Beating Billionaires

Do you want to learn an investing strategy that beats the returns generated by the greatest investors of all time?

I’ve earned an estimated 143.3% return on my money from 2017 up to the point of this writing.

Investors working with me in our framework of passive investing have beaten Buffett, George Soros, and other wizards of wall street.

How did we do that? That’s what I cover in this article.

In this article, I’m going to share an investing strategy that outlines how you can earn a higher return then Warren Buffet and George Soros earned in their respective funds.

Yep, those are billionaires.

They’re legends in the investing field.

Yet, their investor’s returns aren’t as impressive as you’ve been led to believe. Don’t get me wrong, I’m not a billionaire, and their personal wealth is impressive. That’s a different thing than the return they’ve earned for investors.

I know I’m making a big promise, but there’s simply a better way to build wealth.

Read on and let me walk you through a different world of investing.

Investing Returns

This article is going to outline a strategy that small investors can use to earn better returns than Warren Buffett and George Soros.

I’m talking about the fast lane of investing.

To kick it off, let’s benchmark the numbers.

Here are the returns produced by the titans of wall street:

• Warren Buffett – Buffett Partnership – 29.5%: This was Buffet’s fund before he “retired” and bought Berkshire Hathaway. His fund compounded annually at 29.5% from 1956-1969 (Absolute Returns – Kindle Location 663 of 6085). Buffett’s numbers fall to 26% if you take the 44 years ending in 2001, so I added that to the below table as a reference.

• Warren Buffett Leading Berkshire Hathaway – 19%: Berkshire Hathaway grew at an even slower rate than his fund. Berkshire Hathaway’s value grew on average 19% annually since 1965 (Lynn Alden). As funds or businesses grow larger, their returns tend to go down.

• George Soros – Quantum Fund – 31.6%: After fees, Soros grew his investor’s money at 31.6% from 1969-2001. That likely makes him the best (large) money manager of all time.

• Peter Lynch – Magellan Fund – 29%: Peter Lynch, another investment legend grew his investor’s money at an annual rate of return of 29%. He was likely the best (large) institutional money manager. Warren Buffett and George Soros both built their own funds from scratch and didn’t have to work within the constraints of a larger institution which is often another barrier to high performance.

Let me summarize the above numbers:

Table 1: Returns of Legendary Money Managers

Based on those returns, beating the return that the greatest money managers of all time achieved means getting above 31.6% IRR. That return gives you triple the historic stock index funds return (10%), and beats the top money managers in the world.

So what? 

You might ask. What’s the practical difference between a diversified portfolio (4% return – 6% return) and a 32% return that beats Soros’s Quantum fund?

To put this in practical terms, a 32% return means an early retirement on the beach with $380,000 of retirement funds producing $120,000 per year in passive income. In other words, we’re not waiting for $3 million of savings and the 4% rule to do the same.

Definition: The 4% rule basically says you should save enough money so that you could live off 4% of the principle. That allows you to get a public market portfolio of assets, and still comfortably live off your between different portfolios and asset classes in more depth.

Let me take you into the Average Joe’s life and run a few scenarios.

Scenario 1: Average Joe at 4% Return: Let’s take the average college educated income earner, saving 10%, and investing in an average 4% (Ray Dalio, All Weather portfolio written about by Tony Robbins). Average Joe gets average raises for his life. In this scenario, he reaches $1.5 Million at retirement age. Using the 4% rule he has to retire on $60,000/yr for him and his spouse with the risk that if he lives longer than average, he’ll run out of money.

Scenario 2 – Average Joe at 32% Return: For a second scenario, take the same Average Joe, saving the same 10%, and making the same average income but receiving a 32% return. He can retire at age 32 making $126,228 per year in passive income without touching the principle. That’s one decade of work, and a lifetime of living life on your terms.

Scenario 3 – High Income Earner at 32% Return: Now let’s add some hustle to the numbers. Let’s say you’re at a 30% savings rate. Then you’re earning $100,000/yr salary. I think this is achievable for most hard working couples who work hard at saving. They can retire in 5 years making at $90,000 per year in passive income. That’s the Fast FI target for financial independence.

