32% Return – The Investing Strategy that Beats Billionaires

Joseph Drups has earned an estimated 143.3% return on his money from 2017, and that is still true today.

Because of that, investors working with Drups Ventures in their framework of passive investing have beaten Buffett, George Soros, and other wizards of Wall Street.

How did they do that? That’s what we’re talking about here: how to beat billionaires.

Joseph Drups has shared an investing strategy that outlines how investors can earn a higher return than Warren Buffet and George Soros earned in their respective funds.

Yes, those are billionaires.

They’re legends in the investing field.

Yet, their investors’ returns aren’t as impressive as people have been led to believe. Don’t read that wrong. Their personal wealth is impressive. That’s a different thing than the return they’ve earned for investors.

There’s simply a better way to build wealth.

Investing Returns

The following strategy is one that small investors can use to potentially earn better returns than Warren Buffett and George Soros.

Moreover, this fast lane of investing contradicts much of the Wall Street wisdom that investors have been led to believe.

But the numbers speak for themselves, painting an intriguing image.

To start, examine the returns produced by the titans of Wall Street:

• Warren Buffett – Buffett Partnership – 29.5%: This was Buffet’s fund before he “retired” and bought Berkshire Hathaway. His fund compounded annually at 29.5% from 1956 to 1969 (Absolute Returns – Kindle Location 663 of 6085). Buffett’s numbers fall to 26% if the one takes the 44 years ending in 2001. All this data is summarized in the below table for reference.

• Warren Buffett Leading Berkshire Hathaway – 19%: Berkshire Hathaway grew at an even slower rate than his fund. Berkshire Hathaway’s value has grown, on average, 19% annually since 1965 (Lynn Alden). As funds or businesses grow larger, their returns tend to go down.

• George Soros – Quantum Fund – 31.6%: After fees, Soros grew his investor’s money by 31.6% from 1969 to 2001. That likely makes him the best (large) money manager of all time.

• Peter Lynch – Magellan Fund – 29%: Peter Lynch, another investment legend, grew his investor’s money at an annual rate of return of 29%. He was likely the best (large) institutional money manager. Warren Buffett and George Soros both built their own funds from scratch and didn’t have to work within the constraints of a larger institution, which is often another barrier to high performance.

The table below summarizes the above numbers:

Table 1: Returns of Legendary Money Managers

Based on those numbers, beating the return that the greatest money managers of all time achieved means getting above 31.6% IRR. That return gives the investor triple the historic stock index funds return (10%) and beats the top money managers in the world.

What’s the practical difference between a diversified portfolio (4% return – 6% return) and a 32% return that beats Soros’s Quantum fund?

To put this in laymen’s terms, a 32% return means an early retirement on the beach with $380,000 of retirement funds producing $120,000 per year in passive income. In other words, an investor isn’t waiting for $3 million of savings and the 4% rule to do the same with standard Wall Street investment methods.

As for the 4% Rule, it basically says an investor should save enough money so that they can live off 4% of the principle. That allows an investor to conservatively retire off a public market portfolio of assets.

It’s useful to consider the average person utilizing different return scenarios to illustrate the point.

Scenario 1 – Average Joe at 4% Return: This scenario takes the average college-educated income earner, saving 10% and investing in an average 4% return (Ray Dalio’s All Weather portfolio adjusted for small investors as described by Tony Robbins). Average Joe gets average raises for his life. In this scenario, he reaches $1.5 Million at retirement age. Using the 4% rule, he retires on $60,000/yr with the risk that if he lives longer than average, he’ll run out of money.

Scenario 2 – Average Joe at 32% Return: For a second scenario, take the same Average Joe, saving the same 10% and making the same average income. However, he’ll be receiving a 32% return instead of a 4% return. He can retire at age 32, making $126,228 per year in passive income without touching the principle. That’s one decade of work and a lifetime of living with financial freedom.

Scenario 3 – High Income Earner at 32% Return and 30% Savings Rate: Now add some hustle to the numbers. This scenario will take a 30% savings rate and use an investor earning $100,000/yr salary. This is achievable for many hard-working couples who are disciplined savers. They can retire in 5 years, making $90,000 per year in passive income. That’s the Fast FI (Fast Financial Independence) 5-year target that Drups Ventures generally aims at in the Fast FI investing club.

With those scenarios built out, it is important to look at how an investor might achieve a 32% return on their money and beat the Wall Street titans.

For additional context, small investors are considered to be < $10MM. The larger an investor’s net worth, the harder it is to reinvest money using the strategy discussed without defaulting to scalable public market investments that lower returns.

Wall Street’s Dirty Secrets

Joseph Drups’ released an article on Debunking Wall Street Wisdom, where he discusses why the best and brightest minds in Wall Street fail to beat the smart, small investor. The article covers index funds, diversification, and other myths of Wall Street investing. Some key points include:

• Diversification Myth: Diversification across an entire index waters down an investor’s return to average. All an investor needs to gain the majority of benefits that come from diversification are 8 to 10 uncorrelated assets. Twenty uncorrelated assets gain virtually all the benefits of diversification. That means 8 to 20 different uncorrelated business investments would suffice. Most high-performing money managers like Buffett focus their money on less than 20 assets to manage risk and outperform the average. They don’t diversify to average across every asset class, indices, and other average performance narratives.

