Fixing Retail Investing, Part IV: When Life Gives You Lemons You Paint That Shit Gold
NOTE: This is the fourth part of an ongoing series regarding the disconnect between what retail investors truly require in order to generate wealth and what is currently being (under-) provided in terms of platforms, products, pathways, and personnel. Part I dealt with the gamification of personal investing, the shortcomings of current offerings, and the new wave of DeFi-based ideas that could mitigate some of that disconnect. Part II offered up some simple changes to investment platforms that could create a virtuous and productive relationship between app and customer. Part III dealt with how the democratization of investing has occurred as jumps instead of a slow, constant pace, and how the latest potential leap forward needs to build its own bridge from idea to reality. For this part, we show how the investment world is stacked against the retail investor and typically causes the haves to outpace the have-nots…any how to use that to your advantage to play catch up.
We had a reggae festival in town a few weeks ago, my first live music event since seeing Pepper the weekend before the NBA shut down its season and the pandemic got into full swing. Iration and Tribal Seeds were a nice one-two bookend to 2.5 years of…well, you know, but Atmosphere’s third-billed inclusion in a SoCal reggae festival left me surprised, curious, and pushed the festival from “yeah sure” to “hey we need to go to this”. Atmosphere was one of the main acts for Rhymesayers Entertainment back when I was in college, and as a tragically uncool awkward white boy growing up in Iowa at the turn of the century, groups like Atmosphere and Brother Ali and Eyedea were my regional exposure to the greater world of hip-hop. I didn’t truly get into or get the genre until moving to LA and keeping my dial on KDAY in the car, but Slug’s smooth flow and Ant’s production helped bridge me over from my jazz and blues predilections at the time.
I mention Atmosphere because I have pretty much lifted the title of their fifth studio album for this blog post wholesale (an album I’ll go ahead and recommend you listen to and purchase, if only to hear Tom Waits (!) beatbox(!!!)). It is a work that focuses its subject on the downtrodden, the forgotten, and the messed-up, and how some of them can take a terrible hand dealt to them and scratch and claw and eke out victories that may seem insignificant to others but are everything to them. There’s an element of Taoism/Tai Chi in this perspective, the ability to use the momentum of the energy/attacks being sent your way and send it back, turning your opponent’s strength into their own downfall. Why fight a powerful enemy with your own inefficient attacks when you can slingshot their own bullshit back at them and give them a taste of their own medicine?
If you haven’t been living under a rock for 2022 so far, you know that there’s a lot of bullshit flying through the markets at the moment. Stocks are down, bonds are down, commodities are down after an initial run up, and inflation is nearing double-digits YoY. With everything coming up against the average retail investor, how does one survive a downturn where all asset classes seem to be suddenly correlating toward negative returns? There are some assets out there that are able to weather a storm like this better: Private Equity, Hedge Funds, and specialized financial products are specifically tailored for downturns to be as anti-correlated as possible to a declining economic environment. Unfortunately, these are typically only available for accredited investors, or investors whose net worth is over $1 million or an annual income over $200k (or $300k joint income with a spouse) over the past two years (There have also been some additional qualifiers for the designation added recently, but aimed toward professionals in the finance industry who do not reach the monetary thresholds). This corresponds to roughly 10% of Americans; not a tiny amount, but definitely not representative of the country as a whole…not to mention that one’s net worth does not automatically make one financially adept (nor does a lack of income/net worth indicate a lack of knowledge!). Chances are you’re not in the club that has the ability to get into these specialized products.