Now that I’ve established the baseline and explained how return practically affects people, let’s dive into how you might achieve a 32% return on your money and beat Wall Street geniuses.

Definition: I’m considering Small Investors to be < $10MM. The larger your net worth, the harder it is to reinvest money using the strategy I’m going to discuss without defaulting to other private market investments that lower return.

Below I outline how I consistently, with managed risk, beat the returns billionaire’s get.

But first, let me discuss a few dirty secrets you’re not going to hear from Wall Street pundits.

Wall Street’s Dirty Secrets

In my article on Debunking Wall Street Wisdom (Click Here), I discuss why the best and brightest minds in Wall Street fail to beat the smart, small investor.

Check out that article to blow away all the Wall Street Wisdom you’ve been taught about index funds, diversification, and other myths of Wall Street.

Here’s a quick summary:

• Diversification Myth: Diversification across an entire index waters down your return to average. All you need to gain the majority of benefits of diversification are 8-10 uncorrelated assets. 20 Would gain you virtually all the benefits of diversification. That means 8-20 different uncorrelated businesses would suffice. Most high performing money managers like Buffett focus their money on only a handful of assets to manage risk and outperform the average. They don’t diversify to average.

• Public Market Return Myth: Public market investments cut return in half or up to a quarter of what you can make in private market investments.

• Money Managers Beat Small Investor Myth: Money Managers manage 100’s of millions or even billions of dollars. That means they CANNOT invest in high return, main street rentals or small businesses like the small investor can. Small investors can earn a significantly higher return than money managers by investing in main street. You can expect 15-20% if you invest rentals (double what index funds make) or 30%+ if you invest in small businesses passively. Harvard Business school showed this in their research on search fund investing which is essentially investing in someone to go find and buy a small or medium sized business.

• Index Fund Myth: For the above reasons, indices can easily be beaten by a smart, small investor with less than $10MM in assets. Wall Street money managers are geniuses when they can earn higher than market returns on $100 MM + in assets, NOT on less than $10 Million in assets. That just takes a little intelligence and some hustle.

I delve into this more in my article on Debunking Wall Street Wisdom, as mentioned above, but for now let’s move past that and cover how to beat Buffet’s return using a small business syndication.

Beating Buffett: The Small Business Syndication Strategy

In my Beating Buffett: Fast FI Portfolio Guide, I outline the strategy I cover below in more depth as well as a portfolio management concept, so grab a free download if you’d like to learn more.

Small business investing is interesting because it earns a high rate of return as well as produces cash flow.

Take a look at a few benchmarks below.

Figure 1: Public Market Benchmarks

Figure 2: Private Market Benchmarks

I broke out the Small Business Syndication return versus other private markets returns in the figure above. You can see that private market returns earn more then public market returns. Then in turn, the small business syndication strategy blows everything else out of the water.

I’m going to get into the brilliance of the small business syndication strategy which allows you to earn these high returns passively. However, let me work you through some of the math, so you understand the core concepts of this strategy I’ve built out over the past decade.

Many small businesses in the $500K – $2 Million range sell for 3 – 4 times earnings. If you pay them off in cash, they make a 25%-33% return.

Read that again. 25%-33% return unleveraged!

However, if you leverage up the business with a loan, you can earn your money back in 1 year. That’s a 100% return on your investment in cash. I’ve done this with every business I’ve bought with my own cash and I have earned over the last 6 years that juicy 143.3% return I mentioned in the first paragraph. The business pays for the loan and gives me my money back every single year in cash.

I typically buy a small business for 3x – 3.2x times earnings.

Are you one of those skeptics who doesn’t believe anyone without running your own numbers?

Don’t take my word for it.

Simply go onto your favorite small business marketplace and look at the different businesses for sale and their cash flow vs asking price.

