In the turbulence created by the Covid-19 pandemic, high-net-worth (“HNW”) investors are turning more and more to alternative assets that will grow and preserve their capital over Wall Street investments promising large returns.
Furthermore, the types of investments that HNW’s are drawn to are rare finds on Wall Street. They are the ones with intrinsic value.
Assets with intrinsic value have an underlying value independent of its price. Stock prices can skyrocket solely on the hype with no change in underlying value.
It’s no secret that Wall Street is mostly speculative with share prices mostly determined by the whims of the investing public driven by the financial press, social media, and talking heads that have nothing to do with the underlying value or performance of the company behind the stock.
Intrinsic value says the price of an asset can never be zero because of the underlying value:
- Real estate is never worth nothing because of the value of the underlying land.
- A dairy farm has an underlying value from the income generated from milk production and sales.
- Mineral and energy rights have intrinsic value in the underlying value of the precious metals or oil underground.
It’s no secret that HNW investors are always drawn to assets with intrinsic value. But why do they double down in turbulent times on these assets? Because assets with intrinsic value provide income and are backed by a tangible asset.
During times of economic uncertainty, income-producing tangible assets will continue to provide cash flow shielded from market volatility with the security of knowing you’ll never lose your entire investment because of its intrinsic value.
Unlike a stock that could lose its value overnight, leaving its holders with nothing, an asset with intrinsic value can always be sold – preventing a total loss. Land, productive businesses, mineral and energy rights, agricultural assets can all be sold because of their intrinsic value from an underlying appreciating or income-generating asset.
In good times, investors may be more willing to speculate and chase potential high returns, but in downtimes, loss aversion becomes a stronger impulse.
HNW’s are humans too and aren’t immune to loss aversion, but how they deal with loss aversion is different from the average investor.
While loss aversion drives Main Street investors to sit on the sidelines to ride out economic storms, HNW’s reallocate. They reallocate to assets with intrinsic value that will preserve income as well as capital.
These assets aren’t found on Wall Street. These alternative investments are found outside of Wall Street in private markets where they operate under different rules than the typical Wall Street risk-reward model.
Wall Street says high returns are only possible with high risk. That’s why investors flee in the face of economic disaster. Unwilling to risk their capital, they cut their losses and sit on the sidelines.
Alternative assets operate under a separate set of rules.
Alternative assets with intrinsic value don’t fit the traditional risk-reward model. That’s because of the income, appreciation, and tangibility factors that all work to reduce risk while providing asset protection and above-market returns.
HNWs don’t just invest in any assets with intrinsic value. They have very specific criteria they follow when making investment choices, including the following:
- They invest in private companies to avoid market volatility.
- They invest in real assets with calculable value.
- They invest in assets with historical, consistent income.
- They invest with long-term windows to compound their returns and to prevent mass selloffs like the ones seen on Wall Street.
- They invest in assets and markets with which they’re familiar.
- They keep it simple. There aren’t any complicated investment models or algorithms for them.
- They leverage the expertise of others to further their diversification goals.
Why do HNW’s double down on assets with intrinsic value in the time of economic turmoil?
Because assets with intrinsic value can provide recession-insulated income that will reliably grow over time and, when backed by a tangible asset, ensures that an investor can never lose their entire investment.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.