Alternative Investments – Diversification Part 3
I just recently read a couple of fascinating investing books and started listening to new podcasts that opened my mind to novel investing ideas that differ from the traditional dividend investing concept that has treated me so well this past decade. These ideas are fascinating because they appeal to the quantitative part of my brain.
I’m going to attempt to get some of these thoughts to paper by writing a multipart series discussing them. In short, they will be all based on the theme of diversification with an emphasis towards increasing performance as well as decreasing volatility. Yes, dividends will still be a part of them.
What investing books and podcasts peaked my interest? Stick around to find out. I don’t want to spoil the surprises by revealing my sources too soon.
Definition of Alternative Investment
When I discuss investments, I typically mean such things as stocks, bonds, ETFs, mutual funds, cash, etc. A good way to think about it is things that you can log on to your average online broker and purchase with the click of a mouse (and now at no cost thanks to the removal of commission fees!). Up until about the last year and half, all my assets were in these kinds of investments and were distributed with the largest concentration in the taxable account and the rest in a non-taxable Roth IRA.
From July 2018 onward, I decided to venture into the world of private investments. I’ll be calling these alternative investments from now. They include such things as real estate (farmland, rental), pre-IPO funding of companies, buying into part ownership of a private business, convertible debenture, and security token offerings.
Let’s touch on real estate first. I am specifically not including the value of my primary home/land. I may touch on this in the future since it is and will be a large part of my investments. I also do not have any rental properties…while I can see the advantage of having tenants pay off a mortgage for you, the risks, cost, and time associated with managing those properties and tenants does not appeal to me.
As you can probably tell from some of the content now on the site, I have started listening to Meb Faber’s podcast and reading his blog. It is an entertaining and informative podcast to add your podcast player if you are looking for more financial information to consume. There was a podcast awhile back entitled, ‘Carter Malloy, “I Looked At Farmland And Realized…It’s Wildly Inefficient”’. To be honest, this is one that I intentionally skipped when I saw it next in the queue. I wanted to learn more about stocks and things of that nature, not learn about farmland.
However, after getting caught up with everything else, I decided to take a listen… and I was blown away. Farmland is actually an incredibly interesting sector. In fact, since 1990 farmland has had a compound annual growth rate of 11.5%. $10,000 invested in 1990 would be worth nearly $200,000 today. This is also with much lower volatility. In fact, since the farmland index was first started in 1990, returns have been positive every year. The trouble with farmland is that it has been historically very difficult to directly invest in. This is where AcreTrader comes into play.
AcreTrader allows accredited investors to easily become owners of farmland. The two investments currently active on the site, a corn and soybean farm in Illinois with a wind turbine and an almond farm in California, are anticipated to have a net annual return of 9.2% and 11.9%, respectively. With global population growing and farmland becoming more and more scarce, this seems like a good situation to be in.
I have invested $9501 for 1 acre of the corn and soybean farm and $50,000 for approximately 1.46 acres of the almond farm. I will be keeping an eye on this space for more farmland investment opportunities. In the future, AcreTrader will also be offering a secondary market to trade ownership units in farmland, providing yet another way to participate in this market.
Investing in companies pre-IPO
Investing in private companies before they go public is also a great way to diversify. Everyone would have loved to invest in Facebook prior to its IPO. Even a company like Uber, who reached a high of 47.08 before dropping to the current level of 28.49 was a very lucrative situation for the early investors. While Facebook is an example of a situation that worked out for everyone, the early investors, those that invested in the IPO, or even those that bought shares on the open market, Uber, thus far, has not been kind to participants in their IPO.
The pre-IPO investors in Uber loved the IPO because it allowed them to cash out and sell their shares at a premium to the eager people of Wall Street. The early investors were finally able to exit their non-liquid investment. They did not care what happened to the price afterwards.
While I can only hope that the pre-IPO investments that I’ve participated in turn out as well as Facebook, I am not investing without any guidance. My investments have been thoroughly researched and then recommended by a few of the newsletters that I subscribe to, including Katusa Research and Curzio Research. Other investment opportunities have come from my co-workers. Speaking of my other alternative investments, here they are:
Uranium Royalty Corporation
URC’s pre-IPO funding was actually my very first investment of this kind following my qualification as an accredited investor. I bought 10,000 units at CAD$1.00/unit (USD$7645). URC is now having an IPO with units priced at CAD$1.50/unit. This unit includes not only a full free trading share but also a 5-year freely trading warrant! I attempted to get an even USD$20,000 allocation but, due to demand, was only able to be allocated 13,190 units at a cost of USD$14,916. This one is closed to more participation in the IPO and is trading on the TSXV.
Drake’s Organic Spirits – Private Placement
This is one that was recommended by a colleague of mine. Drake’s Organic Spirits makes the first and only spirit line in the world to be certified USDA organic, non-GMO Project Verified, gluten- free, vegan and kosher. I had a chance to sample some of its products, and it is delicious. Even better, it is a local Minneapolis-area business. I love supporting local businesses as much as I can.
