physical alts part 2
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Remember Pokemon cards?
What if I told you, someone paid $100k for a Charizard Pokemon card?
But they didn’t pay $100k.
They paid $220k for it…
And as wild as that is, sports cards get well into the millions.
This falls under the category of a collectible item, which is a sub-section of this week’s discussion: physical alternative assets.
The smartest guys in the room, like big pension fund managers are no strangers to physical alternative assets. They have always used this asset class to get an edge, and are turning to it now even more than ever.
But instead of pokemon cards, they invest in things like railroads, highways, seaports, timberland, and other infrastructure-related assets.
We’ll touch on their role in a portfolio before diving into the renaissance that is making this asset class more accessible for retail investors.
We’ll also cover some funky out-of-the-box alternatives we love.
This is all about uncovering cool corners of the market outside the common, boring, and now sub-optimal “60% Stocks, 40% Bonds” portfolio.
If you missed last week, we covered “digital” alternative assets here.
This week, in <5 minutes, we’ll cover physical alternatives:
The role of physical alternatives 👉 Negative correlation & yield
Private equity proxies 👉 Wham BAM thank you ma’am!
The Quirky 👉 LeBron, Acker (Wine), Air Jordans, Fractionalized Art
How GRIT’s Playing it 👉 My Favourites and ACTUAL holdings
Let’s get started!
1. The role of “physical alternatives” 👉 Yield, Negative Correlation
Alternatives are commonly described as simply something other than stocks and bonds.
The common categories are real estate investments, private equity, venture capital, commodities, and collectibles (art, jewelry, sports cards, wine).
The main functions of these alternatives are: 1) Low or negative correlation and 2) income generation (yield).
Low or negative correlation: Correlation is the relation by which variables move together. The more you run, the more calories you will burn. Both move up together. Positive correlation.
Something that has a negative correlation is inversely related. The more you run, the lower your body weight will be. One goes up, the other goes down. Negative correlation.
You can see why this is advantageous, especially during times of market turmoil. If equities reach a level of contagion (where all assets go down together), it’s very likely the price of the Charizard trading card will not be impacted in the same way.
Income generation (yield): This has historically been the role of bonds in a portfolio. But what happens when interest rates are at historically low levels? You have to hunt for yield somewhere else.
This is where assets like mobile home parks, auto repair shops, storage, cemeteries, blueberry farms (lol), multi-family and multi-unit residential real estate can fill in the gap…
Why buy a 10yr treasury bond yielding under 2% when you can get 6-7% yield on a 5 unit multiplex rental unit!
2. Private equity proxies 👉 Wham BAM thank you ma’am!
One of the best capital allocators of our generation is Bruce Flatt, who has been the CEO of Brookfield Asset Management (BAM) Since 2002. If you look at a total return analysis since he began his tenure as CEO, he has returned an annualized rate of 19% per year. The return on the S&P 500 over the same time frame is 9%.
Investing $100 when he started would turn into just under $3,000 today.
So what does Brookfield do?
They own things like real estate, infrastructure, renewables, and industrial operations. Their Private Equity segment accounts for around 65% of total revenue and invests across a broad range of industries, focused on long-life high-quality assets.
They have about $600B Assets Under Management (AUM) and count sovereign wealth funds and many institutional investors as their holders.
They own London’s Canary Wharf, Berlin’s reconstructed Potsdamer Platz, and are the largest commercial landlord in New York.
Beyond real estate, they also own 14,500km of railways and toll roads, about one-seventh of France’s mobile phone masts, and Westinghouse, the formerly bankrupt nuclear reactor maker.
The beauty is these assets have huge moats. They are hard to purchase, and nearly impossible to replace. These are the EXACT types of real assets you want to own in an inflationary environment - the prospect of which fills so many headlines.
As you can imagine, buying a wharf or nuclear reactor manufacturing company is a bit beyond the budget of your average investor. But because BAM is publicly trading, you can buy that stock and get exposure to a similar return profile that the company achieves!
There are a couple of different Brookfield entities, which are broken down simply here. I own BAM, the parent company that takes a fee + carried interest. I tuck that in my 80% “safer” portion of my portfolio, and just forget about it.
Here are a couple of other Private Equity proxies that are publicly traded that you can check out:
UNDER THE RADAR...
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3. The Quirky 👉 StockX (Jordans), Acker (Wine), Masterworks (Art)
Collectibles are great uncorrelated assets because the price of a $450MM painting has little to do with how interest rates are expected to act over the near term. Sure lower ticket price collectibles can fluctuate with personal disposable income, but the relationship between the two is much farther removed.
Collectibles have gained a lot of traction over the years given some pretty eye-popping numbers.
