The Billionaire Next Door is my attempt to document an investment strategy that will compound to between $100M and $1 billion within my lifetime.

In this edition, I will lay out the “base case” for a $100M net worth, and the “best case” for a $1 billion net worth.

In future editions, I will share what I am investing in, and I will share the private investments that come across my desk for accredited investors.

If you would like to be on the private notification list for regular updates on what I am investing in, you can subscribe to it here.

Entrepreneurs are magicians - we know how to make money out of thin air. Unfortunately, we also make it disappear.

Like many entrepreneurs and high income earners, I know how to to make money.

However, learning to keep it and grow it is a different skill set.

Hindsight is 20/20, but I knew what I knew now, my net worth would be 10X what it is right now.

Instead, I treated wealth generation the same way that I treat entrepreneurship - ripe with risk and focused on the short term.

This newsletter will serve as a place for me to stay accountable to a sound long-term strategy. I will also share what I am learning and investing in, and encourage other entrepreneurs to develop an investment strategy for themselves.

How I Made And Lost $5 Million

I became an entrepreneur in 2006.

Like most new entrepreneurs, I did everything that I could to make money, without any focus on a long-term wealth plan.

I simply hoped that I could make enough money to eventually become financially free.

I had cash in the bank, but no investing plan… and I was only focused on making more and more money.

Then, in 2017, I sold one of my businesses to a private equity group for $16M.

My partner and I received approximately $10M up front (split between us), and we carried the rest as equity into the new company.

To a 29 year old, this was all the money in the world.

I was financially free forever. If I invested the money wisely, then I would never have to work again.

But I did not invest the money wisely, because I had never learned how to invest for the long term.

Instead of becoming a good investor, I treated my investing practice the same way that I treat my entrepreneurial career - I put the money into “good ideas” that would pay off in the short to medium term.

I invested the money into a variety of “entrepreneurial” ventures:

• $1.5M into a venture that bought turnaround opportunities.

• $1M into a business that was similar to the one I sold.

• $500k into a variety of startups and syndications.

• $1M into business that bought cash-flow websites.

• $1M into a lake house.

My entrepreneurial experience told me that this was a good idea, and I figured that at least some of these ventures would pay off big.

Instead, most of these investments (except for the lake house, which I still own) went to zero.

Within a few years, most the money that I invested from my big exit was gone.

BUT… the private equity group still owed me millions of dollars, right?

Well, the company that we sold to went bankrupt, and the $6M that we were owed went with it.

Thankfully, I had other profitable businesses, but the “nest egg” from years of hard work was basically gone.

I was only 32 years old, so I had time to recover, but I needed a better plan.

It took me two years just to get through the dark depression of feeling sorry for myself before I began to create a plan to create compounding returns over time.

It took several years just to get back to where I was, and now I am (once again) in the position to grow and compound my wealth.

I even bought back the company I sold from the private equity group, and I’m now restoring that to it’s previous glory.

Now that my net worth and my income is back to where it was, I have a second shot at creating a massive amount of wealth.

This newsletter is my documentation of developing and following a strategy of compounding returns over the long-term.

The Billionaire Next Door Strategy

If I had put all of my “exit” money into a well-chosen stock, like Apple or Microsoft, it would be worth tens of millions of dollars today.

If I had put all of the money into Bitcoin, it would be worth hundreds of millions of dollars.

I wish I had done that, but it is unlikely that I would have had the wisdom to pick an investment that would 10x or 100x in a period of a few years.

Of course, we all wish that we had bet on the “next big thing,” but that is very difficult in practice. Wishing in the review mirror is pointless.

On the other hand, if I had put all the money into a boring index fund, like the S&P 500, it would now have doubled in value.

However, it is unlikely that such a “boring” strategy would appeal to my entrepreneurial brain… because I enjoy pursuing new ideas and new strategies.

I was a young entrepreneur, so how could I have known that “boring” investing strategies could be wise?

I wanted to develop a combination of “boring” and “exciting” so that I could enjoy the process while still generating predictable returns.

That’s how the idea of compounding returns was born.

The strategy includes three buckets:

1. Boring: my investment practice must have a foundation of boring, long-term investments that I add to for several decades. This includes ETFs, index funds, and/or mutual funds that have a strong record of growth. If I do this consistently and aggressively for many years, then it should compound into tens of millions (or hundreds of millions) of dollars.
   
   This ensures that my portfolio will expand over time, even if I make stupid decisions in every other area of my life.
   

2. Value: I track a list of stocks and opportunities that I would love to invest in if they ever become undervalued. This includes companies that I believe in and want to own for many years. If done well, then value investing should “beat the market,” but I cannot count on being correct.
   
   In order to do this well, I must track a core group of companies and know them well than the average investor. Then, I must wait until they go on sale. With this in mind, there may only be two or three good investments each year.
   

3. Speculation: I reserve a small portion of my portfolio for personal investments, private deals, and things that make me happy. For example, I recently invested $50k into a co-working startup that I will personally use. This makes me happy and gives me connection to other entrepreneurs in my area.

