In “alternative investment”, like in “alternative medicine”, the word “alternative” really means “not”.
In the first part of the series, we made the important distinction between speculation and investment. This article covers a specific misnomer – so-called “alternative investment”, typically in precious metals, gems, art, wines, vintage cars, stamps and stuff like that. However, we will see that those things are not investments in any rational sense of the word.
A real investment, typically in a bond or stock, ultimately represents ownership of production. This means you get returns because stuff is being created, not just because people changed their mind about the price of something.
This is not semantics. It’s fucking important and half the finance industry actively ignores the difference.
It follows that:
- The only way to invest in cars is to run a taxi company.
- The only way to invest in wine is to buy a hill in Bordeaux.
- The only way to invest in art is if the Artemision Bronze bangs the Venus de Milo and gets her pregnant with a little marble Cupid. New value right there.
- The only way to invest in diamonds is to buy the damn mines.
At best, those things are speculative. At worst, they’re scams. Usually, they’re ways to get the moderately-well-to-do to pay way too much for fragile consensual value.
Q:Wait, so gold is not an investment?
A: Of course gold is not an investment.
Q:“But my financial advisor…”
A: …is almost assuredly an asshole who, out of inertia, follows a diversification formula from the days of the gold standard, when there was still a semblance of reason to holding precious metals. No more.
Another way to put it is that “alternative investments”, like all speculation, are collective hallucinations.
The bait-and-switch inherent in the term “alternative investments” (or more accurately, “unusual means of speculation”) is akin to ordering a prostitute and getting a pre-op transsexual.
This isn’t to say these things have no good use.
If you’re truly enthusiastic about wine, buying valuable vintages is a great hobby (unless, like me, you’re perhaps too enthusiastic about wine). If you buy art, you get to look at it (and maybe. eventually. sell at a profit) . And classic cars, oh my. Gorgeous. Those are all fascinating, enjoyable, expensive hobbies with non-negligible potential for profit under favorable circumstances. But if you do it for the possibility of profit alone, you’ll probably get stuck with expensive conversation pieces. You have to not care if you never get to sell the stuff at all.
Those. Things. Are not. Investments. In. Any. Rational. Sense.
An even worse reason for hoarding the stuff is social signalling – or in plain English, showing off. Without that, there would be far fewer wine and art enthusiasts among the upper middle classes. Unless you’re a billionaire, you can’t really afford to do that. And if you’re a billionaire, you don’t need to. It’s simply an aspirational trap.
There are, to be sure, rare circumstances when precious metals have uses. Like this joke:An elderly Jewish man and his son are fleeing the Soviet Union. They carry little except a bust of Vladimir Lenin.
The Soviet customs officer asks: “What’s that?”
The man replies: “A bust of our liberator, so I can remember him in Israel”.
“Okay, you may go”.
Then Israeli customs officer likewise asks: “What’s that?”
The man replies: “The worst criminal in human history, the perpetrator of atrocities that would make even the Nazis blush. I want a reminder why I left Russia”.
The man and his son settle into their new home. He puts the bust on the mantelpiece and asks his son: “Do you know what this really is, son?”.
The boy shrugs.
“Forty kilograms of gold.”
If you don’t trust an impressively articulate guy on the internet, trust Warren Buffet:
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
And another good article on the topic.
Gold’s sole distinction is that it was historically a repository of value and therefore will probably have a non-zero culturally ascribed value even in the bleakest scenarios. Other “alternative investments” don’t even have that. The trade in gold is also supporting slavery and child-trafficking warlords in Africa. So other than being pointless, it’s also sordidly immoral.
Easily fungible valuables such as diamonds, gold and Picassos are, at best, capital preservation. But capital preservation is not investment. It’s what you hide in your underwear if you need to cross the Himalayas in the middle of the night to escape party purges and modestly live out the rest of your days in a 4-story villa on the shores of Lago Maggiore, an insurance policy for billionaires who live in the wild places. It is not a sensible policy for millionaires, much less hundred-thousandaires, who need to worry about getting out of any and all debt and building a solid foundation of wealth, not frivolous crap like rare vintages and diamonds.
The question is what share of your wealth you should reasonably devote to last-resort insurance policies if you’re a moderately wealthy citizen of a normal, generally stable country with predictable rule of law and an amiable relationship between state and citizens, such as Switzerland or….orrr….huh, I can’t think of another example. Scratch that.
But the answer is “probably zero”.