Two summers ago, Fortune asked, “Should you buy stock in private companies?”

Fortune‘s answer was an emphatic no. The article’s last sentence says it all.

“The simplicity of public markets is hard to beat.”

At the time, not everybody could invest in these private companies.

Only professional investors and well-off “accredited” investors could buy private shares.

A lot has happened since then.

The SEC finally issued two different sets of regulations.

It tore down the remaining barriers preventing non-accredited investors from participating in this secluded corner of the market.

My partner Adam and I applauded the SEC’s actions. (See some of our comments here, here, here and here.)

When I first read Fortune‘s article back in August 2014, I found it appallingly backward-looking and paternalistic.

So why bring it up now – more than a year later?

Because the one recommendation it made is back in the news.

Could Be Worse

“The safest way for retail investors to [invest in these private shares],” author Jen Wieczner suggested, “is through mutual funds that allocate a small portion of their assets to private companies.” [My emphasis.]

Wieczner mentioned five funds: Fidelity (FFIDX), T. Rowe Price (TROW), BlackRock (BLK), Janus (JNS) and Wellington Management. They invest anywhere from 1% to 4% of their total funds in these private companies.

Is she right?

While it’s too early to give a final verdict, it’s not looking good. The best you can say is, investing this way hasn’t been a disaster.

Fortune (yes, the same magazine that published Wieczner’s article) recently gave us a peek at a couple of Fidelity’s funds that do private investments. (See this article and this one.)

Of the 23 companies it examined in Fidelity’s $70 billion Blue Chip Growth Fund, more than a third have been marked down between this past July and September.

A few were also marked up. And some didn’t change at all.

Fidelity isn’t the only mutual fund marking down its privately held investments. We know of two others for sure: T. Rowe Price and The Hartford. It’s extremely likely that other funds have too.

We’re not picking on Fidelity. It’s just the only fund that publishes valuations on a monthly basis. And it’s not looking great…

Fidelity took its worst beating with NJOY – a maker of electronic cigarettes.

Its $4.91 million investment made in February 2013 is now valued at $300,000. It put another $9.52 million into the company a few months later. It’s now marked down to $12.

By the way, that’s a 99.9998% markdown. I’m not sure how Fidelity arrived at $12 versus $120 or $1.20. But whatever mysterious methodology it used, the investment itself was a total wipeout. And that’s not the end of it.

Another investment Fidelity made in February 2014 – this one for $2.5 million – is now valued at just $70,000. That’s a mere 97.2% markdown.

Some more of the fund’s walking wounded…

Snapchat was marked down 25% on the investment it made this past spring.

Blue Bottle Coffee was marked down by 43.3%. Fidelity bought $21 million worth of shares this past May.

Similarly, Zenefits was added to Fidelity’s portfolio in May. It’s been marked down by 47%.

Dataminr (a big data startup that analyzes social media) has been marked down by 35%.

Another of Fidelity’s funds – its $142 billion Growth Company Fund – has also sprung some big leaks…

Dropbox has been marked down by 19.5% since May.

Database company MongoDB is down 11.77% (and 54% from when Fidelity invested in October 2013).

Turn (its platform manages data-driven digital advertising) is down 25.7% since May (and 46% from its original investment in December 2013).

Okay, this is bad, but it could be worse.

Dropbox is still up 46% from when Fidelity bought it in May 2012. And the privately held companies in its Blue Chip Growth Fund are overall still in the black, thanks to its huge gains in Uber and The Honest Company.

Private Companies Don’t Move the Needle

These returns are disappointing and trending in the wrong direction. But they’re not catastrophic.

And no matter how bad they do, they never will be. Why?

Fidelity bought $300 million worth of privately held shares as part of its $70 billion fund. Even if its $300 million stake lost half its value, a 50% loss would amount to a 0.2% drop in the overall fund.

In this sense, Wieczner was right when she called this kind of investing “safe.” Of course, it works the other way too.

If the $300 million investment were to rebound and make a 100% return, the uptick for the entire fund would be a microcosmic 0.4%.

Negligible downside means negligible upside. Nothing gained. Nothing lost. Just a big pile of nothing.

Why bother?

A Better Way

The article also noted a lack of transparency and liquidity. And how much tougher it is to research private companies versus public ones.

But none of this is why Fidelity has done so poorly. Simply put, it bought high – not so unusual for mutual funds. They often do it in their public company investments too.

So if you’re interested in participating in the upside of private company investing, mutual funds are not a good option.

I believe in direct investments in private companies. I also believe in paying attention to the price tag. In the early rounds, where Adam and I do most of our investing, prices are still reasonable. In the later rounds, they’ve gotten frothy.

It’s worth noting that every single company Fidelity has marked down recently still represents a bonanza investment return for its early round investors. Price inflation has hurt the late-stage investor crowd much more than early-round investors.

But because we agree with Wieczner that researching these private companies isn’t easy, our premium Startup Investor service offers fully vetted recommendations. We do the heavy lifting.

Wieczner’s list of supposed drawbacks doesn’t bother me. In fact, we’ve turned each of them – lack of transparency, little liquidity, and researching companies without the usual metrics that stock analysts depend on – into an advantage.

In my next post, I’ll show you how we do it.

Invest early and well,

Andrew Gordon