If I follow a consistent investing plan that compounds for the rest of my career, then I will generate a net worth of between $100M and $1 billion, without making dramatic changes to my income or a windfall event (like selling a company).

The “Base Case” of $100 Million

I want to have a plan to become worth at least $100 million in my lifetime… even if I screw up anything else.

Since I have proven myself to be an idiot at times, my strategy must account for my own errors and stupidity, and still compound into at least $100M within my lifetime.

Therefore, the “boring” part of my investment strategy must compound into $100M… even if I get everything else wrong.

I assume that everything I touch will turn to poop except for my ability to produce income, and a long-term strategy into “boring” investments.

In order to account for my stupidity and mistakes, the model must be able to compound into $100M even in the “base case” scenario.

That means it must account for everything I touch possibly going to zero.

In other words, much would I need to invest into only the S&P 500 in order to become worth $100M?

I used the following assumptions:

1. Over the past 100 years, the average return of the S&P 500 is 9.7%. We assume that this average will stay consistent.
   
   For reference, the average return over the past 50 years is 10.25%, and the average return over the past 10 years is 15%. Therefore, we are using the most conservative of the averages.
   
   Of course, the index might perform worse than this, but we make our assumptions based on the long-term average.
   

2. We assume a starting capital amount is $1M. While I do not have a million dollars in the S&P 500, I have a few million dollars in other investments that I am willing to reallocate over time.
   

3. We assume a very long time horizon. How long? As long as we need to. Compounding returns get very, very impressive when you give it a few decades.

Using an investment calculator, we can determine the following:

If I invest consistently for 40 years, then I will need to invest $15,000 per month into the S&P 500 to build a portfolio of $100 million.

In other words, if I add about $200k per year into boring index funds, then I will become worth $100M over 40 years.

OK, I can work with that.

Sure, I’ll be almost 80 years old by then, but at least I have a plan.

When I ran these numbers for the first time, I relaxed.

It took the pressure off.

If all I do is invest $15k per month into the S&P 500, and the index performs at its historical average, then I will retire with more than $100M.

Since I know that I have a long-term plan that becomes worth at least $100 million over time, I can relax into doing meaningful, high quality work that also compounds over time.

In other words: even if my career stays exactly the same and I never have another “big financial win,” I will still retire with at least $100 million.

This allows me to focus on good work, which (ironically) will likely increase my income exponentially and grow my career faster.

From that foundation, we can make assumptions for the “best case” scenario, which assumes that my income will go up, and the “riskier” parts of my portfolio perform modestly.

The “Best Case Scenario” of $1 Billion

If I invest $200k per year into the S&P 500, and the index continues to grow at its historical average, then I will build a portfolio of $100 million over my lifetime.

This assumes that I “only” invest in the S&P 500, and I “only” invest $200,000 per year.

While that is a tall order for the average person, I am an entrepreneur and have control over my own income.

I will also probably have another windfall event or significant financial win in the future.

In other words, the “base case” scenario assumes that my life does not change and everything I touch turns to poop (except for the S&P 500)…

…BUT the “best case” scenario assumes that my income will continue to expand as my career progresses, and my other investments will perform.

The “Best Case” Scenario assumes that my total net worth will perform at least modestly, whereas the “base case” scenario assumes that everything will go to zero.

In this scenario, we make the following assumptions:

1. The starting amount is $5M (versus $1M in the “Base Case”). This includes the total amount of investments on my personal financial statement, plus the expected value of my private investments.
   
   For example, I invested $200k into a supply chain company ten years ago. It is now worth over $1 million.
   
   I do not have access to this money until the company sells, so this investment might go to zero. The “Best Case” scenario assumes that the company will continue to perform, and I will get the present value of the investment.
   
   My current portfolio is not necessarily well-balanced. This is just the “total amount” that I expect to have to work with as I refine the strategy.
   

2. I will invest (on average) $500,000 per year. I assume in this scenario that my businesses will increase in profitability, my lifestyle will remain modest, and my income will go up over time.
   
   Some years, I may have a windfall event and have millions of dollars to invest. Some years, I may take a loss. In this scenario, we assume that the average invested amount will be $500,000 per year over the entirety of my career.
   

3. The blended investment return will be 12.5%. If I continue to invest approximately $200k per year into “boring” investments, then the remainder will be invested into Value and Speculation.
   
   I assume that the more “aggressive” portion of my portfolio will generate returns of 15% per year, giving a total blended return of 12.5%.
   
   Once again, this assumes that all investments perform at least modestly, and nothing goes to zero. (There is a reason this is called the “Best Case”.)

Using these assumptions, we can calculate the following:

If I invest $500k per year with a blended return of 12.5%, then my total net worth will be in excess of $1 billion after 40 years.

Of course, both of these scenarios assume that life is linear, which it is not.

There will be years of abundance, and years of tight buckles.

There will be business setbacks, and there will be financial windfalls.

These scenarios simply provide a framework to develop a strategy that I can follow and improve upon for a very, very long time.

