I met a billionaire recently. I say billionaire, but I don’t know for sure. He was definitely a paper billionaire at one point before the dot com crash – whether he still is I’m not sure, but it seems like a fair bet. He is a serial entrepreneur who made his money by selling his tech business for >>$1bn (in an all-stock deal), a long time ago. He is now a Euro-elite type, being based on the continent and travelling frequently around Europe.
As it happens, I got into a brief conversation with this chap about how he manages his money. I found it quite interesting. Here are a few snippets as I remember them. Let’s call him David.
David has set up a Family Office which is where the money is managed from. He doesn’t have a ‘day job’ any more, but is clearly a busy guy.
David thinks of his investments in three pots, and takes a specific approach for each:
- Public equities. While David is well aware of the ‘textbook’ investing approach (low fees, diversified assets, don’t try to beat the market, rebalance regularly) he doesn’t directly follow this; he employs some investment professionals to manage the money. I believe he diversifies widely, taking in commodities, hedge funds et al.
- Private equities. David specialises in ‘value-added’ angel investing, mostly (or possibly exclusively) in the tech sector. His investments vary in size from $500k to €10m+. He has 30+ such investments and is reasonably hands-on with several. My impression is he is looking for visionary, ambitious businesses based in Europe, where he can put some serious money to work – and he is not afraid of being the biggest shareholder.
- Real estate. He looks for real estate to ‘double or triple’. I asked ‘so, IRRs of 5-7%?’ and was firmly put in my place – “no; 5% would take 14 years to double; I am talking doubling in 1-2 years”. He is prepared to put in a bit of development/planning / etc effort to create value. He owns at least one large (100+ unit) residential block. Interestingly, he said “if I was simply trying to maximise net worth for least effort/risk, I would invest 100% in real estate”. He doesn’t appear to consider his c.£10m primary residence part of his investment portfolio.
In some respects, I have a very similar approach to David myself, albeit at a much smaller scale. However, what I found interesting was that David clearly manages his money as one aggregated pot, with one total valuation. Whereas I think about my three pots very differently. In fact I only analyse one of my three pots in detail at all – the public equities pot. And as I think about it I have very different objectives for each of these three pots.
Like David, I have done quite a bit of private equity investing as an ‘angel investor’ and, like him, my private holdings have a material valuation. But unlike him I don’t think of them in the same total asset pool as my other investments. For one thing, I can’t readily sell my private holdings. If I needed to raise funds, these assets would be almost completely useless. My objectives for these investments are only loosely around making a return – I also want to support talented people, ‘put something back’, and learn. As it happens I have made some very good returns out of this activity, but that is a bonus rather than the raison d’etre.
For me, my public, liquid investments are really my ‘f**k you money’. I don’t yet have enough money in this pot to truly provide ‘f**k you’ independence in all scenarios – e.g. after I bought my Dream Home my liquid investment pot dipped well below a long term sustainable value, though it has now risen to a level where I could be quite career-limitingly offensive and survive the consequences.
For these liquid funds, my objectives are about financial independence, which for me is about minimising the chance of running out of money, having a reliable store of value and source of income over the long term, and once that is secure, maximising my risk-adjusted net worth. I need this to be robust to changes in my circumstances – from a health catastrophe to a change of country or even, God forbid, a divorce. Partly because it isn’t quite enough for my liking, I track this pot carefully.
Finally, like David, I also have significant real estate holdings – notably my Dream Home, my Previous House and some commercial property. But I think of these assets as either ‘not investments’ (my Dream Home) or as ‘pension income’. I have different objectives for these assets than for my liquid investments. For my Dream Home, I am looking for a convenient location, and a smile on my face every morning and every time I return home from work. For my other real estate assets I am looking for an easy life, low risk, never to be a forced seller, and having a predictable, inflation-proof income stream.
I do find myself getting ensnared by some investments on the borderline between my three pots. For instance I do own some significant REITs / liquid real estate investments – and I find myself wondering if this is sensible given my over-exposure to UK real estate already. My biggest holding is a publicly traded company that began life as an angel investment and then IPO’d; does this mean I should reduce my exposure to fall in line with my diversification approach? I have some direct (and increasingly valuable!) holdings in AMZN and others, but I probably have a bigger exposure than I realise due to my passive holdings. Should I ‘x-ray’ my passive holdings to track such exposures?
Overall, My approach means I barely think about my ‘net worth’. Instead I concentrate on investment income, my annual return, and the underlying drivers of my long term investment performance (costs, allocations, etc). Should I consider my assets more holistically? Should my objectives be more integrated? Suggestions, opinions or just brickbats very welcome.