Comparing and Contrasting Publicly Traded Securities and Alternative Investments

There are elements of listed securities and alternative investments that are similar, and there are elements that are different.  One is not better than the other, and neither has an advantage over the other when it comes to the risk-reward ratios.  These differences and similarities though do need to be understood by investors to be able to properly plan and manage their investment portfolios.

I’m in a unique position to be able to compare the two.  I was a stockbroker and financial consultant with Merrill Lynch, then CitiGroup Global Markets for ten years out of college.  After that, I’ve been involved in the sale and administration of alternative investments for the last ten years.  I’ve sold and advised clients as a financial advisor to a small group of brokerage firm clients with $350 million in assets and liabilities, and now run an alternative investment administration platform.  I’ve bought and sold listed securities and alternative investments in my own account.  I have made money and lost money with both in my own money.  I sold both, advised on both, and generally experienced the trials and tribulations with both.

It’s A Little Like Soccer

I guess it is a little like how I’ve approached soccer, a sport I’ve loved since I can first remember.  I have played it, refereed it, coached it, and watched it.  If I had to stack rank my abilities in the sport, it would have to go; best at watching, and worst at playing it.  I am a Grade 7 US Soccer Certified Referee,  that won’t get me an MLS or World Cup game to referee anytime soon, though I can referee competitive youth and adult recreational games.  Plenty of personal opinions are shouted at me from these kids, parents, and weekend warriors for me to not feel too comfortable with my referee abilities though.  I do feel that I’m at least understanding the game from a lot of different perspectives.

A listed security is any investment that has been registered with the Securities and Exchange Commission (SEC) to be marketed for sale to the public and is listed on a public exchange. The SEC does not “approve” investments, it only has agreed that it has met certain requirements.  Then they are available for consumption by the public and people and companies that are properly licensed can advise and sell them.  When a security has been properly registered and listed for sale, there are rules around the flow of information.  We have, by far, the best capital markets system in the world.  Even though I live in the alternative investment world now and make my living here, doesn’t mean that I don’t have great respect for it.  Our listed securities exchanges that our marketplace of advisors and investors work in provides fantastic access to capital that our country greatly benefits from.  To provide an even playing field, you are not able to buy or sell these securities based on information that is not available to the public.  People can interpret information in their own way and combine public information from different sources in any way they choose to try to get an advantage.  This ok.  But you aren’t able, for example, to learn of a disappointing company earnings report that is about to be made public and sell the stock based on that information.  That’s cheating, and you can be fined or go to jail for that.

One Bad Christmas

When I was a broker at Merrill Lynch, I had several Microsoft executives as clients.  One morning, as I arrived at the office at about 8, am, my assistant told me, “oh Stu called early this morning and bought $250,000 worth of some company call Nvidia”.  I said, “What, why?”.  Stu had a managed portfolio that was managed by three different portfolio managers that we had picked, and they would make a regular trade in his account on his behalf based on the style we had hired them to do.  His portfolio was a little under $2 million dollars and his largest holding was about $50,000.  He also very rarely called in to make his own trades.  I called Stu and asked him what was up, and he had a pretty good explanation for what he was doing. It wasn’t that unusual for one of my clients to do things off the wall at times, just read my book, “Blame It on the Broker” for sale on Amazon.  Let’s just say that there was a company-wide investigation at Nvidia and Stu along with a couple others at Microsoft had their Christmases ruined.  Microsoft had negotiated a large purchase of their graphics processors for their XBOX division and some decided to front-run on that information.

On the other hand, an alternative investment must rely on an exemption from registration with the SEC.  I this case, the security (both are still called securities by the way) does not need to meet the strict (and very expensive and time-consuming) process of audited financials and regular public reporting.  Most smaller offerings and securities utilize this exemption process that includes the requirement to provide certain risk disclosures, restrictions on who the offering group can solicit to, the amount that can be raised, and certain notices that must be filed with the SEC and/or the States the offering is sold in.  The general idea is that we don’t want bad investments with very little information solicited and sold to people that can’t afford to lose the money. Without going into a detailed securities law analysis, let’s just say that we have a system in place that doesn’t let bad people sell crappy investments to little old ladies.   To help this idea along without stopping smaller offering and companies from raising capital, there is an avenue to offer unregistered securities to qualified investors if the exemption rules are followed.

