October 2024
Modearn™ advisors Kevin Rex and CEO Jeff Sarti discuss creative investments that offer opportunities for growth through emerging or niche markets.
Here are some key takeaways from their conversation:
- Lowercase "c" creative investments like Bitcoin are now mainstream, while uppercase "C" creative investments are still niche and less crowded.
- Real estate can be creative depending on the approach, such as focusing on niche sectors like healthcare or storage during market dislocations.
- Morton Wealth advocates for private credit as a creative investment avenue, lending to businesses and individuals with tangible collateral, providing stock-like returns but with less volatility.
- Modern investors are often distrustful of traditional institutions, fueled by political and economic uncertainty, inflation concerns, and fears around money-printing.
- Creative investments often involve more work and expertise, particularly in assessing risk through due diligence on operational, structural, and collateral factors.
- Jeff and Kevin urge investors to consider adding more international stocks to their portfolio, with a preferred mix of two-thirds U.S. stocks and one-third international to take advantage of global opportunities and mitigate U.S. market overvaluation.
Join us on October 17th at the Westlake Village Inn for our annual Investor Symposium to learn more about investment strategies and financial planning topics.
RSVP here: https://www.mortonwealth.com/investorsymposium
Watch previous episodes here:
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Supporting Your Child's College Plan: A Guide for Parents
Hello. Welcome to another episode of Couchside Conversations. My name is Kevin Rex. I'm a wealth advisor here at Morton Wealth, and I'm joined by my friend, partner, CEO Jeff Sarti. Excited to talk to you today.
Really excited.
We are talking about creative ways of investing. And what's important about investing is it matters to everybody, right? It doesn't matter if you're a firefighter or a business owner. We can't work enough hours to really generate the wealth that we most likely want. And so we need passive investments. We need things to grow for us. And so let's talk about how we can do that in ways outside of potentially just more the traditional options.
Sure.
I think so with creative investing, some people will call them alternative assets. Let's start with your definition. You've been in this business a long time, and I'd love to know what you think about what is a creative investment.
Yeah, these are things we think about a lot fun to think about. Fun to talk about. I'd say in a nutshell, very basic level. Creative investments are things different than stocks and bonds, right. That's the most simple definition. But when I dig a little deeper in the definition, I think really when I think about it, you have lowercase creative and uppercase creative lowercase c creative might be something like Bitcoin comes to mind.
Definitely creative on the surface because Bitcoin is different than stocks and bonds. But it's already become mainstream, right? I mean, if someone invested in Bitcoin, let's say ten years ago, that was a creative investment. You were at the forefront of something. But now the bitcoin's more mainstream. I'd say people aren't really being creative when they're investing in Bitcoin.
They're really just chasing a price with the hope that that price will go up over time, if that makes sense. So contrast that with uppercase C creative. I really think that's something that maybe is more emerging in nature. Niche. You're at the forefront of something and you're not investing in something just to be different for different sake.
There's really value in investing in something that's truly creative because it's just less crowded. Right? And if something less crowded, theoretically it won't be bid up in price as much.
What comes to mind when you mention, that's what, ten, 15 years ago we started investing in music royalties.
That's right.
Yeah, right. And that's basically buying a book of someone's creation, someone's songs and profiting from it in the future. I know you see
that in the media a lot like Taylor Swift selling her music catalog, things like that.
So now people know about it. But ten years ago, I think we were able to set terms. We were able to get better returns because there weren't as many players or call it people in that sandbox. And now that it's become more mainstream, maybe it's gone from the big C to the lower C creative. Yeah, and that's not something that we necessarily want to play in any longer.
We want to go now, find that next opportunity.
Curious to know your perspective on real estate. Because real estate definitely is a can be a creative investment. Big C little C where do you think it falls.
You know that's a good question. I think theoretically it has elements of both to some degree little C because real estate's broad base, a lot of people know how to access it. We all have family members who have invested in real estate, theoretically. But I'd like to think that the way we do approach it is more from a, again, big C creative point of view spotting opportunities.
Maybe that again, or maybe out of favor. We don't we're not just going to invest in plain vanilla real estate often. It's crowded, expensive when there's interesting opportunities or niche opportunities. Maybe with dislocations, you can have examples in nursing homes or health care. Maybe storage is out of favor at certain times. I think that's where creativity really comes into play.
Willing to be flexible, not just treat real estate as a broad asset class, but be able to be targeted in your approach. That's where the creativity comes into play. I'd say.
Sure, find and create value.
Exactly, exactly. All right. So you, Kevin, you're in definitely the modern demographic, right?
