Cash…or lack thereof
Cash as a percentage of a client’s portfolio has reached record lows not seen before at Charles Schwab over the last 25 years. While no chart on its own tells a full story, we do find the above indicator to be rather telling of today’s investment environment – as Buffett once said, “be fearful when others are greedy and greedy when others are fearful”.
Will the emergence of more winner-takes-all markets challenge economic growth and innovation in the future? That’s the question being addressed in Farnam Street’s most recent musings.
As venture capitalist Marc Andreessen noted in 2013, “In normal markets, you can have Pepsi and Coke. In technology markets, in the long run, you tend to only have one….The big companies, though, in technology tend to have 90 percent market share. So we think that generally, these are winner-take-all markets. Generally, number one is going to get like 90 percent of the profits. Number two is going to get like 10 percent of the profits, and numbers three through 10 are going to get nothing.”
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We are making too much of a habit covering Bezos in recent months, but his life lessons and long-term optimism in this interview are certainly worth a watch. A bright spot in an otherwise somewhat downbeat edition of Insights.
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Making money in any one particular sector isn’t supposed to be this easy. Needless to say, blind buying of most stocks (particularly in the Cannabis sector) almost irrespective of management pedigree or execution capability has led to meaningful gains for almost any investor who has held on long enough.
While we don’t doubt the long-term prospects for the sector, we do question the degree to which all companies live up to the market’s expectation. To us, it’s reminiscent of the early 20th century when investors were hyping automobiles. Even if you did invest with Henry Ford, there were still two bankruptcies between you and the Ford Motor Company of today.
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In our opinion (and in Howard’s), the easy money has been made. While we have no idea as to when returns will begin to suffer beyond this month, we do believe the current market environment warrants a less aggressive stance compared to years past. In his latest memo, Howard discusses where he believes we are in the current cycle alongside some notable observations:
At the beginning of 2018, 2,296 private equity funds were in fund-raising mode, seeking $744 billion of equity capital. These are all-time highs
The average debt multiple of EBITDA on large corporate loans is just about the previous high set in 2007; the average multiple on LBO loans is just below the 2007 high; and the average multiple on middle market loans is at a clear all-time high
Student debt has more than doubled since the Crisis, to $1.5 trillion, and the delinquency rate has risen from 7.5% to 11%
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A sign of the times or the new normal? As noted by CNBC, 83% of the U.S. companies that have gone public so far in 2018 had lost money in the year leading up to their IPO – the highest proportion since 1980.
In our opinion, many market participants have forgotten that markets are cyclical (until recently) – venture capital and growth equity are no exception. Some of the companies that came public recently will no doubt offer investors compelling long-term returns… the issue is that every company is being treated with unbelievably generous assumptions. We suspect that gravity and due time will lead many to second guess their investments in recent IPOs:
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