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What if your government shut out 99% of Americans from investing in assets that have the highest risk-reward ratio? Aka, ones that make the most money potentially. That seems to me like it’d be a bad thing. It might even mean your government doesn’t want you to win, or at the very least, doesn’t think you are very smart. I could count the ways I stand by that statement on both sides of the aisle, but let’s start with one relevant to my financial freedom-oriented Corazon. Two words = SEC + Accreditation.
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Today in <10 Minutes We're Going to Cover:
- Transparency. Why am I here..and why are you?
- Are you qualified? Accreditation. What is it and who qualifies?
- Money is all around, in a hidden way. The state of the private fund market.
- Who’s your real daddy? Protecting (limiting) normal investors from wealth-generating opportunities
Listen to the Audio Version of This Week's Newsletter!
🔊 How-the-Rich-Get-Richer-&-The-Poor-Say-Thank You.mp3
BUT FIRST A RANT:
I had someone ask me why I spend time on Contrarian Thinking?
I suppose I could retire at least at the lifestyle I have right now for a while. Unless inflation continues at which point I’ll have to go live in my laundromat. So – why am I working 50-60-70 hour weeks on this baby?
You wanna know why I’m here.
It’s kind of contradictory. I am here because I expect nothing from anyone. Because I expect at the end of my days to have to stand on my two feet. Because I believe I’m capable of doing that, and I believe you all are too.
Tell me; why are you here today? Why are you giving your most precious commodity, your time?
Most of you think you’re here for yourself.
You wanna know why you’re really here? Because you are Atlas. We all are. The best of us know we have others to carry. And why do we do it? Because we can. I had my mom stand up at one of my events lately and I said three words, “I got you.” She gave me life and one day I’m going to take care of her. She will never have to worry for anything because I got her. She carried me and I’ll carry her.
But today more than ever before, we’ve forgotten it’s not all about us. It’s not about being weak. We’ve forgotten what it feels like to know you are strong. There is no greater feeling than standing up against the man and feeling like this mother f*cker…
That’s what we’re here to become.
Strong of mind, body, and balance sheet. Because our people need us and so does this world.
It’s time for each of us to step the f*ck up. If you’re reading this, we need you.
If you haven’t been combing the archives of SEC minutes let’s catch you up.
Gary Gensler (head of the SEC – that decides how investments are regulated in the US) just floated the idea of moving the threshold for those who can invest as an accredited investor to those with $10,000,000 investable net worth instead of $1 million.
I for one, think it’s a bad thing. And not because I win either way from it. 99% of my investors historically have been institutional investors, aka banks, sovereign wealth funds, pensions with billions or at least hundreds of millions to invest with. The reason I think this is bad is that well, the SEC is not my daddy and I didn’t ask for his permission. Neither should you. Let’s get into it.
What Is An Investor Accreditation Status? – Now & Proposed
Right now accredited investors in short have $200,000 in annual income or are worth $1 million (there are other specifics you can read here and allowable exemptions).
What that means is you can invest in:
- hedge funds
- private equity funds
- interval funds
- crowdfunding
- startup fundraising
- venture capital funds
- real estate syndication
- private placements
- secondaries and some types of structured products
Why does it matter to me?
The private market has exploded in size.
Over the last 25 years, companies have moved away from public markets to more private markets like PE and VC. While the equity capitalization of the U.S stock market is about 27 times the size of AUM for PE and VC funds, the number of public companies dropping is interesting. There are about 3,600 public companies in the U.S. today, about one-half as many as in 1996 and 3/4 as many as in the 1970s. That means that more than 90 percent of the stocks have disappeared since 1996.
The arguments that concern me the most are that:
- there is some data that shows private markets have the potential for higher returns
- companies increasingly are experiencing exponential growth pre public listing meaning retail investors may be missing out on returns
- increased cost to publicly list due to more regulations will continue this trend
The Dirty Little Secret secret of U.S. securities law is that the rich not only have more money, they also have access to wealth-generating investments not available, by law, to the average investor. . . .
