1/ "They call 'em illiquid assets for a reason."
Illiquidity is viewed as a disadvantage, usually a one-sided argument from the "stock guys".
They work for a Wall Street shop, so naturally, they'll talk up whatever they know & discredit other ways of investing. However...
Illiquidity is viewed as a disadvantage, usually a one-sided argument from the "stock guys".
They work for a Wall Street shop, so naturally, they'll talk up whatever they know & discredit other ways of investing. However...
2/ ...you don't see them having a balanced debate, entertaining the other side — the benefits of investing in private assets.
The facts (stats) are, the wealthier an individual becomes the more likely wealth was made/kept in private equity or real estate holdings. Not in 401ks!
The facts (stats) are, the wealthier an individual becomes the more likely wealth was made/kept in private equity or real estate holdings. Not in 401ks!
3/ If executed correctly, you'll stand to make a fortune investing in private deals a lot faster then via index funds.
And you'll achieve those "unbelievable" returns with a whole lot less risk. Therefore, today I want to discuss just some of the benefits private assets offer.
And you'll achieve those "unbelievable" returns with a whole lot less risk. Therefore, today I want to discuss just some of the benefits private assets offer.
4/ Because the asset class is illiquid, volatility is very low. Private assets do not fluctuate like crazy. Moreover, sentiment & newsflow doesn’t affect the price on a dime.
Volatility is an opportunity for top traders only. It actually hinders performance for most investors.
Volatility is an opportunity for top traders only. It actually hinders performance for most investors.
5/ But even these top traders who've traditionally taken advantage of volatility — like the legendary Stanley Druckenmiller — are claiming their performance is struggling in the middle of algorithmic, super-fast, computer trading in the public markets.
6/ When it comes to private real estate, you do not have to worry about algos & computer trading affecting your investments. Nor will you experience prices swinging around like crazy. Prices trend in direction of fundamentals, based on supply & demand.
This is what you want!
This is what you want!
7/ "A 2014 study claimed that one positive impact of algorithmic trading is that it made stock markets more liquid and efficient."
I'm not sure about you, but that is not a positive for me. Due to their illiquid & inefficient nature, private assets offer an illiquidity premium.
I'm not sure about you, but that is not a positive for me. Due to their illiquid & inefficient nature, private assets offer an illiquidity premium.
8/ What is an illiquidity premium?
Those focused on private investments have a larger cost of entry, as well as the inability to exit so easily. Market forces have traditionally compensated investors with illiquidity premiums by giving a much higher return.
Those focused on private investments have a larger cost of entry, as well as the inability to exit so easily. Market forces have traditionally compensated investors with illiquidity premiums by giving a much higher return.
9/ What I also like about the private investment deals is the people I work with & partner up with as co-investors.
From my experience, a partnership of owners or families are usually focused on very long term profits.
Not on the next quarter's results (Wall Street nonsense).
From my experience, a partnership of owners or families are usually focused on very long term profits.
Not on the next quarter's results (Wall Street nonsense).
10/ What about risk management? Liquidity lets me cut my investments quickly.
Yes, it does. However, ask yourself what does the inability to exit so easily do for you?
Many smart investors, including Buffett, would actually argue it makes you a better investor!
Yes, it does. However, ask yourself what does the inability to exit so easily do for you?
Many smart investors, including Buffett, would actually argue it makes you a better investor!
11/ "Our favorite holding period is forever." — W Buffett
“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.” — W Buffett
“An investor should act as though he had a lifetime decision card with just 20 punches on it.” — W Buffett
“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.” — W Buffett
“An investor should act as though he had a lifetime decision card with just 20 punches on it.” — W Buffett
12/ Buffett made a fortune in the public markets, which contradicts what I'm tweeting here. However, you have paid attention to Buffett's wisdom & execution over the years, you probably observed he behaves as someone focused on private business as opposed to public share price.
13/ Due to the lack of liquidity private assets also get less affected during downturns. While publicly traded risk assets become highly correlated & overshoot to the downside, illiquid assets have a very low correlation to stocks & bonds making them great portfolio diversifiers.
14/ However, it's not only the correlation story. Fundamentally sound illiquid assets, such as real estate in prime locations, tend to have far lower drawdowns relative to many other assets, especially the public ones. This is true even during some of the worst financial crisis!
