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This is a very unique feature we offer entrepreneurs (human capital) which in turn lowers cash needs and helps accelerate the growth and profitability of our investment targets.

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What is an ‘Accredited Investor’?

An accredited investor is a person or entity that can deal with securities not registered with financial authorities by satisfying one of the requirements regarding income, net worth, asset size, governance status or professional experience. The term is used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include natural individuals, banks, insurance companies, brokers and trusts.

BREAKING DOWN ‘Accredited Investor’

Because raising capital entails costly regulatory filings, many companies offer securities to accredited investors, exempting the companies from registering securities with the SEC. Regulatory authorities verify that an individual or entity possesses necessary financial means or knowledge to take investment risks in unregistered securities, before he is considered an accredited investor.

Accredited Investor Requirements

To be an accredited investor, a person must demonstrate an annual income of $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income. An individual must have earned income above the thresholds either alone or with a spouse over the last three years. The income test cannot be satisfied by showing one year of an individual’s income and the next two years of joint income with a spouse. The exception to this rule is when a person is married within the period of conducting a test. A person is also considered an accredited investor if he has a net worth exceeding $1 million, either individually or jointly with his spouse. The SEC also considers a person to be an accredited investor if he is a general partner, executive officer, director or a related combination thereof for the issuer of unregistered securities.

An entity is an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. An organization cannot be formed with a sole purpose of purchasing specific securities. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.

In 2016, the U.S. Congress modified the definition of an accredited investor to include registered brokers and investment advisors. Also, if a person can demonstrate sufficient education or job experience showing his professional knowledge of unregistered securities, he is also considered an accredited investor.

Example of an Accredited Investor

Consider an individual who earned $150,000 of individual income for the last three years and reported a primary residence value of $1 million with mortgage of $200,000, a car worth $100,000 with outstanding loan of $50,000, 401(k) account with $500,000 and a savings account with $450,000. While this individual fails the income test, he is an accredited investor according to the test on net worth, which cannot include the value of primary residence and is calculated as assets minus liabilities. The person’s net worth is exactly $1 million, which is calculated as his assets of $1,050,000 ($100,000 plus $500,000 plus $450,000) minus a car loan of $50,000.

Source: Investopia

Beating the market over the long term is hard to do.

If you want to learn how it’s done, Berkshire Hathaway bears repeated study…

My lead analyst Thompson Clark and I recently returned from the annual Berkshire meeting in Omaha, Nebraska.

Berkshire was the top performer in 100 Baggers, my study of stocks that returned 100-to-1 from 1962 to 2015.

The stock had risen more than 18,000-fold, which means $10,000 planted there in 1965 turned into an absurdly high $180 million 50 years later versus just $1.1 million in the S&P 500.

Berkshire, and the other 100-baggers in the study, affirms that not only can you beat the market, but you can also leave it miles behind…

There are two important factors you need to consider to get that kind of outperformance. We’ll go over them in today’s essay.

No. 1: Don’t Own Too Many Stocks

First, you have to be concentrated. You have to focus on your best ideas. You can’t own a lot of stocks that just dilute your returns.

And, in fact, this is what many great investors do. There was a book that came out last year called Concentrated Investing by Allen Benello, Michael van Biema, and Tobias Carlisle. (Highly recommended.) The basic idea behind the book is that owning a portfolio of fewer stocks (10-15 names) leads to better results than a widely diversified one.

Warren Buffett, as is well-known, did not hesitate to bet big. His largest position would frequently be one-third, or more, of his portfolio. Often, his portfolio would be no more than five positions.

There is, for example, the time he bought American Express in 1964 in the wake of the Salad Oil Scandal, when the stock was crushed. He made it 40% of his portfolio.

Charlie Munger, too, is famous for his views on concentration. He’s had the Munger family wealth in as few as three stocks:

My own inquiries on that subject were just to assume that I could find a few things, say three, each which had a substantial statistical expectancy of outperforming averages without creating catastrophe. If I could find three of those, what were the chances my pending record wouldn’t be pretty damn good…

How could one man know enough [to] own a flowing portfolio of 150 securities and always outperform the averages? That would be a considerable stump.