Start with the biggest marketplace on the web as of this writing: BizBuySell.com. Skim the business list for a while. You’ll see small businesses with asking prices selling for 2-5 times earnings. You’ll see great investments, and wrecks that people are desperate to sell. Many of those businesses have the potential to earn 3x more than public markets, unleveraged or 10X+ leveraged. 

I’ve brought you through to the kernel of my strategy. However, there’s a catch, and we have to design a unique investing system to get past it. The holy grail of investing is to determine how to earn those Buffett beating returns passively.

There’s Always a Catch: The Operator Problem

There are a few catches in our little plan to defeat the demigods of finance.

One catch to get the returns I achieve is that you must become the operator. That’s hard. Trust me, I’ve done it 7 times (including the original company that I founded).

That’s also not investing; it’s management and buying a job.

A money manager on Wall Street can’t go out and buy 10 of these small businesses because each one requires an operator and unique knowledge on how to run the business.

Another problem that we’ll need to address are that the investment is illiquid, not diversified, and not scalable.

The difference between making 3x what Warren Buffett and George Soros could make on their investor’s money, and the pitiful 6% that you can likely get in a diversified public market portfolio (minus taxes, minus inflation) is active business management.

This is the problem I’ve been working on for the past 6 years. The trick is to figure out how we can buy a small business, and then turning it into a passive investment with empowered employees as quick as possible while managing risk. If you can master that process, you’ve beaten the masters of finance.

That’s what I’m good at.

Passiv-FI Your Small Business Investment

Small businesses outperform the stock market, and build wealth so much faster that it’s hard to over state.

There’s a reason most of the millionaires in the country are business owners. According to Zippia.com 88% of millionaires are small business owners in the U.S.

I already let you in on the secret, that small businesses can earn 100%+ on your money but it requires active management, leverage, risk and it’s hard to make it scalable above $100,000-$500,000 of capital.

That’s not really the passive type of investing that most investors are looking for. There’s also a bit of sleight of hand. In considering those returns, I’ve conflated two roles: the CEO’s salary, and the owners’ investment (aka investor). The question is: how do you get those high returns without the need for your time?

In my journey, I started by trading my time for the high returns I’ve achieved.

I used to buy businesses and run them myself. I’d take the CEO’s pay as well as the Owner’s pay and be very happy with the return and the salary I made. Gradually, I’d work myself out of the operator’s role and into the owner’s role as the business became passive.

Since I’ve been through the process of making 6 businesses passive there’s a new truth I learned.

If you find an operator at the beginning, you can accelerate a business to make it passive from day 1. I can also pull from all the lessons, resources, and processes I’ve learned over the last 6 acquisitions and improve the process of onboarding a new business. This allows me to reduce risk, increase asset diversification, and increase return.

This is a hard strategy to pull off. You have to spend 10 years building the skillset, the resources, and also become that critical Overwatch Insurance policy for the business.

What I mean by an Overwatch Insurance policy, is that if anything goes wrong in the business someone has to have the know-how to step in and fix it, then turn it passive again. Someone has to watch over the business. Hence the name, Overwatch Insurance.

My team knows how to do this. We’ve done it 6 times.

This realization is what led me to this final investing innovation: the small business syndication.

Let’s run some additional numbers to show how this has worked in my investing process, and how it would work for a passive investor.

First, we start with a search fund incubator. A search fund is basically a group of investors getting together and pooling their money to fund a business acquisition process.

Historically, search funds earn 38.5% IRR. Wow. That looks like it’s beating Buffett & Soros by over 6%! Here’s an infographic I put together summarizing the data from a Harvard Research Paper on search funds: Click Here. I also have a Search Fund primer you can download in my resources section or by Clicking Here.

Now that I’ve shown you a way to get that small business ROI that beats Buffett, let’s look at what we need to do to mitigate risks.

The search fund structure doesn’t offer oversight, vetting deals, or an entrepreneurial support function. At Drups Invessting, we call this set of risk mitigation factors Overwatch Insurance. Search Funds rely directly on oftentimes first time entrepreneurs acquiring an existing business. This is risky for small investors, and puts this type of investing out of reach for non institutional investors (Institutional Investors = $100 Million +).

