Navigating Public Markets with a Private Equity Mindset

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During their recent episode, Taylor, Carlisle, and Robert G Hagstrom discussed Navigating Public Markets with a Private Equity Mindset, here’s an excerpt from the episode:

Robert: I’m not going to be the dog chasing the tail that never catches the tail. So, let’s own good businesses, and I will tell you the progress, the economic return of our companies. If that’s satisfactory to you, then you should basically hang in there. The conclusion to the talk was, this really is a private equity approach with public securities. How does a private equity manager report to his owners? They have no stock price, so, what do they report?

Jake: Whatever they want. [laughs]

Robert: Well, yeah, sales, earnings, margins, whatever. They do have this clever way which is their NAV never changes. The NAV starts as like a buck. For three, four, five years, it’s a buck 10, a buck 5, 0.97. So, they have no variance of return, which makes everybody upset. They just motor along. And then the seventh year, [laughs] it magnanimously goes up three times. But basically, during that period, from start to finish, T1 to T10, they report sales and earnings and margins. I said, “Well, why “Can’t we do the same thing? Just because we’re a public stock price, why do you force us to play by different rules? Why can’t we play by their rules?” And so, that’s what I said. Business driven investing is basically private equity with public securities.

It got a good rap. There was a lot of on social media, and we’re talking to some people and try to get to Morningstar, SEI and rest of those guys and say, “Hey, you slice and dice the world between value, core and growth, large cap, mid capacity, small cap and all this stuff. Well, why don’t you segment some of us over here that we’re concentrated, low turnover, business driven guys, and let us have a separate space that has different rules and let’s see how we do head-to-head.” We’ll get back to you.” I don’t know what the appetite is, but we– What I also said is, I don’t know if you heard of SPIVA, standard and poor indices versus active managers.

So, the 2023 numbers came out. You look at the largest sector of the market, which is large cap stocks, basically going against the S&P 500. Over five years, 79% of the portfolio managers underperform the market. Over 10 years, it’s 87%. I know of no sector, no industry, no collection of businesses that would continue to allow the perpetuation of a model or process that fails so miserably [Jake laughs] and allows these guys to stay in business.

The 20% that are outperforming in good old Adam Smith capitalism should have eaten the lunch of the 80% that underperformed the market, and they should end up with all the money. But it’s amazing to me, the money management industry continues to perpetuate a process and a portfolio strategy that basically underperforms over the long-term. But they win over a quarter– They’re heroes and they win over six months or they’re the best this year, but then they fail over five and ten years. So, anyway, I’m preaching too much, but that’s what business driven investing means to me.

Jake: Yeah. Well, this is the church of that, so you’re fine [Robert laughs] to give a sermon.

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