YouSaid · the spoken record

Dan Rasmussen

lines on the record: 69
first: 2018-02-27
most recent: 2018-02-27
sittings or episodes: 1
sources: podcast

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“Such a wonderful question. And, you know, I think for me, my mother from age probably when I was little, barely able to talk until, you know, I could read on my own, would probably spend an hour to a day reading to me. And I think that instilled a lifelong love of learning in me. And I'm sure it was boring for my mother to read book after book after book. But her self-sacrifice and time she spent reading to me, I think really inspired in me a love for reading, which has shaped my entire life and career. And I think that that was probably the greatest kindness, and it was done. I think sheerly out of love and self-sacrifice.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“That they made for their clients. So it wasn't that the financial advisors were about to screw their clients. Far from it, they were doing the things they thought were best. They were just making bad decisions. They had bad ideas. And I think that's sort of a better picture of a lot of the parts of Wall Street. It's not that these people are bad people. They're trying to screw people. It's just that they are operating from frameworks that don't work, informed by ideas that don't work, believing theories and philosophies that don't work. And I think it would be fun to sort of continue to expose some of them and then to offer alternatives that are based on reason and logic and empiricism and the scientific method, which are things that anyone can access. Anyone can say, hey, what's the evidence for that? Let me weigh that evidence and see whether it makes sense. And it doesn't require you to have spent 400 hours studying the vacuum cleaner industry.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“I've been thinking about it. Is there sort of a theme to the pieces I've been writing about Porter's five forces or modern finance theory? And I'm working on a few others. But I think if there's one theme to them, or two themes, one is that most good ideas don't work. And I think the second would be that experts who are often purveyors of good ideas that don't work are often no better or worse because they're more confident than laymen armed with common sense and logic. And so I think it would be fun to write a book, maybe not bonfire the vanities, but maybe bonfire the bad ideas or something and just talk about because I think many, there was a great study, I forget if you posted it on Twitter or someone did that basically they looked at financial advisors and many financial advisors make horrible decisions but they then looked at what are the financial advisors do with their own portfolios and they actually made the same bad decisions”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Smelled like, you know, how would they have felt? What were their emotions have been? And to paint that by using other contemporary sources. So really the process was, although writing about history probably a process or a thought process that is not dissimilar from the way I approach investing.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“I had a line for each of the individual participants in the revolt where they came from, what we knew about them, where they came from, from those property records and legal records, and then took those. And then I got old land maps, and then from the time, and I shaded in if there were 10 slaves or more red, five to ten, orange, less than five, you know, et cetera. So you could actually see visually mapped where they came from and then marked each event where we knew where it had happened on the old land maps and then use Google Maps to say, okay, well, how would how long would it have taken to walk from point A to point B, et cetera, so we know that if this happened at 10 a.m., this other event, which we know from the legal records happened here, must have happened at 5 a.m. And so it was this huge process of sort of detective work and using sort of empirical tools or quantitative tools in some sense to unpack history. And then once I had the sort of bones of the story, the architecture of it done, to then go back and say, you know, what would it have looked like, felt like.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so it's sort of funny. I mean, I sort of approached the study in a very similar way to who the way I invest. So, you know, if you look at the history of the slaver vault, what's interesting is that there's none of the slaves ever wrote down anything that they did, right? There are no letters, no diaries. They were illiterate. So we actually have no way to know what they were thinking or doing. And so constructing the narrative of what happened in the revolt was actually quite different because most of the records we had were actually wills and testaments, land records that sort of said, well, I had 80 slaves five years ago and now I have 20 court cases, which were basically these lists where they said Kuk was a 23-year-old slave purchased for $800 who used a machete in the cane fields and he was executed on X date for insurrection. And so what I did to sort of decipher this is took all this data, put it into Excel, into this big data base where each”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“That progress moral compromises or great sins were made. And I think if you look at the American South in particular, you see that in the greatest relief where tremendous economic progress is coming at the cost of literal enslavement of people, of a lot of brutality, and then to see those enslaved people rising up and trying to overthrow that system, but doing so in a way that was incredibly obviously incredibly violent. That's the only way to do it, but destructive. And to think about those tensions between good and evil economic progress and slavery between a violent, destructive uprising, but then also the concomitant brutal violence of slavery. And I think it's just such a fascinating place to study, you know, the human condition and what drives people and the trade-offs that this country has made and that we all make.