Realistic Returns

I met up with an old friend recently and after all the catching up and all the football talk, we started talking about careers and business.
The conversation eventually turned to how I make my money in the private investing world. Once I started talking about alternative investments and real estate, the conversation quickly became as polarized as the upcoming election.

As I dove into my investment activities, it wasn’t too long before I mentioned the ROI on the last few acquisitions my companies have made and how our investors are making good money passively with relatively low risk.

It seems as soon as I mentioned a number above 8% annual return, the conversation turned sideways fast. “Logan, you’re crazy! No one is going to believe you can get those returns – ESPECIALLY WITH LOW RISK! Do you know who else promised high returns and low risk? Bernie Madoff.” Shoot. I could’ve mentioned an annual return above 5% and my old friend still would’ve flipped his lid.

Why is this so common? Because my friend, like the vast majority of investors, are Main Street investors. They’re used to Wall Street telling them how to invest. 

It’s my position not to try to convince a Main Street investor to become a private investor. It’s like convincing a politician, to tell the truth. It’s a waste of time.

It’s like trying to deprogram a person who’s been in a cult their whole lives. In a way they have been in a cult . . . the cult of Wall Street. And Wall Street has been telling them their entire investing lives that high returns are nearly impossible – and definitely not with low risk.

Main Street investors are right in a sense. High returns are impossible without high risk . . . that is if you’re talking about the stock market.

Over the past 30 years, the stock market (based on the S&P 500 index) has returned an average annual return of 4.61%. I said that skeptical Main Street investors like my friend would probably freak out if I mentioned any ROI above 5%. That’s because they know how hard it is to beat the market unless you cheat or get lucky by rolling the dice and taking on a lot of risks.

Main Street investors don’t think they can beat the market. This is actually backed up with data.

It turns out, 95% of the people whose job it is to beat the market fail. I’m talking about professional investors like financial advisors and brokers and mutual and hedge fund managers. This is according to SPIVA (S&P Indices vs. Active) who keeps a scorecard of the performance of professionally managed funds vs. the S&P 500. According to SPIVA’s 2019 year-end report, over the past 15 years, 95% of professional funds and investors have failed to beat the S&P 500.

Yeah, so it seems daunting to achieve better than a 5% ROI. But, here’s my secret and the secret of every other investor out there who has turned to the private markets to achieve above-market risk-adjusted returns:

Realistic returns ARE relative. What’s realistic in the public arena is not necessarily realistic in the private arena. 

I can’t blame my old friend too much. Most people haven’t been exposed to anything but Wall Street. This is coupled with upbringing, personal experience, and beliefs about money, and most people are indoctrinated with very conventional attitudes about risks and returns.

That’s why most people stick with something conservative like an S&P 500 index fund to achieve average returns or go completely in the opposite direction to make it quick by investing in risky stocks like penny stocks or stocks in distressed companies. And if the risk-takers look outside Wall Street, they’ll turn to even more volatile assets like Bitcoin, Forex, gold, etc.

To Main Street investors, high returns with low risk seem like a happy medium that just doesn’t exist. Those aren’t realistic returns.

What those investors don’t know is that high returns of 8%, 9%, and beyond are realistic. You just can’t find them on Wall Street. They exist in private markets.

You don’t think above-market risk-adjusted returns can be achieved in the private markets?

Look at the following developments and ask yourself why there is such intense interest in the private markets right now?

  • In a speech given in June at the PLI Investment Management Institute 2020, Dalia Blass, the Director of the Division of Investment Management at the SEC suggested that Main Street investors need more access to private markets for above-market returns. The same returns that the ultra-wealthy and connected investors have been enjoying for decades.
  • The SEC recently expanded the definition of an Accredited Investor to effectively make private investments more accessible to a greater pool of qualified investors.
  • Late last year, Mark Wiseman, the global head of equities at Blackrock, Inc., one of the world’s largest investment management firms with $6.9 trillion in assets under management, reported that 50% of Blackrock institutional investors are actively reallocating their assets from public to private markets. “We’ve never seen numbers like these before,” said Wiseman.

Ultra-wealthy and institutional investors have always favored the private markets – not only because of their non-correlation to Wall Street but for the types of returns not found on Wall Street.

Private investments in alternative assets like real estate offer the twin wealth-building benefits of cash flow along with growth that public equities don’t offer. Income, appreciation, and non-correlation to Wall Street are why private investments like real estate can offer investors above-market risk-adjusted returns.

Everyone has different tolerances for risk.

Main Street investors think that to achieve higher returns you must have a higher tolerance for risk. And if you’re risk-averse, you should expect lower returns from something less risky. I like to think there is a self-imposed risk informed by your biases and then there is a true risk.

Your biases tell you that achieving high returns at less risk is impossible. However, the true risk may suggest something different – especially with an asset like real estate. That’s because the true risk of investing in the private markets in something like real estate doesn’t play by the same rules as Wall Street offerings and therefore buck traditional attitudes about risk.

By offering income, growth, and non-correlation to Wall Street, private real estate investments CAN offer above-market returns – all with less risk.


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Logan Freeman

Building generational wealth with alternative investments