While regular people stumble around brainwashed with the “you can't time markets” mantra, many private equity managers capitalized famously in the late bull market ending 2007–by timing their own exits perfectly.
This morning's Wall Street Journal points out the painful truth for unsuspecting and now decimated investors. See Private Equity's Ultimate Buyout:
“Two years ago the founders of Blackstone, Fortress Investment Group and Apollo Management were the toast of Wall Street. Now investors who bought into their vision know what getting toasted really means: Their shareholdings in the listed vehicles are down between 85% and 95%.
But not everyone is in the dumps. In 2007, the firms' key principals — comprising just 11 men — took $6 billion in cash off the table. The combined market value of those three firms today? Roughly $6 billion.
Take Fortress. It came out of nowhere in February 2007 as the first U.S. listing of a private-equity and hedge-fund firm. The firm's five principals — led by founder Wesley Edens — cashed out just prior to the IPO, selling 15% of the company to Nomura Securities for $888 million. On top of the Nomura proceeds, the principals received an additional $409.2 million in distributions from the company just before listing.
That roughly $1.3 billion dwarfs Fortress's $620 million stock-market valuation — with the stock down 95% since the IPO.
Blackstone's June 2007 initial public offering, meanwhile, yielded $2.6 billion in cash proceeds for three individuals. Co-founders Pete Peterson and Stephen Schwarzman banked $1.8 billion and $684 million, respectively, while President Hamilton James received $191 million. The firm's market value stands at about $4.5 billion, down 85% since the IPO.”… there is more if you care to read the whole list of examples.
Lest US stars get in our eyes. Canada also had some bull market heroes who sold their companies at peak cycle to hoards of greedy buyers. The Sprott Inc. IPO in May of 2008 was an incredible feat of timing for its founding principals. See Does Sportt's IPO signal end of rally? We now know the answer to this article's rhetorical question was a resounding “YES”:
“Sprott Asset Management Inc.'s initial public offering this week will make a billionaire of the hedge fund company's founder, spurring speculation Canada's decade-old commodities boom is ending, investors say.”
Having founded Sprott Asset Management in 2000, right at the start of the credit driven boom in commodities, and selling the company public almost exactly at the peak of the cycle in May 2008, Mr. Sprott made himself a billionaire. Very impressive timing indeed. Unfortunately for those that blindly bought the IPO, their timing has been a horror show.
From the issue price of $10 in May 2008, Sprott Inc. shares traded down 75% to $2.50 by November 2008. And the flagship Sprott Canadian Equity Fund lost 43.7% in 2008 alone. The Canadian Equity Fund losses in 2008 evaporated all of the previously impressive gains of the prior three years, making compound returns -3.66% a year for 3 years ended Dec 31, 2008; -13.05% a year for the Sprott precious metals fund, and -23.70% a year for the Sprott Energy Fund. See Sprott’s web site for performance numbers.
None of this was illegal. The principals simply used their expertise and knowledge of cycles to cash out at the top. They were smart to do so. Those that bought were the fools.
These transactions were not unique. They come from a long-tested formula on how to become super-rich in business. Invest at the start of a cycle and sell out anywhere near the top.
My only quibble is with the hapless slaughter of innocents in the process. I cannot count how often I meet people who start off their conversation with “I know you can’t time markets but…” This is when I know we will have to spend considerable time deprogramming their brainwashing before we can proceed. The public has been brainwashed by the buy and hold propaganda of the financial industry. They have spent billions “teaching” us all the falsehoods that we “know.”
To move forward, we must step into the detox chamber and start from scratch. Lay back…relax…breathe…and say after me… yes, we can time markets, yes we can. We do, because we must, otherwise we will be the ones left without a chair when all the music stops.
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Cory’s Chart Corner
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I think it's a bit unfair to group Eric Sprott with the other private equity/hedge fund principles that you listed in your post.
True, Mr. Sprott benefited enormously from his IPO and his net worth increased tremendously as a result; however, he did not cash out. I don't recall the exact numbers but he still hung on to 85%? of the firm. So he is feeling more pain, as a result of the drop, than any other individual holder of his firm.