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, I wrote a book as my senior thesis. I studied the history and literature of the 19th century American South with a focus on slavery in college. And I wrote my senior thesis about a slave revolt in New Orleans that was actually the largest slave revolt in American history. And I think what interested me about it was this sort of, I think when you look at American history, right? First and foremost, America is an absolutely amazing country, one of the most amazing enlightenment reason, the rise of capitalism, free market democracy, right? I mean, those forces have driven such a huge amount of human progress. These are some of the best ideas humans have ever had. I think it's very easy to look at American history, therefore, and write this narrative of tremendous progress and to do so accurately. But I think some of the most interesting literature, the most interesting things from a moral or philosophical perspective are to look at those places where in the service of”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Of base rates and even Tetlock says, interestingly enough, in his super forecaster study, he actually does not just stop. His super forecasters don't tend to just stop at the base rates. They actually do make individual more qualitative adjustments at the end after they've finished doing a base rate assessment. And he's found that that does work. And so I think that is probably the field that I've learned the most from. And I think it's the most contrarian too. I mean, I think, you know, so few people are familiar with the forecasting literature and so much of our industry is tied up in forecasting, sometimes unwittingly, that it's probably the single most impactful thing I think any investor can read.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“The single most influential thinker to me is Philip Tetlock. I mean, I think his book Expert Political Judgment and then more recently Super Forecasting. And he's one of Daniel Kahneman's students. And I think that investors, we are forecasters. That is our job. And we have to be reading the forecasting literature. And Tetlock in particular has done so much good work on how to make better forecasts, what bad forecasts look like, how to make good decisions about the future. What are the, even he does things like, you know, what's the duration of a forecast, right? Like how accurate, how far into the future can we our forecast see? And I think I have just learned so much from studying his stuff and then comparing it to every part of my own process and saying, well, gee, you know, if Tetlock says it's nearly impossible to predict outside of a one-year horizon, certainly we should be only thinking, and why would we ever think in two or three year just focusing on the use of”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I'm with you, Patrick. I think size, at least in our research, especially in Japan and outside the US and more recently in the US, does not seem to be overly predictive. And we don't wait it very much, but we do say we do leverage small value because most of the levered value opportunities are small. So it's a good descriptor of what we do, even though it's not a driver of our decision maker. We don't necessarily think a 200 million market cap company is just automatically going to outperform an 800 million dollar market cap company. And so I think when you go up, I love running these beautiful niche capacity constrained, tiny little strategies, because I know that there's a huge amount of alpha to be made in them. And I think my view is that, hey, once we fill up the capacity of these strategies, we can't run small value, would there be an opportunity to run levered mid-cap value? I think there might be in the future, but I think we have a while to go before we do that.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“To use a spray gun to cure cancer with gene editing or something. And you just like, this is not satisfactory $700,000, $800 million market cap. But what's interesting is even though I've sort of made those observations, right, that I can run a lot of these screens and see things that obviously don't look attractive. Anytime I run a quantitative screen on this or a back test, on any of the rules I've come up with, even though it generates alpha relative to a negative market index, they all lose money, which I think is sort of interesting because I like making money and so losing less money than another hypothetical alternative is not overly attractive to me. But it's been fun looking into it, but even though I probably, I'm not going to do anything with this information, it has been fascinating to look out there at all of the things that predict bad outcomes. And yet even with all the things that can predict bad outcomes, it's still really hard to make money shorting things for any number of reasons.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“You know, it's funny. I've almost thought about writing an article that said why most good ideas don't work or something. And I feel like I've spent a lot of time diving into things, mostly just to sort of reject them or say, well, you know, I don't know. And one that's caught my eye recently is if you look in the public equity markets, and I think a lot, you know, because I'm thinking a lot about a lot of the companies in my portfolio that I think we do do a good job of sort of picking the ones that are eliminating the ones that have low expected returns and that aren't sort of false positives. I spent some time looking at companies, just running screens of companies that look like to me they're going to go bankrupt and then from there went down the pathway of looking at stocks that seem likely to be fraudulent. And if you look at today's market, there's so much froth, and especially in some of the U.S. small cap biotech and tech in particular, there are a lot of things that look like frauds. And they've got these huge market caps and no revenue, no profits, and they're promising.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Are there any ideas that I might have as I sort of reflect on the stuff I've read? And I think that largely it's nice because those two things are also pleasant to do. I enjoy reading and I enjoy going for walks and I enjoy making bats about companies and I enjoy doing a lot of empirical research. So it's sort of an ideal life from my perspective.