TL;DR

This newsletter will document my investment practice, which I will modify and follow for the rest of my life.

In my base case scenario, I invest only into index funds. If I invest $200k per year at the historical average of 9.7%, then my net worth will exceed $100M after 40 years.

In my best case scenario, I invest into a blend of index funds, value stocks, and speculative investments. If I invest $500k per year at a blended return of 12.5%, then my net worth will exceed $1 billion after 40 years.

I will share my investments, strategic adjustments, and learnings in future editions.

What I’m Investing In Right Now

Future editions of this newsletter will track what I am investing in, and any adjustments made to the strategy.

I will also share the private deal flow that comes across my desk.

For this first edition, I’ve included a brief breakdown of the public investments that I am actively making and tracking right now.

In future editions, I will provide more detailed breakdowns of each investment that I make on a regular basis.

Boring: VOO, VOOG, and QQQ: My base case scenario mandates that I invest at least $200k per year into boring index funds.

I currently rotate between VOO (the broad S&P Index) and VOOG (the Growth index), and I recently added QQQ into the rotation, since it has a higher concentration in growth-oriented companies.

I invest at least $15k per month into this category, with the intention of adding to it for several decades.

Value Investments: I follow a list of companies, but I only add them to my portfolio if they are significantly on sale.

If no stocks are currently trading at a significant discount, then I instead invest in a “boring” bucket. If, however, stocks from my list are trading at a significant discount relative to its value, then I will invest directly into them.

Below is a brief summary of some of the stocks on my watch list:

1. PayPal (PYPL): My highest conviction investment over the next ten years is PayPal, due to the vision of the new CEO, Alex Chriss.
   
   PayPal was my #1 pick for 2024, and it rewarded me with nearly a 50% return.
   
   I believe that this company will more than double in value over the next few years.
   

2. Pfizer (PFE): Pfizer is down more than 50% from its highs, but the company just turned profitable again. It also pays a healthy dividend of over 6% per year and has a strong management team.
   
   While its recent performance has been abysmal, PFE could make sense as part of my long term portfolio.
   

3. Alibaba (BABA): Alibaba is down 70% from its highs, but it is still insanely profitable, and it is an important piece of the Chinese economy. China has its problems, but Alibaba makes sense to me as part of a long-term value investment.
   

4. Kellogg’s (KLG): Kelloggs split into two companies in 2023, and KLG represents the cereal division that went public at a modest $1 billion valuation. This portfolio includes the brands Frosted Flakes, Fruit Loops, Kashi, Raisin Bran, Corn Flakes, Bear Granola, and others.
   
   The portfolio is extremely profitable, trades at a valuation of under $2 billion, and pays a healthy dividend. While it looks like an old school buy, it is operating like a startup. This company fascinates me, and Frosted Mini Wheats are delicious.
   

5. Disney (DIS), Target (TGT), Bank OZK (OZK), & Southwest Airlines (LUV): All of these companies are interesting to me for a variety of reasons. We will likely touch on them in future editions of this newsletter.

Speculative Investments: Finally, there are a few purely speculative investments that I track, including Bitcoin.

While cryptocurrencies are booming right now, they are nearly impossible to value. Yes, I wish I had bought more Bitcoin, but the reality is that its value is impossible to calculate, so decision-making is foggy at best.

Therefore, while it has outperformed nearly every investment in the world, we leave all cryptocurrencies in the speculative bucket of this portfolio, and we add to it sparingly.

The other speculative plays that I like right now include the following:

Ethereum: While ETH has more than 3x’d in the last two years, it has underperformed in comparison to Bitcoin. If the crypto market continues to boom, then I expect ETH to grow at higher percentage that BTC.

Rivian Stock (RIVN): A legitimate competitor to Tesla, Rivian is valued at just 1% of Tesla’s market cap. It is not yet profitable, but it is taking a foothold in my hometown of Austin, TX. This is an interesting company to watch, but it is hard to value due to the fact that it bleeds cash.

Tiny Holdings (TINY.V): I am a fan of Andrew Wilkinson’s work, but his public holdings have been wrecked since they IPO’d. To date, the Tiny Co stock has dropped by over 95%, making it a penny stock.

On the positive side, the portfolio is EBITA positive and has strong management. The thorn in their side has been their debt, plus the fact that they trade on a Canadian exchange. The US dollar has been very strong compared to the Canadian dollar, which puts a lot of downward pressure on Canadian values.

As a speculative play, I see a lot of reasons to like Tiny.

Coming Soon…

In future editions of this newsletter, I’ll cover what I invest in on a monthly basis. I will also break down my favorite investments currently available, and I will share the private investments that come across my desk.

Over time, we will modify and update the investment thesis, and my hope is that a community of investors begins to form and invest together.

Entrepreneurs are marvelous wealth creators, but we are rarely wealth multipliers. My intent is to lead the charge in changing that for other entrepreneurs.

Thank you for being along for the journey, and I’ll see you in the next edition. To subscribe to the notification list for when this newsletter is updated, sign up through this ugly and very legally compliant opt-in.