• Public Market Return Myth: Public market investments cut return in half or up to a quarter of what the investor can make in well-chosen private market investments.

• Money Managers Beat Small Investor Myth: Money Managers manage 100s of millions or even billions of dollars. That means they CANNOT invest in high return, main street rentals, or small businesses like the small investor can. Small investors can earn a significantly higher return than money managers by investing in Main Street. An investor can expect 15 to 20% if he invests in rentals (potentially double what index funds make) or 30%+ if he invests in small businesses passively. Harvard Business School showed this in their research on search fund investing which is essentially investing in someone to go find and buy a good small or medium-sized business.

• Index Fund Myth: For the above reasons, indices can easily be beaten by a smart, small investor with less than $10MM in assets. Wall Street money managers are geniuses when they can earn higher than market returns on $100 MM + in assets, NOT on less than $10 Million in assets. That just takes a little intelligence and some hustle.

These points illustrate why it is possible for smaller investors to outperform larger investors. It is all about capitalizing on the advantages available to a small investor.

Beating Buffett: The Small Business Syndication Strategy

In the Beating Buffett investing guide, Joseph Drups outlines the strategy in full detail, as well as a portfolio management concept to support the investing outlook. This resource is available for anyone who wants to learn more. However, to get a general understanding, take a look at the information below.

Small business investing is interesting because it earns a high rate of return as well as produces cash flow from day one. Take a look at a few benchmarks.

Figure 1: Public Market Benchmarks

Figure 2: Private Market Benchmarks

The small business syndication return versus other private market returns is shown in the figure above, demonstrating that private market returns earn more than public market returns. In turn, the small business syndication strategy blows everything else out of the water.

The small business syndication strategy allows an investor to earn these high returns passively. Many small businesses in the $500K to $2 Million range sell for 3 to 4 times earnings. If an investor pays them off in cash, they make a 25% to 33% return.

However, if an investor leverages up the business with a loan, he can earn his money back in one year. That’s a 100% return on their investment in cash. Joseph Drups has used this to earn over the last six years a juicy 143.3% return mentioned earlier. The business pays for the loan and gives him his money back every single year in cash.

There may be skeptics who look at those numbers with incredulity and want to run numbers themselves. 

Simply go to any small business marketplace and look at the different businesses for sale and their cash flow vs asking price.

An investor who does some due diligence will find small businesses with asking prices selling for 2 to 5+ times earnings. Many of those businesses have the potential to earn 3x more than public markets, unleveraged or 10X+ leveraged.

This is the kernel of Joseph Drups’ strategy. However, there’s a catch.

There’s Always a Catch: The Operator Problem

There are a few catches in the plan to defeat the demigods of finance.

One catch to get the returns Joseph Drups achieves is that an investor must become the operator. That’s hard.

That’s also not investing. Instead, it’s management and more like buying a job.

A money manager on Wall Street can’t go out and buy ten of these small businesses because each one requires an operator and unique knowledge about how to run the business.

Another problem that an investor needs to address is that the investment is illiquid, not diversified, and not scalable.

The difference between making 3x what Warren Buffett and George Soros could make on their investor’s money and the pitiful 6% that an investor can likely get in a diversified public market portfolio (minus taxes, minus inflation) is active business management.

This is the problem Joseph Drups has been working on for the past six years. The trick is to figure out how to buy a small business and then turn it into a passive investment by empowering employees and managing risk. If investors can master that process, they’ve beaten the geniuses of finance.

That’s what Joseph Drups focuses on.

Passiv-FI Small Business Investments

Small businesses outperform the stock market and build wealth so much faster that it’s hard to overstate.

There’s a reason most of the millionaires in the country are business owners. According to Zippia, 88% of millionaires are small business owners in the U.S.

Remember, small businesses can earn 100%+ on their money. The catch is that it will involve active management, leverage, and risk. Moreover, it’s hard to make it scalable above $100,000 to $500,000 of capital investment.

That’s not really the passive type of investing that most investors are looking for. There’s also a bit of sleight of hand in those numbers. In considering those returns, we have conflated two roles: the CEO’s salary and the owners’ investment (aka investor). The question is: how does an investor get those high returns without the need for an investor’s time?

In Joseph Drups’ journey, he started by trading his time for the high returns he achieved.

He used to buy businesses and run them himself. He’d take the CEO’s pay as well as the Owner’s pay and be very happy with the return and the salary he made. Gradually, he’d work himself out of the operator’s role and into the owner’s role as the business became passive.

Since he’s been through the process of making seven businesses passive, there is a new truth he learned.

If an investor group can find the right partners at the beginning, they can accelerate the process of turning a business passive. Joseph Drups can also pull from all the lessons, resources, and processes he’s learned over the last seven acquisitions and improve the process of onboarding and finding each new business. This allows him to reduce risk, increase asset diversification, and increase return.

