The Approach

Are there certain words you avoid because you don’t like how they are interpreted by other people? There are for me.

Yoga.

Even when I am literally doing yoga, I will find other words. “I’m working on my range of motion.”

Sometimes this is to avoid my own biases – I am already the vegetarian in San Francisco, add the yoga label and I’m one step closer to the hippie stereotype.

Biases by others can lead to an interpretation I did not intend. No, I do not have a yoga mat that I take to a studio, I am just doing 5 minutes of stretching in my living room. No, I have not and will not ever use the word namaste.

By not using the word yoga, I can avoid the other interpretations that someone might have.

Which brings me to the word THESIS.

Cringe. It brings to mind essays and homework. I can see you about to close this tab based on that one word.

It is a word that has room for interpretation and thus loses its power.

Instead of asking about your investment thesis, let’s put it another way.

What Are Your Set of Beliefs?

Anything smart I say is just a regurgitation of what someone smarter said.

Reid Hoffman (a Silicon Valley baller) in a recent talk spouted this nugget of wisdom:

Here’s my set of beliefs that make me believe this startup is a good idea. It’s like the list of the investment thesis. The kinds of things that would say why it is … this is a world changing company.

An investment thesis is just a set of beliefs. Things that you believe to be true about the future that lead you to the conclusion it is a good investment.

Elon Musk (definitely smarter than me) talks on this theme as well, which he calls reasoning from first principles:

First principles is a physics way to looking at the world. What that really means is, you boil things down to the most fundamental truths … and then reason up from there.

Picking the right investment is predicting the future. Predicting the future is hard, unless you are an investment advisor with all the latest data. Your best bet is to start at the beginning and reason up.

For example, many people believe that investing in cryptocurrency will result in large profits over time. That is why many people make it a full-time business, investing and forecasting its ups and downs. Cryptocurrency is an excellent investment for those seeking direct exposure to the demand for digital currency. Buying the stocks of companies with cryptocurrency exposure is a safer but potentially less lucrative option. Bitcoin investors believe the cryptocurrency will increase in value over time because its supply is fixed, unlike fiat currencies such as the US dollar or the Japanese yen. Bitcoin’s supply is limited to less than 21 million coins, whereas most currencies can be printed at the discretion of central bankers. Many investors believe Bitcoin will rise in value as fiat currencies fall in value.

Many people even buy a bitcoin miner, similar to the bobber 5g hnt miner, to help run the network. Bitcoin miners are the Bitcoin protocol’s backbone, helping validate and secure transactions on the blockchain. Not only do these miners produce Bitcoin at a discount to the current market price, but many of them also hold this Bitcoin on their balance sheets. While investing in Bitcoin miners carries the same volatility and risks as investing in Bitcoin, they may outperform Bitcoin in the long run.

Back to Reid:

What is human nature? What is humanity like now and where is it going? And how does your product or service fit into that?

That doesn’t sounds so hard. For example, think about the trends you keep hearing about millennials. What will happen if a greater portion of the population gets married later or hops around from job to job?

The chance for the greatest returns are when your beliefs are different than everyone else’s beliefs. If you just arrive at the same conclusion as everyone else, the potential return is much smaller. This stands especially true in the case of real estate. Everyone is aware that it is a growing market, but which property would fetch more profits than others can only be predicted with proper market research. Thankfully enough, those without the time or expertise to surf through the different statistics and analytics can get the aid of realtors like Lincoln Frost, for instance, to make the most profit out of their investments.

As Peter Theil (smarter than me, but seems really dumb sometimes) puts it:

Tell me something that is true that no almost nobody agrees with you on.

Once you have a set of beliefs, you can follow them to their logical conclusions for investments.

Do I Need an Investment Thesis? I Invest in Index Funds

Regardless of the investment, whether someone has decided to invest in crypto having read this great guide here, property, stocks and shares etc., there are some underlining assumptions that go with it. You need to know what those assumptions are, otherwise they may not match up with your beliefs.

Let’s look at an example of a investor in 401k mutual funds. This is perhaps the most common type of investor.

What is the thesis behind this? What are the underlying assumptions?

• It is beneficial to defer taxes on the money
• The fees don’t outweigh the benefit of deferred taxes
• You won’t need the money until you are 60 or are ok with paying a penalty
• The mutual fund options will produce a satisfactory return compared to outside investing options

Each of these could be broken down further. For example, which mutual fund you choose indicates beliefs about how to diversify to reduce risk, as well as balance categories like international, small businesses, technology, etc. Do you have any beliefs about these categories? Did you know you are investing in them?

The same goes for Vanguard index fund investors. You are prioritizing low fees, assuming the fees are more important than generating a greater return.

Maybe you agree with these beliefs. I hope you do, because based on your actions, they are your investment thesis.

