Follow The Few, Not The Masses

If you’ve been following the masses and investing in what’s popular, chances are your portfolio is limping along right now.

“The time to get interested is when no one else is. You can’t buy what is popular and do well.” -Warren Buffett.

So, what has been popular lately?

Meme stocks and crypto. Enabled by trillions in stimulus money and free trading platform Robinhood, novice investors have flooded the stock and crypto markets the past two years – taking advice from social media and online forums to latch onto meme stocks of unprofitable companies and the latest crypto craze.

The stock and crypto feeding frenzy led to record highs for both the Dow and crypto in 2020 and 2021. Fast forward to 2022, and the honeymoon is over. Stocks and crypto have plunged with stimulus money dried up, and inflation fears gripping consumers.

Just since the beginning of the year, the Dow is down nearly 1,500 points (4%), and Bitcoin has shed almost 13% (38% from its all-time high on November 8, 2021).

After hitting its highest rate in 40 years in December, inflation shows no signs of slowing, and with no further stimulus expected, there appears to be more pain ahead for those investors who go along with the masses.

The 1% don’t follow the masses and aren’t suffering the same inflation-induced losses. Why? Because they don’t invest like the rest. They don’t follow the herd.

Take, for instance, one particular group of investors from the 1%, Tiger 21 – an exclusive social investing club for the 1% whose members must show a minimum of $50 million in investable assets to join:

From the above chart, one thing should be crystal clear. The 1% don’t allocate like average investors who allocate a majority of their portfolios to stocks and bonds (i.e., 60/40 portfolio).

Instead of stocks and bonds, the 1% allocate a majority of their portfolios to private alternatives, focusing on two in particular:

  • Commercial Real Estate.
  • Ownership in Private Companies (Private Equity).

Why real estate and private equity?

Because these assets offer benefits stocks and bonds do not, namely:

  • Above-market risk-adjusted returns.
  • Tax deduction, deferral and avoidance benefits.
  • Cash flow.
  • Non-correlation to market volatility.
  • Insulation from inflation.
  • Leverage of both human and financial capital.

Are the 1% concerned about inflation? Not the ones invested in assets that correlate with inflation. An essential commodity, especially non-luxury housing, is always needed and has historically shown a strong correlation to inflation. In other words, rents typically rise with rising prices – maintaining income that keeps pace with inflation.

Are you concerned about inflation?

Are you concerned about a recession?

If you follow the masses, you should be. Follow the few if you want to maintain your lifestyle by generating inflation-insulated income. Follow the 1% who allocate a majority of their portfolios to private alternatives and not stocks and bonds.