A little bit insight into what kind of asset classes i like and don’t like. Things to keep in mind:
- Safety of cash flows is paramount.
- Capital preservation is more important than capital growth.
- This is not other people’s money so messing up and moving on isn’t really an option. You have to get more right than wrong, constantly.
- My investment horizon is years to decades. The longer, the better. Liquidity for capital deployed is relatively unimportant, but money management is not.
- Something that doesn’t provide a relatively predictable cashflow while maintaining it’s value, is not really a possible investment instrument. At best, it’s a hedging instrument. At worst, it’s a zero sum game with me as the lemur in a room with 700-pound gorillas who are smarter than me.
- I operate in – and exclusively invest in – safe regions, where bureaucratic, tribal and warlord relations don’t affect property rights.
Now that daytraders, gold and oil bugs, hedgies and professional asset managers have stopped reading :), here are the 3 categories i divide assets and instruments into:
1. Good investments.
2. Ok stuff, depending on circumstances (and problems at this stage).
3. Stuff i wouldn’t touch with a 10-foot pole.
1. Good investments:
- Cultivated farmland.
- Land under all types of infrastucture: pipelines, ports, cell towers, roads, gas stations, railroads, etc.
- Intellectual property licensing. Applies also to technology IP portfolios (eg ARM holdings), but especially to entertainment IP portfolios (the latter have a MUCH longer shelf life and lower maintenance costs).
2. Ok stuff, depending on circumstances (and problems at this stage):
- Corporate real estate (yields are getting out of sync with tenant counterparty risk).
- Residential real estate (yield safety is fine but returns are getting too low).
- Stocks (but not in this stage of the cycle – grossly mispriced).
- Bonds (but not during this stage in the cycle, where coupon is being massively overshadowed by principal appreciation – this is dangerous).
- P2P lending (needs a cycle completion to mature the business and credit assessment models).
- Angel investing. It’s fine in small doses, but tends to be more entertainment than serious business for most angel investors (and at this stage valuations and expectations seem to be excessively optimistic).
- Interest rate swaps. Rarely do the stars align to make it worthwhile (theres no point in insuring and theres no premium to be made in underwriting right now).
3. Stuff i wouldn’t touch with a 10-foot pole:
- Gold (and all other metals).
- Currency bets (excluding hedging).
- All kinds of synthetic products offered to retail and private wealth management clients. These tend to be structured on underlying assets that have already made their big move and are basically a product version of how an average investor would behave, with fees attached.
Right now, of capital deployed, i’m at a mix of about 80% category 1, 20% category 2. It’s fine, but i’m looking to expand category 1, all the time. On the other hand, category 2 expansion is not really something to strive for (except at cycle bottoms for higher beta, compared to category one). It’s more of a substitute for lack of better alternatives belonging to category 1. Category 3 is at a permanent 0%, regardless of cycle or market dynamics.