Why even participate in a game that’s tilted against you from the start? The products that are best equipped to deal with downturns and bear markets are only available to the winners, thus widening the gap between the haves and the have-nots. The average investor only has the excess funds to invest in the market toward the peak of a bull run or a bubble, causing a “buy high, sell low” obliteration of capital (this can be partially mitigated by dollar-cost averaging). The best time to buy into the market is a downturn, but those excess funds are likely going to be called upon for more-pressing purchases such as rent, food, gas, or other vital needs to keep up one’s quality of life, thus ruining the opportunity to get into the market at a lower price point. Index funds and ETFs are the most-recent great democratization of financial markets, but an index fund only lets you essentially hold serve: as the economy improves so does your portfolio, but so does everyone else’s. Well. not entirely: the haves will still outpace the market with their special opportunities and continue widen the gap. It’s no surprise why so many Gen Z and Millennial newbie investors sought a shortcut to wealth via cryptocurrencies: on some level they knew that it was a rigged game, but if there was a better chance of success if they could be in on the rigging. It’s a big club…and you ain’t in it.
So…yeah, why even attempt to participate when there’s a constant thumb weighing down the othere end of the scale? What hope does the typical retail investor have against these giant tankers on the ocean of investing?
Be a sailboat.
Large financial institutions are massive on a scale that we struggle to comprehend, which is mostly a strength for them. They can hire the smartest minds, bend opinion to their needs, and even press their own thumbs on the scale as need be. But they can’t pivot quickly. A massive wave of bad economic impacts are unavoidable in a tanker, and while a large tanker can take a massive wave or two, too many leads to a lot of trouble and perhaps even danger. Nor can a tanker easily adjust its course if it finds itself heading for a previously-unknown jut in shallow water. Just as storms can be seen approaching but their wave patterns are unpredictable, so too are the public markets. A three-body problem between corporate financials, narratives, and human behavior in unknowable ratios drive the markets at any one given time. A tanker has the size to take on these storms, but it is likely to take a beating. However, a sailboat rides with, around, or on top of these waves. It’s small size makes it nimble enough to maneuver through such seas with an experienced pilot. Its usage of wind for propulsion harnesses the very storms themselves to ride out choppy waters. Its small size makes it much easier to steer around previously-unseen rocky outcroppings. You might end up feeling queasy as all hell after the storm, but chances are you’ll be through to the other side.
How can we extend this tortured analogy to retail investing? Find strategies or corners of the market that:
Are untenable for large financial institutions, due to potential volatility or complexity or the like
Are ignored due to the inability for institutions to control them, or because they are boring or unsexy or lack an attractive narrative
Are able to take advantage of the blind spots or errors of the large financial institutions.
There are plenty of foreign investment vehicles out there, but how many of them bundle them by country instead of size, development, etc.? GAIA continues to see outperformance over domestic and international benchmarks during its out-of-sample testing period via county quantile and knowing when the global equity market has flipped from a rational, financials-driven environment to a emotional, narrative-driven one. EASE and NRCH monitor stock transactions by corporate executives, both public and private, as well as any massive changes in share buybacks preceding and/or following these transactions. This gives us a perspective few strategies consider even in the ESG space: are executives sacrificing the long-term growth and stability of the company in order to wring out short-term returns to line their own pockets. The market may unpredictable, but building a strategy that capitalizes on the inevitability of people in power to become avaricious has a much better predictive power. Finally, the volatility-enhanced index COVES allows for a position in say the S&P 500 to be made anti-fragile by hedging with volatility when markets turn toward the negative. Given that volatility almost-always leads to lower returns, this provides a powerful sail to catch the ever-changing direction of gusts in the middle of a market storm. Don’t believe it? Our daily updated out-of-sample paper trade of COVES and its synthetic volatility variant has been running on Twitter for over 200 days now, and…well, I couldn’t be happier with its performance so far.
I can’t tell you what you should invest into: everyone’s investing needs are different, as is their position in the storms themselves. However, I greatly encourage you to find funds and investment strategies that fit both your needs and the idea of offering a perspective that capitalizes on the failures or fissures in the behemoths. It is what I have worked to bring with Novatero Investments since the beginning; hell, it’s literally our name. Capitalism has its faults, but the best way to truly enact any change in it is not by taking yourself out of the game; it is by throwing your weight around inside of it. If the masses want any chance for enacting change that truly benefits themselves, they’ll need a way to get on the level of those who are large and in control. What better way to do so than disruption and improvement, delivered by capitalizing on and using the system’s own faults against itself?
