From the May 2009 issue of Investment Advisor • Subscribe!

Venture Populist: Chaos = Opportunity (Oh, please)

Will advisors revisit their mantras or continue to tout the same asset-allocation models that have so devastated their portfolios?

How often will we have to hear this nonsense from pontificating pundits and portfolio managers out ballyhooing the pending stock buying opportunity of a lifetime? The equation above is only applicable when something is actually learned from the chaos and behavior is changed. The common definition of insanity--the behavior of people who keep doing the same thing, yet expect different results--is likely more relevant.

So far, I see little evidence that advisors have learned anything from their vanishing AUM, despite irrefutable evidence that:

o Stocks have plummeted more than 60% in real terms since the market peak in 2000. They have performed no better than 20-year Treasuries for the past 40 years and certainly have not delivered their risk premium.

o Bonds may be the next bubble (according to Warren Buffett; Don Phillips of Morningstar expresses similar misgivings about fixed income in an interview on page 44) as unprecedented spending, ballooning deficits, risk of a devalued dollar, and inflation could prompt foreign investors to dump Treasuries.

o Modern Portfolio Theory, traditional asset-allocation and diversification models, and buy-and-hold investing have been materially discredited over the past 80 years.

Will investment advisors revisit their mantras or continue to tout the same traditional asset-allocation models that have so dutifully devastated their investment portfolios?

Empirically, investor returns on private investments constitute the single largest source of private wealth in America. All stages of private venture investment (early/seed through mezzanine and later) have dramatically outperformed traditional equity indexes over the past five, 10 and 20 years.

Investment advisors should educate themselves to become more familiar with best practices in evaluating and ultimately embracing private investment opportunities for investors. Prudently implemented, private investments can materially benefit your client's portfolios, and, in turn, your investment advisory practice.

By "private investments" we are referring primarily to investments in private enterprise. (But this column, and the Venture Populist blog at www.venturepopulist.com, will address the wider range of private investment strategies, including angel investing, private equity, venture capital, venture debt financing, private placement offerings, and private investment in public equity (PIPEs).

Walk the Walk

True, sustainable wealth is rarely generated through traditional investment or employment. It is the consequence of inheritance, windfall (lottery), illegal activity, or private enterprise. Contrary to the widespread, pedestrian misconception, inheritance is not the major source of private wealth in America. Rather, it is entrepreneurial success or investment in private enterprise.

According to Drs. Thomas Stanley and William Danko's research published in their book The Millionaire Nest Door: The Surprising Secrets of America's Wealthy (Longstreet Press, 1996)--a must read for IAs, by the way--80% of today's American millionaires are first-generation rich. More than half never received as much as $1 in inheritance, and 91% never received as much as $1 from their previous generation's ownership of a family business.

The same was true a century ago per Stanley and Dankos's citation of a 1892 study of the 4,047 American millionaires..."84% were nouveau rich, having reached the top without the benefit of inherited wealth."

The highly-coveted high -net-worth and ultra-HNW investor knows this better than anyone, because, as probability has it, they very likely accumulated their own private wealth through entrepreneurial activity or investment in private venture. When you are speaking with HNW investors about private investment opportunities in start-up ventures or emerging companies you easily capture their attention...they are attentive and engaged, and do not show that glazed look of disinterest that a lecture on the Efficient Frontier evokes. They may not be familiar with the specific product, service, or technology that the venture you may be discussing is engaged in, but they do understand business, private enterprise, and their potential for wealth creation.

Advisors should become more receptive to learning to speak the language of their desired target market, rather than continuing to subscribe to the defiled dogmas and outmoded portfolio fallacies (like Modern Portfolio Theory) that have so wantonly wasted wealth and invalidated their perceived value proposition.

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