I hope you had a fantastic weekend! We are counting down the days until Summer here in the Kung Fu Family household and I personally cannot believe it is June already.

The year is 40% over…are you 40% closer to achieving your goals? I hope so! (I’ve got to get a move on, myself!)   🙂

Today I bring you Part 2 of my interview with Mark and Chris from Capitalist Exploits, and I hope you enjoy it!

Mark and Chris are true “smart money” investors who invest full-time and are quite successful at it (that’s an understatement!). Their area of focus is private equity and frontier markets, and even if that isn’t your particular area of focus I highly recommend you give this a read, because you will learn a tremendous amount from studying how sophisticated investors think and behave.

What do they think is important when investing? How do they evaluate deals? Do they diversify or concentrate?

Today we dig down deeper into the sexy world of private equity and answer those questions and more! Find out what Mark and Chris are doing with their money now, what they think is most likely in the future (inflation or deflation?), and what they invest in in addition to private equity.

Like most sophisticated investors I’m finding, they don’t mince words 🙂 and give a great interview!

Read on to discover their smart money “secrets” (although they will be the first to tell you that there are no “secrets”…just smart financial education, hard work, and experience!).

Susan:

I would love to find out a little bit more about your experiences with private equity and private placements. You both have vast first-hand experience with this, and I know my subscribers would love to find out more about those from your “been there done that boots on the ground” perspective.

Could you tell us a little bit about how you got started along the private equity path and what made you continue along it? How did you wade into your first deal and what did you learn from it? Also, if you are comfortable sharing, what percentage of your portfolio would you say that private equity opportunities now make up?

Chris:

I was first introduced to the concepts and some of the mechanics by a very successful investment banker I was fortunate enough to work with many years ago.

I didn’t actually go out looking for these investments per se; rather I was in search of specific investment opportunities, in certain countries that I’d identified as benefiting from macroeconomic tail winds. This approach led me directly into the private equity space.

Each investor needs to make their own allocations based on their own skills, risk parameters and an entire host of other factors. It’s really not possible to make any generalizations about these things. For me diversification is just lazy investing. I’m not a big fan of it… at least in so far as it’s taught in universities.

I know of exactly zero investors and entrepreneurs who have made millions diversifying. If you’re either too lazy or uninterested to manage your money then diversification makes sense, but I don’t think you can expect even half decent returns investing like that.

Many times when you invest in frontier markets there is no exchange available, so what are you going to do? The option to invest in public equity isn’t there. As a result, the majority of my capital is in private equity.

Susan:

Thanks Chris! I agree with you about diversification. As Warren Buffett said, it’s simply “protection against ignorance—it’s better to put all your eggs in one basket and then watch that basket very, very closely!”

Mark, how about you? How did you get started with private placements?

Mark:

My first foray into a private placement didn’t work out too well. I put some money into a friend’s venture. That friend’s agenda wasn’t properly aligned with the shareholders, which I unfortunately didn’t find out until after-the-fact.

I lost all of my investment.

That taught me a couple of valuable lessons, not the least of which was not to automatically trust your friends. (laughs)

It also illustrated to me how many moving parts can be involved in a deal. You really need to understand the management, first and foremost. Good management can make an otherwise bad investment work out, while bad management can bury a great idea.

I instinctively always knew that the big money, the real money, was made in deals the public would likely never get to be involved in, or, at least not early enough to be life-changing. Sure, Apple’s and Berkshire Hathaway’s come round, but those are few and far between.

The truth is, those kinds of returns are available much, much more frequently in private equity and private placements. As a result, I keep probably 90% of my wealth in these types of investments.

Susan:

Thank you Mark, and thank you both very much for sharing a bit about your personal portfolio make up!

I appreciate it, and I agree with you about management—I strongly believe in “people power“, too.

Do you focus exclusively on mining and resource companies, or do you also invest in other market sectors (like technology, biotech, etc.)? How important do you feel it is to be a “master” of a particular sector before investing in it?

Chris:

I try to stay away from mining as a whole. It’s just not “investible.” Mining is a crapshoot basically. It’s an arena where I do allocate some capital, but this is as a trade and never as an investment.

For instance Mark and I will participate in private placements in resource deals from time to time, mostly when the sector is demoralized and beaten down… like right now actually. It allows for those with capital to be very selective and to reduce risk. Risk is typically reduced since the financing terms become more attractive — investors know the companies are desperate, and that’s reflected in the terms. Things like half and full warrants coming with placements are an indication to investors to wake up and pay attention.

The key as always is management. I personally have zero interest in financing some unknown management team.