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Pages a week over a year and then over 10 years, the exponential amount you'll have learned relative to what people who don't read or don't bother to study stuff is just massive. And I think not just reading within investing. I think there's obviously a lot of great stuff in investing. But I think a huge amount of interesting research is being done in behavioral psychology, economen, TETLOC world. All that research is fascinating. I think reading stuff also, I've been reading a lot in evolutionary biology recently. I mean, Stephen Pinker, E.O. Wilson, I mean, some of these guys have just incredible data-driven insights that I think are so valuable. And so I think reading a lot and then, you know, I spent a lot of time just walking and thinking. And I think being a more quantitative person, right, it frees you up because you're not doing all these things that waste most people's time, like creating PowerPoint decks about competitive advantage. So you have time. And I think taking a nice walk and just thinking about things.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I mean, I think the first and foremost thing I do is just read a lot. I mean, I think we are so blessed with things like Google Scholar and Amazon, right? I mean, I have all these books on my shelf, right? I mean, I can reference, I've got what works on Wall Street. I've got Wes Gray's book, Quantitative Value, I've got Tobias Carlyle's books. I have all these books that I can read and learn what the great minds of investing are thinking, what all this empirical research is showing. And then, you know, you can come up with questions as a result and you can think, well, gee, I really wonder, you know, does market share drive profits? You go to Google Scholar and you say market share profits, relationship, enter, you know, or meta-analysis, profitability returns and enter. And the whole world of knowledge is open to. And I think if you just bother to spend time reading these things and studying what other people are putting out, you can accelerate your learn it, your personal learning so dramatically. And I just think that ultimately if you read even”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“No, I mean, it's funny because I'm going back to lecture at Stanford to Charles Lee's class and talk to the students there and point out the sort of craziness of the things like the DCF model. You've just built this model which forecasts cash balances, income, profit for five years into the future. Does any single one of you want to offer a two decimal point figure for how much in revenue they're going to make in 2023, what their net income on their tax return is going to be in 2023, and how much money they're going to have in their bank account in 2023, even what industry they're going to be working in 2023. And you are the world's leading expert in you. And if you can't forecast that, what in heaven's name makes you think that you can forecast that for like a complex business like Microsoft? I mean, it's just the height of idiocy and hubris.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Doing it because your PowerPoint presentation, you know, Bain and Company came in and gave you a 50 PowerPoint slide presentation about how you need to segment your market differently and act to increase your score on one part of your Gantt chart or something. I mean, who wants to live their lives that way or run their businesses that way? It just sounds so dull and unsatisfying.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“That you make the most beautiful chairs and people love the chairs and they buy them, and maybe there's no great strategic plan and there are a ton of other companies that make chairs. And so you might not have a high market share or a high competitive advantage or anything like that. But if you love what you do and you do it well and you make your customers happy, I think that's much more satisfying than sort of these elaborate plans as though you're sitting in a war room in World War II, you know, plotting out tank movements two years in advance. I mean, it's just, I just don't think it's the right way to act or to make decisions. And I think from some of the critiques of Porter's Five Forces and these strategic planning curriculums, I think are so good. It's just that there's this rise of the sort of managerial thinking that's so sort of distanced from the actual thing or art or profession or the actual thing that you're supposed to be loving, doing, and doing well and doing for the customer. And instead you're doing...”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, well, I think it comes back to this idea of forecasting, which is that, you know, I think that predicting the future is really, really difficult. And so I think most efforts to plan things are bad because there's not going to come true. Other things are going to happen. And so the more time you invest in planning and sort of saying, well, gee, let's use this strategic model to dictate what we do, you know, it's just a really bad way to make decisions. I mean, I think there are much better ways to make decisions. I have a very simple idea. If I can produce beautiful, excellent strategies that beat the market, I'm going to have a great business. And by the way, it's a heck of a lot of fun to go look into the market and try to figure out how to build these strategies to design them, to do the research, to prove that they work, to tell people about them, right? I mean, it's a huge amount of fun, and I love doing it. And I think that when you love what you do and you do it really well, maybe you make beautiful chairs and what you derive meaning from in life.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“We can't just say because a company has high market share, it's going to be bad because there's actually no evidence for that. So we're going to have to start using a different methodology, which is to actually look at the impact on customers. And actually, the field of industrial organization too said, well, gee, based on the studies, right, it's clear that industry does not dictate structure. Industry structure does not dictate conduct or performance of firms. So we're going to actually stop doing these industry studies. And all of that was happening, right? This hugely huge intellectual demolition of this.