What if there was an investing vehicle that would allow you to fund acquisitions, diversify risk, and place that Overwatch Insurance on top of a small business investment?

You guessed it. This is exactly what my team does at Drups Ventures.

What we do is source the operator on the frontend, and fund the business search, then roll all of that into a larger roll-up entity. A roll-up is simply a way to roll a lot of similar small businesses into a single entity that offers an Overwatch Insurance service.

The roll-up structure provides that Overwatch function of the larger entity to protect any of the individual businesses that falter as well as monitoring and setting high standards for management in processes and best practices. We achieve incredible results with managed risk, and execute best practices across the full set of businesses.

There’s one more ROI multiplier that you get when you do this.

Larger businesses earn a greater valuation multiple. I mentioned above that small businesses sell at 3 – 4 times earnings. What I didn’t mention was that when you group a collection of those $1+ million dollar businesses into a single entity, those multiples can go from 3 times earnings to 5x+ times earnings.

This offers a 66% return on top of getting that high return ROI from the earnings and value of a single small business. Granted, this return is split between the owners and operators, but when structured correctly it provides a method to manage risk while beating George Soros, Warren Buffett and Peter Lynch.

This strategy is scalable, creates diversification, and generates high return.

Let’s walk through the specific numbers and deal structure of how a deal like this is put together to earn that 32% return. Then if you’d like to learn more I’ll give you a resource that discusses how to turn that investment into a portfolio to manage risk while achieving a high return.

The goal is to balance the stock and profit sharing between the investors and the operator to give everyone enough of the pie that they’re all bought into the success of the venture.

Running the Numbers: Small Business Syndication

Let’s assume the investors are paying 50% of a $2 Million business, and financing 50% with a conventional loan.

The investor can take 59.1% in ownership to earn a 32% return thus beating the returns of the greatest investors of our time. That leaves 40.9% to incentivize an Overwatch entity and the operator(s) who are running the business.

Rinse and repeat 8 times and you have a diversified portfolio of small businesses giving you cash flow to fund the life of your dreams.

This investment strategy can be setup to check all the boxes of good portfolio management:

• Managed Risk and Diversified Assets: Diversification of assets to manage risk.
• Buffett-Level Investing Returns: 32% return, beating the top money managers of all time.
• Cash Flow: Investments that pay you cash flow each year.
• Early Retirement: A strategy that lets you retire in 5-10 years of saving rather than 45 years.
• Real Path to Wealth: True wealth building that leads to the life of your dreams.
• Cash Flow Not Merely Paper Wealth: Owning a dividend paying small business gives you cash flow, not only a net worth on paper.

Beating Buffett: How to Execute the Strategy

I’ve executed this strategy as an investor and operator over the past decade, and it’s led to incredible results. The strategy was so life changing for me that I decided to open it up to a larger group of people via my investment club.

Although I’ve focused my assets in this one strategy, it’s also easy to see how a percentage of your portfolio allocation put into small business investing can super charge your whole portfolio. Even a 10% allocation would drive up your whole portfolio returns by 58% if you’re using a traditional Ray Dalio, all-weather portfolio technique.

If you’re looking for a passive way to earn cash flow and retire early, this strategy is the best one I’ve found. My goal over the past decade was to turn this concept passive and make it available to the small investor.

This was the idea that we had when we put together our Fast FI investor club. We created a forum where investors can discuss different small business acquisition options, invest in small businesses, and turn them passive while maintaining that critical Overwatch Insurance to mitigate risk.

Smart small investors can beat billionaires.

If you’re interested in learning more about how to create a portfolio of small businesses for Buffett-beating returns, we expand on this idea in our Beating Buffett: Small Business Portfolio Guide which can be found by clicking here or in our Resources page.

I’d love to connect with you online, so take a look at my LinkedIn and social links below to stay in touch.

I’m going to bring this plane to a landing with a quote I love from Benjamin Franklin.

“The poor have little; beggars none; the rich too much, enough not one.” (Benjamin Franklin)