The problem for me in this space is that I personally have little to no idea how to value holes in the ground. In fact I’d go so far as to say that most brokers who are pushing this paper have even less understanding than I do. Furthermore, I would need to dedicate an entire chunk of my life toward learning what would be required for me to make intelligent decisions in this space. Even the smartest guys like Brent Cook manage to get it wrong. If a guy like Brent can get it wrong then I have little chance in that market. I need an edge, and I don’t have it in the resource markets.

I don’t invest in biotech. Again, I don’t know enough about it to have an edge.

Technology I love, as it’s completely scalable, it has minimal startup costs and Mark and I do have some investments in this space that we discuss frequently on our blog.

Susan:

Thanks Chris! You bring up many important points — the importance of finding an edge, playing in your area of strength, good management teams, and reducing risk when any of those are absent.

Mark, how about you, what are your thoughts?

Mark:

I knew an investor a long time ago who owned a logging company in the Northwest. This guy really knew a lot about forestry. He tended to invest in…

Wait for it…

Forestry companies!

Who’d a thunk it. He’d trade the big forestry products companies several times a year and he did very, very well.

Understanding an industry and applying that knowledge in your investing and trading can be a very powerful advantage.

If you’re starting out in investing I’d recommend picking an area and becoming obsessed with it. You don’t need to trade everything, and you can’t possibly do that anyway. Take a look at guys like Kyle Bass. They get a macro theme in their head and they just focus, focus and focus some more on how to position for it.

Jack of all trades but master of none is a quick road to the poor house.

Susan:

Thanks Mark, that’s terrific; I completely agree—mastery (or even obsession, as you say) is crucial to becoming a successful investor. Thank you!

How much of one’s portfolio would you recommend reserving for private placement opportunities in these early stage companies? I realize it’s extremely personal and highly based on one’s own risk tolerance, but can you give any guidance, particularly for someone just starting out on the private placement path?

Also, how many private placement opportunities should someone take place in at the same time? Is it important to diversify/manage your risk by investing at several at once, like with the highly speculative junior mining companies? How many is just too many to manage in your portfolio?

Chris:

As with anything in the investment space I hate giving advice since it’s a very personal decision and one that really, really needs to be your own. Investors need to internalize themselves. By this I mean take a very hard look at your own personal attitude towards outcomes and how to get from A to B. This may sound like a cliché but hear me out. When you decide what you want this is an all or nothing moment.

Let’s step outside of the investment realm for a minute. Let’s say you’re a smoker and you decide to quit. It’s actually very easy. The word “decision” comes from the Latin word decisio which literally means to cut off. If you think about it then a decision to quit smoking means to cut off all other possibilities. Simply you STOP. There, then on the spot. You cut off all other possibilities. It’s all or nothing. I mean you can either smoke or not. You can’t half smoke right?

Susan: True! (laughs)

Coming back to investing now and using that analogy, I don’t think investors need to start out saying hey I want to allocate 10% to bonds, 10% to large caps, and so on. This is lazy investing and lazy thinking.

If you want to get rich then laziness is not an option, unless I’ve been doing this horribly wrong.

The first question is the end result. What is it that I want? How do I get from A to B. The path to get there will be a factor of age, skills and resources.

So for example let’s say I’m 30 years of age and I have “decided” to reach a net worth of $1m by age 35. If I’m broke right now it’s unlikely I’m going to get there from investing. Zero capital is the first problem. I need to generate some capital – as much as is humanly possible. Then I will need to very specifically allocate that capital over the following 5 years.

If I find myself a job earning $50k a year and I can save even 20% of that and invest it I will need to generate some phenomenal returns on my capital to achieve my goal. Do I invest in T-bills? Do I invest in real estate, taking on leverage? Do I begin trading my capital in the spot forex market? The answer will likely drive the investor to seek a whole new set of skills in order to succeed.

For me portfolio allocation comes out of the investment landscape, not the other way around. It’s not something set in stone.

I’m quite happy to have the majority of my capital in cash if I can’t find anything smart to do with it. I’m equally comfortable allocating large amounts of it to very specific areas.

This would terrify a traditional financial advisor of course. I’m not saying that’s what others should do, I’m just saying that’s what I do and that has worked for me.

I think it’s foolish to place too much capital into one or two private deals. The caveat being that if you are personally involved in those deals then that’s possibly different. I know of many very intelligent, wealthy people who have literally all their wealth in their businesses. The further removed from any investment you are the less you place in that particular investment would be my rule of thumb.

Personally I have disproportionate capital allocations towards private equity. My portfolio would likely give a traditional financial advisor a heart attack.

Susan:

Thank you Chris! Mark, what about you?

