present to us today.
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These incredibly engaging conversations embody the timeless truth that knowledge is power when it is not only learned but truly applied.
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The second reason we needed Ryder, I told him, was even in the circles of high net worth families and the advisors that represent them, there s honestly a general lack of awareness regarding the breadth and depth of possible alternative investments and what they represent.
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This is what s true for me, and I know it s true for many of the successful people in my inner circle.
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Far too often, individuals working with well-intentioned advisors only see a limited set of opportunities, which honestly are often pre-selected by the advisor s parent company.
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We wanted everyone, investors and advisors alike, to be equipped with the tools, the awareness, and the opportunities that many of the world s greatest investors are using for their own Holy Grail approach.
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Seven unique strategies.
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So let s dive in.
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This book is divided in two parts.
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In part one, each chapter is dedicated to a specific alternative investment strategy or category.
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We selected seven unique strategies that have created extraordinary returns over long periods of time.
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Each of the seven strategies is an entirely uncorrelated investment opportunity, which is why we selected them from the universe of potential options.
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We ll first launch this rocket by covering GP stakes in more depth.
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Then we ll reveal how investors can now take part in one of the only legal monopolies in North America, professional sports ownership.
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Relatively recent rule changes have opened the door for investors to own a portfolio of numerous teams across Major League Baseball, Major League Soccer, the National Basketball Association, and the National Hockey League.
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These teams have incredibly durable revenue models that have the advantage of powerful tailwinds.
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And they ve evolved from making money off beer and butts in seats to becoming multifaceted global empires that command billions in streaming rights, sponsorships from those involved in legalized gambling, hotel and restaurant revenue, and much more.
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This is just a taste of what s to come.
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Every one of the other strategies we present is equally exciting.
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Then in part two, we ll sit down with an all-star lineup of expert asset managers.
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Collectively, they manage more than half a trillion dollars.
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I m so grateful to them for generously sharing their time and their origin stories, their instincts, their techniques, their principles, and the strategies that guide them to unimaginable success.
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And now we get to share them with you here.
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We asked each of them to share what they think of as their holy grail of investing.
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Their answers are diverse, surprising, and profoundly wise.
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So let s turn the page and begin with GP Stakes to discover why tens of billions in smart money are chasing this strategy.
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Now, a quick note from the authors.
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We, meaning Christopher and I, wrote this book in tandem.
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We conducted the interviews together and we collaborated to bring the absolute best information to you.
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Thus, instead of passing the baton between chapters or paragraphs in the remainder of the book, we decided to write with one clear, unified voice.
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You ll be hearing from a narrator representing both of our voices, and then I ll join you personally again for the final chapter of the book.
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So let s keep the momentum going by diving into the power of GP sticks.