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Should be able to drive prices higher or something, and certainly a company that's the only company that can produce something should earn some higher margin or something. I mean, it makes perfect sense. But what happened is basically a bunch of the Chicago school economists, some of these really famous guys, you know, Bork and Posner and others, started saying, well, is this really true? Does industry structure actually dictate performance? Does higher market share actually translate to higher profitability? Are any of these nice stories actually empirically true? And they started running all these price industry concentration profit margin studies, and they found that it's not true. It's not true at all. There's no relationship. And industry is a factor does not predict almost anything about a company. A company's market share in its industry doesn't predict almost anything. There's just no correlation. And so starting in the 70s, basically the antitrust court started to say, well, gee, we can't use this.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“And so he said, Well, why don't we take structure conduct performance and have students study industry structure and study how industry structure and how market power can shape a company's profitability? And that's much more rigorous. And so, you know, he came up with this theory of the five forces, which is really saying the power a company has over suppliers, over customers, competitors, barriers to entry, et cetera. In each one of those cases, the power you have over a supplier, in essence, is your market share. How much market share do you have is going to dictate how much power you have over your supplier in the same versus your customers? And so in effect, it's just a reframing of the simple idea that higher market share is going to lead to market power, which will allow firms to bully suppliers or customers or competitors and thus earn higher profit margins. If you control the market for X, you know, you should.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“If a company gets if they take a 30% market to your company and they buy another 30% market share company, they'll have 60% market share and they'll use that market power to screw over customers or suppliers or whatever it might be. And that was really the fear. And Porter emerged from that world and he started, you know, he studied under a few of the sort of foremost thinkers in that structure conduct performance field. And he comes to Harvard Business School at a time when Harvard Business School's strategy curriculum was SWOT analysis, right? Strengths, weaknesses, opportunities, threats, right? You draw this like four squares and you'd say, oh, well, this company has strength in this and a weakness in that. And that was how they defined strategy. And Porter sort of looked at this and said, well, gee, that doesn't sound very rigorous, right? I mean, that sounds a little bit like silly. How could you possibly get any sort of useful insight from doing a SWOT analysis?”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, you know, so it's interesting the story of how Porter's Five Forces came about was that in the 60s and 70s, there's a prevailing school, it's called industrial organization, it was a subfield that looked at how does the structure of different industries affect the performance of firms. And broadly, the theory was that industry really mattered, right? Different industries had these structures and the structures of those industries affected how firms performed. And within that essentially the higher the market share of a firm within its industry, that the higher their profit margins would be, the more market power they would have in that industry to dictate prices, to do bad things like keep competitors out, etc. And that was called the structure conduct performance theory. It was actually the basis for most of the antitrust legislation in the 50s and 60s, which said, you know, gee, we got to stop monopolies because, gee,”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“to a very risky environment where they're not getting the sort of constant feedback that you'd get in public equity markets.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“their long term oriented. And I think it's funny just you just think of the incentive effects and how that changes. Private equity in some sense has the perfect wrapper for an equity product. And that wrapper is a 10-year lockup with quarterly valuations that are subjective and based on the manager's opinion of what the portfolio has worked. I mean, that's just perfectly designed to behaviorally adjust for the problems that most investors face, which is buying and selling the hot, you know, selling the bad things, buying the things that have gone up, switching your money around too much, et cetera. And in some sense, the sort of straightjacket of private equity is very good for these institutions and the lack of transparency on interim valuations is also historically been very good. But I think where that becomes worrisome is if they start to do bad things, the results of those bad things won't be seen for five or ten years. And so investors can fly blind.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and I think it's also funny just to get back to the beginning where this discussion started, it's private equity. I mean, if you talk to institutional allocators, you say, well, what do you like about private equity? And so they're really long-term thinkers. It's long-term holds. Our money's locked up for 10 years and it's just great. And we think it's worth paying two and twenty for the privilege of having our money locked up for 10 years. He said, well, what about like locking your money up in a really smart factor-based small value strategy? Would you ever do that? And just, oh, no, no, no. I never locked. We would never do that. I mean, why would we want to lock up our money? We hate lockups. But I just thought you said you wanted to pay higher fees for the privilege of locking up your capital and private markets. Walk me through why you wouldn't want to do that in public markets. And then you say, well, public markets are so short-term oriented and the private guys are long-term oriented. So well, you gave them 10-year capital, right? Of course, in some sense,”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“quarters or years. And if you think that way, it's going to be really hard to make money in some of these more factor-based strategies.