This is a hard strategy to pull off. An “investor” has to spend ten years building the skillset and resources and also become that critical Overwatch Insurance policy for the business.

The Overwatch Insurance concept is that there needs to be someone accountable to step in if anything goes wrong in the business. Someone has to have the know-how, buy-in, and fortitude to step in and fix it, then turn the business passive again. Someone has to watch over the business. Hence, the name Overwatch Insurance.

This is the critical role Drups Ventures plays in every acquisition it purchases and onboards. They have done it seven times.

This realization is what led Joseph Drups to this final investing innovation: the small business syndication.

First, Drups Ventures starts with a search fund incubator. A search fund is basically a group of investors getting together and pooling their money to fund a business acquisition process.

Historically, search funds earn 38.5% IRR, which beats Buffett & Soros by over 6%. You can find an infographic the team at Drups Ventures put together summarizing the data from a Harvard Research Paper on search funds here. They also offer a Search Fund Primer that investors can download in the resources section.

The search fund structure doesn’t offer oversight, vetting deals, or an entrepreneurial support function. That means there is a lot of risk in variability. An investment could do great or go to zero. Search Funds rely directly on oftentimes first-time entrepreneurs acquiring an existing business. This is risky for small investors, and the level of risk and lack of diversification puts this type of investing out of reach for non-institutional investors (Institutional Investors = $100 Million+).

What if there was an investing vehicle that would allow an investor to fund acquisitions, diversify risk, and place Overwatch Insurance on top of a small business investment?

This is exactly what Joseph Drups’ team does through the Fast FI Investing Club.

What the Fast FI Investing Club does is group together small business investors, source the operator on the front end, fund the business search, and then roll all of that into a larger roll-up entity. A roll-up is simply a way to roll a lot of synergistic small businesses into a single entity while offering an Overwatch Insurance service.

The roll-up structure provides the Overwatch function of the larger entity to protect any of the individual businesses that falter as well as monitoring and setting high standards for management in processes and best practices. Drups Ventures achieves incredible results with managed risk and executes best practices across the full set of businesses.

There’s one more ROI multiplier that an investor gets when they do this.

Larger businesses earn a greater valuation multiple. Remember, small businesses sell at 3 to 4 times earnings. But more than that, when an investor groups a collection of those $1+ million dollar businesses into a single entity, those multiples can go from 3 times earnings to 5x+ times earnings.

This offers a 66% return on top of getting that high return ROI from the earnings and value of a single small business. Granted, this return is split between the owners and operators, but when structured correctly, it provides a method to manage risk while beating George Soros, Warren Buffett, and Peter Lynch.

This strategy is scalable, creates diversification, and generates high returns.

The goal is to balance the stock and profit sharing between the investors and the operator to give everyone enough of the pie that they’re all bought into the success of the venture.

Running the Numbers: Small Business Syndication

For context, the numbers below assume the investors are paying 50% of a $2 Million business and financing 50% with a conventional loan.

The investor can take 59.1% in ownership to earn a 32% return, thus beating the returns of the greatest investors of our time. That leaves 40.9% to incentivize an Overwatch entity and the operator(s) who are running the business.

Rinse and repeat eight times, and an investor has a diversified portfolio of small businesses offering them cash flow to fund the life of their dreams.

This investment strategy can be set up to check all the boxes of good portfolio management:

• Managed Risk and Diversified Assets: Diversification of assets to manage risk.
• Buffett-Level Investing Returns: 32% return, beating the top money managers of all time.
• Cash Flow: Investments that pay investors cash flow each year.
• Early Retirement: A strategy that lets an investor retire in 5-10 years of saving rather than 45 years.
• Real Path to Wealth: True wealth building that leads to the life of an investor’s dreams.
• Cash Flow Not Merely Paper Wealth: Owning a dividend-paying small business gives an investor cash flow, not only a net worth on paper.

Beating Buffett: How to Execute the Strategy

Drups Ventures has executed this strategy over the past decade, leading to truly incredible results. The strategy was so life-changing for Joseph Drups that he decided to open it up to a larger group of people via his Fast FI Investment Club.

Although the Drups Ventures team focuses their assets on diversified small business investing, it’s also a good strategy to peel off a percentage of an investor’s portfolio allocation to put into small business investing in order to supercharge their whole portfolio. Even a 10% allocation would drive up their whole portfolio returns by up to 58% compared to a traditional Ray Dalio, all-weather portfolio technique, or even a 60/40 stock to bond.

If an investor is looking for a passive way to earn cash flow and retire early, this strategy is the best one Joseph Drups has found. His goal over the past decade was to master this process so he could make main street investing available to the small investor.

This was the idea that the Drups Ventures team had when we put together their Fast FI Investor Club. They created a forum where investors can discuss different small business acquisition options, invest in small businesses, and turn them passive while maintaining that critical Overwatch Insurance to mitigate risk.

Smart small investors can beat billionaires.