Cheers,
Wayne
Hi Danielle,
The markets seem to be wanting to test their respective lows. I am wondering if this recent activity is considered testing? Or do the indicies have to actually hit the previous lows (plus or minus a few points)?
Thanks,
Parm
The Financial Industry is a juggernaut of false information. It it the best way to get you to hand over your hard earned money so they can do very little and put your money on autopilot. Problem is that the autopilot portfolio literally crashes ever so often. Autopilot investing does not work. Thank you Danielle for being that voice for all of us fighting back against this “brainwashing.” I will continue to try and convince those I know to take responsibility for their investments.
I think one has to be quite careful about moral judgement in financial matters. After all none of us really “makes”money from any of our investments. We are all simply trying to get for ourselves a bigger “share”. For every trade,allocation ,or timing call there is a winner and a looser (sure we can construct win_win scenarios or equally loose-loose events but ultimately it is all about how the whole is proportioned. While I am all for making it fairer for the small investor the logical extension of this fairness is to make it so that no investment really is helpful unless it truly adds to the whole pie.
yes Parm, we consider this to be testing mode. No verdict yet.
Aren't we all playing a game of greater fool? We try to buy low and sell high, before the stock drops again. For that to work the system must conjure up a believer, one who expects our shares to go up higher still. Hence the need for the never ending promotion, the RRSPs, TFSAs, RESPs and other vehicles enticing the public to throw its money into the whirlpool. We try to profit by betting against other players and, not unlike what happens at any poker table, the participants with the least experience get burned. Some of the big boys may be particularly nasty, but can any of us claim the moral highground here?
JC
Those reading moral judgments into this article are missing my point. My point is not about the people that cash out but rather about the blind masses who are told to buy at any price and hold. Markets move in cycles and that those who do not execute their investment strategies and their own businesses to be tactical around this reality get financially devastated time and again. My point is an effort to help the many who are not in on this secret yet; to wake sleepers up.
Who's telling the “blind masses” to buy and hold at any price?
No credible investment professional says that. That's a strawman argument you've created.
I wish it were a strawman. Perhaps it is more accurate to say that the bulk of the industry advises people to buy and hold at “every” price. That is the very foundation of the long always passive strategies that are sold far and wide as conventional wisdom.
I suspect you are a “Financial Advisor” Many, many of us have been told time and again to buy every time we have money and hold on because markets always go up eventually. At 67 I've had my fill of Sales Reps. posing as Financial Advisors.
Danielle is not creating strawmen.
BillB
The average share of stock is held of 3 months and is getting shorter all the time.
If buy and hold were conventional wisdom, you would see average holding period in years not months.
Conventional wisdom today is portrayed by the Jim Cramers of the world. It's chasing momentum and rapid fire trading. The stock market has become a speculative casino.
Buy and hold has been dead for some time.
Danielle, perhaps you have taken my comment a little too personally. From the public’s perspective (and from mine) you are one of the good guys. I recall you advising your readers to take their money off the table, perhaps pay down their mortgages and so on. Your book seems to have spawned a mini-industry with other authors and whistle blowers releasing “industry revelations” of their own.
Yet this is a cut-throat game and we chose to play it. When you properly time the market and make money for your clients there is indeed the other side of the equation and someone elses customers have lost big time. That’s just the way it is.
Outside of this blog, TV appearances and your very good book your services are available only to high net worth clients. While I’m one of your lucky few readers who might qualify, I gather from the comments I read on this site that most do not. The warnings you and other authors in your genre issue are welcome. Still, they fall in the category of a well experienced boxer warning a potential challenger: “if you step into my ring, I’ll hurt you”.
That’s just the nature of the game. I hope my contribution here wakes up a few sleepers, too.
JC
Investing isn't a personal competition. That thought process is likely to lead you to some bad decisions.
Worry about your own methodology and execution. It doesn't really matter who else might lose or win.
