On this episode of The Impatient Investor, Andrew talks about why it is wise to escape Wall Street and invest in alternative assets instead. These assets are preferred by wealthy investors for their certainty and discipline, with a foundation on sound economic principles.
“Invest like the wealthy who have an affinity to alternative assets. Follow this path. Flea Wall Street for private markets, insist on cashflow, seek alternative segments that would thrive in a downturn.”
Since the onslaught of the COVID-19 pandemic, there has been a massive upswing in interest in private investments. According to a recent article in Institutional Investor, a majority of institutional investors were set last year to increase allocations to alternative assets. And according to Natixis Center for Investor Insight cited in the same article, 37% of investors were planning to increase exposure to private debt in 2020, while 28% intended to increase their investments to private equity. Tired of being Wall Street’s punching bags, investors are turning to Wall Street alternatives in the private markets to take their financial fates out of the investing public’s hands.
Wealthy individual investors and institutional investors stopped being wall Street’s chumps long ago, and have always turned to alternatives to avoid market volatility, and also to be insulated from recessions. Short term disasters don’t phase these investors because they invest around 10-year windows. Wealthy investors know Wall Street’s realities that the odds are stacked against them for building consistent wealth.
Why? It’s because Wall Street companies aren’t built to reward the ordinary investor. These are the three main categories of Wall Street companies, all offering unsatisfying results to the ordinary investor.
First is IPO’s. The only people getting rich from IPO’s are the venture capital firms that funded them through the going public stage. Most of these IPO’s already have had their upside stripped upon going public, rewarding the various private equity groups that sponsored them. When these IPO’s go public, very few of them succeed in providing any of their initial public investors, any significant return.
The second is heavily leveraged companies. The next category of companies involve companies with a long history of non-profitability and large debt loads. These are dead companies walking that managed to keep hanging around. They will never provide their investors with any future cashflow. The third is established companies. Established companies with a stable operating history can provide investors with a consistent cash flow, but the dividends often don’t outpace inflation and aren’t immune to market volatility.
Companies always give themselves an out, when it comes to paying dividends. So when the going gets tough, they have an out clause for not paying them. And this is why wealthy investors are unsatisfied with Wall Street returns to turn the private markets. With 10-year investment windows, wealthy investors are willing to give up liquidity for above-market returns, non-correlation to Wall Street, consistent income streams, management transparency, long-term growth, expert and efficient management.
Let’s talk about preferred alternative segments. Although alternative assets cover broad categories of investment options. The wealthy have an affinity for cash flowing private equity and private debt. Along with income and growth. These assets offer inflation hedging and volatility insulating benefits common among all alternative assets. What about the liquidity arguments? Well, wealthy investors understand that only a few lucky make money on Wall Street. Like the lucky cat at the craps table, there’s an occasional winner on Wall Street that time to shift right.
For most Wall Street volatility breeds a climate akin to a lottery where the money is made based on speculation and not on sound financial fundamentals. Wealthy investors prefer certainty, fundamentals, and discipline. All of these elements combined to create cashflow and growth built on sound economic principles.
What about off-market opportunities? Unlike Wall Street, private markets are inefficient markets. Meaning there still exists advantages to be gained from information advantages, including familiarity with local markets and with particular alternative asset classes. Alternative markets are inefficient markets, and that’s why wealthy investors have an affinity for alternative investments.
They allow for the leveraging of superior management experience, knowledge and information advantages to provide above-market returns. Invest like the wealthy who have an affinity to alternative assets. Follow this path. Flea Wall Street for private markets, insist on cashflow, seek alternative segments that would thrive in a downturn. And partner with a management team to obtain informational and geographical advantages. Invest in established industries with a track record of success.
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