Stability vs Opportunity

Bernie Madoff promised investors above average, consistent year after year mathematically impossible returns. Investors fell for the high returns but what they REALLY fell for was the apparent consistency. The stability or returns, the certainty.

Bond funds appeal to investors because they offer stable returns each year. Quantifiable and certain. Mutual funds tend to stuff portfolios full of bonds which themselves offer a set return allowing mutual fund managers the ability to promise more consistent returns. That most of them are terrible is not the point.

The corporate job offered stability of returns. I say offered because like the horse and buggy they’re destined for the scrap heap of history as mentioned in “Cubicle Jobs are Over” and the “March of Technology”.

Marriage offers stability of affection and love. Looking around me I feel like the odd one out. I’ve only got one wife, no ex.

Humans love stability and certainty. It’s why Volkswagen sold 9.7 million units last year and AVTOVAS, owner of the iconic Lada brand, sold 533,634 vehicles globally. The Lada, people have figured out, is both ugly as well as unreliable.

Millions of people get divorced each year, bond funds blow up, currencies move against investors. Corporate jobs disappear and about the only thing I’m willing to rely on is that Volkswagens won’t break down. Stability is a myth yet it’s what we humans strive for.

Stability is also NOT where the home runs lie. Jack Ma never became a billionaire through a corporate position, and Kyle Bass and Mark Hart never bought into the “stable” housing market. Instead, they shorted it. Definitely not considered a sure thing at the time. Nope, the payoffs exist outside of the norm.

I recently found myself speaking with a group of gents. One an insurance salesman, another an accountant and the third a partner in a law firm. I know, sounds like the start to a joke.

When they found out that what do for a living is invest in private companies including a healthy smattering of very early stage start-ups the response was overwhelming, “You’re mad, how can you do that? That’s so risky. Who do you sell your shares to? What happens if you need to sell?”.

They really lost it when I suggested it is completely normal and in fact expected to have a good number of these investments go to zero. They wanted stability.

To them what I do was more reprehensible than launching a drone attack on a wedding party or clubbing a seal pup to death in front of a kindergarten class. Clearly they would sooner see their children taken away for medical experiments than invest their capital into private equity.

The flaw in this thinking is that stability and consistency in mainstream investments are stable and consistent. Stability in markets all too often predates violent counter moves. Everything is fine, until it isn’t.

Take the yen which I’ve written so much about my fingers bled. We’ve also prepared a complimentary special report detailing how to trade it and Brad has outlined an asymmetric way to play it to the subscribers.

When we first began badgering you dear readers with the story it was 2012. The yen was in the 70s and we were building short positions. It had been stable for so long. Well, my gut is things are getting a little out of control. Certainly there are some folks unwinding their carry trade.

Feel free to read the free report here. We don’t think this trade is over by a long shot and everything we wrote about in that report is valid to this day.

This brings me back to private equity.

If you’re curious as to where the biggest returns have been in history let me give you a sampling.

  • We all know about Peter Thiel’s $500,000 investment into what eventually became Facebook. Thiel sold 80% of his shares 7 years later they netted him in excess of $400 Million.
  • Henry Flagler invested $100,000 into Standard oil in 1867 and by 1913 this investment was worth $75 Million, over 75,000% ROI.
  • Benchmark Capital invested US$6.7 million into what became known as eBay. In just 4 years this investment was worth $5 billion.

What you’ll find is that the big profits have been made by investing when these companies were PRIVATE.

The first lesson here is that investing for stability without a solid understanding of whether that stability is justified is as foolish as expecting your Lada to perform like a Volkswagen.

And secondly one is that balancing a portfolio with “opportunity” driven from understanding asymmetry such as the yen trade, and/or investing some portion of capital into well researched private equity deals actually makes a ton of sense. I can’t promise that you’ll not be viewed as insane by the average investor buying mutual funds, and CDs but who cares what others think?

Speaking of opportunity…

One of our investments is in a company which is looking for an entrepreneurial online marketing manager. If you’re a self starter seeking an exciting opportunity contact us here.

Have a great weekend.

– Chris

“Never think that lack of variability is stability. Don’t confuse lack of volatility with stability, ever.” – Nassim Nicholas Taleb


Leave a Reply