Alternative Investments Are Not Created Equal

November 3, 2017

Written By: Andrew Lanoie, Founder and CEO of Four Peaks Capital Partners LLC

These days there’s a myriad of alternative investments, which one is right for you?

Alternative investments like real estate; commodities; tangibles like gold, art, wine, and stamps; private investments; private equity and venture capital have long been utilized by investors to hedge against stock market volatility. This is because alternative investments are theoretically uncorrelated to the broader stock and bond market and therefore insulated from broad market swings.

I am going to make the argument that not all alternative investments are created equal.  Investors have long flocked to one class of alternative investment or another for one reason or another. Investors in alternative investments mainly fall into two camps:

1. Those who view tangible assets like gold as a safe-haven asset, a hedge against geopolitical and economic uncertainties
2. Those seeking to accumulate wealth uncorrelated to the wider markets through private investments, venture capital, private equity, etc.

My view is that a certain class of alternative investments, those considered productive assets, are ideal for either strategy, even trumping tangible assets like gold as a hedge against geopolitical and economic collapse.

Warren Buffett explained his dislike for gold, calling it an “unproductive asset.” He said that assets like gold “will never produce anything, but are purchased in the buyer’s hope that someone else will pay more for them in the future.”

I’m with Warren Buffett when it comes to his aversion to investing in tangible assets like gold as a hedge against social and economic collapse.  First of all, you’re betting against human ingenuity and production and it’s not a safe bet.  You’re also betting that by hoarding gold now, it will be valuable in the future when society goes south.  In a 2011 shareholder letter, Warren Buffett explained his dislike for gold, calling it an “unproductive asset.” He said that assets like gold “will never produce anything, but are purchased in the buyer’s hope that someone else will pay more for them in the future.”

​​He went on to say that the owners of assets like gold “are not inspired by what the asset itself can produce — it will remain lifeless forever — but by the belief that others will desire it even more avidly in the future.”  But, who’s to say anybody will care a hill of beans about gold if things really go downhill?  Water, food, and shelter would seem to be more valuable in such times.  Tangible assets like gold are unproductive with no inherent value, other than for use in a few obscure industrial applications.  It just sits there. It will be even more useless if it fails to live up to its value as currency in bad times.

So as a hedge against socio-economic collapse, gold is a risky and unproductive bet. If recent history is any indication, gold as a hedge in bad times is tenuous at best. In September 2011, when Standard & Poor’s downgraded the US Government’s credit rating, US stocks fell 7 percent and gold dropped 11 percent. In October 2008, when the global financial crisis was in full swing, US stocks lost 17 percent but the gold price fell 19 percent. So much for the hedge against bad times argument. Gold will sit in your vault hoping to be valuable one day, in the meantime doing nothing for you.

As a hedge against bad times, alternative investments considered productive assets would appear to be better alternatives. Passive income generated from productive assets should continue to produce even in bad times. Income generating real estate will not suddenly cease providing rental income, a soybean farm won’t abruptly stop producing soybeans, and a private investment with regular distributions shouldn’t just stop making those distributions.  Productive alternative investments like real estate, farms, and income producing private investments that are uncorrelated to the stock market are effective hedges against down times, more so than tangible assets that produce nothing.

​​On a micro level, if you lose your job, that gold in your vault will get you by for only so long when you sell it, but if you had a productive asset generating regular returns, your ability to ride out storms for longer periods of times is vastly improved.

For building wealth, it’s no contest. Productive assets are essential for building wealth.  In the alternative investment class, productive assets like real estate, private investments with regular distributions and some private equity and hedge fund investments with an income component all meet the standard for creating wealth. Why must the alternative investment be productive to create wealth?

Wealthy People Make Different Choices

Dr. Stanley Riggs in his article, Wealthy People Make Different Choices with Their Money Than the Rest of Us, for BusinessInsider.com, (Jan. 7, 2015) shed light on the spending habits of the wealthy and what made them wealthy.  In his article, Dr. Riggs explained what set the wealthy apart from everyone else; the poor, the middle class and even the rich.  The distinction lay in how the wealthy allocated their income.

​​They were the only class that allocated any percentage of their income towards passive income producing assets.  In fact, a majority of their income was dedicated to acquiring income producing assets and the passive income produced from those assets were reinvested or used to acquire other income-producing assets.  This idea of compounding passive income is the key to wealth.  The rich have to work for their money. Although they may choose to work, the wealthy don’t have to work.  They can sit back and collect passive income from their productive assets and not have to worry about money.

So, to grow wealth it’s important to grow the basket of productive assets producing passive income to generate the compounding effect.  It all starts with one productive asset.  The income from that asset gets reinvested to grow that asset or into other assets, but the key to compounding is not to stand still.  To illustrate, you have real estate holdings that yield 10% a year.  If you reinvest that 10% profit after that first year, you will make 10% on 110% the next year and so on.  If you don’t reinvest, there is no compounding.

Here at Four Peak Capital Partners, as a hedge against bad times and for generating wealth, we gravitate towards alternative investments.  Alternative investments have historically been uncorrelated to the broader economy and have proven to be recession-proof.  So, while other sectors of the economy suffer in a downturn, mobile home parks continue to generate income without a glitch.

Use the Multiplying Principle

​​For building wealth, we wholeheartedly embrace a multiplying principle.  Profits from current alternative investments are reinvested in the same or other alternative investments.  Because alternative investments have intrinsic value, that along with anticipated appreciation, leads to a multiplier effect that grows income with velocity in this investment class. By adding our offering to your portfolio and committing to multiplying your earnings by reinvesting the passive income from our regular income distributions, you too can put yourself on the path to financial success.

Looking for more information about diversifying your portfolio? Ready to see which option is right for you to grow your wealth? Download our free guide to private investing.