Juggling Dynamite

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.

Sorry the blog has been off line the past two days, the host company was making some changes and their seamless transition proved not so seamless.
It has been quite a two days. Yesterday's downside action was strong and broad, the fact that North American indices rallied off key support today may prove constructive. Since Christmas we have been expecting a re-test of the November lows. We may have got that yesterday. Still too soon to tell what longevity this bounce may have. We will have a better idea by the weekly and then monthly close at the end of January. This month has already been one for the history books. The next two weeks will be significant either way.

By Young Advisor
What’s the point any more?…
I’m a young advisor with only 4 years experience in the financial industry. But I must say that I’m losing interest and confidence in this business. It all started for me with Freedom 55. I left that stink hole and was hired by TD Waterhouse. I parted from Waterhouse and began working at the bank. What do they all have in common? SALES! And this, in my opinion, is a BIG problem in this industry.
Freedom 55 was a huge eye opener for me. I developed an interest in finance and met someone there, for what I thought was information only, and next thing you know this guy is offering me a job. As long as you’re a good talker, they’ll hire anyone off the street…literally.
I must emphasize that I had absolutely no background in finance…and I mean NOTHING!! They offered me courses, fully paid (LLQP and IFIC), which encouraged my decision. After six weeks of intense studying, I was finally appointed the honorable title of “Financial Advisor or Planner or London Life’s Monkey Boy”…whatever works, but I didn’t have a clue what I was doing. I was just legally able to sell investment products. And if you need to pay the bills, it becomes a challenge to put the client’s interest first.
TD Waterhouse was a much better experience. If you really want to learn about the stock market, a discount brokerage is the way to go. I learnt so much there and met many intelligent people who were passionate about the market. But once again, the company had mandatory sales goals, which they constantly pushed on you. The fact that it was a call centre wasn’t too appealing for me, either. I got my experience, completed my Canadian Securities Course exam and needed to move on.
“In banks we trust.” These guys are all about sales. Even the tellers are out to get you. Nobody had much knowledge of investments or the markets. Because I came from Waterhouse, they looked at me as though I was a god. They pay you peanuts and set high sales goals for your absolute pleasure.
They put fake dollar values on the products they sell. Lending was the highest paying product, such as mortgages or home equity lines of credit. Every sales person would brag about the size of credit they sold, which in turn gave them huge “fake” sales dollars towards their goal (while earning the same peanut salary, go figure).
Every action was for their benefit. There is no compensation for doing what’s in the best interest of the client. Just escorting them to the safety deposit box was a waste of time. And there is constant annoying pressure from management to make those sales.
By the way, all the investment decisions are based on what the computer says. And the computer is not taking into account our current economic crisis.
Don’t get me wrong, I have met some great advisors. I just think they’re harder to find. As long as commissions and sales goals are in the picture, the industry becomes confused about ethical practice. And in return, trust is more difficult to establish. I can’t even find much reason for myself to keep going. I’ve lost the passion.
So here I am today, I left the bank and I’m trying it out on my own. It’s difficult to begin a new book of business. Especially with a young face like mine. And I couldn’t charge a “fee for service” with my limited years of experience. But I genuinely enjoy educating my clients without the pressure of sales.
I’ve always felt awkward about chasing clients for their money. I can’t seem to accept it. I fully understand the importance of sales in any successful business, but I think managing people’s money is a very sensitive subject. There’s a big difference between selling a person shoes and selling the idea for them to give you all their life savings.
I truly love this business; I just don’t feel comfortable in it. I even started the PFP course with the intention to get my CFP. I just don’t see the point any more.