Danielle marketing angle is that she is different because she believes in timing the market and criticizing the bulk of the other professionals in the industry. That's her marketing niche. That's what she's selling. She rails against the sales culture of the money management business but she “sells” as much as anyone. Why else would she write a book, maintain a blog and do countless interviews and speeches? She's spinning and selling big time.
I cannot speak to Danielle’s motives as I don’t know her personally. I think that communicating her ideas has served her readers well. As for my methodology, I don’t really worry about other players or how my actions might affect their game or net worth. I was simply trying to convey my observations of what the stock market is. There will be losers and winners, and that’s that.
Recent scandals are nothing new. One only needs to read “The Money Game” or “Rogues To Riches” to see that the more things change the more they stay the same.
I appreciate your reply. It gets a bit confusing following contributions to this blog as there are many “anonymous‘” . It might help if one was to use a nickname keeping it consistent at least throughout each thread.
JC
I too agree that Danielle is performing and important service. I also agree with the general premise that the stock market as presently constructed has a lot of casino like properties. I also disagree with profiting from insider information and conflict of interest as outlined in the original article.
Wealth mostly acquired from work and enterprise can be preserved by diversification among different asset classes and holdings. This requires a fair bit of juggling. It is Dynamite. The point of this blog
I was licensed in 1966 as a Registered Representative and currently practice as a Registered Investment Advisor Representative. I think I am as qualified as anyone to comment here. All of the comments above are true! There are those who experience the equities markets as shooting dice, and others who expect to invest and grow their capital. It would be absurd, though, to suggest that Wall Street has not promoted the latter. I would challenge all of those above who think Wall Street has prepared their clients to experience investing as gambling to post a copy of those marketing articles. The regulatory agencies would be very happy to visit those firms. It is a fact that the agents of every securities firm are instructed to sell shares and mutual funds as long term investments, and every dip in the averages is an opportunity to “dollar cost average”. Hold on for the rally! 99% of all agents are never told that an investor who has held on for a 50% loss will need to “hold on” for typical 6% market returns for the next 12 years, just to get his money back. In my experience, I have never had a Wall Street firm tell me, or my clients, to get out the equities market in advance of an easily foreseen decline.
Bill H.
Thanks BillH,
Coming from someone who has been in the industry for over forty years I tend to believe you (as well as my own experience) over those who protest too much.
If anyone is in doubt Google the question Where are the Clients' Yachts?
Thanks again,
BillB
Richard Bernstein at Merrill Lynch told everyone to get out of equities before the crash. So did Liz Ann Sonders at Charles Schwab.
Maybe you aren't listening to the right people?
So Merrill Lynch's Richard Bernstein told every one to get out of equities?
Here is a quote from him, in his November update, after the market top.
“The popular press is full of reports of famous investors moving back into equities. However, history shows quite clearly that being early can carry substantial performance penalties. Despite the popular consensus, it's historically been better to actually be somewhat late.
“We continue to rely on our indicators to guide our way. Until they show us that the risk/returns are skewed in investors' favor, we are happy with our current themes: Treasuries and very high quality bonds, developed markets, defensive sectors, and secure high quality dividend paying stocks.”
it does not sound much like is telling his clients to get out of the market…..rather he telling them they need to be in the right sectors and/or stocks.
and that is typical of the advice that staff of the big firms were giving the brokers and clients.
Hell, I worked for Francis I DuPont, Smith Barney and Paine Webber. There was always someone on the staff talking about being defensive, in every kind of market. Being defensive is not getting out of the market, it is being in the market smarter …what ever that means.
and needy brokers and fearful clients went for it….. and watched the losses mount in declining markets.
The only successful strategy long term is to avoid losses. I am so pleased that Danielle is willing to offer that strategy to the public. She is being very bold and courageous to present the truth to the public….most in this business are not willing to do that, even when they personally turn to cash as the best strategy.
Everyone in this business for any period of time knows what it would mean to their income if their customers were in cash or short term equivalents for any period of time.
BillH
One last thought, based on my experience….
Making money in the markets is easy…….keeping it is very hard. Besides the lucky investors (and they exist) I think I can count 4 or 5 investors who have made and kept money with the buy and hold strategy.
BillH