One theme that keeps smacking me in the face again and again over the past few years is just how pervasive our current Everything Bubble is.  It has worked its tentacles into almost every conventional asset class in the market today.  They are all overvalued to some degree, with the worst offenders – the WeWorks, Ubers and Netflixs of the world – totally reliant upon a perpetual stream of fresh investment dollars from zero-interest rate crazed mouse-jockeys in order to continue operating.

So I was intrigued when I read an article on the popular financial commentary site Zero Hedge that introduced me to the concept of anti-bubble assets.  According to this theory, every financial bubble throughout history has also produced an anti-bubble – a boring, cheap asset class that is neglected in the rush for everyone to be part of the historic investing “new paradigm”.

I’ll quote Kevin Duffy, co-founder of the Bearing Asset Management hedge fund and originator of the anti-bubble thesis:

“One of the things we know from past bubbles is that you often get anti-bubbles. This was clearly the case in the year 2000 when you had the new economy bubble on one side, and the old economy anti-bubble on the other side. When tech stocks peaked in March of 2000, a lot of the value stocks bottomed at the same time.”

I can absolutely attest to the validity of this idea, because I experienced it firsthand.  In late 1999/early 2000, I was fresh out of college and new to the financial industry.  When I looked at the markets, it didn’t make any sense to me that Webvan (a money-losing online grocery delivery service) was trading at a market cap of over $1 billion while the staid tobacco firm of Philip Morris was trading at a lowly P/E of 5 and a fat dividend yield of over 8%!

I drooled over the concept of purchasing Philip Morris for the juicy dividend yield, but alas, it was not to be.  Being straight out of college, I did not have two dimes to rub together and nobody was going to loan money to a penniless 22-year old so he could speculate in the stock market.  As you can probably guess, Philip Morris went on to make its shareholders as rich as Nazis while Webvan went bankrupt in 2001.

But this ordeal underscored to me just how hopelessly irrational markets can become in extreme bubble environments.  And our current bubble is no exception.

Today’s Everything Bubble makes the late 1990s dotcom bubble refugees look like chump change in comparison.  Right now Tesla has an improbably large $151 billion market cap.  Netflix sports an eye-watering total valuation of $188 billion.  And Uber, even after being mercilessly punished by the stock market for being a piece of hot garbage, still retains an astounding $60 billion market cap.  Webvan – the biggest failed IPO of the dotcom era – has nothing on our current crop of bubble darlings.

So now that we know where the bubble is, the real question is where is the anti-bubble?  What asset class or classes will allow us to safely double or triple our money over the next 5 to 10 years?

And while there can ultimately be no assurances about future investment returns (as the famous 1930s economist John Maynard Keynes once observed, the market can remain irrational longer than you can remain liquid), buying anti-bubble assets certainly stacks the proverbial deck in our favor.

According to Kevin Duffy, precious metals, short-selling stocks, retailers (Ed. note: in light of the Covid-19 pandemic, going long retailers seems like a busted thesis) and active investing are the mirror images of today’s Everything Bubble.  These are the asset classes/ideas that simply don’t get the time of day from otherwise intelligent, rational investors.

Although I’m not going to take issue with Mr. Duffy’s largely accurate assessment of our broken markets, I would like to extend the definition of anti-bubble assets slightly.  I believe that in addition to gold and silver bullion, antiques, gemstones and fine art have also been wholesale abandoned in the rush to find the next Lyft, Beyond Meat or SpaceX.

Antiques, art and other hard assets are definitely perceived as boring has-beens at this point in the economic cycle.  But I like boring.  The perception that an asset is boring is what allows us to buy it for an obscenely low price.  Boring is what produces outsized investment returns over the course of a decade or two.

And this leads us to my next point.

When bubbles burst, you want to be sure to have some money laying around to take advantage of the bargains that are sure to materialize.  But I’m not convinced it is either feasible or wise to hold a 100% cash position.  This is where having some antiques and hard assets in your portfolio can be invaluable.

You see, antiques, gemstones and art, while not money, all share important similarities to money.  Money must possess five attributes in order to function properly as a medium of exchange.  It must be acceptable in transactions, durable, portable, scarce and easily divisible.

This list got me thinking about an article I wrote a few years ago titled The Five Aspects That Influence Art’s Desirability.  In that article I defined 5 attributes that antiques and fine art had to possess in order to be considered investment grade.  Those characteristics are quality (of materials and construction), portability, durability, scarcity and stylistic zeitgeist (how closely a piece matches the style of its era).

As you can easily see, investment grade antiques share 3 out of 5 of the properties associated with money: durability, portability and scarcity.  Right now nobody cares even a little bit about that fact, but the day is coming when they will.  The Everything Bubble will burst one day.  And when it does, bubble assets will plummet in value.

But people who have the foresight to invest in money-like, anti-bubble assets such as antiques, gemstones, fine art and bullion will do quite nicely.  Conversely, people who don’t buy today’s boring assets will eventually wish they had.

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If you live long enough, you get the honor of witnessing some pretty stupid things.  And nowhere is this statement truer than in the arena of investing.

In the late 1920s, know-nothing shoeshine boys were giving their customers hot stock tips.  Everyone knew that the stock market was a sure thing – an easy path to riches.  Only a few years later the Dow Jones Industrial Average crashed by 89% during the Great Depression.

An entire generation of investors was wiped out.

In the mid 1960s, Nifty Fifty companies like Xerox, 3M and Polaroid were widely considered “one decision stocks” – with the only correct decision being to buy (and hold forever).  The DJIA peaked at nearly 1,000 in 1966 during the height of the mania…and then proceeded to move sideways for the next 17 years.

