The ultra-wealthy, also known as ultra-high-net-worth individuals (UHNWIs), are wealthy for a reason, and one of those biggest reasons is they don’t follow the herd.
They don’t follow the herd because the herd doesn’t base its investment decisions on sound economic fundamentals – influenced more by societal biases and influences, hype, and emotions than anything else.
The madness of the crowds is how bubbles happen… the dot-com bubble, the subprime mortgage debacle, and the stock market and Bitcoin bubbles currently brewing are all products of the herd.
The crowds’ current madness has taken over the stock market and Bitcoin, unlike at any other time in our history. Since COVID-19 landed on our shores, a perfect storm of developments has been brewing, explaining the stock market and Bitcoin craze.
Lockdowns, high unemployment, and stimulus checks have spawned a new breed of first-time investors who are investing with a devil-may-care attitude and treating Wall Street like the Las Vegas Strip. These investors, numbering in the millions, invest as if they have nothing to lose.
Anyone who doesn’t think the madness of the crowds has gripped the markets isn’t paying attention. The ultra-wealthy are paying attention. They always pay attention.
Here’s the problem with following the herd:
“We so desire to blend in, to acclimate to society, to be a part of the herd, that we will do almost anything to avoid standing out in a crowd, failure to separate yourself from the herd is why most people never achieve success.”
“The herd stops them in their tracks.” -Thomas C. Corley from his book “Change Your Habits, Change Your Life.”
That’s why the ultra-wealthy don’t run with the herd. It prevents investing success. As humans, we are hard-wired to follow the herd. The same holds with investments. Financial behavioral biases such as availability bias and the FOMO (the fear of missing out) drive people to make investment decisions based on trends on social media and what the talking heads on cable are talking about.
A common misconception about the ultra-wealthy is that they inherited their wealth. The truth is most are self-made, and they made their money not by going along with the crowds.
The middle-class mindset is to go along with the crowds, to do what’s comfortable and convenient. The stock market is comfortable and convenient. Everyone’s doing it, and anyone can open a Robinhood account and be trading within minutes.
The ultra-wealthy are rich because they stepped out of the comfort zone to invest in alternative assets not readily accessible to the masses.
“Physical, psychological, and emotional comfort is the primary goal of the middle-class mindset. World-class thinkers learn early on that becoming a millionaire isn’t easy, and the need for comfort can be devastating.” –Steven Siebold
Those on the outside looking in would call alternative assets such as private equity, venture capital, and real assets high risk, but the ultra-wealthy have been around the block. Many have started and operated their own businesses. Many would consider starting a business a risky venture, but the ultra-wealthy know how to evaluate risks and mitigate them.
That’s what the middle class doesn’t understand. What they perceive as high-risk, the ultra-wealthy perceive as opportunities because there are risk-mitigating strategies they incorporate and that they’ve picked up over the years that turn opportunities into productive assets.
That’s why the ultra-wealthy gravitate towards alternative assets available only in the private markets and immune from the crowds because the crowds have proven time and time again to be dangerous and unwise in their investment choices.
What do the ultra-wealthy do different than the herd? They invest long-term. There’s no such thing as day trading in their world. In fact, they go out of their way to shield themselves from the effects of the masses.
Long-term investments with long lockup periods in assets like private equity, venture capital, cash-flowing business, and income-producing real assets prevent investment decisions driven by emotion because of illiquidity. Illiquidity prevents panic-stricken decisions. It’s like grounding your teenager from the car by taking away the keys.
By investing long-term, not only do elite investors avoid the dangers of investing with the masses, but they are also able to leverage a commodity that the masses ignore – time.
While the masses are all about timing, elite inventors leverage time – time that rewards patience. The right long-term investments can provide income over time that can be reinvested and compounded, and grow.
The ultra-wealthy avoid the herd for a reason. That’s why they’re ultra-wealthy.