Alternative Investments (What about Gold and Silver?)

Episode Transcript
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Chris Holling (00:00):
This is the truth about investing back to basics
podcast where we want to helpyou take control of your
personal finance and long terminvestments. If you're looking
for a way to learn the why andhow of investing then you found
the right place. Thank you fortaking the time to learn how to

(00:23):
better yourselves.
button is pushed el pushedo. Asthe French would say.

Sean Cooper (00:37):
Right.

Checking 1

2

3

I think we need to work on your French

eins, zwei, is that the French

Going to jump over to German, huh. now my mom would
be very disappointed and she herFrench isn't even that good
anymore.

Well as long as as long as she can be
disappointed for my not evenelementary level. French

Un, deux, trois

what is that cat?
Quatre, cinq, six, sept, huit,neuf, dix. That's it. That's all
I got. I'm out. I'm out of un.
iens, no. There it goes again.

Did you jump back to German again.

I did.

Were you in German the whole time?

Uns

Yeah, you were in

that's that's what happened is I was gonna say
uns and then I went iens sept.
it's whatever. It doesn't matter

how little foreign language we really know or
speak. It's rather sad

Well. I mean, what I know the best is sign
language. And that's not exactlysomething I can demonstrate on a
podcast.

No, go ahead, Chris. It'll be really
entertaining for everone.

Okay.
Okay, here here. I'll sign toyou. I signed.

Nice job. Nice job.

Thank you.

That was fantastic.

Yeah, I appreciate that.
I asked how you are, by the way,I know, I know. You couldn't
tell that.

I'm pretty good.

Because you don't understand sign language.

I'm even better now. Oh, that's why I couldn't
tell

Yeah, that's why you couldn't understand that.
That's what happened. Okay,whatever, we should introduce
things. Welcome back, everybody,ladies and gentlemen, to the
truth about investing back tobasics, not how to learn a
foreign language.

Clearly,

my, my name is Chris Holling.

And I'm Sean Cooper.

And today we are going to talk about alternative
investments. Right, Sean?

Indeed,

okay, he had to correct me because I put little
notes on how to remember thatwe're talking about alternative
investments on here. And he saidno, that's not all we're talking
about. So.

Chris just wants to talk about gold and silver.

I do I want to talk about the metals. And I and
and aluminum should we investedin aluminum

not among the precious metals that most people
would buy into, but it's a youknow, certainly an industry you
could buy into I suppose

Well, maybe not a bunch of people are into it yet.
is what I think that's what itis.

That could be

a trendsetter.

It is a unique metal, that is for sure.

Well, okay, so I know that it will fit in there.
Because I am I am interested to,to learn a little bit more about
that. But like, Where Where doesthat land? Do we do we open up
with some some precious metalsperhaps?

Well, I was thinking maybe we should discuss
why we're talking aboutalternatives in the first place
kind of tie into some of ourprior episodes. Specifically,
we're talking about alternativesbecause of that diversification
that we've been talking about inthe past and the correlations.
So adding in alternativeinvestments to the portfolio can

(04:00):
help enhance the portfolio in anumber of different ways, either
in improving return or reducingrisk or some combination of
those two, but really allowingyou to tailor the portfolio to
your risk and reward profilebased on your risk tolerance,
financial ability to assumerisks, that sort of thing.
Because strictly sticking tostocks and bonds, really doesn't

(04:25):
provide the same diversificationbenefits that it used to when
modern portfolio theoryoriginally was devised.

Okay.

So yeah, I was going to basically present some
of the alternative investmentsthat are available out there and
discuss why they can potentiallyhelp a portfolio or where they
might fit in.

Well, I have a question about that. And maybe
maybe this is me kind of jumpingahead. Maybe not but when when
we were looking at these the thealternative investments that you
have not listed yet. Is there apoint when you start to say, now
is the time to start consideringthese things as opposed to the
stocks and bonds stretch likeyou're referring to? Or is it

(05:12):
more of a fluid option thanthat? Like? I don't know if I
asked that very well,

no, that no, it's a good question. Assuming I
understand what you're gettingat, is there a time to get in or
get out of alternativeinvestments? And my answer to
that is, if there was, if yousomehow have a magical bell that
goes off to tell you when themarkets going to tank, then yes,
there would be a time to get inand out of alternative

(05:41):
investments. And realistically,

I need to get me one of those

yeah, yeah, you and me both. Realistically, if there
was somebody who actually knewwhen that was going to happen,
consistently, I should say, evenif they knew it once, they'd be
very wealthy. You look at TheBig Short, if you've ever seen
that movie, or read the story,

I haven't but it sounds like it's time to

the original person who basically predicted
2008

Oh, ok

Yeah, and he was wrong for months. And he nearly
lost everything in the process.
And then when it did happen, andhe proved to be right, he made
tons and tons of money forhimself and his clients.

Wow.

Okay, and that's because he predicted it once.
Could he do it again? MaybeMaybe not. Because the cause for
market crashes varies each time.
Now, there are some somecommonalities but the the
overarching cause and what likehe predicted in 2008 is not the
same. So actually being able tosee the entire market and go

(06:53):
Okay, this is going to be thecause and this is when it's
going to happen because even hedidn't get it right in terms of
exactly when it was going tohappen. Like I said, he almost
lost everything. Waiting for itto actually happen so

well, in part of that's because when you have
things like, 07' 08' occur, thennew things get placed in new
things get put in place to helpavoid that from happening is the
point

oh, you brought in a whole nother topic
there. You're talking aboutgovernment regulation that
didn't work to begin with, andthey made worse in there...
oh, that's a that's another tpic that we really need to disc
ss. Because, oh,

we can we can have a different episode

That one I'm a little fiery about

I was mostly just addressing that when you are
going, Oh, this, this couldhappen again. Even if things get
shuffled around, and you're justyou know, robbing Peter to pay
Paul to fix something else. It'sstill not likely for that crash
to happen for the same reasoncuz new things are in place

Hint, hint, they didn't fix anything,

Shut up. That's a different different episode. Or
it's about to be I have to Ihave to put it in here.