Small Offerings, Big Opportunity

An offering being smaller does not necessarily make it less attractive.  Often-times a smaller investment opportunity can be more attractive.  For example, I have seen some investment sponsors take advantage of real estate opportunities that have been overlooked or passed on by the larger publicly-traded REIT (real estate investment trust) companies.  When a large organization must deploy a large amount of money, they can’t afford to waste their time on a small deal.  Some of these smaller companies are run by very experienced real estate professionals that used to work for the large REITs and have a history of success.  They can use the same criteria and process they used to be successful with the larger organization on a “small” deal.  They do this because they now get to take advantage of those gains in a more direct way.  The problem for them is that they don’t have the piggy bank they used to have, so they must raise private capital.  I know some people that seem to be able to manufacture success in real estate.  I’ve never had that talent myself, but I’ve watched other people have success time and time again.  One thing I notice that these professionals have in common is that they get a niche and they exploit it over and over and get better at it each time.  A mentor I once had told me, “be niche and famous, don’t try to do everything”.

On the flip side of this, many smaller offerings are made by people without any experience. They read some books and attended some classes on making money in real estate and they now want to try their hand.  These are danger bunnies in the woods.  Some unsophisticated investors are not able to discern what is a quality offering and what is not.  Even some sophisticated investors can be fooled. For example, there might be a small offering done by inexperienced people, but they happen to have an asset under contract at a fantastic price.  Their plan then is to partner with an experienced group to help them execute on a solid business plan.  This you should jump on.  But, another example is you have an experienced group that appears to have a solid plan, but they lack the resources to do the due diligence they would have normally done or lack the resources or time to execute properly and there are losses.  People need to look at the team first, but still look at the deal to be sure the plan makes sense.

Publicly Traded Securities

With a publicly traded security, there is plenty of educated scrutiny on the team and the opportunity.  This goes for equity, debt, and derivative offerings.  There are often-times high-quality reports you can read that go into interest rate sensitivity, company-specific and market risk, and other opinions that you can read from reliable sources.  This doesn’t exist for most alternative investments.  There is what is called the “Efficient Market Theory”, that makes the opinion that all relevant information is already reflected in a publicly-traded securities price making it impossible to buy an asset for less than it is currently worth.  People still debate if this is entirely true, but most people agree that is for the most part at least partially true. There are pros and cons, and that is certainly a con. The biggest advantage to a security traded on an exchange is that it is considerably more liquid, meaning you can sell it at any time and turn it into cash.  You need to run it through the supply and demand featured exchange and sell it at the current bid price.  This can be a plus unless the price is not currently at a price in which you are willing to sell.

With a private investment, there likely is not a liquid market to sell your investment.  Most alternative investments are very illiquid and can be for many years.  You may have invested in a fund that has purchased a multi-family dwelling, with the plan to renovate and rent it out for ten years.  Then the plan is to sell it at some point in the future at again.  Be sure to understand what the agreed plan is before you invest to be sure it matches what you are looking for.


Let’s briefly examine fees.  There are considerable fees involved with most investment programs you can participate in with the larger investment firms. Some of these fees are obvious and some are not.  Charging fees is a regulated activity, so some are disclosed upfront and some you need to use common sense to calculate on your own.  Some private funds charge no fees because the principals plan to make their money from the results.  Other charge enough fees where they may not care how much money is made from the actual activity of the offering.  Use caution here on both sides.


Comparing publicly-traded securities and alternative investments to determine which are better, is a personal endeavor.  It takes different skill-sets to analyze different types of investments in general, so don’t rule out one over the other because they are or are not traded on an exchange.  What’s most important is that you do as much due diligence as you can to be sure you are getting what you are expecting. The biggest similarity is that there are people who are interested in you putting your money with that security, so be careful.



Download Our Free Report: The 5 Steps To Owning Your Own Self-Directed IRA

How to Get Higher Returns, Lower Fees, Diversification, and "Check Book" Control of Your Retirement Investments

Thank you! Please check your email inbox to confirm your request and the report is on it's way!

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *