Don’t be fooled by the recent rally in everything from tech stocks to crypto, says Steve Eisman of “Big Short” fame. The Fed’s recent signaling of easing its aggressive rate hike agenda to combat inflation breathed new life into the markets, but don’t be fooled by this temporary spark, warns Eisman. The Neuberger Berman Group portfolio manager, who famously bet against subprime mortgages right before the global financial crisis, sees an oncoming market regime shift in the higher interest-rate era.
“Paradigms change over time,” Eisman says in the latest episode of the Odd Lots podcast. “Sometimes those paradigms change violently, and sometimes those paradigms change over time because people don’t give up their paradigms easily. And I think we’re going through a period possibly like that again.”
The signs are already there for a major market shift and downturn. After riding high in 2021 from stimulus money, the stock and crypto markets crashed in 2022. In addition to high inflation (reaching a 40-year record in June of 9.1%), other factors, including high energy prices, supply constraints, recession, and political conflict, contributed to market volatility and a major downturn. For 2022, the S&P 500 was down 19.44%, and Bitcoin was down 65%.
The markets have rallied in recent weeks in response to the Fed’s signaling to ease up on its interest rate hikes to combat inflation. However, there are still signs of a recession on the horizon, with market volatility sure to continue for the foreseeable future.
When I read about Steve Eisman talking about paradigm shifts, I think he’s talking about what the herd is about to do next. In 2008, he correctly predicted that subprime mortgages would implode and the herd would run for the exits. Shorting mortgage-backed securities ensured that when the subprime market collapsed, and the herd liquidated their assets, Eisman and his “Big Short” cohorts would make hundreds of millions of dollars from the price drop of those securities.
Some would take Eisman’s remarks as a tip for looking for the next “big thing,” but wouldn’t that just take you from one bubble to another? The dot-com herd shifted to financial stocks, which then shifted to tech stocks and crypto, which both saw recent massive declines.
Following the herd has never been a recipe for success. It only ensures massive losses when the bubble bursts from the latest craze.
I get it. It’s human nature to go along with the crowds. Nobody likes to be left out (i.e., the fear of missing out), and it feels safer to go along with what everyone else is doing. It also gives investors an excuse if things do go south. You can’t blame them for something that everyone else was doing.
Ultra-wealthy investors don’t follow the herd. They’re unaffected by paradigm shifts, market crashes, or burst bubbles. That’s because they don’t engage in the madness of crowds. And that’s why they’re ultra-wealthy while the average investor fails to beat the market.
Armed with stimulus money, the herd went wild over meme stocks and crypto in 2020 and 2021. While everyone else jumped on the stock, crypto, and even the NFT train, smart investors stuck to their guns as they have always done. They stuck to boring and tried-and-true investments.
How do the ultra-wealthy separate themselves from the crowd?
Do the ultra-wealthy consciously separate themselves from the crowd or do they stand apart from the herd by their investment choices?
I think it’s a combination of both. The average investor has one investment objective: to buy low and sell high. It’s all about appreciation of the stock or crypto price, and it’s all about timing – getting in or getting out before everyone else to maximize gains and minimize losses.
Sophisticated investors not only have more investment objectives, but these objectives are also more substantive.
What are their objectives?
- Passive Income.
- Appreciation.
- Tangible Asset.
- Capital Preservation.
- Tax Benefits.
- Insulation from Volatility and Inflation.
- Multigenerational Wealth.
- Leaving a Legacy of Charity.
If I could boil down what sets the ultra-wealthy apart from other investors, it’s this:
Ultra-wealthy investors seek out investments capable of providing a lifestyle that lets them do things on their terms, like spending time with their loved ones and engaging in worthwhile causes while also providing for future generations.
These investments are capable of standing on their own – independent of a job – able to meet the needs and cover the expenses of their owners even if they stopped working. Speculative stocks and crypto that the herd chase don’t fit within these loftier investment objectives. Cash-flowing commercial real estate and income-producing tangible businesses do.
Are you concerned about the next bubble or paradigm shift?
Don’t follow the herd!
Protect your portfolio by gravitating towards assets that smart investors favor and not assets the herd flock to.
