‘Good judgment comes from experience, and experience comes from bad judgment.’
Rita Mae Brown
Looking back, I now realise how green I was.
When first starting in this business in 1986, I was under the misapprehension of ‘the more complicated the better’.
Investments with labels like ‘special opportunities funds’ — and let’s face it, who doesn’t want to be ‘lucky’ enough to invest in a special opportunity — were all the go.
Or how about the ‘enhanced cash funds’? Of course, we want an enhanced return on our cash.
Mortgage funds with an image of a giraffe and those reassuring words of ‘never stick your neck out’. High returns without risk…where do I sign?
Business development managers (BDMs) would visit the office and explain their fund’s strategy on the whiteboard. The end result was an assortment of circles and criss-crossing lines. Impressive-sounding words flowed so easily off the tongues of the BDMs…hedge, arbitrage, leverage, derivatives, mezzanine debt.
You hid your ignorance by keeping your mouth firmly shut…better to be thought of as ill-informed than to open your mouth and confirm it.
It was the classic ‘emperor with no clothes’ predicament.
My ignorance stemmed from not appreciating the nature of the investment cycle. The upside rotation was the enabler of the spectacular performance numbers being touted by the BDMs.
The complex — and high fee-paying — strategies were delivering…who was I to question them?
Then along came the downside rotation on 19 October 1987.
The great illusion was exposed for what it was.
Special opportunities funds did indeed provide investors with a very special opportunity…to lose more money than anyone else.
Enhanced cash became diminished capital.
And the poor old estate mortgage giraffe?
It was decapitated.
In the years since, I’m reasonably confident I’ve seen all the industry product tricks.
There have been all sorts of bizarre and non-sensical marketing efforts designed to validate why superior past performance will continue for ever more.
These are…wink, wink, nudge, nudge…highly specialised investment strategies only the professionals are intellectually equipped to handle.
Yeah…pull the other one.
Industry experience — learned the hard way — is why I never bought into the Cathie Wood ARK hoopla. I’ve seen this type of flash-in-the-pan stuff before.
Everything in the ‘everything bubble’ is connected
Have you seen the news on the ‘Buy Now, Pay Later’ industry teetering on the edge of collapse? Why is anyone surprised by this?
This product was born into existence at the peak of the greatest credit bubble in history…and, in the very best of times, none of the firms could make a profit.
What hope did they have when the credit cycle turned?
On 22 September 2020, I wrote in The Rum Rebellion:
‘…one of the co-founders of “buy now, pay later” Afterpay is a millennial.
‘As a boomer (heavily influenced by my parents [frugal] approach to money), I think: “Who would be stupid/desperate enough to use a service like that?”
‘But obviously, there are plenty of people…people who have been born into the [credit bubble] build-up phase.
‘The hardship endured by my father’s [Great Depression] generation is completely foreign to them.
‘Knowing the stages of the debt cycle AND the lengthy time frames involved is hugely important in understanding the trends at play within society…
‘In the upcoming bust, the pattern is likely to repeat itself…a large percentage of first- and second-generation wealth is going to be lost in a Depression-like market collapse.’
Around the edges, that Depression-like market collapse has started.
Crypto lender Celsius is having some liquidity issues…who would’ve thought that could have happened (tongue is firmly in cheek)?
My disdain and distrust of-all-things crypto is very much on the public record.
Where does my (visceral) derision for cryptos come from?
Experience.
If you’ve been around markets long enough, you can see this is a massive con hiding in plain sight.
By the way, I see the very-much-untethered (to the US dollar) Tether [USDT] lent US$1 billion to Celsius…could the prospect of Celsius defaulting on this loan cause a run on Tether?
Watch this space!
Everything in the everything bubble is connected. What may appear to be isolated cases of collapse are actually bit parts of a much larger unravelling in excess, speculation, and downright stupidity.
How stupid is stupid?
High-flying hedge fund, Tiger Global (or, more to the point, former high-flyer), has lost 52% in value since 1 January 2022.
As reported by The Wall Street Journal on 6 June 2022:
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| Source: WSJ |
The 9 June 2022 issue of The Gowdie Advisory included this background on Tiger’s ‘rigorous’ investment process:
‘In August 2021, boutique investment bank, AGC Partners, wrote this Investor Profile on Tiger Global:
“Tiger, like its namesake, has become the most feared predator in early and later-stage growth technology private funding.
“Because of their exceptional performance record and large check [cheque] writing ability, not only do they have the cache of being among the elite technology growth investors in the world, but they move much much faster with far less traditional due diligence.
“Tiger is also willing to pay more than anyone else, which makes it very hard to refuse their funding.
“Tiger has now made 600 investments since 2013, among them some of the most successful young technology companies in the world.
“With one of the highest investment velocities of any fund, Tiger has already invested in 187 companies in 2021 with a median check size of $114M and a median post-money valuation of $1.45B.
“As an LP [limited partnership], you would typically hesitate to invest in this buy high, shotgun style of investing, but in this crazy marketplace, it is working.”
‘Here’s the checklist on Tiger’s particular set of investment management skills:
- ‘Conduct far less traditional due diligence.
- ‘Be willing to pay more than anyone else.
- ‘Use a buy high, shotgun style of investing.
- ‘Make sure you operate in a crazy marketplace
‘And that, dear reader, is how you [as a hedge fund manager] make a multibillion-dollar fortune.’
Over the years, I’ve written many articles on the pitfalls of hedge funds and how, in the main, the managers invariably fail to outperform the (benchmark) index.
An article I wrote in August 2020 included a link to research conducted by Monash University:
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| Source: Monash University |
In a boom, investors really don’t care about research reports or historical context. It’s all about returns…the higher the better.
The failure to ask, ‘How are the returns being generated and can the performance be maintained?’ never ceases to amaze me.
After reading the AGC Partners Investor Profile on Tiger Global’s investment management style, you have to wonder…how stupid can stupid be?
There’s a direct correlation between markets and intellect…the greater the boom, the greater the loss of brain cells.
‘Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.’
Albert Einstein
As the deflation of the everything bubble gathers momentum, we’re going to be treated to story after story of man’s infinity stupidity.
What goes UP, comes DOWN…and this collapse is only just getting started.
Regards,
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Vern Gowdie,
Editor, The Daily Reckoning Australia