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, we only accept locked up capital. It forces a very productive discussion. If people are willing to lock up their capital for three years, we generally think they're aligned with us on understanding that this is a long-term thing and it's going to be volatile. And if they say, oh, gee, well, why do you have that lockup? But, you know, aren't these underlying firms quite liquid? We say, well, it's not that the firms aren't liquid. It's that, you know, we want to make sure we're aligned behaviorally to make sure that we can make money across a full cycle. I think that the Hippocratic oath of investing to some extent is don't lose people money. And the easiest way to help people not lose money in equity markets is to extend their timeframe, right? I mean, if you just run bootstrap simulations on U.S. equities or small value equities or leverage small value equities, it doesn't take that many years to dramatically improve the probability distribution of outcomes. But people think in such short term, right, they think.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Cognizant that anytime that the high yield market panics, levered equities are going to panic even more. And so we just have to design our strategy in the US and Europe to be full cycled, to make sure that investors are not going to sell at that one year out of five when the high yield market panics and that they live because the rebounds from that are very quick, right? It's just a liquidity-driven thing. These are liquidity driven panics where people say, oh my gosh, nobody's going to lend to a company ever again. And of course, twelve months later, they're lending to companies again. These things are always short-lived. But dealing with that volatility is one of our core business issues. And then I think if you go over to a place like Japan, where there is no high yield cycle and interest rates have been zero for 30 years, you don't see that risk or that volatility. But in the US and Europe, you really do.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“In correlation with other good things happening like rising growth or for equities rising inflation and they fall obviously when things get bad and so if you layer those two things in together you know it's really hard to find any sort of useful signal from interest rates I think that said What we find is that obviously the borrow cost and the refinancing risk of companies is cyclical and it's cyclical and the much more volatile time series other than interest rates is actually high yield rates and the spread between high yield and the prevailing interest rates and what we find is that anytime that high yield risk spikes when you go from sort of historical average of three or four percent high yield premium and all of a sudden in a year rates go from the high yield spread goes from three percent to nine percent that's going to be a really bad time a really painful time for levered public equities and so for us we are just”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, we went back and we looked back to nineteen sixty four and we did a few different things. We looked at the correlation between one year returns and every different interest rate. So Fed funds rate, one year treasury yield, five-year treasury yield, ten-year treasury yield. And we also looked at, I'm not sure the exact number I'd have to look, but maybe a dozen or eighteen or so periods where interest rates rise over 1% over a year or two. And so if you look at both of those types of environments and you say, okay, well, how did that correlate with equity returns? How did that correlate with the small value premium? How did that affect leverage small value in particular? And what we saw is that there's no correlation really between interest rates and equity returns. And actually small value appears to do quite well in rising rate environments and leverage small value does not appear to be penalized in rising rate environments. And I think that's just the interest rates as they rise or fall. They often rise or fall. They rise.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Initially, Patrick, and the way my mind works is I just saw a bunch of cheap stuff there. I said, well, you know, there's so”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“And so for us, you know, we love Japan because it's a much lower risk way to execute our strategy. And it's a place where valuations are still very low and there's a large, large opportunity set. There are 3,500 publicly listed companies in Japan. So you have almost as many companies to choose from in Japan as you do in the US, which is just great from a quantitative perspective in terms of being able to find the things that meet for us a very specific set of criteria.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Fewer of them are levered, and high yield spreads in Europe are so tight that it's just hard to find great value opportunities in mainland Europe. There are a bunch of good ones in the UK. But France, Germany, we almost have no exposure to. And then I think in terms of which geographies really do generate maybe surprising results or where the country of geography actually does predict outcomes, one of the most interesting things we found is that if you look at Japan and specifically, the Japanese Koretsu system, the bank, government company, Cabal, whatever you want to call it, the way that they are financial system works is essentially they will not let public companies go bankrupt. And so for a strategy like ours of buying small cheap, highly levered things and then trying to avoid the ones that go bankrupt, we can basically buy anything in Japan because nothing's going to go bankrupt except for maybe one out of $3,500 a year or something.