Savage Beating, Economic Vikings and College Football
In my first post, I mentioned a tiny group of investors who consistently make money in the markets.
Check that. This group does not just make money.
They earn enormous amounts of money.
They make money in quantities akin to the amount of ice cream a fat guy locked overnight in the Blue Bell factory down in Brenham, Texas, would polish off.
These investors stock cash like aliens stacking blocks to build pyramids in the Egyptian desert.
There is only a tiny group of these investors, but watching them trying to out-earn each other is like watching Democrats and Republican politicians compete to see who can tell the most lies in a 24-hour period.
They are serious about making enormous amounts of money for themselves and their investors.
For themselves, it is obvious why, but these investors also have the luxury of the fact that when they make big money for their investors, 20% of those profits stick to their fingers and can be reinvested in more deals to make more money.
It may sound like hedge funds, but it is not.
Hedge funds get all the headlines, and people make movies and cable TV series about them, but they are pikers at making money compared to the group I am referring to.
If you dug through the SEC filings of these investors every three months and just bought the top ten holdings of any of them, you would earn market-beating returns.
You would not just beat the indexes.
I am talking about beatings like Larry Holmes gave Tex Cobb.
Younger folks can think of Amanda Nunes' beatdown of Rhonda Rousey.
Think the University of Alabama versus Slippery Rock State University in any sport you care to name.
More literary types might consider Hemingway versus John Updike in a brevity contest.
Those with small kids or grandkids at home might find Paw Patrol's regular embarrassment of Mayor Humdinger as an apt description of the level of beating involved.
I am talking about earning from two to five times as much as the S&P 500.
That is before you add leverage, and these folks love leverage.
I am talking about a small handful of private equity funds.
They never tell you what they own if it was up to them.
Unfortunately for them, the Securities and Exchange Commission has some pesky disclosure rules they must follow regarding publicly traded securities.
I track these filings for both hedge and PE funds every quarter and have for decades.
It is much easier than in the late 1980s when our tools were an S&P stock guide, a Quotron machine, a yellow highlighter, and the United States Postal Service.
Following this small handful of powerhouse investors has been very lucrative for me.
I have written about it extensively, and I can tell you that everyone reads the articles, and no one uses the strategy.
Why not?
Good Question.
Maybe I did not promise to make readers rich by next Tuesday.
I did not give them the top 1%'s secret to trading options (The secret is that they do not trade options. They may have managers that use them for Black Swan Hedges and such, but they are not buying puts and call passed on chart patterns).
I did not suggest that America would burn to the ground or be consumed in a civil war (Seriously, why does buying stocks listed on exchanges in a country about to be burned down make sense).
Markets and media alike love to vilify Private Equity as destroyers of companies, job killers, and enemies of the American Dream. (They are not. Even if they were, that sounds like economic Vikings, and who does not want to be on the side of the Vikings?)
I never once suggested that they and they alone had some small secret device that would soon solve all our energy problems, cure cancer, or create robotic servants to cater to my every need.
All I ever said was that if you follow these folks and can tolerate volatility, there is a good chance you will make a lot of money.
I guess I am not cut out for this marketing stuff.
The list of private equity funds that crush the market may change over time.
What will remain the same is the philosophy and approach to investing that helps deliver these returns.
The small group I track has stayed the same for some time, and I do not see any signs of anyone losing their touch anytime soon.
In the past two quarters, all these super investors on steroids have had something in common.
They have been buying corporate debt.
Some investment-grade debt but mostly high-yield bonds.
Collectively, these firms have borrowed and lent out trillions of dollars based on corporate balance sheets and cash flows.
They know debt like Bo knows ball.
These firms also see the economy from the ground up. They run hundreds of businesses and know more than any economist sitting in an office between the rivers or inside the beltway who never goes outside.
They also talk to some of the most prominent investors on the planet. They know how pensions, endowments, and other large collections of capital are allocating their cash.
They pay people to take politicians to long, boozy dinners and skyboxes at ball games to make sure they know how the political winds are blowing.
Given the massive amount of experience and information connection these firms have, what should we be doing if they are all buying into fixed income instead of stocks?
Obviously, the answer is trying to learn how to sell enough options premium to pay our mortgage next week while taking no risk whatsoever.
Failing that, we should be considering moving a significant part of our portfolio into fixed income.
That is bonds.
That is preferred stocks.
Which bonds?
What the hell is preferred stock?
I cannot answer those today. The Tennessee-Georgia game starts in a few minutes (my son is married to a Tennessee girl who is a big fan. Unless Navy plays simultaneously, viewing is considered a newfound family obligation. Navy already won today, so it is game time!).
I will name some names and explain more of my reasons for loving fixed income early next week before my tryptophan coma kicks in.