The Language of Alternative Investing
By Denis Shapiro
The art of the alternative investing can be a tough transition with a steep learning curve for most traditional investors. The silver lining is that the journey of learning alternative investing opens the door to a wide world of investments that is not subject to the limitations and volatility of the private markets. But learning the terminology is only half the battle; an investor needs to learn the context of the terminology to fully understand the meaning of the language of alternative investing.
Cryptocurrency’s Impact on Alternative Investments
Alternative Investments have become very trendy in the last few years. Ironically, one of the most popular alternative investments in the last decade—cryptocurrency, such as Bitcoin, Dogecoin, and Ethereum—has transitioned over to the traditional side with more public access. Cryptocurrency has taken the investing world by storm, and there aren’t many investors who aren’t aware of the parabolic moves that can happen on the upside or downside. When you talk to investors with a tech background, the common consensus is that blockchain technology is truly disruptive and will have the same kind of technological impact that the web had. However, the valuation is the true question and is almost impossible to gauge. When an investor mentions alternative investments, Bitcoin is mentioned often, but the cryptocurrency doesn’t personify what a typical alternative investment represents: a less volatile, better-yielding asset.
More Common Forms of Alternative Investments
Real estate and life insurance policies are more standard examples of alternative assets. Real estate is backed by the collateral of the underlying asset, and life insurance policies are guaranteed to pay out by some of the highest rated financial companies. Both assets are also considered tax friendly, where real estate can take advantage of the benefits of depreciation, and life insurance policies can be structured where distributions are treated as loans rather than income. The other major similarity is the low correlation to Wall Street assets. Stocks and bonds still make up a large chunk of many high net-worth individuals’ assets, so it’s important for diversification purposes to have some assets with minimal Wall Street correlation.
These two examples are just some of alternative investments mentioned in my book “The Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways”.
You Already Know More Than You Think
If you work in the tech space, chances are, you can understand most of the language used in a tech startup offering. The same concept applies to a lawyer looking to invest in litigation finance or a commercial real estate broker looking to invest in real estate.
One of the greatest mysteries in the investing world is when professionals don’t try to invest in their own comfort zone, and instead, they spend most of their time listening to advice steering them towards investments that would require them to rely on other people’s opinions.
While it’s nice to have a scapegoat, it’s even nicer to have a profit. So, when you are looking to learn alternative investments, look for a space in which you can leverage your prior and current experience. Your experience will give you a huge leg up over other investors and will go a long way toward building a relationship with other operators. Who knows, you may even have something to contribute on a future deal!
The Power of the Collective
When starting out, the power of the collective can’t be understated. If you have a tech background, you can seek out others with similar backgrounds who are also looking to invest. Planning a monthly call with them can enhance existing relationships and expedite your learning curve. These kinds of groups are great at providing an environment in which you can openly share what you are learning and what you are struggling with. The added benefit is these groups can also provide an extra set of eyes for any deal you are looking at.
The Best Time to Start Is Today
It can be a daunting task to learn a new language, but the prospect of learning how to take back some control of your financial life is worth the endeavor.
Here is a rundown of the most common terms you will encounter to help you get started on your journey.
Alternative asset/investment — An asset/investment that is not categorized as a traditional investment and would not be found in a standard investment portfolio. Examples are real estate, art, jewelry, and private equity funds.
Arbitrage — To make a profit by simultaneously buying and selling the same asset in two different markets.
Bitcoins — A digital currency that serves as a ledger for recorded transactions.
Collateralization — The process of leveraging one asset to purchase another asset without having to sell the original asset.
Crowdfunding — The pooling of modest sums of capital from a large number of individuals that are used to finance a new business startup or other project.
Internal rate of return (IRR) — A method of calculating an investment’s average rate of return factoring in the time value of money and the investments cash flow schedule.
Liquidity — The ability to sell an asset at any given time. Stocks are considered very liquid, while private equity investments are considered relatively illiquid because they take longer to sell.
Long tail investment portfolio — A strategy of investing in projects that have a high probability of failure; the projects that succeed are extremely profitable in order to make up for any losses and provide an above-average return for an entire portfolio.
Mastermind — A group of like-minded individuals getting together to share their experiences and ideas with each other.
Net operating income (NOI) — A formula used to show how profitable a business is by subtracting all the revenue the business produces from all reasonably necessary operating expenses.
Preferred return — A preferred return is the hurdle that an investor needs to see in distributions before the investor starts splitting the profits with the operator.
Pro forma — A Latin term meaning “for the sake of form,” this is a method of calculating financial results, based on specific projections or presumptions, that is used by managers or investors to make decisions.
Time value of money — According to Investopedia, the time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity.
If you liked this article and wish to continue on your path in learning about alternative investments, please make sure to check out my other educational articles as well as my book, The Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways.
Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though, the author has made reasonable efforts to ensure that the contents of this article were correct at press time. The author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article results in any investment or other losses. Your use of the information in this article is at your own risk.