The wisdom and thesis of Dan Rasmussen (@verdadcap) in a tweet storm of quotes from our conversation (FM EP.15)
@verdadcap 1. In times of easy money, a lot of stupid things work. A lot of unprofitable companies see massive increases in stock price. A lot of bad ideas get funded. Some of those bad ideas turn out to be good ideas.
@verdadcap 2. Everything you do should be based on logic. You should test every rule empirically - test it in the US, test it in Japan, test it in Europe. Does it work across all of them?
@verdadcap 3. If so, that's the way you should evaluate investing decisions and investing strategies. Not based on stories, not based on idiosyncratic things, but based on long-term evidence to prove out logical, empirical hypothesis.
@verdadcap 4. There are two broad reasons why you pay higher prices for a company. 1) A higher growth rate. What we found empirically was that growth is really hard to predict, if not impossible. 2) You might pay a higher price for a higher quality business.
@verdadcap 5. As you pay higher prices, you get hit in private equity in two ways. First, you can't get that multiple expansion anymore, and second, you increase bankruptcy risk by taking on so much debt.
@verdadcap 6. If you think about the common error in private equity, it's paying too much for future growth that doesn't end up happening and then you get in trouble and you put on too much leverage.
@verdadcap 7. So much of private equity today of LBOs is B or CCC type quality that I would say 25% to 30% of LBOs would go bankrupt in a normal business cycle, normal recession with normal levels of delinquency.
@verdadcap 8. If we are doing things other people are unwilling to do or unable to do - unwilling because it's tedious and boring, unable because of capacity issues - and we can do that, that should be where alpha is.
@verdadcap 9. You very quickly get to the idea that true small value, true deep value, true Fama-French value, has a very limited capacity.
@verdadcap 10. One of the things that you learn about being an investor is if you're buying something, someone else is sell, and you both have good reasons for doing so. You develop this intuitive sense that for every pro there's a con, for every argument there's a counter argument.
@verdadcap 11. There are hard problems and impossible questions in finance. There are no easy questions.
