Invest for the “Fall of the Wall?”

By Travis Johnson, Stock Gumshoe, February 23, 2016

Brad Hoppmann at Uncommon Wisdom Daily is pitching his “entry level” Cash Flow Kings newsletter by promising two “secret” investments that will help you profit from the “Fall of the Wall” … so what’s he talking about?

Well, the “Wall” is, of course, his metaphor for what a lot of folks, particularly the small investors he’s trying to convince to subscribe to his newsletter, believe to be the truth: Wall Street is set up to protect its own and keep the info and the best investments for “insiders”.

And I hate to cut to the chase too quickly, but he’s essentially saying that crowdfunding/crowdvesting (or whatever name you choose) is going to pull down this wall.

Here’s a sample from the intro:

“About 220 years ago, a small group of powerful men built a Wall.

“Its purpose?

“To hide the greatest money-making secrets in history from the rest of America.

“Behind this Wall lies the truth about Wall Street’s corrupt empire.

“Opportunities that have created some of the richest men in history …

“Information that has allowed certain people to make amounts of money most Americans can’t even comprehend …

“Even power and privilege that allows them to front run the entire stock market.

“In short, this Wall has divided our country — and our financial markets — into two very different sides.

“On one side are those who live and operate inside the Wall — a very small group of the wealthy elite who live in extravagance and luxury.

“On the other side is everyone else — an oppressed majority who live off the scraps of this corrupt system and have been on the losing end of Wall Street’s broken promises far too many times.”

I have a great deal of sympathy for the view that the richest of the rich are defending their “Wall,” and I regret that the rise (again) of the financier class has been so dramatic and has brought such a wildly disparate distribution of wealth… though using that to sell a “secret” investment idea is a little silly.

But we’ll leave that philosophical argument for another day — let’s move on and see how Hoppmann thinks this wall will come down, and how we can profit… even if it doesn’t mean we’ll be joining Steve Schwarzman in hosting celebrity-studded birthday parties for ourselves.

He says that the “Wall” was completed in 1933 with the passage of the Securities Act, and what he really means is that the move to “protect” unaccredited investors was actually a way to keep the good stuff for the accredited investors — that’s what the SEC calls the folks who have enough money that they should be financially sophisticated and able to do careful research (though they often are neither, of course) and, perhaps more importantly, can afford to lose a lot of their capital, and therefore shouldn’t require much regulatory protection. You’ll see the term if you try to invest in a hedge fund or other restricted investment, all you have to do to be “accredited” and therefore (in Hoppmans terms) be on the other side of the wall is have income of over $200,000 or assets (aside from your home, usually) of over $1 million.

Hoppman refers to this accredited investor rule using the term “Elite investor status” — here’s a bit more from the ad:

“You see, in 1933 the United States government passed the Securities Act, and with it what I like to call ‘Elite-Investor Status.’

“Those who obtained ‘Elite-Investor Status’ under this new act were fast-tracked inside the Wall and given special access to investments the rest of the public were outlawed from.

“And these types of investments presented opportunities to make amounts of money not possible through the normal stock market.

“Today, to obtain ‘Elite-Investor Status’ you either need to be worth $1 million or more, or have a yearly income of $200,000 or more.

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“To put that into perspective only about 5% of Americans qualify.

“So the other 95%, or more than 302 million Americans, are automatically denied ‘Elite-Investor Status.’

“And with it the ability to invest in companies before they’re released to the public, or in other words, investments in private equity.

“This is exactly what the Wall has protected. Up until now …

“Because for the first time, you can now access to these same kinds of investments, which have the potential to turn small sums of money into fortunes.

“Take Facebook. According to Business Insider … the Facebook IPO alone created more than 1,000 millionaires …

“And a few early investors made Billions!

“Peter Thiel, the founder of PayPal and one of Facebook’s first big investors, turned a $500,000 stake in the company into more than $1 billion.

“That’s more than a 200,000% return on capital.”

Of course, essentially all those millionaires created by the Facebook IPO were Facebook employees (I assume that all the venture investors in Facebook were multi-millionaires already, Mark Zuckerberg didn’t solicit many $5,000 investments), and Facebook shares were bought and sold many times by those employees for years before the IPO so it’s a bit disingenuous to say this all happened at the IPO, Facebook shares were trading at a higher price six months before the IPO than they were six months after the IPO. Though, yes, the shares that employees and insiders were selling could only be bought directly by accredited investors before the IPO.

And the reason that you’ll always see Peter Thiel’s 200,000% return cited by folks who are pitching private equity-type investments is that it’s incredible — and rare, and unusual. Facebook was a one in a million company, and Thiel bought in extremely early because of personal connections, skill, and expertise. And luck.

So yes, this is the point where I should remind you that private equity and venture capital investments, which are generally illiquid and come with high fees, also h