There’s a famous Warren Buffet quote:
“Price is what you pay, value is what you get.”
But price is very much “in the eye of the beholder” here, and value becomes somewhat subjective.
For collectibles, I would like to think the value of something is one dollar more than the highest price that the second most willing person would pay. But this isn’t usually what happens in real life. How can we remove the opacity and frictions behind this?
Marketplaces have three very important functions 1) Connecting Buyer & Seller; 2) Facilitating Authenticity (or lack thereof); 3) Payment & Shipping.
Let’s use StockX as an example. StockX is self-described as a “stock market of things.” They started off in sneakers and have a website that connects buyers that have the inventory with sellers that want to obtain it.
Buyers can place bids or “buy now” prices and sellers place asks or “sell now” prices. This creates a market price with a spread for the good.
However, where StockX differs from eBay is that they also take the good from the seller and verify it before shipping it off to the buyer.
This is extremely important because it instills confidence in the exchange of the products that they are indeed real. The Global Brand Counterfeiting Report in 2018 estimated that counterfeiting globally reached USD$1.2T.
Without confidence in authenticity, it is more difficult to create a market because it will then rely on trust, which is in short order these days.
Authenticity providers such as Professional Sports Authenticator (PSA) provide a gradient of condition to physical sports or trading cards. The better the condition, the higher the rating (out of 10).
This guarantees authenticity and also subsections the asset class by condition. You can then sell it on any exchange that you want (eBay, StockX, etc..).
Very importantly, it also creates a database of supply and a record of sale.
Using the Charizard example above (which was a Gem-Mint 10 condition), the charts above tell us that the most recent sale for a GEM-MT10 condition is now $325k and there are 122 cards in existence. This tells you SCARCITY and VALUE.
Go check through your kid’s old boxes to see if they somehow kept a Charizard in mint condition. Then send me my cut.
What this also does is establish pricing chart history. Below is the value of the mid-tier PSA condition of one of the most famous sports trading cards. Can you guess the athlete?
Ok here’s a clue.
The “Last Dance” on Netflix came out at the beginning of April 2020. This is when the adoption of sports cards as an asset was taking off and top of mind was Michael Jordan.
Another example is Acker. Acker is the oldest wine shop in America and is the world’s largest fine and rare wine auction house. It has a great marketplace effect, as it reached critical mass by aggregating the most buyers and suppliers and put up the highest auction revenue out of any other competitor.
Acker helps in the appraisal of your entire collection, shipping, and the auctioning of your item. However, there is not as much open-source data as the PSA charts mentioned above.
Acker also crossed worlds onto the digital payment side introducing an NFT. They did a release of sixteen bottles of wine, each accompanied by a unique, one-of-one NFT showcasing the wine producer’s description of each particular vineyard and its expression in that year’s vintage. Payments are to be accepted in USD or in cryptocurrencies (Bitcoin, Ethereum, and more).
And if you wanted access to wine as an investment… well Grit has you covered… read until the end!
As you may have also noticed, the art market is booming right now. Deloitte reports that the overall art market is expected to explode over $900 BILLION by 2026. But despite this new boom, few people know about an “untouchable” asset class that the super-rich are pouring money into.
I recently found a little-known...but smart way...for everyday investors to diversify in fine art without breaking the bank. Masterworks, the premier membership for investing in contemporary art. Over the last 25 years, data shows that contemporary art prices returned 14% per year - crushing S&P 500 returns by 174%, according to Citi. That’s a huge difference—even in a record bull market. It even outperformed real assets like gold and real estate over the same period, providing an inflationary hedge with nearly uncorrelated returns (0.01 correlation factor to equities). With results like that, it’s no surprise that over two-thirds of billionaires allocate more than 20% of their overall portfolio to art.
But unless you have $10,000,000 to buy an entire Picasso yourself, you've been shut out of the exclusive asset class. Until now. Thanks to Masterworks you can invest in multi-million dollar works by artists like Warhol, Banksy and Basquiat (holds the record of $110MM for the most expensive artwork sold at auction by an American!!) at a fraction of the entry cost.
The best part? I've partnered with Masterworks to let Grit Capital subscribers skip their 15,000 person waitlist for a limited time.*
Another cool platform to look into is Rally… they “IPO collectibles and assets.” They have +200,000 users, $30M+ in assets under management which is apparently 2x since COVID started. I guess some stimulus money made its way here too!
Before we get into How Grit is playing it…
Let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel and see what he thinks of investing in alternative assets?
After watching famous art documentary Exit Through the Gift Shop this weekend (it’s amazing BTW!) while drinking wine, I have to say alternative assets intrigue me more than ever!