Mark:

I’m the same way. If you looked at my portfolio you’d think I was insane. However, as Chris pointed out, diversifying is a sure way to do no better than the average.

I’m not interested in average, and I don’t have to be. I don’t have children, I don’t own a home, I don’t even own an automobile right now. I’ve been a perpetual traveler for the last 3 years. I live in rental apartments, hotels and airports. My laptop is my (second) best friend.

If I were just starting out I’d probably do it just like I’m doing it now. I wouldn’t buy an index mutual fund. I wouldn’t try to buy two dozen stocks either. I’d pick one sector that I was intrigued by and find a couple of stocks that show a bit of volatility (up and down price movement). You can’t make money on a stock that goes nowhere. Ask Microsoft investors over the last 5 years!

Susan:

(laughs) Yes, true that! Thank you Mark!

How do you go about finding the best opportunities? Is there a service out there that helps investors evaluate these?

Chris:

Well, it’s one of the reasons we decided to start Capitalist Exploits. There are plenty of armchair newsletter guys who’ll be quite happy to tell you what to buy for a fee, while their mandates preclude them from putting their money where their mouths are and their business budgets are centered around marketing.

You know I used to work in the IB world and it shocked me to see what marketing budgets looked like. These guys spend truly enormous amounts of capital telling investors how good they are, more than on their research in fact.

Think about that for a minute.

It’s disgusting, but hey, don’t get angry at it; the model works and fools and their money are soon parted. It’s just the way it is.

There is a force I like to see at work. That force is called “ass on the line.”

It’s why we invest our money in businesses where management have this force at work. It’s why I take with a grain of salt a recommendation from anyone who does not have their ass on the line.

Don’t show me a CEO with a 6-figure income with no stock in the company (and no I’m not talking about issued stock… I’m only interested in capital saved and invested himself/herself… I want to see him or her experience some financial pain if things go sideways).

Susan: (laughs) I think you should trademark “ass on the line” — that’s a great rule of thumb and one often neglected!

Mark, how do you find these deals? Can you give us any advice?

Mark:

When it comes to finding opportunities I don’t know what others do, but for us it means looking for mis-priced assets where there is a fundamental case for investing at the same time. We work on a very simple strategy. We identify macro themes which are at play in the world. We attempt to find those which are not on the mainstream radar. This allows us to participate in the upside while reducing risk due to having a tailwind behind us.

This typically allows us to enter markets where liquidity is poor and pricing is difficult to obtain. We can buy assets at steep discounts — really steep discounts to NAV. I mean buying businesses for half book value or less. Businesses where the cash flows alone will dividend us out in a couple of years and leave us with a free carry on an operating, profitable business.

We look to invest where we feel we have a completely skewed bias in our favor, and where we can literally make multiples on our money. We’re not in the business of participating in lots of deals, just profitable deals.

It’s very simple but not easy. Chris and I spend an extraordinary amount of time on particular countries and sectors before we invest heavily. The due diligence process chews through capital and time and you have no guarantee of any reward.

When entering a new frontier market it’s simply not possible to fly in on a weekend excursion, meet everyone you need to meet, learn all you need to learn and fly back home again. This is better than not doing it at all I guess, but really just barely.

It’s one of the reasons we are hosting an investment summit in Ulaanbaatar in late July. We know what it takes to develop these networks and gather the requisite knowledge, and so we said to ourselves, “you know what, our readers can’t get this without spending months on the ground, and for most of them that’s simply not an option.”

We’re not seminar or newsletter guys and we’re certainly not marketing guys, we’re just two independent investors who make our money investing our own capital, so it’s a bit of a new thing for us to host a seminar.

We put together the culmination of over a year’s worth of networking and due diligence to let investors obtain, in a few short days, the sort of information that would take them an extraordinary amount of capital and time to accumulate. We believe that sort of information is important and if you want to leverage what we created then you’re welcome to come along.

We’re also launching a membership network to share private equity deals with accredited investors. Those who are interested in hearing more about this service can go here for more information.

Susan:

Thank you Mark, that sounds like a fantastic service!

There is no better way to learn quickly than by having a good mentor, someone who’s done what you’re trying to do and can show you the pitfalls and help you on your own journey to mastery.

So a quick shout-out to my readers—if any of you are interested in private equity or frontier markets investing, I encourage you to check out Chris and Mark’s service (and join them on their trip to Ulaanbaatar!).

Along these lines, what do you think of do-it-yourself sites like SharesPost.com where accredited investors can buy shares of pre-IPO companies? Is this a good idea or a terrible idea?