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so I run a global fund and a Japan fund. So, you know, I don't run a purely domestic US strategy. And I think to me, it always seemed if you could look at 15,000 equities, and you can buy them on your brokerage account. Why would you limit yourself to the 3,000 that happen to be in your country that you happen to invest in? Unless there's a very solid reason why a company being headquartered in the U.S. should be predictive of future returns. And I didn't really see a reason why there should be. So I figured, you know, let's just go wherever the opportunities are globally. And I think broadly today, today personally, our fund, our global fund is about 40% in the US. We still see a lot of opportunities in the US and about 35% in Japan, which is a really interesting market for what we do. And then the remainder in emerging markets and in Europe. I think Europe is a little bit of a harder place today for us to find opportunities, both because the absolute number of companies in Europe, the opportunity set is more limited.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“And that's a 20% hit to EBITDA. So it's actually not as cheap on a prospective basis as it is on an LTM basis. It's sort of much more simple things like that rather than, I think, if you train your mind, I think, to say we're not trying to second, we are fully in line with what the screen is looking for, right? We have a clear view that we want to buy things that are not going to go bankrupt. And if we can identify those things that are going to go bankrupt through whatever means necessary, we're going to do it. And we think there's some ability of humans to look at a company and say, gee, that thing is on a path to bankruptcy.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and I think in our case, we look at another way we looked at it is we looked back every quarter for the past three years, what we've done is we've force ranked our portfolio. What did we think subjectively was the most attractive opportunity and what did we think was the worst? And we found actually very little ability to distinguish between, say, number one and number 30. But at the bottom end, the stuff that we really didn't like actually did slightly underperform the rest of the portfolio. And so I think really what we're doing is we're saying, hey, I don't think what we're doing is trying to say, oh, I know this is people are really pessimistic about this company because they think that pulp prices are declining and capacities coming on in China or some really complex thing. We're just trying to say, hey, is there anything you read the 10K and you say, oh, I didn't realize that they'd already breached their covenants? Or, oh, holy smokes, all their maturities are due in a year. And anyone who could have refined would have. Or, gee, I didn't see that they actually lost their biggest custom.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Likely in X-quarter's earnings are not going to be too hot. And so you really want to wait a quarter or two quarters or even three quarters to get a full position in to make sure that you're not buying on sort of a bad signal, which is LTM financials relative to market cap today. And so I think between those two things, we then track, you know, if we just had bought the top 40 equal weighted, would we have done better? And our hypothesis.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“And this is something we track really closely because after we do all of our process, our quantitative process, we don't just take the top forty ranked things from our quantitative work and invest in them equal weighted. We actually go and say, okay, let's go. I know that all the quantitative work we've done says this is a good opportunity. Let's just go read the financial statements. Let's check it over. Let's make sure we understand it. Let's read some of the earnings call transcripts and see if there are any red flags that would really change our perspectives on this business in a big way relative to what we know about the company from our quantitative work. And then second, I think in addition, we're also saying we don't necessarily want to equal weight everything because in deep value, I think that you really want to average in and average out. You want to move slowly because oftentimes big price movements, which drive valuations, are also signals of future fundamentals. And so if you see a stock that's dropped 50%,”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Next year. Now, we actually use just a simple Bayesian boosted tree algorithm where we took all the US data back to 64 and said all the statistically significant factors that you would look at or I would look at, right, asset turnover and net debt to enterprise value, market cap, price momentum, et cetera. Plug that into a machine learning algorithm and said, hey, show us whether you can improve on that 60% accuracy rate. And we see in our tests, and we've done this out of sample, and we've also done it in live trading, we can hit probably about 70% accuracy by going more complex than just looking at historical debt paydown. There are other predictors that help shade that how much absolute debt, for example, firms that have had sharp drops and share price tend to be more likely to repay debt, et cetera.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“To go back to forecasting, I think that investors have to multiply importance by no ability. So something like how fast is the company going to grow over the next five years? Very important to your outcome. How knowable is it, according to most academic literature, not knowable at all. A company that has grown above the median for the past three years has about a fifty percent chance of growing above the median next year. It's just pure chance. Now, deleveraging is not only very important because if you can pay down debt, obviously it's going to accrue to equity, but it's also knowable. So if you just said, let's look at all firms that paid down debt last year, what percent of them will pay down debt next year? The answer is 60%. That's a lot better than fifty percent. I mean, that's a great number. So it is a very persistent phenomenon. So just looking at firms that have paid down debt in the past gets you a long ways towards predicting.