Yeah, you do need to put that in.

Instert that in.
Yeah,

yeah.

Here I go. I'm, going to enter it in now.

No but my point is the cause of market crashes.
Very, I mean, look at 2008versus 2001. Tech had nothing to
do with 2008. But it waseverything to do with 2001. That
was a tech bubble.

Right

Whereas 2007 2008 was the mortgage crisis.

Correct

Okay, I just so completely different things that
actually caused the crashes, weknow there's going to be
crashes, that's it's going tohappen. They'd like to pretend
they can avoid it.
Realistically, I think they'regoing to make them worse.

Probably,

but it's going to happen. It's just a matter of
when and why. So my point beingin all this, I don't think
anybody is going to consistentlypredict each and every market
crash when and why it's going tohappen.

Right

So trying to get into or out of alternative
investments at a particular timeis going to be very, very
difficult, if not impossible. Somy point is, you should probably
add in alternative investmentsto your portfolio permanently to

(09:38):
some degree.

Okay, that makes sense. I could see that.

Okay.
If we use 2008 as an example,many people assume that in 2008,
everything went down becausemost people lost lots and lots
of money in 2008. We're talkingabout the market going down. I
think the worst point was like39%, something along those
lines, most people it was closerto, you know, 30 35%, that they

(10:08):
may have lost in theirportfolios, especially on the
equity side. But in that timebonds, for the most part also
lost money. And so people justassume that 2008, everything
lost money. And that's not true.
And that is, I think, theeasiest illustration of why
alternative investments can beadvantageous. So you have some,
pretty much the only traditionalasset classes that even broke

(10:32):
even in 2008 that most peoplehad access to, would have been
like the BAR Barclays aggregatebond index, so I'm just using
kind of broad asset classeshere. Foreign corporate bonds
actually basically broke eventhe only thing that most people

(10:52):
probably were invested in or hadaccess to that did that actually
had a positive rate of return in2008 would have been long term
treasuries.

Oh, okay. Like I said, what, when you say
treasuries, plural, like, doyou? Do you have an example of
some treasuries or

Treasury treasuries, meaning US
Treasuries, bonds, notes?

Okay, sorry. I thought that's what you
meant. I just

yeah,

I didn't know there was some Walmart Treasury?

No, no, nope, in fact, yeah. corporate bonds, US
corporate bonds really didn't dovery well, high yield bonds
really got hurt. So yeah. Butthat's where the alternatives
come into play. And see, whenyou talk about alternatives,

(11:49):
some people might dabble. Andthey would consider like real
estate an alternative assetclass. And I would agree that is
an alternative asset class. Itis among the alternative asset
classes that did really, reallypoorly in 2008. Because it was a
mortgage crisis.

Sure, yeah. That makes sense.

However, things like gold, silver, private
equity. If you invested involatility, and managed futures,
which are other alternatives,all did really well in 2008.

Okay,

but most people are not invested in those things.
And that's why having thosemixed into your portfolio Can
you know, enhance returns orreduce mitigate risk? Do you
want me just to start jumpinginto some of these, and we can
talk about them?

Yeah.
Well, I mean, sure. When I thinkwhen I think of an alternate
investment, or alternative,alternative investment, really,
I jump to precious metals, and Iimagine a lot of people do, as
well. And I'm not trying tocontinue to go back and harp on

(12:55):
I really was just giving you ahard time about it.

No, I don't mind certain there.

No, I just think that that's that's something
that's commonly known as anoption that's readily available
to people and and towards thetop of their minds. Like, when
you refer to the the first setof bonds that did well, in the,
in the O7' 08' stretch, I waslike, yeah, sure that that bond,

(13:19):
of course, everybody, everybodyknows about that bond. So So I,
you know, as far as like groundlevel stuff, I would think like,
yeah, this this is stuff that isalmost in common conversation,
that is an alternativeinvestment that that you could
consider, and here's why. And,and then, past that point, like,

(13:41):
I think it's all noteworthy, soyeah,

yeah, um, so yeah, but before I jump into the
metals, let me actually make ita quick distinction here. When
looking at alternativeinvestments, I divide them into
two subcategories. Soalternative assets, and

(14:04):
alternative strategies. Soalternative assets would be
things like hard assets, thingsyou can physically see touch,
smell, that sort of thing.
alternative strategies beingunique investment methodologies.

Do you do you smell your metals?

I mean, not inttentionally

If you can touch it and you can smell it. I
mean, you just, you said if youcan see it, and you smell it and
touch it, and I just wondered ifyou got a hold of your metals
and smelled them.

No, I'm not Scrooge McDuck.

I'm gonna start smelling my metals. Sorry,

you should

continue

You should. Okay.
So alternative assets, thethings you can see touch. I
guess you could taste them andsmell them if you want. I, I use
those, or I view those asalternatives to equities because
they tend to be higher risk andhigher reward. So they tend to
perform like equities but noncorrelated, so it potentially

(15:02):
can enhance the portfoliowhereas alternative strategies
tend to have risk and rewardprofiles more similar to fixed
income, bonds. And so I use themas a bond alternatives. So I
break those two categories out.
So addressing the alternativeassets, we have your metals,

(15:29):
real estate, global naturalresources, and private equity
basically. So jumping into themetals, the ones most people
know and are aware of are goldand silver. You can also invest
in things like platinum,palladium, copper, I guess you
could probably invest inaluminium

aluminium.