My Set of Beliefs

• The zero-effort default approach to investing will not produce enough results, so some effort is required. It is ok to pay someone for that effort when the return is worth it.
• Taxes hurt, but the net return is what is important. It is ok to pay taxes when the return is worth it.
• My 20+ year timeline of investing is an advantage. Investing in stocks with quarterly goals is a mismatch with my timeline and doesn’t use my advantage.
• Access to leverage is a huge advantage given my timeline. Controlling 100% of the asset for only 20% invested with a 30 year fix-rate loan will allow me to invest earlier to start the compounding effect.
• The United States will continue to be an attractive place to live, people will prefer to be near cities, single family homes are preferred over shared living.
• The number of renters will continue to be strong as student loan debt is larger than ever and families are started later.

Conclusion: rental properties for me! Most people don’t understand the returns and that time spent to set up a passive investment is well worth it.

What are some of your beliefs that go into your investment thesis?

“Find a mentor” is common advice. Or “surround yourself with people who have found success in what you are trying to do”. Then we think “ya ya good idea, but in the meantime I’ll just keep doing what I’m doing.”

It is easy to stay in our own little world. It is uncomfortable to put yourself out there and expose how much of a beginner you really are. Yet often what is uncomfortable is the most valuable thing you could be doing.

Last week I went to my first meet up – San Francisco Real Estate Investing Out-of-State. Here is what I learned.

People Want to be Active, Hands-On Investors in Order to Replace Their Job

This is something I already knew, but I expected the out-of-state investor meetup to have more passive investors. Wrong. It was still mainly people who want to be extremely hands-on, just do it out-of-state because there are much better deals.

By hands-on, I mean going out and finding off-market deals (which the presentation was about this month), negotiating, wholesaling, and managing repairs.

This is essentially a part-time job where they are their own boss. They want to get good enough at it so that they can replace their day job.

Real Estate Can Be Applied Creativity

I was really impressed by the creativity of some of the experienced investors. There are so many different ways to find and close a real estate deal. Here are some examples from the meeting last week:

• Finding leads by going to the courthouse and getting a list
• Finding leads with newspaper adds in small towns as part of a wider real estate marketing strategy
• Finding leads with targeted Google ads
• Finding expired listing leads through software systems
• Finding leads through contractors who find a house with expensive repairs necessary the owner isn’t likely to want to pay for
• Investigating leads by hiring someone on Craigslist to take photos
• Investigating leads with a local wholesaler like Abound, sharing the deal
• Seller financing – “I can offer $50k now or $60k paying $1k per month for 60 months”, basically a 0% loan for 5 years
• And much more…

But My Goals Are Different

I want to put my money to work to earn a passive income. I don’t want a part-time job on the side*, nor want to do it full-time one day.

Meeting other investors was a great way to learn about wider trends from the world of real estate investing though. For example, it seems that more people are getting involved with mortgage note investing than ever before.

In case you were not aware, investing in notes and mortgages is a wealth-generating strategy that can provide consistent returns with predictable monthly payments to the investor.

When you purchase mortgage notes, you are not buying a property outright, but instead, you are securing the rights to the mortgage and note and, therefore, the mortgage payments.

Ultimately, it is amazing to think about just how much variety is out there for real estate investors nowadays.

As for me though, ideally, I spend as little time as possible on my investments. Yet I realize in real estate there is a function between time spent and investment gains. My goal is to find the sweet spot – how can I get 80% of the benefit for 20% of the work?

The goal of passive income points me to owning rental properties. Not flipping, not wholesaling.

This narrows it down, but there are still a lot of ways to invest in rental properties. At one end of the spectrum are REITs – basically stocks representing companies who invest in rentals. This is maybe 1% of the effort for 10% of the benefit.

At the other end is doing everything yourself – finding a deal, repairing the house, renting it out, and handling the on-going management. This is 100% of the effort for 100% of the benefit (but there are some big risks while you are still learning).

In between is everything else. This includes participating in pooled investments (which really varies in terms of time and returns) and notes (maybe 5% time and 30% benefit).

What is my current approach to get 80% of the benefit for 20% of the effort? Purchase turnkey properties where someone else finds the deal and does the rehab. Pay for a property manager to deal with the tenants.

Sure, it still requires time on my part, but not a whole lot. Even with conservative projections, I believe I can return 20-25% per year when you consider all the components of return. The fact that I’m ahead of projections, at 29% per year after 5 years, is great. I’m happy with that, I don’t need to chase greater returns with greater effort or risk.

What is your goal? To replace your job by being an active investor or to put your money to work and be passive?

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*I do think it is really important to create a situation where your effort directly controls how much you make. Most people have no ability to change their income through their day-job, so the only way they can save more is spend less. They forget about the other side of the equation of increasing your income. This could be as simple as driving for Uber part-time or running your own business (whether real estate or otherwise).