The book also includes profiles of investors who ran such concentrated portfolios. These include Buffett and Munger along with lesser-knowns such as John Maynard Keynes, Lou Simpson, Claude Shannon, and more.

Lou Simpson ran Geico’s investment portfolio from 1979 until his retirement in 2010. His record is extraordinary: 20% annually compared to 13.5% for the market.

Simpson’s focus increased over time. In 1982, he had 33 stocks in a $280 million portfolio. He kept cutting back the number of stocks he owned even as the size of his portfolio grew. By 1995, his last year, he had just 10 stocks in a $1.1 billion portfolio.

Claude Shannon is another. He was a brilliant mathematician who made breakthroughs in a number of fields. He might also be the greatest investor you’ve never heard of. From the late 1950s to 1986, he earned 28% annually. That’s good enough to turn every $1,000 into $1.6 million.

He also was extremely concentrated. At the end of his run, one of his positions (Teledyne) made up 80% of his portfolio, up 194-fold. That’s concentrated to an extreme that few could stomach.

The point is many great investors focus on their best ideas. They don’t spread themselves thin. And there is also more formal research in the book that supports the idea that focus is a way to beat the market.

No. 2: Leave Your Stocks Alone

The second part of this is to hold on to your stocks. The power of compounding is amazing, but the key ingredient is time. Even small amounts pile up quickly.

In Omaha, we heard money manager Raffaele Rocco retell an old parable…

There once was a king who wanted to repay a local sage for saving his daughter. The king offered anything the sage wanted. The humble wise man refused.

But the king persisted. So the sage agreed to what seemed a modest request. He asked to be paid a grain of rice a day, doubled every day. Thus on the first day, he’d get one grain of rice. On the second day, two. On the third day, four. And so on.

The king agreed… and in a month, the king’s granaries were empty. He owed the sage over 1 billion grains of rice on the 30th day.

I have heard other versions of this story, but I like it because it shows you two things. The first is obvious: It shows how compounding can turn a little into a whole lot.

But the subtler second lesson comes from working backwards. If the king pays 1 billion grains of rice on the 30th day, how much does he pay on the 29th day?

The answer is half that, or 500 million. And on the 28th day, he pays half again, or 250 million.

So you see that returns are back-end loaded. This is 100-bagger math. The really big returns start to pile up in the later years.

And we know the benefits of holding from our discussion above: It’s low-cost and tax-efficient.

These two factors alone – a concentrated portfolio and low turnover – are important ingredients to beating an index and amassing serious wealth.

Buffett himself used a concentrated portfolio and low turnover to build Berkshire. And these two factors are also key parts of our project at Focus.

Our goal is to not merely beat the index, but to trounce the thing and make it irrelevant. We aim to compound our investors’ capital at a high rate for years and years.

So far, so good… Of the five recommendations we’ve made over the last seven months, two are already up by double digits and one is up by triple digits.

This article was originally published in Bonner & Partners on May 27, 2017

First-time angel investors should know what they’re getting themselves into before writing any checks.

By Young Entrepreneur Council

So you want to invest a promising startup that you believe could have unicorn potential. Before you sign that check, however, think about what your new role as an angel investor will entail: are you investing solo, or joining an angel group in order to mitigate risk? Consider the implications and establish some ground rules before you go all in on that investment.

Below, nine entrepreneurs from Young Entrepreneur Council (YEC) offer their advice — from pitfalls to beware of to best practices to follow — for those considering adding the title of “angel investor” to their resume.

