Do you wish you had a yuan for every time you heard the inaccurate reference that the Chinese symbol for “crisis” is the same as for “opportunity”?
How often will we have to hear this nonsense from pontificating pundits, investment advisors and portfolio managers out ballyhooing the pending stock buying opportunity of a lifetime?
The equation above is only applicable when something is actually learned from the chaos and behavior is changed. The common definition of insanity–the behavior of people who keep doing the same thing, yet expect different results–is likely more relevant.
So far, I see little evidence that investment advisors have learned anything from their vanishing assets-under-management, despite irrefutable evidence that:
- Stocks have plummeted more than 60% in real terms since the market peak in 2000. They have performed no better than 20-year Treasuries for the past 40 years and certainly have not delivered their risk premium.
- Bonds may be the next bubble (according to Warren Buffett) as unprecedented spending, ballooning deficits, risk of a devalued dollar, and inflation could prompt foreign investors to dump Treasuries.
- Modern Portfolio Theory, traditional asset-allocation and diversification models, and buy-and-hold investing have been materially discredited over the past 80 years.
Will investment advisors revisit their mantras or continue to tout the same traditional asset-allocation models that have so dutifully devastated their investment portfolios?
Empirically, investor returns on private investments constitute the single largest source of private wealth in America. All stages of private venture investment (early/seed through mezzanine and later) have dramatically outperformed traditional equity indexes over the past five, 10 and 20 years.
Investment advisors should educate themselves to become more familiar with best practices in evaluating and ultimately embracing private investment opportunities for investors. Prudently implemented, private investments can materially benefit your client’s portfolios, and, in turn, your investment advisory practice.
By “private investments” we are referring primarily to investments in private enterprise. (But Venture Populist will address the wider range of private investment strategies, including angel investing, private equity, venture capital, venture debt financing, private placement offerings, and private investment in public equity (PIPEs).
Walk the Walk
True, sustainable wealth is rarely generated through traditional investment or employment. It is the consequence of inheritance, windfall (lottery), illegal activity, or private enterprise. Contrary to the widespread, pedestrian misconception, inheritance is not the major source of private wealth in America. Rather, it is entrepreneurial success or investment in private enterprise.
According to Drs. Thomas Stanley and William Danko’s research published in their book The Millionaire Next Door: The Surprising Secrets of America’s Wealthy–80% of today’s American millionaires are first-generation rich. More than half never received as much as $1 in inheritance, and 91% never received as much as $1 from their previous generation’s ownership of a family business.
The same was true a century ago per Stanley and Dankos’s citation of a 1892 study of the 4,047 American millionaires…”84% were nouveau rich, having reached the top without the benefit of inherited wealth.”
The highly-coveted high-net-worth and ultra-HNW investor knows this better than anyone, because, as probability has it, they very likely accumulated their own private wealth through entrepreneurial activity or investment in private venture. When investment advisors are speaking with HNW investors about private investment opportunities in start-up ventures or emerging companies they have their attention, and do not show that glazed look of disinterest that a lecture on the Efficient Frontier evokes. The HNW may not be familiar with the specific product, service, or technology that the venture you may be discussing is engaged in, but they do understand business, private enterprise, and their potential for wealth creation.
Advisors should become more receptive to learning to speak the language of their desired target market, rather than continuing to subscribe to the defiled dogmas and outmoded portfolio fallacies (like Modern Portfolio Theory) that have so wantonly wasted wealth and invalidated their perceived value proposition.
Album: Crisis, Mike Oldfield, 1978
Popularity: 39% [?]
MPT works. With the right allocation and systematic rebalancing to maintain percentages as well as in line with clients goals, there is no lost decade. Markowitz knew what he was doing, and as an academic, he did not stand to profit as you do from pumping your business. When MPT is juxtapositioned with Daniel Kahneman’s Nobel Prize winning ideas on heuristics, you see how MPT does add value when used in line with clients goals. “Set it and forget it” is a horrible strategy, but that is not MPT. Any classic definition of “Venture” includes the idea of risk taking. Where does that fit in CAPM or the efficient frontier?
Just yesterday I saw yet another client approved piece produced by one of our on long only investment management friends stating the perils of selling out of the market and therefore missing those few glorious days that drive performance – how pathetic. Advisors that go to clients with that message will not be in business for very long. It’s about managing risk and diversification of return streams through alternative asset and strategies to compliment the traditional triumvirate of stocks, bonds and cash.
For those who further believe the last the last two months market performance marks the return of the norm (orderly and upwards) should probably look at history for direction. Two decades of excessive leverage by institutions and individuals does not get solved easily. In the past 100+ years you have had 4 bears and 4 bull secular trends with the bear averaging over 12 years. We are, to say the least, not in average times so expect more to come. That means doing what the institutions and HNW have been doing for decades. Moving beyond reliance on just traditional assets.
What’s over 50 years old and considered modern? MPT..time to dust it off give it a face lift and focus on low to non correlating assets.
Thanks for challenging the status quo and afflicting the comforted. The business is getting more challenging and fresh ideas are needed now more than ever to succcessfully meet the demands of our clients.
Matthew, thank you for your post. We certainly see things differently with respect to MPT and I will address your comment in a subsequent post. But in addition to agreeing to disagree, I should clarify that I don’t have any business to “pump” to advisors. I do regularly advocate that investors, and their advisors, more aggressively evaluate and allocate to private venture investment opportunities. In supporting my assertions, I can draw from my career experiences as a registered investment advisor, private investment counsel, the head of a multi-billion dollar alternative investment group, a private venture investor, financier and venture catalyst. I am not an “academic” but I do have real world experience in these matters. I have had first hand experience with the disingenuous manner that Modern Portfolio Theory has been used by financial services firms and advisors to attract investor assets…and we have all had a couple of very harsh lessons with respect to the shortcomings of MPT. Trillions of lost investor dollars tells me that MPT does not work.
[...] You are in the business of wealth preservation and wealth creation. Without question, the primary source of family wealth in America is the result of private enterprise and private venture investments characterized by [...]