[C]urrent law . . . discriminates on the basis of wealth, as a proxy for sophistication, or the ability to fend for oneself. Securities law thus in theory, as in practice, marginalizes the average investor without acknowledging that it does so, let alone justifying it.
TLDR – less access to accredited investments could mean the rich get richer, the poor stay the same.
But Who Are the “Poor”?
Who are the poor that won’t have access to this kind of investment? Well, about 6-8% of Americans have at least $1 million net worth, so that means right now a very small percentage of Americans can access accredited investments. But if we raise the number to $10 million that would shut out over 99% of Americans from hedge funds, private and venture capital, etc.
- There are supposedly 1,456,336 households in America with over $10 million in net worth (although I assume that is including their primary residence which would NOT count for accredited status)
If that number is true, that’s 1.13% of the population who can invest in accredited assets.
Who is the guy who gets to decide if you’re smart enough to invest in private deals?
Meet Gary Gensler.
His bio doesn’t suck. It is filled with a smorgasbord of impressive institutions; MIT, Sloan, CFTC, Wharton, assistant Secretary of the Treasury, a fellow Goldman alumn, and on and on. Here’s my main rub – when you’ve sat in ivory towers for the ENTIRETY of your career you probably would also think all of us normies are incompetent. Or perhaps what happens is that when you’ve worked 18 years at Goldman Sachs, and then another 20+ years in government, you start to believe that institutions are the answer and the workers are not.
On a fair note, you know what I love about Gary… his dad. His dad was a pinball machine vendor and owner. Y’all know how I feel about vending machines. Wink.
Why your government thinks you’re dumb and why sometimes they’re right?
If you take a stroll through history, investing was kept amongst the wealthy. They were thought to be able to handle risk because of their wealth. Also to begin with, because the market was small and the players were known, the level of fraud was not as widespread or enough to scare off most investors. But then the stock market explosion happened pre-Great Depression. It led to Black Tuesday, Black Thursday, and the Great Depression.
The short version is, investors overbought securities on margin (debt), massive speculation abounded, billions of dollars were wiped out, banks overlent and became insolvent, economic production slowed down, unemployment surged to 25%.
So understandably our government wasn’t thrilled that our financial markets wiped out our economy within a period of weeks. That meant they created a slew of financial regulations followed continuing from there:
- Glass Steagall and Securities and Exchange Act which created the SEC
- Dodd-Frank bill – which btw is 8,843 pages. Also funny story, I met Barney Frank (creator of said monstrosity) while I was at Goldman and without knowing who he was proceeded to lambast his bill at the brilliant age of 20 something. He wasn’t thrilled let’s just say.
Now apparently we humans can’t be trusted to look at the numbers and say: “I have x amount of money, what if I lose it all in this investment can I afford that?”
So regulators step in. But here’s my philosophy:
- We should “protect investors from unsafe investments,” aka fraud, exorbitant terms, false claims, and promises, not “protect investors from themselves.”
By protecting investors from themselves we’re asking the SEC to become our parents. Keep out bad actors, hold them accountable but instead of telling someone what they can and can’t invest in, maybe instead we TEACH them how to invest.
I don’t know. That’s probably too reasonable.
Question everything & be an adult,
Codie & Your Contrarian Team
The Not-So-Boring Section
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Disclaimer – This is the “Be an adult” section. Everything mentioned above isn’t advice, just a recount of what I did. That said: This article is presented for informational purposes only. The opinions stated here are not intended to recommend any investment or provide tax advice. Neither are they an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Codie Ventures, LLC or its affiliates. All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only. Day trading and investing do involve risk, so caution must always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk. You are solely responsible for making your own investment decisions. We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting from your investments are your sole responsibility. By reading/sharing this newsletter or consuming our content on our other channels, you are indicating your consent and agreement to our disclaimer.
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