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“That's exactly right, Patrick. It's the most important thing you have to know about investing in levered equities is that it's the direction of leverage. You've got to be delevering. And that's also free cash flow yield. That's how I calculate free cash flow. So how much debt did they pay off in the last year? Let's divide that by market cap. And when I'm looking at, you can call that almost deleveraging yield. I mean, if you buy these high deleveraging yield companies, you get a bonus because you don't just get the yield like you would with a dividend, but as they pay off that debt and they get closer to the median leverage for that industry or for that subset of companies, you know, you get multiple expansion because a lot more people grow comfortable with the firm. And so understanding the dynamics of debt pay down and what causes a company to pay down debt, why do some companies pay down debt and others don't. That is to some extent the key, I think, to unlocking value among leveraged companies.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“For some portion of those equities, the returns are actually extremely attractive. And the returns are going to come from the deleveraging process.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Sample of high free cash flow opportunities. And I think secondarily, I think in a time, I think there are so many people chasing small value that at least over the past few years, small value hasn't seemed to work as much. But I think the advantage of investing in levered firms is that which has worked over the past few years is that leverage creates its own catalyst because as you repay the debt, the firm gets less levered and thus more attractive to a broader selection of investors who like cheap firms but not cheap levered firms. And I think if you think about most value investors say never touch a levered firm, don't invest in levered firms, right? Fortress balance sheet, et cetera, et cetera. There is an opportunity in the levered universe to go to a place where other people dismiss the entire cross-section of equities without seeing that.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, if you compare small, cheap levered firms to small cheap firms that are unleavered, if you look on sort of a EV to EBITDA basis, the levered ones will outperform though with higher volatility. But if you look on a free cash flow yield basis, roughly they're going to have a similar profile. What leverage does is it just jacks up free cash flow yield. So if you buy something for 10 times cash flow, if you're unlevered, you know, you have a 10% cash flow yield. Well, if you lever that thing up 50%, now you have something that has 20% minus whatever the interest costs are. But let's say roughly 20% free cash flow yield. And so a 20% free cash flow yield firm is comparable to another 20% free cash flow firm, but leverage is just one way to increase the free cash flow yield to equity. And so I think broadly, that's how I would say they compare is that by using leverage, you can create a broader”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“All firms that have really high short interest, you can eliminate firms that score low on the relevant Petroski F score factors. You can use all the sort of literature from the quality literature that you've put out, that Petrosky has put out, that Cliff Asnis has put out, take all those quality factors. And those are going to be doubly important to some extent in levered equities because bankruptcy is always a possibility if you have debt.”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Your money where your mouth is to bet on the results being right, which would I do on a day to day basis. And I think the biggest lesson I've had since starting my fund and since doing this in live trading is to say to almost think like blue team, red team, right? If blue team is buy cheap, highly levered things with really big free cash flow yields, your red team is, but gee, these things are levered and they might be cheap for a reason. And so you've got to do everything you can to ensure that you're not buying things that are going to go bankrupt and you're not buying that subsetment of firms that are cheap because they're really having deteriorating operating performance. And so I think of my process as basically a balance between the red team and the blue team. And I think the red team is relatively simple, right? Small, cheap, highly levered thing. On the blue team side, I think there's some key quantitative rules that you can use to helpfully eliminate bankruptcy risk, or not eliminate, but reduce. You can eliminate all firms that have a secret rating. You can eliminate”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source
“Quantitatively, what they did is they bought companies at less than seven times EBITDA. They levered them up 65%, and they generally bought small companies about $200 million a market cap. And so my logic was simple, is that buying small, cheap, highly levered companies should be a good investment strategy based on the historical evidence from private equity. And I think if you think logically, again, what small, cheap, and really what cheap and levered together do is jack up free cash flow yields? And so if you're buying something at six, seven times EBITDA, about 50, 60% leverage, your free cash flow yield should be around 20%. So it should be unsurprising to you if you buy things at a 20% yield that they return 20%. And so that's sort of the logic. And I think the empirical evidence is to go and test that. Broadly, does buying small cheap, highly levered things work across markets, across geographies, across market cycles, to which the answer is broadly yes. And then finally, third is to do it in live testing, right? To bet your might put your...”
2018-02-27 · Invest Like the Best · Dan Rasmussen - Private Equity Returns in Public Markets - [Invest Like the Best, EP.78] · IDENTIFIED FROM THE TRANSCRIPT · source