The index only irrevocably surmounted the stubborn 1,000 barrier in late 1982.  Some of the Nifty Fifty names even went on to declare bankruptcy eventually!  So much for buying and holding forever.

In the mid 2000s, people caught house-flipping fever.  Many thought they had discovered the perfect wealth building plan: buy multiple houses simultaneously with no money down and then sell them to some other sucker at inflated prices.  During this time, Ben Bernanke of the Federal Reserve loudly declared that “we’ve never had a decline in house prices on a nationwide basis [since the Great Depression]”, implying that a widespread housing bust simply couldn’t happen.

Over the next decade, nearly 8 million homes were foreclosed on in the U.S., destroying the hopes and dreams of millions.  Ben Bernanke failed upward during this debacle, becoming the Chairman of the Federal Reserve.

In 2017, tech junkies, fraternity bros and anarchists everywhere were enthralled with the idea of crypto-currency in the bizarre belief that all the old rules surrounding money had changed.  But as far as I can tell, a crypto-currency is a digital guarantee that you own nothing…nothing tangible anyway.  Bitcoin, the undisputed king of the crypto-currencies, peaked in December 2017 at nearly $20,000 a unit.

It now trades for just over $7,500 – down over 61% – with the supply of greater fools running increasingly thin.  There will be more losses here for sure.

In 2020, we are grappling with the largest bubble in history – the dreaded Everything Bubble.  The coronavirus just popped this bubble, but the stock market still hasn’t gotten the message.  When it finally does, look out below.

All of these incidents are historical examples of just how emotionally unhinged investors can be.  It is also an object lesson in why you should practice financial self-defense.  Participating in a bubble can feel wonderful on the upside, but the dream of riches always gives way to the nightmare of reality at some point.

This is why I heavily rely on historical precedent when constructing my personal investment portfolio.  And right now the most undervalued, overlooked asset class by far is portable tangible assets – things like antiques, bullion, fine art and gemstones.

But the concept of financial self-defense also dictates that a portfolio must be well-balanced.  One simply can’t load up on a single asset class to the absolute exclusion of all others.

So in my opinion, the best financial self-defense tactic is to tier or layer your assets.  In this context, tiering your assets means to diversify across different asset types with different cashflow, liquidity and safety characteristics.  This strategy should give you the financial flexibility to buy undervalued assets, while riding out whatever economic disasters may come.

The first asset class vital to the art of financial self-defense is cash.  This can take the form of a checking account, savings account, savings bonds or even physical cash.  Cash is the most liquid of the asset classes and allows an investor maximum financial discretion.  In other words, whoever has a fat pile of cash when a crisis hits will be able to buy investments cheaply when others are forced to panic sell.

Cash is a very underrated asset at the moment.  The stock market has done so well since the last recession that a lot of investors believe that “cash is trash”.  A corollary to this is the misguided notion that you must always be fully invested, usually in an equity index fund.  But this anti-cash stance couldn’t be more unwise.  The ideal time to build a strong cash position (if you don’t already have one) is before a crisis strikes.  The second best time is right now, regardless of the macro situation.

A word of warning though – don’t rely on credit as a substitute for cash.  In a liquidity crisis, common types of consumer credit, such as bank overdrafts, credit cards and payday loans, may very well no longer be available.  As the old saying goes, “A banker will offer you an umbrella when it is sunny, only to take it back at the first sign of rain.”

The second tier of assets in a properly diversified, financial self-defense portfolio is conventional investments.  These include stocks, bonds, mutual funds and ETFs – paper assets that are commonly encountered in IRAs, 401-Ks and brokerage accounts.

Conventional paper assets are generally very convenient to buy and sell.  However, liquidity in this asset class can disappear shockingly quickly in a financial crisis.  But because – pre-coronavirus – it had been more than a decade since our last financial crisis, many people foolishly forgot this fatal flaw of the paper asset markets.

Due to the all-pervading Everything Bubble, I have difficulty recommending anything other than token allocations to most stock and bond sectors at this time.

The third integral part of any financial self-defense plan is real estate ownership.  This is most commonly recognized as owning your own home.  But it can also include owning residential rental properties or raw land.

Unfortunately, due to the Everything Bubble real estate suffers from the same overvaluation problem as stocks and bonds.

That leaves us with the final (and in my opinion best) layer of our financial self-defense cake: portable tangible wealth.  As noted above, this asset class consists of antiques, bullion, fine art and gemstones.  These are items that have been broadly recognized throughout history to possess substantial value, a large portion of which is often intrinsic.

For centuries the middle class and wealthy relied heavily on portable tangible wealth as a discreet and effective store of wealth that could be passed down from generation to generation.  For example, in 18th century Georgian England a house full of art and antiques was considered both a cultural and financial prerequisite for admission into the upper class.

These assets also served as a vital backstop against poverty when all else failed.  Many a European noble family resorted to selling the family silver or jewelry when financial bets went wrong.  Now this outcome might not have been ideal, but it did put food on the table at a time when there was no social safety net.

However, these historical lessons have largely been forgotten today.  Instead, we live in a world where many people put their savings in the stock market, which we are told by the financial media will provide 10% returns from now until forever (hint: it won’t).  Others stay 100% in cash, earning a paltry 1% or 2% a year while inflation eats it all up.

Most households are woefully under-allocated to alternative assets such as antiques and bullion.   Even a small addition to the average person’s portfolio would go a long way to blunting the risks associated with more traditional asset classes.  Financial self-defense counsels us to hold a broad basket of assets, with an emphasis on what is currently undervalued.  So you can feel reassured that when you buy a fine Edwardian diamond pin or a set of sterling silver flatware, history is on your side.

Read more thought-provoking Antique Sage investing articles here.

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