I marvel at how Wall Street creates wealth, even sometimes through high risk investing. Purchase a few 100 shares in a small company that hits it’s stride or a start-up that goes supernova and you could be a millionaire inside a decade.
That’s not the norm, for investors as it usually takes multiple decades of steady, solid investing to create significant wealth. But it does happen from time to time, as we all have seen.
That’s why we get caught up in new companies and try to buy in on the opening day of trading. IPOs (initial public offerings) tend to be extremely volatile, which is why investors are better off waiting for several months before they decide to purchase shares. (Unless you were investing in the 1990s bull market Internet frenzy when pretty much all IPOs skyrocketed on day one. Heck, mygrandmother.com would have opened 50 points higher!)
What if you could purchase shares in a company before it went public though? That would be stratospheric high risk investing – putting money into a company that might not even make it to market. Technically, I wouldn’t even call that investing. More like speculation.
Would you do that given the opportunity? Put money on the line with a chance to hit it big or lose it all? Here’s the story of when I did.
My High Risk Investing Venture
A few years after my wife and I were married, we met a couple at our church that we are still good friends with to this day. The husband worked with an individual who was involved in many high risk trading strategies. Day trading using sophisticated computer software. Venture capital deals. Put and call options. If you could name it, he was doing it and having some success.
He approached my friend about a dot.com business-to-business startup that was looking to raise funds for its company with hopes of eventually taking it to market. A group of investors he associated with were all putting money in on the deal. They were raising capital from any and all sources – friends, family, co-workers, the neighbor’s dog, etc.
My friend mentioned the deal one night at dinner and asked if we were interested. The company was promising one share of insider stock for every dollar we put in. My wife and I talked it over later that night and decided we would be willing to part with $1,000. So later that week I handed the money over to my friend who passed it along. We were in business.
I need to pause here for a minute to explain my reasoning for this because it sounds wild and crazy. Granted, it was. But the chance to be in on the ground floor of something was extremely intoxicating. This opportunity had never come along before in my life and I had no guarantees that it ever would again. (It hasn’t.) We felt this once-in-a-lifetime moment made it worth the risk.
I also felt comfortable handing over the money because:
1. I had an agreeable spouse.
2. We already had some emergency savings set aside.
3. We were invested already in several mutual funds.
4. I didn’t need the money for the mortgage or any other bill.
5. It appeared the trend was positive at the time for this type of company to succeed in the market.
For the next couple of months we talked often about our B2B start up with our friends. How’s it going? Any word? I checked out their website daily for any news. We dreamed of the stock being priced at $30 per share and doubling on day one. A month long Hawaii vacation with champagne and caviar seemed right around the corner.
What happened to be right around the corner was an extremely choppy market in late 1999 and early 2000. This put Wall Street on edge and some IPOs were delayed for fear of the volatile conditions. And in August of 2000, the market could no longer sustain it’s decade long bull market run and stocks nosedived – accelerated by 9/11 – for two straight years.
Bye-bye 1,000 $1-shares.
Bye-bye vacation in Hawaii.
High Risk Investing Debrief
Two questions emerged from this experience that I’ve thought over and through in the years that have passed.
Question #1: What’s the big lesson? The answer to this is twofold:
1. It’s foolish to anticipate or attempt to read what is right around the corner vis-à-vis the stock market. It has a short-term ebb and flow that cannot be predicted in advance. What looks good today may stink in three months. That’s why a long-term approach to investing is the wisest choice so one can ride out the short term ups and downs of the market.
2. I should have been more involved in and knowledgeable about the venture capital process. Perhaps contacted the owners of the company directly. At the least I should have met with my friends co-worker to feel him out.
Question #2: Would I do this again?
Yes (with an 80% probability).
I may lose some personal finance credibility, as this answer seems to completely invalidate lesson #1 above and much of what was written in my investing series. So let me be clear – I’m not out looking for these things. It’s not the pattern of investing that I want to rule my life. But if something crossed my path from a trusted source, I’d take a look at it. (Just being honest here folks.)
But I wouldn’t bet the mortgage money on it…or my kid’s college…or my emergency fund and retirement savings. It would have to be small time capital compared to my net worth – money that I wouldn’t regret losing if the venture went south. That’s what happened before, so I would have to go into it with that same scenario in mind. Hope for the best and expect the worst.
For me, the chance to have some limited involvement in a start-up before it went public would be an investing opportunity of a lifetime.
Questions: You may completely disagree with my answer to Question #2. That’s OK. Tell me why in the comments below. Ever had a chance to do some high risk investing? If so, how did it turn out?
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