Irrational Markets

Last year we had a truly epic disturbance in our household. As our two sons, ages 4 and 6, climbed into their bunk beds, we went through quite an episode. On this particular night, the boys were quite excited to go to sleep with a glow stick each, and as would be expected they were waving their glow sticks around and bending them back and forth. As my oldest son lay on his back with his new luminescent friend above him, the glow stick cracked and spilled a glowing chemical onto his pajamas. My son shrieked and began to cry believing that this was some kind of deadly poison. We took him to the bathroom to wipe him off and change his shirt — and yet he continued to cry dramatically.   I said, “Ayden, it’s okay buddy, you’re going to be fine.” as reassuringly as I could. Then, he exclaimed loudly, “I just don’t want to wake up in the morning, and find myself DEAD!”   At this point, although you’re not supposed to laugh at your kids, my wife and I burst out laughing. We probably won’t win the “parents of the year” award this year, but it was difficult to maintain our composure.

 

We expect children to have irrational moments from time to time, but eventually mature. The Stock Markets, like children, are not completely rational either. In fact, the stock market has never been a rationally managed place to grow and accumulate wealth.  This doesn’t mean that stocks are a bad place to invest; rather it’s the facet that most investors and their advisors lack the experience and necessary skills to consistently generate favorable returns. Unfortunately, the bull market from 1981 to 2000 gave investors the impression that they would always experience successful outcomes while managing their own money.  During the past 15 years, even though investors have watched their portfolios crash and burn, many still hold a blind faith that stocks-and-bonds are the only way to invest.  Though I admire their devotion, it is hazardous to their financial health.

 

The good news is that alternative investments are gaining in popularity with institutional investors, financial advisors and retail investors.  For more information on the gain in popularity of alternative investments see this article.  The proliferation of alternative investment managers, increased ease of accessing alternatives, and lower account minimums are all signs that alternative investments will gain a permanent position in the asset allocation.

 

There is still a lot of mythology with respect to alternative investments. Although alternative investments are often branded as a separate asset class, an argument can be made that alternative investment managers are simply utilizing other strategies and a wider range of investment and risk management tools than those used by relative-return, long-only managers.  Moreover, there is a widely held perception that alternative investment strategies are somehow a new idea.  Investors have used farmland, real estate, commodities, and private equity strategies for hundreds of years before a group of traders and speculators gathered under the Buttonwood Tree at the foot of Wall Street.

 

Nearly every investment advisor, institutional investor and retail investor will agree that the financial services industry is much different today than it was at the turn of the century.  However, many have yet to adjust to the new investment landscape.  I believe that we have an obligation to investors and the financial services industry to intelligently and articulately exposit the significant benefits in utilizing alternative investments in portfolio management.

 

My son, by the way, is fine. He can now find humor in his emphatic statement, and is turning out to be quite a “rational” little boy. I hope he does not grow up too fast—but I suppose that is just me being “irrational”.

 

 

 

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About Troy Vanderburg

Troy R. Vanderburg is the Founder and Chief Executive Officer of the Alternative Investment Store. With a passion for alternative investments and an advocate of change in the financial services industry, he is highly regarded as a foremost authority in the Micro-Alternatives industry. Troy provides expertise in: alternative investments, strategic planning, tactical fund management, capital raising consulting, and thought leadership to some of the most highly regarded asset management firms, fund managers, and entrepreneurs in the United States.

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