Investor vs. Broker Mindset #147
Reflecting on a few interesting reads and listens over the past week
Investor vs. Broker Mindset
This is a repost from last year but perhaps more relevant to us now than before.
Before delving into the idea of having an investor's mindset vs. a broker's mindset when buying assets. It's important to provide some context.
This is a great thread by 10-K Diver on the relationship between asset prices, inflation, and interest rates.
If I had to leave you with one chart from the thread, it would be this one.
A lot of investments/acquisitions over the past 5 years (at least) have been made with the assumption of a low inflation and a low real rate of return environment. While we'd like to believe that assets have become more valuable over time, the reality is that the increase in asset values have largely been driven by a low interest rate/inflation environment as well.
As an investor, this is what makes the next 12-24 months interesting. The constant increase in asset prices (inflation) along with a pending multiple increases in interest rates can have drastically impacted how we value many of our businesses today.
The uncertainty of whether we’ve reached the bottom or if this is just the beginning has sustained an active M&A market where folks are trying to sell while they can or because they have to. Anecdotally, when speaking with M&A advisors, everyone seems to have a short-term view on getting deals at the current price while they can.
Many founders/investors exiting their business today have had the fortune of operating in an environment where interest rates/inflation have become more favorable over the course of their journey (e.g. the past 5+ years).
It'll be interesting to see how the 2019-21 cohort of investments perform over the next 5+ years. I suspect that there will be a lot more pressure to improve operational metrics assuming that interest rates/inflation become less favorable over time.
In theory, this could create situations where poorly capitalized assets emerge and businesses cannot perform up to the standards to justify their initial investment/acquisition price.
At a fund or investor level, the current situation at Tiger Global is indicative of what the end result can be.
The low-flying-yet-seemingly-ubiquitous 21-year-old outfit has seen losses of about $17 billion during this year’s tech stock sell-off. FT notes that’s one of the biggest dollar declines for a hedge fund in history.
As shocking, per FT, according to the calculations of a fund of hedge funds run by the Edmond de Rothschild Group, Tiger Global’s hedge fund assets have been so hard hit that the outfit has in four months erased about two-thirds of its gains since its launch in 2001
Personally, this creates a dilemma between what I'd call as having a 'broker mindset' where we try to close as many deals as possible vs. an 'investor mindset' where we stay disciplined on the investments we make.
If you look at the past 5-10 years, people who have had a broker mindset have done quite well. It didn't really matter which asset in particular you bought, however the more that you bought, the more returns you generated.
Those with an investor mindset (particularly value investors) were unfairly punished (relatively speaking) as they took a more prudent/patient approach with the belief that rates would adjust 'back to normal' again.
Here's how I would compare/contrast the two approaches:
I suspect that we are going through a reversal (assuming inflation/interest rates go up) where those with a broker mindset will be disproportionately punished vs. those with an investor mindset.
The biggest realization that I’ve had talking with investors and owners alike is the fact that the past few years of cheap money (< 2% interest rates) is more of an exception vs. the norm.