Wishing everyone a healthy and wealthy 2007. May 2007 bring happniess and joy to you and your family!
Saw this interesting piece from Michael Lewis posted at Bloomberg.
Here's some interesting comments:
- The job of the private-equity investor is -- again, speaking loosely -- to exploit the idiocy of the ordinary investor, and the corporate executives and mutual-fund managers who purport to serve him. Private Equity Intelligence says this year private-equity firms have raised $300 billion, up from $283 billion for all of last year -- which is up from an ignorable $10 billion or so 10 years ago.
To exploit the idiocy of the ordinary investor...
Here's an example given:
- The recent deal to buy, and then sell, the car-rental company Hertz Global Holdings Corp. nicely illustrates the current state of play in that relationship. In December 2005, a pair of private-equity firms, Clayton Dubilier & Rice Inc. and the Carlyle Group, bought Hertz from the Ford Motor Co. -- which is to say they bought it from the sorry souls who own shares of Ford. Eleven months later, in November 2006, they turned around and sold Hertz back to the proles in an initial public offering.
In buying the company they put up $2.3 billion in equity capital. By the time they sold it they had gotten $1.3 billion of their money back, and held shares -- which they no doubt plan to get rid of as soon as they can -- valued at another $3.5 billion or so. In less than a year they had netted a fairly clean $2.5 billion profit.
Easy peasy huh?
Lewis concludes his article by saying..
- In effect, the smartest, best-connected money has separated itself from the rest of the stock market, and has gone into the business of trading against that market. It seeks to buy from the stock market cheap, and sell to the stock market dear, and if you need evidence that this is possible you need only look to the returns on private equity, which have been running three times the returns of the public stock market.
With the shrewdest and most sophisticated investors armed with essentially unlimited capital, any company that is available to the public is almost by definition an inferior asset, i.e., an asset that the private-equity people have no interest in. We may not have arrived at the point where the publicly traded shares in a company are a sure sign that those shares are a poor investment. But that's the obvious, ultimate destination.
Which raises the question: Why do the proles continue to invest in publicly traded companies? And the obvious answer is: They have no choice.
One day the private-equity markets may expand to the point where even proles are offered a little piece of the action. That will be the day the action is no longer worth having. Trust me. The ordinary investor is now and forever cast in the role of the peasant at the king's banquet. He's so happy to have any food at all that he fails to notice that bone between his teeth isn't the meal. It's the scraps.
And today CNN reported Legg Messon Value Trust performance. Ah, the legendary investor Bill Miller, whose fund has beaten the S&P for 15 straight years. Well, his streak has ended. ( Read more here )
Cheers and have a great holiday!