Verdad Advisers

“The Humble Investor”, the new book by Daniel Rasmussen at Verdad Advisers, is a fantastic book on markets and investing. Like his weekly emails, Dan does a great job of synthesizing mountains of financial academic literature. Highly recommend! My highlights: 1. Dan just absolutely dismantles the modern-day private equity industry and highlights the massive headwinds it faces in a sustained high-interest rate environment. Two quotes: “PE-backed companies are significantly more levered than publicly listed companies. [Studies] found that the average ratio of net debt to enterprise value has been approximately 65% at deal inception. The typical Russell 2000 small-cap company is levered at about 16%, while the median large-cap company in the S&P 500 is levered at about 18%.” “Since the Global Financial Crisis of 2008, US public-sector pension funds realized a negative alpha of approximately 1.2% per year, virtually all of which is associated with their exposure to alternative investments.” 2. Highlighting the obvious ticking time bomb in Private Credit, two fantastic stats on this relatively new industry: “This hot asset class grew from $37 billion in dry powder in 2004 to…$244 billion in 2021, according to data from Preqin.” Note – this is likely over $300 billion now. “Many of the largest private credit firms have BDCs [business development companies] that directly fund their lending. BDCs offered 8-11% yield – or more – on their vehicles from 2004-2019, yet returned an average of 6.2%, according to the S&P BDC Index.” 3. In arguing for the importance of humility to be a good investor due to the many known unknowns in the market, there are a couple of things that are known. One was of particular interest: “[I]n general, volatility is actually quite persistent and quite easy to predict….Next month’s volatility doesn’t follow a random walk; it’s highly correlated with the previous month’s volatility.”?

I very much look forward to reading this. If you don’t already follow Verdad Advisers and read their work I strongly recommend that you do.