So Profitable, It Should Be Illegal
I had this conversation more than a decade ago, and yet I remember this part of it as if it were tattooed on the back of my hand.
"No, man, once you reach that level, you don't buy stock on the open market anymore. You don't buy retail. You buy it privately, and you don't pay full price."
I was being lectured by the guy who brought me into this business — a guy who would go on to teach me the ropes, the rules, and the exceptions of a kind of investing that only one in a hundred or so investors ever get to touch.
"I know it feels great to land a 100% or a 200% gainer and see those green numbers grow on your Scottrade account, but let's get real, how many times does that happen? Even if it's a couple times a year, only a psychopath would risk their entire nest egg on one big swing after another. Even the most risk-insensitive investor is going to allocate measured amounts for every play, and for every home run, you'll probably get at least one or two losers."
"The real way to do it is to go private. Of course, before you can do that, you're going to need a few things."
Those "few things" that he mentioned included a substantial network of investors, company executives, and brokers — rich guys, basically, who knew the business and knew who the players were.
The requirements didn't end there, however.
Nothing Worthwhile is Easy
To get into this private investment club, you needed friends, but you also needed assets. You see, the risk involved with this kind of investing was deemed so high by the federal government that in 1933, in the wake of the biggest stock market crash in history, it established rules for participating.
To get richer using this investment strategy, you already had to be rich. You either had to satisfy a net-worth threshold or an annual income threshold.
I wasn't sure if this was where the saying "the rich get richer" came from, but as all of this was explained to me, it certainly popped up in my mind more than once.
Once you had those two basic requirements in place, however, things got interesting... really interesting.
Say a company you were interested in was trading for $1 per share on the open market.
Call the right guy at the right time, and you could get that same share for less than retail investors were paying — say just 50% of what the stock was trading for.
That meant the moment the sale went through, you already had a 100% gain on paper.
But that was only the first part of the equation. It got better.
Stop Watching Movies About Moguls. Become One.
Those shares often came with something called "warrants" — basically options to buy more of that stock at a later date for a set price, regardless of where the open market was trading those shares when you chose to exercise.
Typically, those warrants were good for a period of years after the initial stock purchase was closed, so if a year after I bought my heavily discounted shares, I wanted to buy more of them, that opportunity was mine to exploit.
Even if the stock had shot up dramatically during that intervening year, I could still get them for at or close to what I paid in the first transaction.
The only catch, in both parts of the deal, was that after the shares were bought or the warrants exercised, there was usually a restriction period — three to six months, usually — where I couldn't trade at all.
That was the trade-off. Once that period was over, however, the floodgates were open.
I could even use proceeds from the sale of the first batch, or tranche, of shares to exercise the warrants — thereby precluding the need for more investment.
If these private deals, also known as "private placements" in the financial industry, sounded like the stuff of the elite, it's because they were.
You needed to be connected to even learn about these opportunities, and you needed to be at least somewhat established to be able to get your foot in the door.
For those who got in, it was usually a one-way ticket to the next level.
Those rich investors you read and hear about in the news... few of them made it to where they are without getting their hands into these deals on a regular basis.
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Stop Trading Stock... Start Financing Progress
And why did they work? Simple... You weren't buying and selling shares from and to other retail investors, as you would when you buy and sell shares through your online brokerage account.
You were buying the shares directly from the company, which would then use the money you gave it to finance its next set of plans for expansion.
Capitalism in its purest, most direct form.
Like I said in the beginning, the conversation that first opened my eyes to the existence of this form of investing took place many years ago.
Things have changed a lot since then. My network has grown. My wealth has grown.
My ability to see opportunity where others didn't also expanded.
There came a point when I realized that despite the efficiency of this system, there was one unfortunate disconnect...
There were plenty of people out there who had what it took to qualify for private placement participation, with the exception of one element: the connections.
That was when I decided to make it a mission to start sharing the information I was amassing on a regular basis with those who could do something with it.
It was a win-win to me, because not only did qualified investors get to make money, but companies in need of financing could see another day of research and development; they could develop another technology or process or get another product to market.
If capitalism was a mechanism, I could serve as the oil to lubricate its gears.
The community I built around this premise is now a reality, and it's growing.
If you think you've got what it takes to become a member and start reaping the rewards of private investing, click here.
Fortune favors the bold,
Coming to us from an already impressive career as an independent trader and private investor, Alex's specialty is in the often misunderstood but highly profitable development-stage microcap sector. Focusing on young, aggressive, innovative biotech and technology firms from the U.S. and Canada, Alex has built a track record most Wall Street hedge funders would envy. Alex contributes his thoughts and insights regularly to Wealth Daily. To learn more about Alex, click here.