I guarantee there's a futures market for it. I just
don't know many people that do

Not yet.

Yeah.
There's a couple things to beaware of. I think people tend to
refer to gold as a safeinvestment and silver maybe to a
lesser extent, the The truth isgold as an asset class that the
price of gold is actually morevolatile than the s&p 500.

Oh, wow, I didn't know that.

Yeah, so I would not classify as safe a hedge
Yes, because gold traditionallyhas done well against inflation
it's done well against. Well,inflation to a lesser extent
it's kind of matched inflation,but it's done very well in bear

(16:39):
markets, market crashes, peopletend to revert to gold when they
are fearful of the the generalmarket. So stocks.

So

additionally, it's worked well as a hedge against
or people view it as a hedgeagainst issues with the US
dollar. If you're investing inif you live in the US and you're
using US dollar predominantly.

Well I might be getting ahead of myself here,
but when you're when you'retalking about that, and you're
comparing it to to a hedge thensay say I am that magical person
that that does know that thecrash is happening tomorrow,
then the gold would sit as abetter hedge overall for that
crash in particular, as opposedto the s&p comparatively but

(17:32):
overall if it if you're lookingat like a, you know, let's say a
10 to 30 year range, if you saton the S&P and then you then you
rode that crash, it wouldprobably do better than the gold
long term. Is that is that whatI'm understanding?

Yeah, yeah, more or less. I mean, if you have that
magic Bell, then you shouldprobably just short, the s&p
500. And forget investing ingold in the first place. But

Dang, it, you're so smart.

But yes, gold would be beneficial for that crash,
long term rate of return on goldis not going to most likely beat
the s&p 500 if you just buy andhold.

Okay.

But again, that's why it's designed as a piece of
the pie to smooth out that rideover time.

Okay,

same scenario with silver, but to a lesser extent.

And so in theory, you aren't smart enough to short
something because we're talkingabout me instead. And we're not
smart enough to short that.
Nevermind. Anyways. So I hedgeit with the gold, this, this
crash that I'm foreseeing andthen because I hedged it I, I
survived that crashsignificantly better than others

(18:42):
might. And then now that the s&phas dropped, then I use my hedge
to purchase s&p while it's low.

Yeah, the easiest way to go about doing that
without having a magic bellwould be to practice periodic
rebalancing. So if you say, I'mgoing to put 70% in traditional
asset classes, 30% inalternative asset classes, I
bring that up, because that'show I traditionally do it. Most
people are more like 90%,traditional 10% alternative and

(19:17):
that's oftentimes becausethey're not familiar enough with
alternatives. Back offices arescary of alternatives, even
though the math works out to bemuch better for the investor the
other way, but anyway, thataside, say it's So say you're
the traditional, traditionalinvestor and your 90/10 90%
tradition, traditional assetclasses, 10% alternatives. So

(19:39):
you've got and we'll just usethe s&p 500 and gold for the
example 90% in the s&p 500, 10%in gold, I'm not advocating that
portfolio for reference.

Right. Okay, I gotcha.

As the market does well, over time, your portfolio
is going to get to a point mostlikely where you're looking at
more like 95% s&p 500, 5% Goldjust because the s&p 500 has
outpaced the gold. If yourebalance periodically, you
rebalance to that 90/10. So youend up automatically it forces
you to sell some of the s&p 500when it's high, and buy some of

(20:16):
the gold when it's low. And thenas the market corrects and you
know we have those thosecorrections, all of a sudden we
get that that swing and the s&p500 does really poorly, the and
gold outpaces so yourportfolio's now 80% s&p 500 and
20% gold. So you rebalanceagain, and it forces you to sell

(20:36):
gold when it's up. And buy s&p500 when it's down. So no magic
Bell, just rebalancing forcesyou to do what you should
already be doing, instead ofwhat most people default to
doing, which is the opposite.

And then from a professional standpoint, from
your side, I understand youryour 70%, traditional 30%
alternative approach that youprefer right to this

Yes,

Did I say that right?

Yes.

Do you do that across the board for like, all
the different realms that youoffer? when you're when you're
offering like non qualifiedaccounts and, and etc? Or do?
When somebody contacts you foryour business? Is it? Hey, I do
stuff to Hey, Sean, do magicwith my with my money? Do you do

(21:29):
that 70/30 as a whole overall?
Or is it only to certainaccounts that that you offer
Where? I'm just I don't evenknow if I'm going to keep this?
I'm just curious. Yeah,

No, that's okay.
Yeah. So it would have nothingto do with the type of account
whether whether it's qualifiedor non qualified. Okay. But to
answer your question, yes, Iblanket, all accounts end up
roughly that 70/30 what whatdiffers is the blend of the the
assets. So, I mentioned earlier,that idea of the alternative

(21:59):
assets versus alternativestrategies and them being
similar to equity versus similarto bonds. So a more aggressive
portfolio is going to have amuch larger percentage of the of
that 30%, a larger percentage isgoing to be in alternative
assets and a smaller percentagein alternative strategies,
whereas a more conservativeportfolio will have a smaller
percent and alternative assetsand a larger percent and

(22:21):
alternative strategies.

Okay. Okay. That makes sense.

Yep.
No, good question. Oh, well, Iguess we should cover how to
invest in metals.

Oh right, how do I do that, Sean

Regardless of the type of metal that you're,
you're buying. So there's anumber of ways to do it. The
first would be to utilize afund. So a mutual fund, an
exchange traded fund, that wouldbe the easiest way to go about
it, you're going to get accessto the what the market deems is
the the price if you will, ormore specifically, how the fund

(22:59):
is performing, because it's nota perfect tie there. So
investing in the fund is theeasiest methodology of the
methodologies that we'lldiscuss, it probably gives you
the least amount ofdiversification because it's not
a perfect tie to the price ofthe underlying metal.