But I most point out that there is a risk difference between conventional pooled alternatives like BAM and single purchase of sneakers or art. Some of the difference is pooling and professional management. Some of the difference is the nature of the asset class. On one end of the risk spectrum would be BAM or other managers of alternative assets low risk and at the other end high risk would be first timers buying art, collectible cards or wine. And of course, for most collectibles mint condition commands a vast premium over fair to poor condition.
4. How GRIT’s Playing it 👉 My Favourites and ACTUAL holdings
In this newsletter, I’m all about having skin in the game and telling you how it is. Just like I never trust a skinny chef, I practice what I preach. For those newer to the newsletter, I discussed my holdings here.
MY PORTFOLIO ACCESS!
Thrilled to announce that May 31st 2021 I will be launching a paid newsletter (this current newsletter will remain FREE) that gives premier access to my (self-directed/managed) public investment portfolio (via google sheets) with my buys/sells, portfolio sector breakdown and a monthly email with rational behind portfolio changes.
I’ve set the price at US$1 per day (US$31/month) or (US$365/year). My rational is that this price balances: 1) the hard work I am putting in to share my insights with you and 2) democratizing access for everyone.
You can sign-up HERE and receive 15% off if you do before June 30th.
GRIT PERK ALERT!
If you sign-up for the 1 year subscription you will ALSO receive the following PERKS from our amazing partners:
US$100 STOCK*: In partnership with Public.com you will receive US$100 in free stock once you create a Public account and deposit as little as US$1 and it gets approved.
US$50 WINE**: In partnership with Vinovest you will receive US$50 in wine as an investment when you set up your account and it gets approved. Vinovest is the world’s first platform for investing in fine wine, an asset class that has traditionally only been available to the ultra wealthy and has outperformed the S&P 500 over the last three decades. It was founded in 2019 in LA and now has over +US$30MM in AUM.
*available to U.S subscribers only. **available to both Canadian & U.S subscribers.
Love to have you all sign-up. But I need you to understand three things:
I am NOT Warren Buffett
I am NOT Warren Buffett
What I mean is…I will lose money on investments. It’s the nature of the game. So if you don’t understand this please DO NOT subscribe to my paid newsletter. The third thing is that unfortunately I will not be able to answer direct questions about the content of the paid newsletter. At this time, I just don’t have the bandwidth to do so. I hope to in the future!
Now, back to investing…
As you can see from my holdings, I’m a big fan of Brookfield, as it’s in my top 10. I’ve owned this one for quite a while and love the “set it and forget it” approach. It’s an excellent source of total return through both price appreciation and yield. Long and strong.
On the quirkier side, I recently bought a position in a private blueberry farm.
I came about this investment through my special network of dealmakers, which I have built up over the last 15 years. This is the type of deal flow I will be sharing with you in my paid newsletter. The management team previously built up a portfolio of $1B in farmland and now they are planning to do it again with organic farms.
Oh and I also invested in a mini-version of StockX based in Canada. At the time I invested they had +4k members paying $78/month and growing!
I think in this new crazy world where contrary to popular belief, stocks do not “only go up,” you have to have alternative assets adding income streams or uncorrelated asset appreciation. There is no better place to look than alternatives.
While the Brookfields of the worlds are steady as she goes, I always love chasing down the nuances of other fun little pockets to make money. Investing is mostly sitting and looking at numbers on a screen, so why not spice it up a bit, with some fun underlying quirky alts.
“All of this making money from cars is fairly new. The real trick is, if you buy something you like, and it goes up in value, great. If it goes down in value you weren’t gonna sell it anyway.” - Jay Leno
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S The B in bitcoin stands for "buy the dip" ; )
UNDER THE RADAR...
The ELECTRIFICATION OF EVERYTHING is firmly on its way and the US infrastructure bill is accelerating the process.
COPPER will be among the big winners and we’ve seen that play out with prices at all-time highs.
Futurist investor Gianni Kovacevic understands this better than most. He was the guy who literally coined the term "copper decoupling from oil" live on Bloomberg TV, well before Goldman Sachs.
The company he started, CopperBank, is positioned to offer investors BIG torque to copper with 2 ADVANCED STAGED development projects in Arizona and Nevada. Plus TWO world-class exploration projects!
The last time copper was $4/lb, the assets they now own would be worth $3/per CopperBank share. Copper's now flirting with $5/lb.
Not only does the CEO own 6M shares BUT he also completed the world’s first zero-emission book tour for My Electrician Drives a Porsche? It details the phenomenon we’re seeing now. Also, check out his keynote at the World Copper Congress in 2017.
If that doesn't show dedication to the electrification of everything, I don't know what does!
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