Unorthodox Investing Strategies
Unorthodox investing strategies during these extraordinary times could be one way of achieving alpha, which is to outperform the benchmark index.
The so-called “new normal” is anything but normal. Central bank liquidity is at an all-time high, US federal debt in the pandemic economy has spiked from 77% of GDP to 108% of GDP by this time next year. Nevertheless, despite this level of economic distress and uncertainty stocks are hovering around record highs.
The stock bull market doesn’t jibe with the macro indicators, which are pointing to a coming global depression
So there is a pandemic, a global depression on the horizon, and to make it even more tricky for investors a fourth revolution, which is changing the way we live, work, and interact with each other is also underway.
These uncertain and fast-changing times could also call for Unorthodox investing strategies
The crux to unorthodox investing is to avoid traditional strategies, ignore the crowd, and diversify the portfolio into alternative assets, outside traditional stocks and bonds.
In a piece entitled, Investing In The Fourth Industrial Revolution, dated October 2017 I noted that alpha returns are likely to go to those investors who orientate their portfolios towards the embryonic (riskier) stage of the fourth industrial revolution which is bringing together digital, physical and biological systems.
The pandemic has accelerated the digitalization of everything trend. So early investors in cryptocurrencies, particularly Bitcoin have done well. The central banks’ response to the pandemic was unprecedented fiat currency creation to purchase assets, which is known as quantitative easing QE, which has succeeded in keeping asset prices inflated. But the drawback of excessive QE is currency debasement. So, an unorthodox investing strategy was to invest outside fiat currency, into cryptocurrencies and precious metals.
Unorthodox investing strategies seek growth stocks in fourth industrial revolution companies during a global depression
It is unorthodox because investors typically seek shelter in value stocks rather than growth stocks in an economic downturn.
But in so doing these investors have missed explosive growth in fourth industry stocks, cyber-physical systems, the internet of things network.
Despite the upheaval, a pandemic, and imminent global depression, FAANG stocks have seen the most growth and performance in 2020 and could continue doing so going forward.
The acronym ‘FAANG’ stands for Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (GOOGL). Over the last decade, the FAANG stocks have accounted for a large portion of the market’s gains and the economy’s growth. Moreover, with the “stay-at-home” economy the pandemic has accelerated their growth trend trajectories.
Unorthodox investing strategies seek to benefit and outperform the benchmark index by investing in tech companies that are forecasted to grow exponentially over the next decade
Strategic advisory firm Aqua Partners suggested that companies ignoring tech will stagnate and lose value, while indexes tracking tech firms will grow exponentially for the next two decades, far outpacing other investments.
More unorthodox investing strategies plays, which could help investors bolster their performance can be found in alternative investments
So, what are alternative investments?
Alternative investments are just one of the many unorthodox investing strategies that
fall outside the traditional areas of cash, bonds, and stocks, as I have already mentioned above. Alternative investments include investments in tangible assets, such as art and wine, as well as financial assets, like cryptocurrency and private equity.
Moreover, because alternative investments have a low level of correlation with traditional investments, they are therefore less exposed to market conditions, alternative investments can be used as a way of reducing the overall risk of your investment portfolio by diversifying it.
“Fine wine and stamps, as well as art and other collectibles as investments, tend to be uncorrelated to tech company equities and other asset classes and as such can serve as an effective hedge,” said Paul Cuatrecasas, chief executive of Aqua Partners.
The report suggests that the best long-term hedge is inflation-protected assets like property, fine wine, stamps, gold, and cryptocurrencies.
So unorthodox investing strategies are a hedge against multiple asset bubbles in stocks and bonds, which have been spurred on by unprecedented central bank QE liquidity
Unorthodox investing strategies help protect investment portfolios against inflation driven by excessive central banks’ liquidity which debases fiat currencies.
The great gold rally has its origins in the debasement of fiat currencies due to the central banks’ QE to infinity policies. Put simply precious metals prices along with cryptocurrencies are rising because fiat currencies are being debased, devalued by the central banks. Unorthodox investing strategies are a hedge against currencies debasement.
But unorthodox investing strategies, like all investment strategies, comes with a degree of risk.
For example, alternative investments market is less liquid, which means when prices are falling it is more difficult to liquidate the asset.
Unorthodox investing strategies often come with a higher concentration of risk
Imagine investing your entire nest egg in say a classic car?
So the easiest way to explain concentration risk/diversification risk is the old saying, “Don’t put all your eggs in one basket.”
But concentration risk can also come with investing all funds in the same industry, geographical region, or type of investment instrument (e.g. only investing in coastline construction) all could carry concentration risk.
Risks associated with unorthodox investing strategies can be reduced through diversification, in other words putting investments in different “baskets”
So Unorthodox investing strategies could consist of a portfolio of diversified assets from classic cars, fine paintings, fine wines, racehorses, and even whiskey, which has been returning 12-20% per annum.
As capital flows into unorthodox investing strategies returns outside traditional investing could continue to do well going forward.