But what if you just want to feel like a pirate?
So you prefer the coins? Youknow?

Well, we'll get to that. I will say,

those are my coins for reference
Yar we be invested in the bestway that we can.

Yeah, the in when you invest in the funds, there
are different types of fundsthat do it. And I tend to prefer
the ones that actually holdphysical bullion. So they
actually for everybody thatinvests in their fund, they
actually go out and buy thebullion, you don't hold it
personally, they hold itthemselves, but at least there

(24:01):
is physical bullion backing yourinvestment, whereas a lot of
them do not. So you're justhypothetically investing in it.

Interesting.
Okay, that makes sense. I justnever would

They use leverage and a variety of other things
that oftentimes it's going to befutures and things of that
nature. So that's something tobe to consider, especially if
you're using it as a hedge, thecloser you can get to the
physical bullion, the better.

Okay, yeah, that makes sense.

Which brings me to the next which would be to
invest it in your portfolio andthen have someone else hold it
for you. If you don't want it tobe at your, you don't want it to
be shipped to you, you don'twant to hold on to it. There are
different banks and stuff thatwill actually hold it for you.
Many IRAs, they have a systemwhere they'll set it up and they

(24:48):
set up basically a lock box thatyou don't actually know where it
is or hold or have anything todo with but it's technically
there for you, representing whatyou hold. So that would be a
step closer, and then The lastwould be you actually buying the
physical bullion and holding ityourself or depositing it into a
bank near you. And as I said, asfar as a hedge is concerned, the

(25:12):
closer you can get to thephysical bullion, the more it
acts as an actual hedge becauseyou're dealing with the true
price of the bullion not whatthe market does. Because if you
look at things like 2008, again,even though gold did well so did
silver in 2008, the funds thatrepresented golden silver did

(25:35):
not do as well as the preciousmetal itself, because people
tend to panic. And they selleverything all at once,
regardless of its underlyingvalue. So even if the mutual
fund or ETF that you invested infor gold and silver, even though
the underlying asset class, theunderlying commodity did well,
the price of it did well, yourvalue did well. The price of the

(25:59):
ETF or the mutual fund did notdo as well, because people
panicked and sold it evenregardless. So

right.

Does that make sense? Okay,

no, it does. It does. I, I was I was totally
just jingling coins at you justbecause I thought it was funny.
But

oh,

well, this is still back from when I sold that
truck for silver coins. And Iwas just like, Oh, I guess I'll
hang on to these. And I stillfeel like a pirate every time I
open this drawer that just sitsthere. But

Yep

I mean, yeah

And there's lots of ways you can invest in like
silver, for example. You've gotthe pre What is 1986? (64')

Yeah.

Silver dollars that were actually 90% silver, and
then you've got actual coins or

you can get little silver bars too

Yeah, or bars?
Yeah.

I mean, there ity bitty there like one ounce or
whatever, but

and then you can get into the debate of Do you
want just US minted silver andgold, which is going to be sold
at a premium, but it's the onlyone the US government will
technically accept? Or are youcomfortable buying? You know,
Canadian Maple Leafs areAustralian. Africa is another
big minter

I just I just want to, I just want to get to
the Ron Swanson stage is all Iwant. Just how much money do you
have? I can tell you how manypounds of money I have.

If you have pounds of gold, you're you're sitting
pretty happy right now. Yeah.
All right. Does that does thatthat sate your your desire to
discuss bullion?

I think so mostly?

Mostly?

Yeah, it does.
Because I, you know, I that wassomething I considered as a as a
Is it is it best to, you know,oh, I I'm going out and I'm
getting hold of this in my handsor somebody is representing this
for me too. And I think itcovers a lot of spots. So
that's, that's good.

All right, so another alternative asset, we
talked about real estate, Iwould argue it's becoming more
and more traditional. However,it does still offer some
diversification, lowercorrelation to your traditional
asset classes. And there's lotsof ways again, you can invest in
it, be it, you know, REITs, realestate investment trusts, or

(28:32):
directly buying into it, andthen you know, being a landlord
or something along those lines.
So and then you've got thedifference between commercial
real estate and residential realestate and the different rents
associated with those or whetheryou're going to be you can be a
fix n' flipper. There's allsorts of different ways to
invest in real estate. But itdoes tend to perform a little

(28:53):
bit different than the rest ofthe market, with the exception
of periods like 2008, where itwas part of the cause of the
crash so

well, and I might be splitting hairs here, but I
would, I would think that thecorporate real estate, unless
you're

commercial,

you're really sorry, thank you commercial,
unless you're really frontingthat, the entire process of all
of that that tends to fall moreinto a traditional thing like
you're talking about becauseit's several shares of a like a
conglomerate all coming togetherto put that together.

for commercial real estate, unless you have very
substantial portfolio, you'remost likely going to do it
through a REIT. So a real estateinvestment trust.

Yes. Which is like, yep, okay. I was just
mostly saying that it seemedmore traditional for to me to be
involved in something like that,like a trust or something like
that as opposed to alternativebut I am splitting hairs, maybe.
Possibly.

Maybe it I guess it's going to depend on the the
period? Because, yes, if themarket crashes and businesses do
poorly, then they're more likelyto vacate their their commercial
real estate, and then you losethe rent. So yes, I could, I
could certainly see that. Butthen there's also the the

(30:19):
trickle down effect of rentersthat, you know, if they lose
their job and their ability topay their rent, so it you know,
it all kind of ties togethereventually, it's just a matter
of, at what level so

yeah, that makes sense

the the renting tends to be fairly resilient.
People still want a place to dobusiness, people still want a
place to live. So

right?