Yeah. Thank you.
I'm a little bit older. I'm actually going to be 50 this year, which is kind of nuts. So I'm just veering towards the outer edges of that modern demographic. But you have a lot of friends in the modern demographic. A lot of them are looking for opportunities outside of traditional stocks and bonds. Like, can you expand? Why is that?
Yeah, it's a great question. I think there's a few reasons that the first one that comes to mind is I think that there with this generation, there's really a distrust in just, I'd say the political system in general, and it kind of expands into different areas. So just starting with, you know, we're coming up on an election, how polarizing is everything gotten.
The Democratic convention as we're recording? It just happened in the recent days.
Yeah. It doesn't matter what side you are. Are there facts being said, or is it all just meant to stir emotion and drive fear or drive greed in one way or another? And I think when you have that type of emotional swings in investors, people start thinking like, how true is this? How much can I trust with this information.
Along those lines? I think that's a great point. We share in some of that distrust, right? Like I'll even give another example, be a little bit attached to the political system, the economic environment, something we've been talking about really for the last decade. Meghan, Sasan and I on our various podcasts at Morton Wealth, talking about the money printing.
Yeah, the debt accumulation that results in distrust. Two decade ago when we were talking about it felt like we were the only voice. But now we're seeing more of those stories in the media, too. And the modern investor is reading those, and they're thinking about their family and the next generation. And with this debt built up, what does the future of our country look like?
I think that caused some distress too.
Yeah, when the solution to every problem is just hit a button and print more money, it's like, wait a second, people are smart. They know. And my last point on that too would I think inflation. Right. You see the inflation data coming out. We know that that data is being manipulated to some degree for the benefit in to make sure that they have a narrative that works for totally for them.
We're going to the gas station, we're going to the grocery store. We're traveling. We see what things cost. We know inflation is still there and sticky and a little bit more real than, than possibly they're stating. And I think, again, putting all that together, modern investors are looking for things that they can touch and feel or that are different than just what maybe their parents kind of 60, 40 stock and bond type portfolio.
And we think that's a good thing. Right? I think here at Morton, we're we're excited that investors want to know what else is out there. There's an entire universe of creative investments that they can be finding and potentially invest in. One thing that I do want to caution in this generation is people also want to be on the cutting edge, and they want to make sure that they are not missing out.
So you think of the FOMO piece you're at dinner and your friends are talking about an investment. You're not doing the research necessarily to get in. You're just going to invest because your friends are.
And that's almost powerful, right? We've all been on the other side of the table when someone talks about a great investment, you're like, tell me more, I want to can I get in on that? Sure.
I actually think people would rather lose money together than watch everybody else make money and then miss out like I think that emotion is real. And so short term rentals, cryptocurrency. And I'm not talking Bitcoin and Ethereum, but like all of a sudden how many different coins came out. And it's like your friends would talk about it like, well I need to get some of that coin.
So I think the fact that people are seeking it out is a great thing. But one thing that I want to bring up to you and hear your opinion on is, what about the risks? What about, you know, the regulations, the regulatory system on creative investments sure is maybe not as strong or it might be different. What are some of the things that these investors, as they're looking for new opportunities, should be thinking of or aware of?
That's a great question. Listen, in any investment, there's going to be risks that have to be focused on and often when people think of risks when it comes to investments and specifically in the creative investment realm, they're thinking about the investment itself, the risk and return profile. And of course, there's risk with that. But I think in many cases where the risk often lies, it's actually underneath the hood around the structure of the investment.
Cash controls things of that nature. Like I'll give a quick example, a really neat creative investment that we've had in some client portfolios in recent years. Whiskey aging, really cool creative investment. And the investment itself actually pretty simple to understand. It's not rocket science. The risk actually doesn't really lie there. All you do is you buy young whiskey, call it 12 month old whiskey, sit it in a barrel, aged for 3 to 4 years.
And because of interesting supply demand dynamics, after that four year period, the whiskeys are worth a lot more. That's all. It is really simple in a lot of ways, right? Where the complex cities and risks come into play are on operational or again, structural issues. I'll give a simple example. A lot of these barrels where they're stored, not surprisingly Kentucky.
Right. Whiskey land, Heart of America. Tornadoes are prevalent in the middle of the country. So you have these warehouses. You got to have insurance coverage around these tornadoes. Great example. Another one lot of distribution in this space, right? Barrels being transferred from place to place, cash moving around. You got to make sure you have cash controls. Right. So it's a lot of these types of elements where again, you got to spend the time and the due diligence to make sure that it's a legitimate investment first and foremost.