15/ Illiquid assets are harder to value, creating amazing opportunities for negotiators. They do not trade tick by tick on the exchange where everyone knows the quoted price.
Therefore, wise negotiators can squeeze a lot out of an asset price by just doing the talking.
Therefore, wise negotiators can squeeze a lot out of an asset price by just doing the talking.
16/ As stated above, illiquid assets are harder to value and the inefficiency factor of the markets offers incredible opportunities for those who have done their homework.
Liquid real estate in central Manhattan or Western London means everyone knows everything. However, if...
Liquid real estate in central Manhattan or Western London means everyone knows everything. However, if...
17/ ...you go stay away from the competition, take the road less traveled by focusing on markets with high inefficiency & you do your thorough homework — you might be positively surprised with your results.
At times, I've made returns which others don't believe are possible!
At times, I've made returns which others don't believe are possible!
18/ "Every time I’ve strayed from the beaten path I’ve never regretted it." — Tori Murden
19/ In late 2017 @morganhousel wrote: "Giving up some liquidity not only offers additional returns; it guards against investors’ temptation to misbehave, which is the single biggest problem in public markets."
I completely agree!
I completely agree!
@morganhousel 20/ Some famous investors have been forced to convert from hedge funds to a family office, but they still only invest in public markets.
On the other hand, @UBS does a great study of global family offices (super wealth families), focusing on their asset allocation.
On the other hand, @UBS does a great study of global family offices (super wealth families), focusing on their asset allocation.
21/ What I find interesting about the super-wealthy:
• 46% (half) of the portfolio is in illiquid assets
• public equity is 28%, private equity almost tied at 22%
• direct real estate exposure is higher than all bonds
• direct real estate is the 3rd largest asset exposure
• 46% (half) of the portfolio is in illiquid assets
• public equity is 28%, private equity almost tied at 22%
• direct real estate exposure is higher than all bonds
• direct real estate is the 3rd largest asset exposure
22/ Are illiquid investments risky? Yes, they are, just as liquid ones are, too. Both offer some kind of advantages & disadvantages for investors.
I hope this thread has created a more open-minded perspective towards illiquid assets. In 2019 & 2020, it is easier than ever...
I hope this thread has created a more open-minded perspective towards illiquid assets. In 2019 & 2020, it is easier than ever...
23/ ...to get exposure to private investments.
Unfortunately, just like their public counterparts, the majority of these "deals" are not very good.
Whether it's public company pick or private real estate opportunities — the deal selection will always be a key!
Unfortunately, just like their public counterparts, the majority of these "deals" are not very good.
Whether it's public company pick or private real estate opportunities — the deal selection will always be a key!
24/ In the famous words of Howard Marks:
"Investment success doesn’t come from buying good things, but rather from buying things well.”
As I always say: focus on the business deal over a business cycle. Deal selection is the key!
"Investment success doesn’t come from buying good things, but rather from buying things well.”
As I always say: focus on the business deal over a business cycle. Deal selection is the key!
25/ I believe we are at an important inflection point in the investment cycle. As central banks have printed vast amounts of money since the GFC of 2008, public assets such as stocks & bonds have become overpriced, and their future expected returns will probably disappoint.
26/ Estimates show that the United States large-cap stocks will most likely deliver around 3 to 4 percent p.a. over the next decade, while most fixed income will be much lower — considering where government bond yields are around the world.
27/ Gaining exposure to the right private deals should increase risk-adjusted returns of your portfolio meaningfully.
This will be one of the ways investors will outperform index funds & balanced 60/40 portfolios in the coming years.
However, deal selection will be the key!
This will be one of the ways investors will outperform index funds & balanced 60/40 portfolios in the coming years.
However, deal selection will be the key!
28/ Don’t be one ☝🏼 dimensional. Grow!
29/ While the stock market & other publicly traded instruments are a whole lot sexier than real estate & building / running private businesses... if you want to achieve financial independence & meaningful wealth, maybe try & study from other wealthy people who've already done it!
30/ The final quote of the thread goes to the great Peter Lynch:
“Know what you own, and know why you own it”
“Know what you own, and know why you own it”