Yeah.

I mean, it all makes sense. I was, I think the
numbers were all weird in myhead.

No, I can, I can see where you're coming from,
though. Absolutely. Moving on.
From there, we've got globalnatural resources. And I'm just
going through some of the onesthat I tend to focus in on,
there are other alternativeassets, other alternative
strategies, but we'll just gothrough the ones that I tend to
focus in on so global naturalresources would be another. So
you're looking at, you know,technically speaking, your

(31:15):
bullion is a global naturalresource. But in this I'm
looking more at things liketimber, oil and gas, your rare
earths that they use in, youknow, batteries, cell phones,
solar panels. anything alongthose lines. So

??

you can focus in and do renewables versus non
renewables, and, you know, godown one of those paths, what
have you, but all of these,again, they, they have ties to
your traditional asset classes.
Certainly, you look at timber,for example.

That's got to be doing well, right now. It has to
be,

it's actually starting decline right now. It
was doing really well earlier. Imean, prices were absolutely
insane. For timber earlier inthis year, they still are, but
the prices that the they'rethey're starting to struggle,
because a lot of the timberindustry has gotten bloated off

(32:26):
of the high prices they gotpreviously, so

gotcha, okay.

Yeah. But what I was getting at is, you know, if
the demand for housing orconstruction and things of that
nature goes down, thenobviously, timber suffers. So
that does have some ties to themarket, but for general
purposes, people still buildingstuff. So it offers, again, some

(32:54):
level of diversification,depending on what natural
resource you're getting into.

Right?

Last one would be private equity. And although,
you know, technically speaking,you it doesn't fit the see feel
touch perspective quite as well,but it still falls into that

(33:20):
category. So private equitywould be anything that's not
publicly traded any, you know,companies that are not publicly
traded. So it's not yourtraditional equity class. They
haven't gone public yet. Theyhaven't done an IPO an initial
public offering. And they'rethere tend to be very closely
held. It gets back into thatwhat we talked about previously

(33:43):
with Chris and his venturecapitalists,

Hello

experience Yes. So private equity equity, we're
either dealing with startups,very new businesses that are
trying to get going, orbusinesses still fairly early
stage, but they're trying togrow, they haven't gone public,
yet, these ventures tend to bemuch higher risk, but also

(34:07):
higher potential reward. Sohigher chance that they
completely go belly up, and youget nothing back, but higher
chance that they give you a muchhigher return on investment. And
so you look at again, I bring up2008, because it's our most
recent example of how this mightlook. Maybe I started this the

(34:29):
wrong way. But most investors asI talked about, maybe 90%,
traditional asset classes, maybe10% alternatives, if they have
any alternatives in theirportfolio at all, and that's
probably real estate if they do.
But you look at the bigendowments like the Yale and
Harvard endowment, and goinginto 2008 60% of their portfolio

(34:49):
was in private equity. That oneasset class

Oh, wow

and, it's varied since then it's gone up. I think
as high as like a 80% or more.
And, but for the most part, itdoesn't really go much below
that 60% mark. So they have veryhigh amounts invested in private
equity. The issue with privateequity, aside from its high risk
is it also tends to be veryilliquid, meaning you buy into a

(35:18):
company, there aren't going tobe a lot of other people that
will buy you out of that companydown the road until they go
public, or until they have somekind of large liquidity event
where they they sell the entirecompany or something along those
lines. So it tends to be veryilliquid, unless you get into
funds that invest in privateequity. But the advantage being

(35:40):
again, that the potential forhigher returns, but also its
diversification benefits. So in2008, when everybody else was
losing their shirts, Yale,Harvard, their endowments, made
lots of money. And that wasbecause of their investments in
private equity. Why? Because in2008, a lot of the things that

(36:00):
lost money from a valuationstandpoint did just fine. The
only reason they lost money in2008 was because people panicked
and made irrational decisions.
Now there is some trickle down,obviously, that those
investments, the underlyingvalue did suffer to a degree,

(36:21):
but not to the degree thatpeople made it look like from
the investment standpointbecause of their panic selling.
So private equity was largelyimmune to that to that because
your average investor whopanicked wasn't invested in
private equity, so it didn'ttank the way everything else
did.

(36:42):
Those private firms actually didjust fine in 2008. Now, take
that another year forward, 2009.
And eventually, the markets didcatch up to those private equity
investments, and they hurtsuffered in 2009. So they lost
money in 2009, when the generalmarket was doing really, really
well. But again, that just lendscredence to the idea of

(37:02):
investing in multiple of theseasset classes to try to smooth
out the ride.

Yeah, that makes sense. Okay,

cool.

And then I guess, do, I was trying to think if
there's like a I was gonna say,a layman's person, but really
like a Chris's person's versionof a private equity. That might
be that might be commonconversation that you like how

(37:34):
we were saying earlier? Oh,well, gold and silver is common
conversation, what what would acommon conversation private
equity be?

Typically, you're going to be looking at, again,
mutual funds. There are someETFs out there, but I don't
think they do a great job oftracking the private equity
market. There are some decentones, there are some decent
ones,

okay.

But it just becomes a little more challenging the
issue with so I still thinkprivate equity even in mutual
fund or ETF form provides somediversification benefits. The
issue is because, you know, onthe plus side, they add
liquidity you can get in and outof those mutual funds and ETFs
more or less as you please, someof them do have lockups, but for

(38:22):
the most part, you can get inand out whenever you please. The
issue is that liquidity alsoallows for that panic, selling,
buying and selling that we sawin 2008. So it tends to perform,
those investments tend toperform more like the general
market. There are still somediversification benefits there,

(38:46):
though. To truly benefit again,it works like the gold and
silver, the closer you can getto the actual investment itself,
the more the diversificationbenefits work. So but obviously
the more illiquid, they becomeso as you work your way closer,
the next step would be a anactual hedge fund. The issue

(39:06):
with investing in an actualhedge fund is most of them have
minimum investments of say,$100,000. Plus, you have to be
an accredited investor, whichmeans either having some kind of
designation, like what I have,or I think you have to have,
like $5 million net worth oflike $5 million, or have made

(39:27):
maybe 1 million, it might justbe a million. I need to look it
up

oh, just a million okay. Yeah, yeah, no
problem.

