Having a long(er) investment horizon than “the Street” has been proven to be one of the most important advantages that an individual investor has over an institutional investor. In the Economist this past week, this article The Omaha play – Long term private equity funds, caught our eye. This is a short read but worth your time as the investment manager for your household and/or family because it shows so clearly the raft of “costs” and “frictions” involved in managed funds whilst also presenting the benefits of these managers.
I will leave you all to decide if it’s worth it. What’s really important here is that in a low return environment, institutional managers are pulling out all the stops to deliver value for their clients – even if that means going to the playbook that their clients are using at home.
An investment fund who sets the expectations of long(er) investment horizons than average has a series of advantages enjoyed by non-institutional managers.
- Underperformance for some period is less of a career risk. This allows managers to take on good investments that will take time to work out, but are forecast to have high returns.
- Information asymmetry on longer dated bets is proportionately higher. There is less understanding of these businesses generally and more execution risk, but that too allows a more informed investor to profit.
- Longer horizons allow one to make investments in cyclical businesses that have prices well below their long term means. Things like commodities go through supply/demand cycles that impact prices substantially – just look at oil over the last 18 months and the effects of that on companies tied to it. Longer horizons allow investors to make bets in those kinds of spaces based on prices reverting at some point.
The real insight in this piece comes at the dead end of it, “If even Henry Kravis, co founder of KKR, a buy out behemoth, has called Mr. Buffet’s method “the perfect private equity model”, might it not make sense to invest directly in Berkshire Hathaway?” This is indeed the point. As an intelligent investor, if you want exposure to good asset allocators with a proven track record, you can very likely find them in stock markets – complete deep liquidity and flexible option chains on their shares. How does that compare to tying up your funds in a “long dated private equity fund” for 20 years? An investment in BRK is liquid tomorrow morning at 9:30am EST.
I’ll say it again, if you want exposure to strongly performing assets with longer time horizons, those assets are not solely available in the private markets. But it does take valuation competency and shrewd investment structuring skills to take full advantage of those opportunities. After all, one has to be able to tell when a business is undervalued, and by roughly how much.
In the meantime, Invest Intelligently…