Chris:

I’m all for a free market in exchange of information, exchange of value and the ability for consenting adults to participate in whatever the heck they want to participate in, so from that perspective I love the idea.

The leveraging of information sharing now allowed by technology is truly revolutionary in this space. Remember the stock market is simply a market for trading shares in living, breathing companies.

E-bay is a marketplace for goods, as is Amazon, iTunes and a host of other platforms. Why should any consenting adult be precluded from investing his or her money into a business?

We’re allowed in most parts of the world to spend our money on gambling, even drugs in some countries… yet investing in prospective value-creating businesses shouldn’t be allowed?

Come on…

Susan:

I completely agree, and it’s extremely unfair that you need to be “accredited” to participate in the vast majority of these investments, particularly since “accredited” doesn’t necessarily mean “sophisticated” nor even “smart”!

What do you think, Mark?

Mark:

I agree with Chris on that. I support SharesPost and SecondMarket, and I openly support crowdfunding.

People have to get over this thought that some regulator needs to protect them from being a dumbass. Sorry Barney Frank!

Those who bought Facebook at $45 share need to lose their capital so they don’t make that mistake again!

But seriously, we all need to take responsibility for our actions. I agree with Ron Paul when he argues for legalization of drugs (or at least de-criminalization).

Just because heroin is legal doesn’t mean that a thinking, rational person is going to go and shoot up. My beliefs don’t make room for regulating common sense.

Susan:

Thank you guys, I agree — just look at Amsterdam, notorious for being “open” about pot and sex…they have a much lower crime rate than the U.S., where just about everything is illegal! I read an interesting article recently on CNBC talking about America’s Nanny State laws…these days everything from drinking 16 oz. of soda to wearing saggy pants to driving with muddy tires is against the law!

I was just at our friend Doug Casey’s “Recovery Reality Check” conference in Florida, and the mood there was quite bearish for the global economy in the near future. Do you share that view or are you more optimistic? Do you foresee inflation or deflation in the years to come, and how are you investing to protect against that?

Chris:

Am I bearish? Yes and no.

It’s true that the world is more interconnected than ever before, but we still live in localized environments. Here in Asia the ’08 crisis had very little impact compared to many other places. At the same time, certain sectors grew very quickly in the midst of the crisis. This will continue to happen.

Let me elaborate… The enormous capex commitments that are being made in a place like Mongolia, a market we are very focused on, will not be curtailed even if we have an ’08 redux. This is a fact. Those capital commitments are taking place, and will continue to take place irrespective of extraneous events.

We’re looking at roughly $30 – $50 billion in infrastructure spending in Mongolia over the next few years. Remember, this is an $8 billion economy. Even a half-wit can put 2 and 2 together here to reach 4, so I’m very bullish.

If you’re talking about Japan, Europe or the US for example then there are some very serious problems which are being made incrementally worse with each passing day by the navel gazing, intellectually empty sociopaths that are steering the ship… so yes, I’m bearish.

I think it’s incumbent on investors to understand the forces at work globally. Americans in particular are in a very dangerous position. Not because their house of cards is any worse than say the Europeans, but more so because they have for many years now survived in a near cocoon without the need to look outside of their borders to understand the world that exists. This is a psychological condition that pervades the establishment and middle class. It’s very, very dangerous.

In answer to your last question with respect to inflation and deflation. I think stagflation is the most likely outcome here. I think inflation would be likely where relative options existed. For example, if we didn’t have a situation where the 3 largest currency blocks are also 3 of the ugliest. It’s extraordinary to see a monetary system built on relativity. There is no underlying foundation for sound money in any of the 3 options available today, namely the Yen, Euro and Dollar.

I’m not willing to say that this is going to end tomorrow; I don’t know, but what I do know is that a setup such as that which we find ourselves in today has never worked in the past and it won’t work this time either. I’m protecting myself from that eventuality by investing in markets which are relatively uncorrelated to the indebted west, as well as investing in productive real estate and precious metals.

Susan:

Thank you, Chris, that is very helpful. I am working to do the same!

Mark, how about you? What are you focused on in your portfolio these days, and what do you see on the horizon?

Mark:

Private equity. Investments that are outside the financial system. I’m placing some capital in frontier markets, backing agriculture, stocking up on precious metals, some mining shares (especially right now). I’m buying land in Fiji, which is something I’m really, really passionate about. It’s a bolt hole beyond comparison.

I also voted with my feet. I’m an American, I’m a patriot and I’m sick and tired of the criminals that have been calling the shots during my entire lifetime. I left the States a few years ago and have a second permanent residency and soon a second passport. My illustrious partner has 3 passports, lucky dog.