Yeah, well, or have made I think 250,000. At the
end, I should look this upbecause I think they might have
changed it, the requirements foraccredited investor. All right,
net net worth over a milliondollars, or an income of over
200,000 as an individual 300,000for joint for the prior two

(39:55):
years and a reasonableexpectation of making that in
the future. So otherwise Youprobably can't invest in a hedge
fund anyway,

gotcha. Okay,

next level down would be direct investment in
private equity. So actually, youknow, becoming like a venture
capitalist, and going out andbuying into a new company, or a
company that's still fairlyearly in the phase that hasn't
gone public yet. So you'reactually, you know, giving them
your money they're taking itinvesting in the growth of the

(40:26):
company, and you're hoping toget your you become an owner of
the company, and you're hopingto get a payout from that
eventually?

Sure.

So

yeah,

yep. That covers the alternative assets that I
wanted to go over. Any questionson those?

No, I think that that went pretty well, actually.

Cool. Then let's talk about alternative
strategies, which, like I said,are more akin to your fixed
income side of your portfolio,you know, a little less
volatility with one exception.
And typically speaking, a littlebit lower rate of return. So
these are instead of being, youknow, hard assets, for the most

(41:07):
part, they are unique investmentmethodologies. So they may still
buy into stocks and bonds, butin different ways. So an example
of that would be mergerarbitrage. So arbitrage is
probably something we shouldhave defined previously, if we
haven't already.

Oh, wait, no, that's, that's where I come in.
Hold on.

Okay.

Arbitrage. Did I spell that right.

A R B I T R A G E

I totally spelled that right.

Nice.

Look at me.
That's, that's, that's awesome.
Mm. Hmm. arbitrage is thesimultaneous purchase and sale

Yep of the same asset in different
markets, in order to profit from

Did that do it?
tiny differences in the assetslisted price. It exploits short
lived variations in the price ofidentical or similar financial
instruments in different marketsor in different forms.

Yeah, that would be the strict form of arbitrage the
true form of arbitrage.
arbitrage in its most oh, what'sthe word for it?

I don't know I did my part most

most pure form is involves zero risk.

Oh,

so like you said, Your this place over here is
selling something for say $49and this place over here is
buying it for $50. So you jumpin as the middleman and go Yeah,
I'll buy it from you for 49. Andsell this guy for 50.

I've seen some couponers do the same thing.
Extreme extreme couponers arejust extreme arbitrageouns?

Right, right. So for the most part, arbitrage in
that pure form does not existanymore, it has largely gone
away due to the technology thatwe deal with in the investment
markets. And those those pricediscrepancies basically no
longer exist. If they do exist,we're talking about hundreths of
a second that only the mostpowerful computers can really

(43:26):
take advantage of.

Wow,

so for the most part, that doesn't happen. Most
people use arbitrage a lot moreliberally at this point and deal
with things that can generallyprovide a lower risk return not
riskless, but lower risk. Sowhen we're talking about merger
arbitrage, we're dealing withthe fact that the majority of

(43:51):
the time the purchaser in amerger so the company doing the
acquisition, the buying tends toperform poorly initially,
because oftentimes they areoverpaying and the company being
purchased tends to perform wellleading up to the acquisition.
So they will typically short thepurchaser, and so sell the sell

(44:14):
the stock of the purchaser andbuy the stock of the seller, if
that makes sense and thereforetry to arbitrage that common
discrepancy in performance goingforward based on that merger.
Now, they could also bebasically just buying into a

(44:35):
company that looks like a strongacquisition in the future in
hopes that they will be boughtand they will take advantage of
that, that that purchase.
However, that relationshipdoesn't always hold. That's why
it's not riskless. In fact, themerger could completely fall
through in which case thosestocks your Your positions cou

(44:57):
d completely Swing, swing willy on you and go the opp
site way. And you could lose a lt of money. So it's arb
trage in a loose form. But tha's basically what it is. The bea
ty of string, you know, diferent investments like this is
ecause you're going long and shot on different companies, the
overall performance of the maret doesn't have as much of an

(45:23):
mpact on your overall invstment. As long as there are mer
ers going on, you can still benfit from this investment sty
e, even if the market is goig down. With that said, mer
ers, the merger activity, merer and acquisition, m&a act
vity, mergers and acqisitions tend to peak about the

(45:44):
same time the market does, andthey tend to go down when the
markets crashing, but they dotill occur. So there are sti
l opportunities to take advntage of that. Questions on tha
one?

I don't think so.

Okay, another and this is the one that does not
follow the general pattern ofbeing lower risk, per se. And
that would be volatility. Soactually investing if you've
heard of the VIX, which is avolatility index. So you're, it
actually utilizes futures to tryto take advantage of the

(46:21):
volatility in the markets. Soit's not an true investment in
any logical form. It's you'renot buying an asset, per se,
you're you're betting on therebeing more volatility in the

(46:41):
markets in the future.

Okay,

the nice part about this type of strategy is
volatility tends to peak as themarket starts to crash. So it
acts as that the hedge thatwe're looking for in a bear
market. With that said, as themarket is going up, oftentimes,

(47:06):
volatility tends to be low andtrail off. So over an extended
period of time volatilityactually tends to have a
negative rate of return.