Yeah. And I think our generation has access to that information. So if somebody wanted to put the time in, people are again smart and they can do that research. Yeah. The problem is putting the time in like who has the amount of time that it would require to research the insurance, the research, the weather patterns to understand how the building was built.
Are they storing it at the right structure? Who can sign off on check there?
Is the whiskey even real?
And so I think to everything you said, even though as individuals, we probably could do it. Yeah. Do people want to do it? And then also, you know, the fact that our team has done it for over three decades, you just know what to look for. You get better as you as you, as you work on a craft or a trade.
And so they know what to look for. They know the pitfalls. They they can look at documents and understand pretty quickly like, hey, this is not something that structured the right way or not. And so I think partnering with, a team that does this can really take away that risk that you're talking about. Not not the investment risk, but actually the the due diligence on operational side and the structural side of things.
So the main theme that you're kind of hitting on is there's really no silver bullets, right? I mean, this stuff takes work and time and you got to be devoted to it, whether it's you or a professional. Again, don't take the shortcuts. All right. So we hit on a couple of interesting examples. Right. Some niche ones. You mentioned music royalties.
I talked about whiskey aging. And those are going to be like more selective smaller parts of a portfolio. But as you know, and I think the audience knows it than well. We do a lot of things outside of stocks and bonds. Can you talk a little bit more of our broader base opportunities that would be more core and resilient parts of a client portfolio, but that are also creative in nature?
Yeah, I think before I jump in there, just high level, the modern investor is typically still in their accumulation phase where we're growing wealth. We're trying to build financial support and stability into the future for retirement and all the things we want to do. So growth is still a key factor. And so when we talk about creative investments being better diversified or maybe even more conservative in nature, taking on different risks, it doesn't mean we're looking to put money into a mattress and not grow it.
Right. And so for us, it's the different risks, the different diversification. But how can we still maintain stock like returns to the stock market historically is 10% annualized.
Ever going back like the last century?
Yeah. So if we can find opportunities that are giving us those types of returns but are taking on different risks, the stocks stock should be up 30, down 50. But what if we can get something that was hanging around ten pretty consistently, no matter who's in the white House, what's going on overseas where interest rates or inflation are at in that for us, we've really opened up a ton of opportunities in the private credit space.
And we talk private credit. These are private loans. And these loans can be made to businesses. They can be made to individuals. They're they're always backed by some form of collateral. And so.
Well, that's where the creativity comes into play, right. Because there's a lot of corporate lending out there where you could just lend to a corporation A, B, or C based on their earnings or cash flow. This is something different.
Yeah. What makes it the creative part. Right. The capital C is it's understanding what those assets are for a bank to walk in and say, hey, this is how much money this company is making and this is how much they want to borrow. This is how we're going to get paid back again, goes back to kind of simple, everybody can do it.
But to understand what a fleet of trucks might be worth on the secondary market or, retail, a basket of different retail products or real estate, there is more complexity. And so therefore less people playing in that space because it's more work and it takes more expertise. So for us, if we can make loans to businesses, individuals collateralized by true assets, if the worst happened, we own something that we can touch, feel and take over.
And the plan being we're going to sell it and at least get most, if not all of our money back and recoup those the the potential losses that we see.
That goes back to the distress comment you made previously, right? With a distrusting modern investor to be able to invest in something and to have those assets to grab onto in downside scenarios that I think provides a lot of comfort. Yeah.
So it's interesting when you talk, we talk about touching and feeling where we're the kind of the first really having cell phones using the internet. And so everything in our world is becoming more and more based off technology. Yeah. But when I talk to my friends, when I talk to people out there like they said, well, what if someone just click some buttons and took all my money out of my bank account?
Or what if I can't get my passcode to my my cryptocurrency, like, even though it's it's leading where we're going as a, as a generation and as you know, in the world in general, people still want to know that they have real assets that they can touch, feel and take over. So I think going back to that distrust piece, people want to know what's the what's the plan B when things go wrong or when things go south.
And that's where these loans are structured in a way where we put the controls in place. We know what the terms and conditions are out of the gate. Yeah. And we're getting stock like returns in a lot of ways. And one cool example we'll talk about it came up during Covid. So Covid hits the world shuts down. Things are diversified or non correlated until everything shuts down.
And then all of a sudden everything's correlated because no businesses are operating. The one space that we looked at and we're like, well, wait a second, you and I still need to eat. Everyone else still needs to eat. We're not going to restaurants, but think about food on the shelves of the grocery store. Salmon, blueberries, butter, milk, cheese.