1. Don’t put it all in one place

You need to have an idea of how much you are going to invest. Meanwhile, you should have a pool of money reserved before making an investment so you have another chance to invest if your initial investment is growing fairly well.–Kevin Xu, Mebo International

2. Establish the limits of your relationship early

The biggest source of drama when working with angel investors is the level of influence they expect to have in the company. It’s tough enough when angels with no experience in business demand a lot of executive control, but it’s worse when the control isn’t well-defined. That’s something you need to be clear on not just with them, but with yourself. Changing the parameters of when, how and to what extent you’ll interfere will make a relationship go sour faster than anything else. So spell that out the first time you meet, and spell it out as clearly as you can in every single contract and document. Even speaking from the other side, I can say that angels deserve the right to protect their investment, but not all of them are as qualified to do that as they imagine they are.–Adam Steele, The Magistrate

3. Develop a personal investment thesis

Angel investors need to define their personal investment thesis on the front end. The thesis serves as a decision-making guide for which deals they should or should not invest in. As part of that thesis, the angel needs to think about five things: what type of return they are seeking: a return on investment, return on involvement, or both; whether the angel wants to invest in what they know industry wise or whether they are looking for diversity; how much money they wish to deploy over what period of time and into what number of companies; whether they wish to reserve money for follow-on rounds (advisable but not required); and what level of reporting and involvement is desired from the companies to make sure the investor is upfront with potential prospects.–Eric Mathews, Start Co.

4. Invest with others

It can be very risky to invest on your own for reasons including cognitive bias, being 100 percent on the hook financially, and not having access to the experience that other investors might be able to provide on the deal. By working with other investors, you can put your heads together to truly evaluate the opportunity and make the best investment possible. As a lone investor, it’s really easy to get caught up investing in friends or other opportunities in which you don’t understand all the potential implications of the deal today or in the future. They always say that “two heads are better than one.”–Andy Karuza, brandbuddee

5. Think in 10-year horizons

Software startups take seven years on average to grow from its first VC investment to an IPO. As an angel investor, you might be investing years ahead of that first VC investment. Be prepared to be locked into each investment for a decade or more. Only invest money that you don’t need.–Neil Thanedar, LabDoor

6. Invest in what you know

When it comes to investing, I stick to the same mindset as Peter Lynch of the Magellan Fun at Fidelity Investments. He says to “invest in what you know.” When investing in something, you are more likely to make smarter choices if you are in a business you know and understand.–Jayna Cooke, EVENTup

7. Save Monday for pro rata

Successful investing is about doubling down on the companies that are doing well. In order to do this, you need to reserve some cash to invest your “pro rata” in a company’s next round — this allows you to maintain your percentage ownership. For example, if you invested $25,000 at a 2.5 million valuation, you’ll own 1 percent of the company. If the company’s next round is valued at 10 million, you’ll want to invest enough to maintain your 1 percent ownership.–Bhavin Parikh, Magoosh Inc

8. Invest in people

When you’re looking to invest early in companies, you aren’t investing in products, you’re investing in the founders. The product will change many times over the course of the business lifecycle, which is why the founders will need to be passionate, skillful and motivated enough to stick to a mission. Ask yourself: Can this team pull it off? Can they work in stressful situations? Are they in it for the long haul? Have they had past successes? Do they get along outside of the office? Have they known each other for a long time? Are they experienced in the field? Can I offer value to them? Would they get along with me? If you answered no to any of these questions, you should reexamine the investment opportunity.–Scott Weiner, ClosingBell

9. Don’t invest just money

When you start out as an angel investor, the tendency is to focus on the money. However, if you’re an experienced professional in your field, you can take the business much further by investing your time and knowledge as well. In addition to investing financially, help your companies with time management, best practices for the industry, skills management, any tips on automation, and any other business advice you may have. Teaching a startup how to run their business more efficiently is better than throwing money at them until they figure it out or spend it all. You can also help them by connecting them with your professional network and guiding them with important business decisions.–Dave Nevogt, Hubstaff.com

The opinions expressed here by Inc.com columnists are their own, not those of AIN.

PUBLISHED ON: MAR 14, 2016

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