Profiting From The Next Major Investor Pivot
If recent memory is any indication, we can expect to see a seismic shift where investors place their capital very soon.
Recent patterns have shown investors’ drastic shifts from overvalued equities to under-valued tangible assets such as commodities, private businesses, and real assets once equities hit bubble territory. Two of the most recent examples were the dot-com bubble and the Global Financial Crisis, where investors stampeded out of an overvalued stock market into undervalued tangible assets.
The Stock Market Is Headed For A Major Correction
Here are some of the headlines:
“These warning signs suggest stocks are heading toward a correction.” — www.cnbc.com
“There will be another big correction in the stock market.”
“4 Reasons the Stock Market Could Crash in the Next 3 Months.”
Since the stock market crash a year ago on the heels of the dawn of the COVID-19 pandemic, the stock market has been on a tear – pushing stock prices to unprecedented levels.
Many investors ignore the gloom and doom, with many asking, “Why hasn’t the market crashed already?” The simple answer is stimulus checks. Fueled by free trading platform Robinhood, newbie investors are pouring billions into the stock market – propping up stock prices with round after round (3) of stimulus checks.
In a recent survey by Deutsche Bank, retail investors said they would put more than a third of their stimulus checks into the stock market, which could represent inflows of around $170 billion.
Still not convinced that the stock market is overvalued?
Just look at the average price/earnings ratio (P/E Ratio) of the S&P 500. The P/E Ratio is the ratio of a company’s stock price to its earnings per share. Historically, the average P/E Ratio of the S&P 500 has hovered around 16. A number above this average suggests a company’s stock price trading at a level not consistent with its underlying economic performance.
For perspective, at the height of the dot-com bubble, the P/E Ratio of the S&P 500 was 45.82. As of the close of trading on Friday, the P/E Ratio was 45.02. Eerie…
For nearly a year now, investors have been flocking to overvalued equities in the wake of the pandemic, but the tide will turn quickly if history is any indication. Stimulus checks and newbie investors have delayed the inevitable, but there is no doubt a major pivot is coming soon.
In 2020, as COVID-19 wreaked havoc on the economy, private businesses suffered as sales of goods and services fell across the board except in certain niche business segments.
As a result, the sale of private businesses by retiring owners stalled as valuations took a hit. It didn’t help banks impose a credit freeze – making borrowing to buy businesses hard to come by. Commercial real estate valuations saw a similar pause as vacancies rose and rents declined.
While mainstream investors largely ignored undervalued assets such as private businesses, commercial real estate, and other tangible assets, the rich were already pivoting – liquidating large swaths of their stock holdings to tangible assets. Warren Buffett’s Berkshire Hathaway recently made news for picking up large gold holdings.
The rich are rich because they anticipate where the herd is heading. They know that the herd will eventually shed stocks and set their sights on more tangible assets.
Commodities like gold and oil have historically been the assets of choice because of their accessibility – with other alternative assets such as real assets and private equity largely limited to accredited investors with high salaries and net worths – but the next pivot may be different.
The next pivot may see many mainstream investors turning to alternative assets like real assets, private equity, and private businesses because of a recent change by the SEC that has largely gone under the radar – a change in the limit of what a company can raise through crowdfunding.
The SEC amended the crowdfunding rules last November, lifting the offering limit from $1.07M to $5M. The $1M limit prevented many companies from relying on the SEC’s crowdfunding rules under Reg. CF because the proceeds didn’t justify the brokerage fees and legal and compliance costs. The $5M limit, however, is a game-changer.
With the ability to raise $5M, expect to see more companies raising capital through crowdfunding. As a result, more opportunities become available to more investors – including investors who previously would not have qualified to participate in more traditional private placements.
The rich already have a jump on the herd and are already pouring capital into assets that will likely see values jump once the herd gets off the stock bandwagon and seeks alternative assets for their investment capital.
As the economy picks up steam from the accelerated rollout of the COVID vaccine and the relaxing of the social distancing rules, expect private businesses, real assets, and other tangible asset classes to draw more attention as their market performance and valuations rebound from 2020.
The pivot is coming, and now is the time to take advantage before the mass exodus of investors from the stock market to undervalued asset segments.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.