I love America, but the United States is on a crash course with reality and it’s going to be a very messy affair. I foresee some price inflation, in fact you can see it everywhere right now. The government statistics are about as reliable as the rest of their propoganda.

Precious metals are the BEST way to hedge against this.

Another really, really easy way is to stock up on goods that you need, while prices are cheap. If you see tuna on sale for 20% off, buy a few extra cans.

Where else are you going to make 20% on your money? Think about it…

Susan:

Thanks Mark, that’s terrific advice. I would love to talk with you about Fiji sometime (as you know, Kung Fu Guy is an islander, too, hailing from Hawaii!). We are working on second passports, too, and on internationalizing our assets to the extent that we can.

Thank you for sharing what you guys are doing with your own portfolios and what you foresee in the future — that is very, very helpful and I’m sure my readers appreciate it!

We don’t have much more time, although I could talk to you all day, so let’s get back to private equity quickly before we have to sign off…What is your best recommendation for someone just getting started in the private equity space?

Chris:

It’s not rocket science. Find smart people in the area you’re interested in and learn from them. If you’re interested in resource private placements for example, guys like Rick Rule, Doug Casey, Brent Cook and so forth are very valuable. Pay them what they’re worth because it will save you a lot of money.

If you’re going to go it alone first determine the reason you’re investing. Evaluate the landscape for the business you’re looking at, evaluate the business itself and especially the management. Look at the offer based on all the aforementioned.

As I said before, Mark and I will shortly be opening up a membership service for participating in private placements. Readers who are interested can reach out to us if they want to know more.

I’d like to also note that when investing where you are leading a round, you have the ability to structure deals as you see fit. Creating convertible bonds and so forth which I spoke about when attempting to solve the pre-money valuation conundrum. This is naturally something that you’re never in the position to do when investing in publicly-listed equities.

Susan:

Thank you Chris, that’s a really important point and yet another advantage to private vs. public equity investing! Mark, what do you recommend?

Mark:

Seek out and infiltrate a network of people smarter than you to feed you deals. Chris and I are really good at that. We recognize that we don’t know everything, can’t know everything, and frankly don’t want to know everything. We’re really good at finding the right people, in the right sectors.

Learn that skill. Go to conferences, attend events (like our Mongolia Meet Up), talk to CEO’s and CFO’s at company’s in the sectors you’re interested in.
Travel. Getting out into the world has been the SINGLE MOST IMPORTANT thing I’ve done for my bottom line and piece of mind. I met a 9-year old the other day at lunch who speaks 4 languages fluently, including Mandarin Chinese (he’s not Chinese by the way). Expand your world view. It’s not an option any longer. Those who don’t are destined to struggle going forward.

When you put yourself out there you’ll be surprised at the opportunities that come your way. Sitting at home won’t help your deal flow. My mentor told me 20 years ago to hit the road sooner than later. I did it a bit later, and I regret it. If you’re a young person just go, get out there and go. Isn’t being average a bit boring? No one needs to be average.

Susan:

Hear, hear!  I completely agree. Heck, I got to meet you in Chile!   🙂   And like you, I credit the most interesting and life-changing opportunities in my life to putting myself out there and getting out into the world — I can’t recommend it enough.

OK, any last words of wisdom or advice you can share with us?

Chris:

Yeah, listen to Kung Fu Girl!

She has some good advice.

Susan: (laughs) Thanks Chris!

Mark:

Don’t over-diversify and learn to manage your risks. Become a student of history and realize that it does in fact repeat, and as I said earlier, this time is not different.

Take care with your thoughts — especially your thoughts regarding money. Fear of lack repels money and success. I’m a capitalist, and I instinctively know that there is MORE THAN ENOUGH to go around, despite what the socialists and liberal pundits babble on about.

Susan:

That’s great guys, thanks! And yes, I am down with the abundance mentality — it’s a big wide world out there filled with more than enough opportunities and money for everyone!

It’s been great talking with you; thank you so much for your time!

Chris:

No problem KFG; great talking with you, too!

Mark:

Thanks Susan; hope to see you in Mongolia!

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And there you have it, straight from the horses’ mouths.  🙂

Chris and Mark are super-savvy investors and believe in the same values I preach here on Kung Fu Finance — the importance of getting out there and networking with other investors, PEOPLE and management, discipline and patience, focusing vs. diversifying (although it is important to diversify correctly…it’s Yin and Yang again, two complementary opposites!).

I hope you enjoyed our interview and I hope to bring you more like this in the future if you did!  Please let me know what you think in the comments!

To your financial success,

— Kung Fu Girl