‘There You Go Again’

By Bill Kelly, CEO, CAIA Association This now famous line was uttered by then citizen Ronald Reagan almost 40 years ago in a presidential debate with the incumbent Jimmy Carter. It was a simple and clever turn of a phrase acting as a counter-punch to Carter’s excoriation of Reagan’s prior record of opposition to national health insurance. This was (and is) a complex subject that remains largely unresolved in the US, but that one-liner has endured. Cynicism grabs the headline, while the full news story usually remains obscure and not fully understood. And so it went this weekend in Omaha, Nebraska at the Berkshire Hathaway Annual Shareholder Meeting where another couple of aw-shucks octogenarians were waxing poetic about the many complexities in our capital markets. Their track record, business acumen, and wealth accumulation require no asterisk and Warren Buffett and Charlie Munger are the real deal. The hedge fund crowd will be pleased to note that they mostly escaped the pair’s direct rhetoric this year (see Rhetorical Oracle for that comeuppance in 2018), but the general partner side of the private markets was not so lucky. A short video clip was posted on Yahoo! News this weekend, and it is pretty clear that neither Buffett nor Munger is a big fan of the current private equity model, especially when it comes to the deployment of leverage and the presentation of investment performance, which Buffett said was not calculated in a way that he would “regard as honest,”  there you go again… Buffett has often used the word “helper” to describe the money manager or the general partner, and the helper and the broad industry model are far from perfect. The broad labeling of hedge funds, private equity and private debt no longer represent products as these areas have morphed into very large and diverse industries. Product is no longer fungible here, and this column has been critical in the past about the shortcomings of IRR calculations and the lack of transparency between the GPs and the LPs. However, yesterday’s forum would have been the perfect opportunity to talk about the importance of due diligence, the widening of performance dispersion, the appalling lack of investment literacy, and the misplaced expectations that naturally follow. That discussion would have been more complicated, more difficult to describe and solve, and certainly wouldn’t have been distillable into a catchy sound bite. A side note is the very messy situation that has unfolded in an adjacent zip code with the Omaha Public Schools’ Pension Fund to which Buffett alludes in the clip. He mostly cuts the plan sponsors and the trustees (science teachers, school board and local business members, and a plumber) a break but proceeds to weaponize this situation against the entire alternative investments industry. Rest assured, there was an appalling lack of investment literacy, due diligence, suitability, and clearly at least one bad actor in that case. In fact, an SEC Edgar search for the investment firm named in this article comes back with Registration Status: Terminated. The story is more complicated, but even a modicum of professional skepticism would have likely mitigated eventual investments in Mumbai real estate, Ukrainian agriculture, oil companies in Kazakhstan and Brazil, and timberland in the more local region of Tennessee. Alternative Investments? They certainly are, but suitability, risk, operational transparency, price discovery, and liquidity never seemed to matter—until it did. We are at a point in the market cycle where valuations for most risk assets are stretched and the inevitable likelihood of a large drawdown could be just one tweet away. Now is the time for greater diversification, literacy, and rational decision making that can endure the volatility ahead. This requires informed levels of due diligence and an investment plan that will keep you fully invested, respecting your individual levels of risk tolerance, and the longer-term financial commitments that you need to meet. Avuncular rhetoric will always make for great theatre but is simply not helpful or productive outside of a certain annual meeting in Omaha. Seek diversification, education, and know your risk tolerance. Investing is for the long term. Bill Kelly is the CEO of CAIA Association and a frequent contributor to Portfolio for the Future. Follow Bill on LinkedIn and Twitter.