Like these are all things that no matter what's going on in the world, we still need. And so that's where we sought out an opportunity to lend to food companies that are really, you know, countercyclical or non cyclical at all and resistance. So again trying to target still higher returns but with better diversification and risk management. That's where the private credit space has been for us.
We have a ton of different opportunities that we've been working on to to build into portfolios. And modern investors are really embracing that.
I love that example. On the food space that shows creativity, right? Where we're thinking outside of the box, and the modern investor wants to think outside of the box to have something different in their portfolio. Again, not just to to be different, but to really be more resilient in nature. Yeah.
Some of you may have seen in past episodes one of our favorite parts, and the audience's favorite part is we do a little this or that. So Jeff and I prepared some questions that we're going to ask each other. We don't know what's coming up and kind of see where our minds take us, and hopefully we can have some fun with that.
So you go with that. Cool. Let's do it. All right, so I get to ask the first one since I'm leading this. Let's see. So the first question I have for you is you have some money that you're going to invest, and would you invest? And you have two options. Would you invest in Bitcoin okay? Or would you invest in art?
That's interesting. Question two totally different things. My knee jerk reaction is art I'll talk about Bitcoin. Bitcoin. Listen I think that Bitcoin has an interesting use case. It's something I think you got to really spend a lot of time on to really understand the purpose of it. And we've tended to avoid bitcoin. I'm not a Bitcoin hater but instead we've invested in gold.
Gold's been our medium of choice to be an alternative currency, which I think Bitcoin is really the purpose of Bitcoin more than anything else. We think it's a better mousetrap. So for that reason we've avoided it. So I just veer towards art, not necessarily as an investment. I think I have invested enough money in art to really with the goal of it appreciating it's more to hang something pretty on a wall.
I like art and design, so I'm going to go with art in that one. All right. My turn. Yes. All right. Let's see. You have, let's say 25 or $50,000 to invest. Friend comes to you, successful real estate professional. He is buying a let's say storage facility. And he's gathering friends and family and can small ticket sizes. You can invest, you know, $25,000.
Would you do that or add to your diversified Morton portfolio?
Without you judging me or impacting my my job in any way. So as much as I talk about the FOMO, our generation, the societal pressures, yeah, it's real. Like I, I would want to invest with my friend and with with the one note of it has to be an amount that I'm okay not doing the due diligence on the operational side, it has to be an amount that's more just I don't want to call it gambling because they're successful and great people in this in this situation.
But it's more just like, hey, I want to support you and I want to be a part of this because, again, I want to make money with everybody else and celebrate and and be there when, when they hit a home run. So for me, it's if it's an amount that I'm just not necessarily thinking about and I don't know what that amount would be, I would go that path, versus investing in the Morton portfolio.
But with that being said, most almost all my money is invested in the Morton portfolio. So again, a little diversification. And then being able to maintain the friendship and support that support them as well. Okay. So last question cap back to you. We talked about creative investments. And so we kind of avoided talking about the stock market. But when it comes to stocks there's some level of diversification that matters.
And I would be curious to know your thoughts. Do you just invest in domestic stocks or us only or do you look at international stocks. And if you're going to diversify globally, what's kind of your percentage range at you, you personally or you would recommend to investors as.
A starting point? Definitely globally. Okay. Right. I mean diversification matters. And there's tremendous companies and and industries outside of the United States that should be targeted. But the majority of a portfolio typically is in the US. And that makes sense. US is leading in technology innovation. Think about the incredible companies that are US based. So I guess it's a the answer is a little bit of both.
We veered towards call it like two thirds, one thirds: two thirds, us one thirds international. But that international should be a meaningful component, partly because U.S. stocks are not cheap. We talk about this a lot, right? U.S are expensive, so everyone it's a crowded trade to some degree. Everyone chases the US because it is the, you know, world's best place to invest.
So that's why you got to diversify elsewhere into cheaper opportunities.
And the major US companies are international I mean right, so yes, they're based or call them us, but they're investing and growing across the globe as well. So thank you for all your expertise. We hope you enjoyed this episode. Talking about creative investments, we know you modern investors are seeking a lot of different opportunities out there. Morton Wealth was a true pioneer in this space.
We've been doing it for decades. And if you're interested in learning more, we have a really cool opportunity. Coming up October 17th, we're putting on a massive, incredibly high end symposium over at the Westlake Village, and there'll be a link down below. So click on it, check out what's going on, and hopefully we'll get to see you over there.