Dang. Okay,

yeah.
So it has it's a fairlysubstantial disadvantage. But it
also has one big advantage ofbeing a direct offset to market
crashes. I've heard it describedas well, I should say the

(47:39):
reverse of it, I've heardinvestment. There are in
investment options out therethat basically do the opposite.
So they, they essentially, sellvolatility. And they've been
described as picking up dimes infront of a steamroller. Because

(48:06):
you're basically just gettinglittle bitty premiums all the
time for the fact that you'reselling you're basically selling
options. And so you're gettingthese little premiums all the
time for the fact that themarkets not doing anything
crazy. But then when the marketdoes do something crazy, you get
steamrolled.

Well, I, that's, I, that's a hard visual to
forget.

So but again, and that that's not a that'd be on
the opposite end of thevolatility, investing. It's the
opposite of what I'm actuallytrying to describe here. So it's
very legitimate investmentoption. It's just not what I'm
discussing. It'd be the oppositeend of what I'm discussing at

(48:55):
this point,

right

Yeah. questions on that? Because I know that's kind
of an arbitrary

No, I mean, I don't know how to how to say
this very well. But I, I feellike if you're going to venture
into that realm, that's muchmore of a call call call Sean
and, and discuss the differentpossibilities if you want to go
down that road rather than makethe decision based off of this

(49:24):
loose description here type typething. So like, I don't know

it's just it's an it is an odd one. So yeah, cuz
you're not investing insomething really tangible it's
and a lot of these are going tobe based on futures as is the
next investment that we'retalking about. So but at least
those futures have somethingtangible behind them whereas
volatility doesn't you're you'rereally just investing in futures

(49:50):
of the market itself. And it'sit's kind of strange, so yeah,

okay.

And honestly, we haven't even discussed futures.
But we we should put that downas a future

future

topic

future. Where Where does that go? So I don't
forget.

Do we have derivatives on their

derivatives at the end?

Okay, so remember this episode? And if you have
questions on futures, we willaddress them eventually. Sorry,
we haven't already

futures in will occur. And in the future

derivatives, yes. We'll talk about futures in
the future. All right, whichbrings me to the next
alternative strategy, which ismanaged futures. So, manage
futures sounds very fancy andvery strange. Realistically
speaking, it is nothing morethan trend following. So we
talked about trends in our, oneof our previous episodes about

(50:48):
technical analysis, that'sreally what they're doing,
they're investing in a trend,they don't care if the, the
underlying investment is goingup or down, they just want to
see it going one way or another,flat or volatile markets, kill
managed futures strategies. Theyalso don't care what they invest

(51:09):
in, as long as there is afutures market for that
investment. They're happy totake advantage of the trend,
whether it is up or down. So youknow, futures on precious
metals, commodities, like corn,soybeans, oil, timber, they're
never actually buying the theasset itself. They're just

(51:35):
investing in the futurescontracts of those investments,
and they are counting on thetrend, whatever direction it's
going, continuing.

Isn't that what, what Eddie Murphy was bidding on
in Trading Places about orangejuice, and

I haven't seen that since for a long time, but I
believe so.

Okay, well, you should go watch that again.

Okay, I should, I should. Yeah, so we'll talk
about futures more in a futureepisode. But that is basically
what they're doing, they arebuying into a trend, it doesn't
matter what the underlying assetis, it doesn't matter which
direction it's going. They justare counting on it continuing to

(52:24):
go in that same direction. Andyou'd be amazed how well they do
about getting that right now.
Where managed futures suffer,again, is any type of flat
market or volatile market that'sjust bouncing up and down, that
those tend to be really hard onmanaged futures strategy,
strategies. Additionally, whenthe market corrects, they tend
to suffer briefly. So managedfutures, always tend to miss the

(52:48):
bottom of the market and the topof the market. So in a bull run,
they'll miss the bottom 10% ina, as it reaches its peak and
curves back around, theytypically don't get out until it
starts to curve back around. Sothey will have lost again, the
top 10% or ish, it all dependson the strategy that they're

(53:10):
employing. But they're theirgoal is to capture that middle
80% of the trend, and do it in abig way, because a lot of them
will utilize leverage in theirinvestment strategies. So the
reason these strategies. fallunder alternatives is, I mean,

(53:31):
obviously, it's not yourtraditional investment. But the
nice thing about it from acorrelation standpoint is like I
said, they don't care whichdirection the markets going. So
you look at, again, 2008 managedfutures strategies made
depending on which strategy youwere following, made anywhere
from 20% to 150%.

Geez,

yeah, they had some big gains in managed futures, in
2008. And, you know, obviously,that, that, that bottom in the
shift to going going into 2009hurt them, but they'd already
made so much money didn'tmatter. And then when the market
started to recover, and itstarted to trend upward again,
they made good money again, sothey can make money in both

(54:19):
markets. It's just those thoseshifts in direction that tend to
hurt them.

Yeah, that makes sense. It's kind of hard to I
mean, any of this is just hardto manage, predict. I don't know
just just options, I guess,right?

