PROF

Professional Investors Cannot Get It Right

Venture capital (VC) funds and the venture capitalists who run them are professional investors (in the business of funding startups) but a more appropriate job title might be unicorn hunters.  That’s because armed with client money, VCs take a reckless approach to investing that’s not unlike the average stock investor.  They’re constantly seeking unicorns – that next big win, home run, lottery jackpot, etc. – but what they often end up with instead are duds.  

Silicon Valley and startups in general are full of duds.  In fact, it’s a dirty little secret that 75% of startups fail, but that doesn’t stop VC’s from playing with other people’s money.  Take for instance the latest example of VC failure: WeWork.

WeWork was once a darling of Silicon Valley and was valued at $47 billion in 2019 before its flamboyant CEO Adam Neumann was ousted for incompetence and misbehavior.  This week, it was announced that it may be on the brink of bankruptcy.  WeWork’s already struggling stock, which was delisted from the New York Stock Exchange in August, plunged 50% last week, putting its latest valuation at about $60 million.  For those doing the math, that’s a $46.94 billion drop in value in just a matter of four years.

Who were the biggest losers in the WeWork debacle?  The VCs who backed it and the biggest stakeholder of all the VCs was Softbank through its Vision Fund, which has lost a total of $14 billion from its investment in WeWork.  Not surprisingly, WeWork is just another in a long line of losers for Softbank and, given the VC failure rate, this is par for the course for most VCs.

Savvy investors don’t bet on unicorns.  VCs and the average investor may speculate with their portfolios, but sophisticated ultra-wealthy investors and institutional investors prefer a sure thing. If professional investors fail at picking the right stocks (or future stocks), what chance does the average investor have?  Little.

The data shows that the average investor has an even smaller chance of picking winners than VCs.   One researcher found that over a period of 40 years, 80% of stocks were losers and that any gains in the stock market can be attributed to the 10% of mega stocks that saw huge gains.  The problem is, most investors allocate to the losers, which explains why the average retail investor fails to beat the market.

The odds of finding a stock unicorn are just as slim as winning the lottery.  That’s why smart investors prefer tangible assets they can touch and feel and that have real world demand.  They don’t have to worry if the investment is going to take off or ever pan out.  It’s already a proven commodity.  It should come as no surprise then that a lot of sophisticated investors are heavily allocated to commercial real estate – especially to multifamily, where demand consistently outstrips supply.  And the segment of multifamily with the biggest gap between demand and supply is affordable housing, which is at crisis levels.

The affordable housing crunch is so bad that the White House is offering incentives to municipalities and developers to convert abandoned buildings into housing.   

The ultra-wealthy are gravitating towards affordable housing because they can see the real-world demand in real time.  It’s not a shot in the dark.  There’s no wondering if consumers will take to it like unicorn technology.  The demand is real and it’s already here.  Unlike new technology, commercial real estate has been around forever with a track record of success and in the case of multifamily and affordable housing, the US transforming into a renter nation has been trending since the Financial Crisis with no prospects of easing.

Why speculate with your portfolio and your chances at achieving financial independence on something unproven when you can invest in commercial real estate that offers multiple benefits and advantages over unproven investments?  With benefits like consistent and reliable passive income, appreciation, tax benefits, diversification, insulation against recession, inflation hedge, and asset protection, why more investors don’t consider commercial real estate for their portfolios is a mystery.

Do you find yourself constantly searching for a unicorn or bigfoot to add to your portfolio so you can win the Wall Street lottery?  The odds are against you and the fact that you’re still searching is proof that you still haven’t found one.  

Why continue to waste money, energy and the most precious commodity of all – time – on chasing unicorns?  Invest in what’s in front of you. Invest in what you can see. We’re in a housing crisis and a lack of affordable housing is not a unicorn.  It’s as real as cattle. You see it all the time and it’s a solid investment.

MIKE AYALA

MIKE AYALA

Mike Ayala has owned and operated mobile home parks since 2007, and has been active in construction and management since he was 15 years old. He graduated from the Associated Builders and Contractors 4-year project management program at age 22 and then became a licensed instructor. He is also the host of the Investing for Freedom podcast.