November 2022
Having a zero-interest-rate policy since 2009 has created asset bubbles in places like cryptocurrency. Crypto is often considered an “alternative investment,” but Chris and Mike disagree. Alternatives are uncorrelated assets that have true potential and backing, like healthcare royalties linked to FDA-approved drugs and real estate lending. Crypto is more speculative and may not be as resilient, a recent example being FTX, the fourth largest crypto exchange in the world, filing for bankruptcy.
Mike and Chris encourage investors not to give into the fear of missing out when making investment decisions. Just because an asset might skyrocket one day doesn’t mean it’s the right investment for you. Stay patient and don’t let current events distract you from your own individualized plan.
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Check out past episodes of The Financial Commute below:
Ep. 7 Restoring Stability in the UK
Ep. 8 Recency Bias When Investing
New episodes of The Financial Commute released weekly on Wednesdays.
Hello, everybody, and thank you for joining me for another episode of The Financial Commute. We have a special edition today to talk about something really interesting going on in the world this week. Here to join me is Wealth Advisor, Mike Rudow. Mike, thanks for joining us.
So the calendar of events, I mean, you can't write some of this stuff. You've got clients worried about midterm elections and what's the cause of that going to be? You've got a cryptocurrency brokerage house that is meant to just transact on cryptocurrency and hold those assets for clients going from a $35 billion valuation to basically almost zero overnight. I guess what's frustrating to me is that we all want to try to be, you know, anticipate what's going to happen, respond or react to stuff or make assumptions. On the whole election thing, it's actually really fascinating going back to World War Two. 100% of the time, 12months following a midterm election, the markets have been up on average 15% per year. I don't know if that's likely to happen this time. There's a number of headwinds that we're facing. But, you know, I think that history would show based on that that knowledge that it almost doesn't matter if it's Democrats or Republicans like that's not what's going to drive the market. Real economics and things that are going on in the world are going to drive market returns, less so a midterm election would you say?
Yeah. I think that's an interesting point. The data that you brought up with markets reacting to elections, and it's interesting when you look at that, there's only been two where there hasn't been a turnaround from Democrat to Republican, a flip. Whether it be one side to the other one was, I think the Bush administration and I forget what the other one was.
But, yeah, I mean, there's a lot to look forward to in the next 12 months, thinking that the market could react positively. But we also have so many different headwinds now than we did in any era before us. Right. It's a different world that we're living in.
And finally starting to see companies scale back on jobs. You know, lots of layoffs in the tech industry, which has been hit pretty hard this year. Yeah, inflation's still an issue. Fed still focused on raising rates to combat inflation, although some of the inflation numbers today came out better than expected. And so the market's reacting positively. Yeah, but one of the real issues, and I've talked about this before is, you know, having zero interest rate policy for as long as we've had since 2009, you know, free money basically, if you could borrow money very, very cheaply for a long time at very low rates, it creates these asset bubbles in some really weird places.
And one of the interesting ones, and I'm sure a lot of crypto fans, you know, will not be happy for me to say this. But one of the interesting bubbles that we've seen as of late is within crypto and this FTX brokerage house, they basically are going under overnight. Now, there's a lot of issues with their business and misappropriation of client funds to back loans and to help save a research company. That was also owned by the same guy. I think there's so many issues with it. But my biggest problem with that is that crypto is considered to be an alternative investment. And we've been investing in alternatives for over 30years. And to us, like, it's not an alternative. Like when we say the word alternative, it is not that.
Yeah, no, I think when you when you say alternative, the younger generations will automatically go to crypto. And even some of our generation and older will think alternatives. And if they go to crypto now, they're putting a negative light on alternative investments. And when we see alternatives, we see uncorrelated assets that have true potential, that have true backing, we see real estate equity, real estate lending, health care royalties that are tied to FDA approved drugs, making money off of royalty streams.
I mean, there's a lot of investments out there that you can have a lot of protection on the downside. They're tied to real assets. They're tied to human capital, and they're not correlated to the public market. And then you look at Bitcoin and a lot of these cryptocurrencies, and that's immediately where people's heads go and they're like, Oh, I want to stay away from alternatives. I'd rather take my chance in the market.
And I guess that's the challenge that we face as a company by investing outside of traditional stocks and bonds. I mean, we've been known to do it for a really long time. But when we're talking to clients or prospective clients about alternatives, like how do we help educate them that, you know, when we say alternatives, we're not talking about some of these other things. We're talking about real assets, real businesses.
Well, I think that's where you got to drive the conversation is ask them what their understanding of cryptocurrency is. Describe Bitcoin to me. If they won't be able to, it's like, well, how do you consider that necessarily a real asset? And I think when you talk to someone about real estate, right, understanding that you own a property, that property has the opportunity to generate income.
