Five Investing Heresies

Dan Rasmussen at Capital Camp (Brent Beshore’s event) · tagged with Patrick O’Shaughnessy

A long talk, so it lives in long-reads rather than the watch queue — Kyle took 60+ blocks of notes on it. The bullet on the April 17th, 2020 daily note was link-only; the substance was on the referenced Roam page, which is what is imported here. Verbatim, hierarchy preserved.

Source: {{youtube: https://www.youtube.com/watch?v=mqynMrNkaTo}}

Notes

• ==Notes==
  • “What returns might be available over the next 10 years? It’s a pretty depressing number; around 3-4%”
  • “We should be constantly searching, no matter who we are, for interesting ideas at the edge or frontier of various asset classes.” Patrick O’Shaughnessy
  • “These assets can return great returns, but they are not pre-ordained returns.” Patrick O’Shaughnessy
  • “Investing is a game of meta-analysis. Not a game of analysis. What matters is what you think relative to what everyone else thinks.”
  • Two approaches:
    • Momentum: Relentlessly staying on trend just ahead of the herd
    • Value: Identify where consensus is wrong and be a contrarian
  • “What is one thing that you believe that the vast majority of your peers disagree with?” Peter Thiel
  • Limited Partners & Asset Allocations
    • Endowed institutions have adopted David Swenson’s ideas
    • Shift out of fixed income towards iliquid alternatives
    • “The flight from safety”
    • Reduce exposure to private real estate, private venture capital, and private equity
      • Real Estate
        • “An iliquidity premium: paying 2% and 20% than paying 50-90 bps in a public vehicle.”
        • Private equity has lagged public REIT’s by 3%
        • One reason is because of fees charged by private funds
      • Venture Capital Investment Returns
        • 65% of venture investments lose money; worse than CCC bonds (default at 30%)
        • 29 venture funds explain 51% of the profits in venture
        • NASDAQ returned 14% per year, venture capital returned 10%
        • Small value over long periods of time is the best returner; small growth is the worst performer
        • “Venture is small growth on steroids.”
        • “I call venture the Rich Man’s lottery.”
        • Staying on top of trends is much easier in public markets than it is in private markets
      • Private Equity
        • 94% of institutional investors think private equity will beat public markets over the next 10 years
        • “The crown jewel of iliquids.”
        • Cambridge Associates said you should have at least 40% of your Family Office capital in Private Equity
        • 1990-2010, private equity returned 14% vs. 8% of the S&P 500
        • Private equity on average leveraged a deal 65% vs. 10% in public equities #Debt
        • Majority of private equity investments made in the last 10 years are still in private equity portfolios; valued by their own internal accounting teams
        • Pro forma EBITDA is typically 15-30% higher than GAAP EBITDA
        • 11x EBITDA isn’t as scary as 6x net debt to EBITDA (at origination that’s a CCC credit)
    • Most institutions don’t operate as balancing public vs. private alternatives, they’re moving capital from fixed income to these private asset classes because it’s less volatile
  • General Partners & Business / Management Quality
    • Key criteria that GP’s look at:
      • Quality of Business (e.g. wideness of moat)
        • Porter’s Five Forces
          • All of these relate to market share (competitors, customers, etc.)
          • The idea behind moats suggests that the bigger you are, the more you can control outcomes, the better you’ll be
          • No argument that market share increases margins
          • No relationship between market share and stock price performance
      • Quality of Management Team
        • No statistical significance to any quality; pedigree, experience, etc.—none of it predicted anything
        • No evidence that higher executive compensation changes outcomes at all
  • Question: Any way to identify Private Equity firms that can be successful?
    • “I’m not against all private equity. I’m against private equity that uses above 10x purchase prices and 6x net debt to EV.”
    • “When we did a big study at Bain Capital into what drove returns, 60% of profits came from 25% of deals that got done at less than 7x EBITDA.”
    • Purchase price is going to be the biggest driver of returns.
    • Unless there is some proprietary sourcing mechanism and you’re operating at small sizes then it is unlikely you can get good prices.
  • Question: In public markets, you focus on Japan.
    • Japan is extraordinarily cheap. Since the 1990’s they had zero interest rates and have had no bankruptcies, and the government will step in to further guarantee loans.
    • Average age of a Japanese company is 100 years or something like that
    • Japanese CEO’s are very risk-averse, they horde cash, and do things that benefit their employees and not their shareholders very reliably
  • Question: On value investing in general, the belief is that it’s been awful compared to growth over the last 10 years.
    • That’s on a relative basis, but on an absolute basis it hasn’t done bad.
    • Many non-growth businesses have just successfully compounded year after year
    • If you think these large growth tech companies will continue to perform at anomalous rates, then growth might be for you. But much of that has come from multiple expansion.

Connections

• Dan Rasmussen — the speaker.
• Capital Camp · Brent Beshore · Permanent Equity — the venue and its orbit.
• Patrick O’Shaughnessy — quoted in the notes.
• Captured from the April 17th, 2020 Roam daily note.