Yep. And speaking of options, the next one I was
going to discuss would becovered calls. So that isn't
options are another derivative.
calls are a type of option. Inthis case, I'm talking about
covered calls specifically,which means you are already
covered on the call as opposedto a naked call which is
uncovered and we'll talk aboutthat more in the future. But
basically what that means As youalready own a stock, so you own

(55:00):
the underlying investment, andthen you sell calls to other
people. So you're selling otherpeople the option to buy the
stock that you own. This, you'restill ultimately investing in a
traditional asset class, butyou're adding an alternative
strategy on top of it. And whatthat does is it does limit some

(55:23):
of your upside potential. But italso bolsters your rate of
return both in bull and bearmarkets to a certain degree,
because you're receiving apremium for all of those calls
that you're selling. Your hope,ultimately, is that those calls
just expire worthless, and youjust get to keep the premium and
keep holding on to yourinvestment. But depending on how

(55:45):
the call strategy is structured,typically speaking, even if the
call does get exercised, you'reprobably selling the underlying
asset at a profit. Plus, youtook in the premium on top of
it. So it helps mitigatedownside risk and provide a more
consistent return almost kind oflike a dividend, but not as

(56:09):
structured as a dividend. So ithelps smooth again, it helps
smooth out the ride. And that'swhy I put it more in that
alternative to fixed income. Soalternative strategies,

right.
alternative strategy within atraditional,

exactly. Yep, you got it.

Gotcha.

And there are different versions of that you
can that you can employ, butthat that tends to be viewed as
the safest methodology for fordoing so because it is covered.
And then the last alternativestrategy that I was really going
to delve into would beconvertible arbitrage. And so
again, this would be moretraditional investments, but

(56:56):
with a alternative strategyoverlay. So there are types of
bonds out there that you can buythat instead of being a
traditional bond it is aconvertible bond. And what that
means is you can actuallyconvert the bond into the stock
of the underlying company, thesebonds, convertible bonds, tend

(57:16):
to pay lower dividends, thenyou're the company's normal
share of bonds. And that'sbecause they've given you that
option of converting to stock,but that option is also giving
you something of a benefit inthat a, you're not completely
tied to the performance of theunderlying stock. You still have

(57:42):
that bond, you still have thatthat fixed payment and that
fixed asset value at the endprovided the company doesn't go
bankrupt. But you still havethat flexibility of going Oh,
yeah, the stocks doing reallywell. I'll convert and take my
profits on the stock because theconversion rate is typically
fixed.

Okay, yeah.

Now with convertible arbitrage, they they
throw in an additional twist,where they might, you know,
short the they might buy theconvertible bond, but then short
the stock and they they takeit's an arbitrage play, where

(58:26):
they're taking profits off ofone and using the other as a to
offset kind of risk to a certaindegree. It's It's a strange
strategy that

doesn't that just kind of wind up leveling out in
the process?

Oftentimes, yes, it tends to be a very low rate of
return play. Yeah, it'sconsidered um, the only place
they've really been able toclassify is market neutral,
which is questionable, but thenice part about it is it has

(59:03):
very low correlation to yourtraditional investments. And by
low, I don't mean really, like,way negative, it's just like,
right around zero. So it has nocorrelation to traditional
assets, either stocks or bonds.
And it still provides a slightrate of return over the excuse
me over the long term. And thatrate of return does tend to be

(59:25):
in line with bonds.

So just sounds like a complicated way to not do
a bond.

Kind of, yeah. But you're also taking some of the
risk off the table

Sure. Yeah. I guess it makes sense.

Yeah, that was the extent of what I wanted to
cover. Like I said, there areother alternative assets or
other alternative strategies,but this gives you a taste at
least of some of what's outthere. And why Why you might
might want to consider them. Andwe briefly touched on why most
people are not invested in them.
But we can certainly discussthat more in the future. But it

(01:00:08):
has to do with both awarenessand large companies, larger
investment companies that youmight be investing with that
just don't want to take on thethe internal risk associated
with it. associated with beingsued, basically.

Chris Holling (01:00:30):
Yeah. That That makes sense. Well, I mean, I
think that's important,especially because you you
personally get involved in itmore commonly than than others.
Do, I figure that's at leastnoteworthy to make sure that
you're, you're taking time tolearn more about it, maybe it's
maybe it's time to have morethan 10% involved in there.

Sean Cooper (01:00:52):
Right.

I think That's a good point. Okay. What else we
got, do we? I mean, we got thatwe got

That's alternative investments in a in a nutshell,

in a nutshell, in a pretty little nutshell.
Cool. Okay. Well, I guess Iguess we should magically wrap
this up. Thank you, again, forjoining us here on the truth
about investing back to basics.
Next time, we're, it's it saysit says I'm being interviewed

(01:01:24):
is, is what is listed on here.

Oh, are we talking about your real estate
investment? Going to delve intoreal estate some more.

alternative investments, talking about real
estate investments from from anewbie from a novice side,

yeah.

So it'll we'll we'll roll over from alternative
investments and just keeprolling on with it. And I have
no idea what this is going tolook like. But hey, you know,
I'm not the one interviewing me.
So well, we'll find out, Sean.
But yeah, otherwise,

I'll come up with some good questions we'll stump
Chris.

Yes, it'll be a five minute episode.
But yes, thank you again forcoming to join us and thank you
for taking the time to want tolearn how to better yourself.
Here on the truth aboutinvesting back to basics
podcast, my name is ChrisHolling.

And I'm Sean Cooper,

and we will catch you next time.
podcast disclaimer. Thedisclaimer following this
disclaimer, is the disclaimerthat is required for this
podcast to be up and running.
And moving forward. This isgoing to be the same disclaimer

(01:02:35):
that you will hear in each oneof our episodes. We hope you
enjoy it just as much as weenjoyed making it.

All content on this podcast and accompanying
transcript is for informationpurposes only. opinions
expressed here in by Sean Cooperare solely those of fit
financial consulting LLC unlessotherwise specifically cited.
Chris Holling is not affiliatedwith fit financial consulting,
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But there's there's only a I guess one more
question that pairs along withthat is Do you know what a
pirate's favorite letter is?

RRRR

Oh, you'd think it'd be RRRR but it's actuall
the sea

Fair. Well played.

Thank you. Okay, proceed. I got that out of my
ystem.

That's good. That's good. We needed a dad joke,
somewhere

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