Investors are constantly chasing that next mythical investment – the one that’s finally going to pay off and make them rich. In the case of FTX, the failed crypto currency exchange founded by Sam Bankman-Fried when he was 27, it was a case of two levels of unicorns, that of cryptocurrency and that of a start-up found on the charm and charisma of a twentysomething wunderkind. At 29, with a net worth of $29 billion, he was the richest 29-year-old ever, even beating out Mark Zuckerberg, who had a $23 billion net worth at that age. But it turns out that it was all a unicorn as both crypto and FTX came crashing down in late 2022.
In the aftermath of the failure of FTX in November of 2022, Bankman-Fried was indicted by the Justice Department on eight counts of fraud, money laundering, and campaign finance offenses. After the trial that started on October 3rd last week, Bankman-Fried was found guilty by a New York federal court on all seven criminal fraud counts. The prosecution’s key witnesses were former members of Bankman-Fried’s inner circle. He faces a maximum sentence of 115 years in prison.
The list of Bankman-Fried’s misdeeds were extensive, including stealing at least $10 billion from thousands of customers and investors to finance outside ventures such as political donations and purchases of luxury real estate, Assistant U.S. Attorney, Nathan Rehn, declared in his opening statement.
The collapse of FTX highlights the problems with mythical investments. They’re built on hype, not grounded in data, metrics, math or anything tangible. They’re built on fantasy fueled by the media, celebrity endorsers, and social media. FTX hadn’t shown any profits when its value skyrocketed to $31 billion in 2022. It was all smoke and mirrors.
Startups like FTX and crypto currency are just some of the recent investments that have not lived up to their hype. NFTs (non-fungible tokens), based on crypto tech, were supposed to be the future of art but, after initially rocketing in popularity, have also come crashing down.
Then there’s the metaverse that was spearheaded by Mark Zuckerberg and Meta (i.e., Facebook). It was touted by Zuckerberg as the next frontier of social interactions:
“Pretty soon, I think we’re going to be at a point where you’re going to be there physically with some of your friends, and others will be there digitally as avatars or holograms, and they’ll feel just as present as everyone else,” he said in September at the company’s annual showcase event. But it has lost money so far – $46.5 billion to be exact.
What investments like cryptocurrency, NFTs and the metaverse all have in common is that they’re all intangible. They have no value other than what the investing public assigns to them and at the moment, investors aren’t high on any of these investments. The problem with intangible investments is that they’re vulnerable to herd behavior and can easily be manipulated by the press and social media. Perception can easily be distorted from reality.
One of Warren Buffett’s most valuable pieces of investment advice is to never invest in a business you cannot understand. This is the reason why he avoids intangible unproven unicorn investments like crypto, NFTs and the metaverse. It doesn’t stop the investing public, however, from diving into investments they know little about. All they know is that everyone is talking about it and they don’t want to miss out.
Warren Buffett prefers proven and tangible assets that have real world use and demand. It’s why he and other smart investors allocate heavily to cash-flowing real estate where value is based on real world data, metrics and demand and not hype.
For example, in the world of real estate, investors can’t be fooled into believing that a property in a rundown area of Detroit has the same value as beachfront property in San Diego. First there’s the eye test. It’s obvious that the two locations are not the same. Then there’s the data. Comps, financial statements, and real-world metrics all back up a property’s value.
With tangible assets like real estate, it’s harder to bend perception like it is with mythical investments built purely on hype.
One real estate segment where the data doesn’t lie is in affordable housing. With inflation putting a pinch on household finances and mortgage rates putting home ownership out of reach for many, the demand for affordable housing has never been higher. And with demand easily outstripping supply almost everywhere, the availability of affordable housing is at crisis levels in some areas. It’s so bad that the Biden administration is proposing to offer incentives to municipalities and developers to convert abandoned office buildings into affordable housing.
Why chase mythical investments? Why not invest in something tangible that you can see and feel and where the data doesn’t lie? Why not invest in a tangible asset like cash-flowing real estate that offers advantages mythical investments can’t?
Tangible assets offering passive cash flow, appreciation and tax benefits while offering a buffer against recession and inflation is how the wealthy build their empires and how regular investors can start theirs.