Through all my years of investing experience, a couple of things have stuck out in my mind about the markets: 1) the goalposts are constantly moving, and 2) investors typically stay on board the Titanic while it’s sinking before realizing it’s too late to get off.
The saying “moving the goalposts” is a football analogy, and it means changing the rules while someone is trying to do something to make it more difficult for them. Imagine a kicker in football trying to make a field goal and, after connecting with the ball, watching in horror as the other team moves the goalpost to spoil his attempt.
The stock market is very much the same way. Investors think they’re playing by predictable rules, but they aren’t. They’re lulled into a certain comfort level, and just when they think they have it figured out, the goalposts get moved.
In the early 2000s, investors were seduced by the dot-com boom, and no one thought it would ever end. Well, it did end and ended badly. In 2008, it was the real estate boom fueled by subprime lending and mortgage-backed securities. No one thought the real estate and mortgage-backed securities boom would ever end, but it did, and the crash was worse than the dot-com boom – sparking the greatest Financial Crisis since the Great Depression.
Most investors during the dot-com boom and Financial Crisis refused to heed the warnings and got out before it was too late. The markets shed more than 50% post-Financial Crisis – leaving many investors financially devastated. One investor who saw the warning signs pre-Financial Crisis predicted the crash and made millions. He is now predicting another move of the goalposts.
Tech and growth-focused stocks have dominated markets for over a decade, but a “paradigm shift” is coming as the Federal Reserve raises interest rates to fight inflation, according to Steve Eisman, senior portfolio manager at the Neuberger Berman Group. Eisman rose to fame for his successful bet against subprime mortgages in the lead-up to the Great Financial Crisis (GFC) of 2008, which was depicted in Michael Lewis’s 2010 book, The Big Short, and subsequent movie of the same name, in which a character resembling him was played by Steve Carell.
“Markets have long periods of paradigms where certain groups are leaders,” the hedge funder told Bloomberg in an episode of the Odd Lots podcast Monday. “Sometimes those paradigms change violently, and sometimes those paradigms change over time because people don’t give up their paradigms easily. And I think we’re going through a period, possibly, like that again.”
The signs of a paradigm shift are already there. Inflation and the Fed’s response through raising interest rates wreaked havoc on the markets in 2022. After a record-setting 2021 for stocks and crypto, the roosters came home to roost in 2022. The goalposts moved again. In June of 2022, inflation hit 9.1%, a rate not seen since the ’80s. In addition to inflation, other market forces were at play to wreak havoc on the markets, like high energy prices, supply constraints, recession, and political conflict. As a result, for 2022, the S&P 500 was down 19.44%. The Dow was down 8.789%, and as for crypto, Bitcoin was down 65%.
What struck me about Eisman’s remarks was “that people don’t give up their paradigms easily.” And it’s because of this stubbornness that investors endure so much pain from these paradigm shifts like the one away from dot-com, mortgage-backed securities, and now stocks and crypto.
Investors never learn their lesson. Just when you think they’ve learned their lesson or just when you think the madness is over, another craze pops up – creating another bubble.
The problem with the average investor is that they think they can time the markets, but as the data has demonstrated, predicting the markets is a fool’s errand. Even 90% of professionals fail to beat the market over time.
Smart, ultra-wealthy investors never get fooled when the goalposts get moved because they refuse to play the same game as everyone else. While everyone else is chasing the next meme stock or piling into crypto, sophisticated investors stuck to their guns and invested in reliable and predictable assets in markets where the goalposts never get moved.
So what kind of assets do savvy investors allocate to that insulate them from the violent paradigm shifts that rock the public markets and the average investor?
Smart investors focus on assets that accomplish three principal goals:
Smart investors allocate to tangible assets that not only appreciate over time but that have intrinsic value, independent of what people are willing to pay for them on the market. A simple example is to compare crypto, which has no value besides what people are willing to pay for it on the open market, and a dairy cow. Besides what people are willing to pay for it in the open market, a cow has intrinsic value because of the milk it produces. A cow can feed you if the markets shut down. Crypto can’t. Tangible assets are ideal for capital preservation because their values can never go to zero, even under the worst conditions. In contrast, stocks and crypto could lose all their value in a single day. Capital preservation is about protecting your investment and what you’ve earned.
Smart investors focus on assets insulated from paradigm shifts. They invest in assets that will always be around – assets with Real Demand.
Smart investors gravitate towards assets where they don’t have to rely on the market price going up to make a profit, like stocks and crypto. Instead, assets like commercial real estate generate returns from consistent and reliable cash flow that also insulates portfolios from inflation and downturns with the right assets.
Is your portfolio ready for the next paradigm shift?
Don’t wait to jump ship before it’s too late.
Prepare for the next paradigm shift by allocating to private assets that generate consistent, reliable returns insulated from inflation and market volatility.
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.