I've made somewhere around 100 private investments at this point.
One of the biggest things that's changed is what I actually look for.
I used to spend almost all my time trying to answer one question.
Is this a good investment?
Who's running it? How does it make money? What's the upside? What can go wrong?
I still care about all of that.
But there's another question I probably care about just as much now.
Is this a good investment for me?
Those sound like the same question.
They're not.
Say someone brings you an investment. $250k check. Attractive projected returns. Good underlying business or assets. Experienced people running it. You've done the work and you like the opportunity.
Now imagine two people looking at it.
The first is worth $12M. They have $7M liquid, strong income, a diversified portfolio and nothing major they need cash for over the next few years.
The second is worth $2.5M. They have $700k liquid. Most of the rest is tied up in the business they own. They already have money in a few other private investments and they're probably buying a house in the next 18 months.
Same investment.
I don't think it's the same decision.
$250k isn't always $250k
For the first investor, that check is about 2% of their net worth and less than 4% of their liquid money.
For the second, it's 10% of their net worth and more than 35% of what they have liquid.
Now forget about the projected return for a second.
What if they don't get their money back when they expect?
What if distributions are lower than planned?
What if their business has a bad year at the same time?
Investor one is probably annoyed.
Investor two might have to change something about their life.
Maybe they delay buying the house. Maybe they pull money out of their business when they'd rather leave it in. Maybe a great opportunity shows up and they can't take it because 35% of their liquid capital is sitting somewhere they can't touch.
That's a very different kind of risk.
The investment doesn't know anything about you
Every investment I've looked at comes with some version of the same information.
Here's the opportunity. Here's how we make money. Here's the projected return. Here's what can go wrong. Here's who's running it.
What it can't tell you is whether you should own it.
The person presenting the opportunity doesn't know you're buying a house next year.
They don't know most of your net worth is already tied up in your company.
They don't know your income can move around a lot year to year.
And they definitely don't know what opportunity is going to come across your desk six months from now.
That's your job.
A lot of investors are good at underwriting investments.
I think far fewer spend enough time underwriting themselves.
Five investments can still be one big bet
Say you own a business.
You also own another operating company, a few private loans, some real estate and a private equity investment.
Looks pretty diversified.
Then the economy gets ugly.
Your business slows down. The other company misses its numbers. A borrower runs into trouble. Distributions slow. The private equity exit gets pushed.
All of a sudden a bunch of investments that looked different start having problems at the same time your income does.
That's the part of diversification I care about more now.
Not just how many things I own.
What could cause a bunch of them to struggle at the same time?
Cash buys you something too
Cash looks pretty boring when everything is working.
You see investments targeting much higher returns and the money sitting in cash starts to feel wasted.
Sometimes it is.
But cash lets you move.
Your business needs money? You have it.
A competitor comes up for sale? You can make the call.
Markets get crushed? You can buy.
A great investment shows up next month? You can actually write the check.
That's the part of illiquidity I think people miss.
When you lock money up for years, you're not only giving up access to the cash.
You're giving up whatever else that cash could have allowed you to do.
That doesn't make illiquid investments bad. I've made a lot of them.
It just means there's a real cost to locking up money, even when the investment itself works.
This is what I care about now
I still do all the work on the investment itself.
Who's running it? How do they make money? What needs to go right? What happens if things don't go according to plan?
But I've learned to spend just as much time looking at my side of the equation.
How much of my liquid money am I putting into this?
Do I already own a bunch of things that depend on the same environment?
Could I need this money before I get it back?
What am I giving up by locking it away?
The biggest question for me is probably the simplest one.
If this goes completely wrong, does anything about my life have to change?
Sometimes I'm fine with the answer being yes.
You don't make money without taking risk, and I'm not trying to eliminate it.
I just want to understand the risk I'm taking before I wire the money.
After roughly 100 private investments, that's probably one of the bigger changes in how I think about investing.
Early on, I spent a lot more time trying to find good investments.
Now I think much more about whether a good investment actually belongs in my portfolio.
There's a difference.
A deal can have a great operator, make complete sense on paper and eventually produce a great return.
It can still be the wrong investment for you.
What I'm watching this week
There's a bigger question underneath all of this.
What are you actually building the portfolio for?
People throw around numbers constantly. $5M. $10M. $20M.
I don't think the number is the right place to start.
I'd rather start with the life you actually want, figure out what it costs, and work backward from there.
Breaking this down in a full solo video later this week.
- Sam Silverman
Silverman Capital
