Investing Out Of An IRA

People are really upset that Peter Thiel was successful.  He took a Roth IRA and converted it from $2000 to $5 billion dollars.  He did it by shrewdly managing money and investing.  More on that down in the post.

ProPublica has an agenda.  They want higher taxes and recently released the tax returns of some of the hyper-wealthy people in the US.  What ticks me off is not only the release of the private tax returns of private individuals, but that somehow earning and growing wealth is bad.  That’s the ProPublica attitude.  By the way, ProPublica is a non-profit where the executives make millions of dollars.  The CEO pulls down a cool million every year.

This all smacks of a coordinated effort by Biden and the Democrats along with their uber-liberal allies in the left-wing press to try and get some tax increases passed.   I hope they fail.  Isn’t ironic that embedded in the “infrastructure” bill is $40B for the IRS to hire agents to audit Americans?

What Thiel did was risky.  Let’s revisit the history because everyone else is focusing on the return.  PayPal was started in 1998 at the University of Illinois.  Its initial rollout failed.  Theil got involved in 1999.  He was the CEO, and received options for his job.  The options were unvested, and he paid tax at whatever his personal tax bracket was at the time to put them in his IRA.

If PayPal were to fail, he couldn’t write off the investment against any income.  It was a big zero.  PayPal wasn’t even named PayPal in 1999. It didn’t get the PayPal name until 2001.

I don’t know if people remember what happened in 2000-2001 to internet stocks like PayPal.  They tanked.  However, in 2002, eBay bought PayPal for $1.5 billion.  Theil probably earned millions on the buyout.   For what it is worth, when you look at the early employees of PayPal they were an extremely strong team.  Legendary.  Elon Musk, Max Levchin to name two.  In Silicon Valley, they are called the “PayPal Mafia” because of the extraordinary things they have done post-PayPal.

Theil took that stake and invested in more internet companies.  His most famous investment was Facebook which absolutely crushed it.  However, it wasn’t clear when Theil invested that it was a lock.  There were other companies out there, MySpace being one, that were bigger and more dominant doing the same thing.

The key takeaway should be the risk Theil took to amass his wealth.  The downsides were pretty large since most of the firms he invested in had binary outcomes; rocket ships or zeros.  He happened to get on a few rocket ships.

• Nothing he did was illegal.  Nothing.
• He invested at the riskiest point of a company’s formation and some of them did very very well.
• If he lost his money, he wouldn’t be able to write any of it off.
• He paid tax on the money he put in.

People do this all the time with self-directed IRAs, Roth IRAs, and other chunks of capital.  They buy real estate, stocks, art and other assets hoping they appreciate in value or throw off a cash flow.  This is not unique to Theil and some strategy he cooked up.

I say great for him.  I hope other people learn from him and can do the same thing.

When you build enough wealth, it is harder for the government to control you.  You gain independence.  People focus on fancy houses and “things”.  But the true value of amassing wealth is the ability to have more self-determination and individual liberty.  Politicians, publications, and people that gravitate to central planning don’t like that.

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