“Find an asset class institutions aren’t aware of. When they do that’s your exit.”

These were the words spoken to me by the Chief Asset Officer of my old private equity job.

Well, I’m paraphrasing. But that’s the gist.

We one day were hanging out smoking cigars and drinking whiskey in San Francisco, pontificating on the next hot asset class. CAO mentioned he was looking at Detroit when homes there were going for $10,000/home after Detroit filed bankruptcy in 2013. Homes there now average around $80,000/home. Would’ve been the type of play financiers regaled themselves with for generations.

This is the edge for those of us savvy with social media. Every day there is someone patting themselves on the back regarding their returns. I’ve seen individuals invest in mobile homes, vending machines, Turo car fleets-the choices are endless.

I hold in high esteem the business acumen of Robert F. Smith, Vista Equity Partners’ Founder and CEO. He began investing in enterprise software right before the dot com crash of 2001-2002. He was investing in lower to mid-market private software companies. He was buying controlling interests in those businesses for pennies on the dollar before institutions flooded the class with capital. Those institutions are who he exited. Now he’s worth multiples of billions.

Or in the words of Sam Zell, “If everyone is going left, look right”.

Investing vs Speculating

One needs only to scroll social media briefly to see mention of someone “investing” in some asset. Be it real estate, businesses (private or public), or even digital assets such as websites or cryptocurrency, we are witnessing the rise of investing as an everyday commonality similar to putting on one’s pants every day.

I posit most are speculating and calling it investing.

Investing is hard. A thesis is given, research conducted, and values determined on a given asset. It seems today’s investor knows the price of everything but the value of nothing. Apps like Robinhood have brought the casino to the everyday investor and each day millions bet it all only to lose.

There is room for speculation in all portfolios, however, if one were to inquire as to the value of an investment and your only retort is silence and eye blinks, maybe take a step back and reevaluate.

Speculating subscribes to the greater fool theory. Speculators buy an asset and hope for price increases. They are swayed by whim & fancy and are always chasing the next great investment.

Speculating is like buying the ingredients to make your favorite dinner and just sitting them on your counter hoping they somehow come together in the proper manner.

Become an investor. Thoroughly vet your investments. Determine values. Develop an investment strategy. Do not be dictated by price. Be moved by value. It is so much easier on your emotions. When your thesis is solid not even Jesus will be able to sway you.