In August 2019 I bought 25,000 units valued at $2.05/unit for a total of $51,250. Drake’s was already branching out into Target stores and was on the verge of a major deal with Costco. Since my investment, their business continues to grow. Revenue has gone from $350,000 in 2017 to $5 million in 2019 and with national orders from Costco, Albertsons, Hy-Vee, Target and Total Wine, revenue is expected to reach $100 million in 2020. A recent article in Twin Cities Business sums everything up nicely: Funding Round Gives Drake’s Organic Spirits a Shot of Growth. The Star Tribune also gives a great report: Minnetonka maker of frozen cocktail pops is poised for big growth — and Beyoncé played a role.
Drake’s Organic is one of the high risk but very high reward investments. Just a few days ago in December 2019, I was able to double my investment at the same valuation of $2.05/unit for another $51,250. With the growth and upcoming prospects for 2020 and beyond, the risk is substantially less for this second investment. My total investment is Drake’s is now $102,500. Yes, this is a ton of money to put into a single investment, but I believe the risk-reward ratio is very, very favorable in this situation. Losing $102,000 would hurt, but it wouldn’t affect me that negatively to any great degree. I wouldn’t have to sell the house or change my quality of life.
This was the second round of financing for Drake’s. The exit strategy for this investment is for them to get bought out by a larger company or to go public themselves. Either way, since I’ve gotten in so early, this investment has the opportunity to yield life changing wealth, opening the doors to other investments and to larger charitable contributions (which will be a topic for another blog post someday soon). In the meantime, I get to enjoy their products and read about their success in the newspapers.
Part ownership of a private business
As a partner at my company, I am now able to participate in the ownership structure of its business components and real estate holdings. These are more longterm investments (especially the real estate portions). Altogether, these investments total $165,500. For the moment they are funded mostly through an interest only unsecured line of credit at the bank at prime plus 0% (currently 4.75%). We are in the process of building a house as well so need the cash for a downpayment, but the amount of money being generated by these investments much more than adequately covers the interest rate we are being charged. Once things with the house are settled down, we’ll be able to start paying back the principal on this loan.
My next alternative investment is an weird thing called a convertible debenture. I had no idea what this was when it was first recommended by Katusa Research. It is, according to Investopedia, a “type of long-term debt issued by a company that can be converted into stock after a specified period.”
The convertible debenture that I invested in was one offered by Universal mCloud Corp. I bought CAD$15,000 (USD$11,346). In retrospect, I probably should have invested more. You’ll agree once you see the details. By loaning mCloud CAD$15,000, I will be receiving a 10% interest rate paid quarterly and repayment of the principal after a 3-year term, essentially giving me a 10% return for the next 3 years. This is a Canadian company so I am also receiving the interest checks in Canadian dollars, effectively alleviating some of my home country bias. However, even better is that I have the option to convert the debt into units, which each come with 1 share valued at CAD$0.50 and a full warrant exercisable in 5-years at a price of CAD$0.75.
Security Token Offerings (STOs)
The last alternative investment that I’ve participated in is an asset backed by the blockchain. If you are at all familiar with cryptocurrency like bitcoin, you are probably familiar with blockchain. The difference with cryptocurrency and security tokens is that the later is backed by an actual asset. Cryptocurrency is either backed by what people are willing to pay for it (bitcoin) or a stablecoin, which is typically pegged to a fiat currency like the US dollar.
There have only been a few security token offerings so far, but the sector is poised to grow rapidly. It allows companies to raise money in a easier, cheaper, and much faster way than every before possible. A good example to illustrate the positive aspects of STOs is the crowd funding platform, Kickstarter. When you fund a Kickstarter you are buying early or cheaper access to the product or service but you are not actually investing in an equity stake in the business. If you were one of the many people that funded Oculus on Kickstarter (raising $2.4 million), you may have thought you won the lottery when you read the news that Facebook bought Oculus for $2 billion dollars…alas, your Kickstarter “investment” only got you a prototype unit to play with and gave you no equity in the company or participation in the buyout.
Security tokens are different. These are actual equity ownership in the business. A good example of that is how you could have actually owned a piece of the St. Regis Aspen Resort or a luxury student residence or something as abstract as a Picasso.
The STO that I recently participated in was called Curzio Equity Owners (CEO). This allows me to participate in the profits and growth of the Curzio Research brand, a stock newsletter service. I have been listening to Frank since 2011 and value his advice. I invested $25000 at $4/token. Once the CEO token opens for free trading in July 2020, it will begin trading at $5 and then move from there as any stock might. It is backed by the performance and reporting of Curzio Research and will also hopefully be paying a quarterly dividend.
Future of STOs
Curzio Research hopes to become a hub for investment ideas regarding the security token market, which is set to boom in the next few years. I hope to be participating in more STOs over the next couple of years. If you are interested in learning more about the Securitize platform that CEO used, head over to their website…they actually used CEO as a case study.
Summary of my alternative investments
Convertible debenture: $11,346
Drake’s Organic Spirits: $102,500
Business partnership: $165,456
I will be providing updates of these alternative investments and anything new in the pipeline.
Thank you for reading through my three part series on Diversification: Home Country Bias, Portfolio Realignment, and Alternative Investments. Please do not hesitate to leave comments. I will respond to each comment as soon as I can.
1) Meb Faber's podcast and blog
2) Carter Malloy, “I Looked At Farmland And Realized…It’s Wildly Inefficient”'
4) Accredited investors
5) Drake's Organic Spirits - Funding Round Gives Drake’s Organic Spirits a Shot of Growth
6) Curzio Equity Owners (CEO)