Right. So now you've got the ability to get capital appreciation, because if you look at history, the property values go up over time and having the ability to also generate income. You know, you've got two shots at making money off of your money. Yeah. And you know, also going back to what you said about being in such a low interest rate environment, we could borrow money for nothing.
Right. Bonds paid off nothing. Right. So people are always looking for that risk return balance. If I'm going to take risk, I expect X amount of return. Well, Bonds had a lot of risk because interest rates had nowhere to go but up. Right. So if you invest in a bond, most likely holding on to that bond, it would have to devalue overtime because interest rates are going to eventually end up rising, which we saw this year.
Sure.
Right. So that's what created the asset bubble for stocks. Well then it’s like, well if we're not going to get paid for bonds and there's downside risk, we might as well take on more risk, go into stocks. And that's where people were starting to over allocate to stocks. Valuations got, you know, historically high. Yeah. And when stocks got super high, it's like, well, where else can we put our money?
And then there's this Bitcoin cryptocurrency phrase where it's like, Well, everyone's making money over here. Stocks are so overvalued, I don't want to go into bonds. Let's throw our money into there. It's like, well, if they had the education to know that's not the only other alternative, you can go into other types of investments. Now that this is overvalued and this isn't paying anything. And that's where we have to just be able to get in front of our clients and be able to tell them, okay, here's where our options are. Here's how we're going to protect you on the downside, but still generate gains moving forward.
It is fascinating the reports coming out of this FTX debacle, the number of pension funds and teachers unions that were actually invested in this. Oh, yeah. I mean, FTX even sponsored a football stadium. I think Tom Brady was a big backer of it. I mean, I bet it’s going to be renamed something else. Right. But you take a pension fund or a teacher's union that they've got to make a certain return for their pensions to pay, you know, teachers and unfunded to meet their unfunded liability, future liabilities. If you approach them with an interesting real estate investment opportunity, they might be like, I don't know, ten year investment timeframe, little too risky, but they're fine going and investing in something like this. Like it just to me it brings a bad taste to my mouth around alternatives. And alternatives can be a great solution for people.
Yeah, no, I agree. And when you look at the most successful endowments, the most successful family offices, they've been investing like we have for years. Yeah, right. That's where when you see Harvard and Yale and these guys having these outsized returns year over year, it's because they've got assets that aren’t correlated to market, that are in real estate, that are driving income. And that's what we're trying to bring to our clients. We're trying to give them that endowment model, that family office model, but they don't have to commit millions to each investment. Right. Right. We break it down so they can have a more diversified, diversified portfolio with these private alternatives and only commit a couple percent of their portfolio to each so that we're still diversifying within the alternatives platform.
You know, with what's going on this week within the markets, but also with this FTX debacle, I did an episode with Bruce Tyson, Wealth Advisor here. He's been in the business for over 40 years...
Oh I’d love to meet him.
I think you know him pretty well, but the Bruce had two comments. Don't be worried about FOMO. Fear of missing out. And it's okay to be patient when it comes to investing. And I think that this is a perfect example of why FOMO and reacting or responding to what your friends or everybody else is doing or the frenzy that comes about it is not worth it sometimes.
No. I mean, look at Snapchat. Look at Skype. Look at.
Peloton.
RingCentral, Peloton, any of those companies, people saw those values shooting up, shooting up, shooting up. And they wanted to be part of it. They didn't care that they were buying at a 30 to 1 multiple or a 300 to 1 multiple. Right. Some of these growth stocks, and they just they got so emotional about it and wanted to participate because they had a fear that their friends or their network was going to get rich and they were going to be left behind. And so what that what you see now is a lot of people bought in at the top and now those stocks are down 60, 70, 80% year to date. And that's real money that people are losing. Right. So I think that's a it's a very good point to put across that you have to be patient new. You have to do your due diligence and understand the market environment, what you're buying into.
And Bruce is right. I mean, Bruce is an interesting guy. I walked into his office the other day and he was watching a, um, an auction on his phone. That was a live art auction. I don't think I've ever seen someone watch a live art auction before. Yeah, he was getting really excited about it, so, yeah.
He loves to learn. Well, Mike, thanks for talking about this and kind of sharing your thoughts, but it's okay to be patient. Alternatives are so many other things besides crypto and blockchain, and there really are solutions out there for clients.
Yeah, 100%. And I think it's important to remember that it's a long game, right? It's a marathon, not as print. So you might see things shooting up one day. Doesn't mean it's the right opportunity for you. Stick with a plan, stay the course. Understand what your investments need to do to you. And at the end of the day, you'll be fine.
Thanks, Mike.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.
