Liquidity, or the ability to quickly turn an asset into cash, is conventionally seen as a desirable trait. It’s what enables millions of traders worldwide to buy and sell stocks and bonds with the click of a button.
In comparison, private market assets like venture capital and private equity are often seen as riskier because it can take years to cash out. In reality, this illiquidity is a feature, not a bug, which allows investors to hold over market cycles and ultimately earn higher returns.
A popular investment saying goes, “time in the market, not timing the market,” which is what matters most for returns. The data bears this out. A study by Fidelity Investments found that investors who missed the ten best stock market days missed out on 55% gains.
If you’re trying to time the market, you will inevitably miss these big days. But if you’re invested for the long haul, you will participate in the market’s ups and downs, capturing the gains when stocks rise and weathering the losses when they fall.
This is where illiquidity comes in. Because it takes longer to cash out of an illiquid investment, you are effectively forced to stay invested for the long haul. This “time in the market” allows you to capture the market’s ups and downs, which is essential for higher returns.
Moreover, over the long term, stocks have never lost money. There’s never been a 20-year period where stocks have declined in value. That’s why Warren Buffett famously said, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for 10 minutes.”
Simply put, illiquidity protects you from redemption risk. This is the risk that you will redeem your investment at a poor time, which is exactly what most investors do, causing them to underperform market indices consistently.
Beyond forcing you to stay invested, illiquidity also allows you to capture a risk premium in the form of higher returns.
The size of the premium varies depending on the asset, but one PIMCO analysis puts the private market illiquidity premium at around 1.8%. That’s not counting the complexity premium of private markets, nor is it counting the additional alpha that fund managers can create.
Still, this alone can significantly impact returns over the long term. For example, let’s say you have one investment of $1 million without an illiquidity premium that returns 5% annually. After ten years, you would have $1.6 million. If you had another equally sized investment that added a 1.8% illiquidity premium, you would have $1.9 million after ten years – a 19% increase.
The benefits of illiquidity are especially pronounced in retirement accounts, such as 401(k)s and IRAs, where the money is meant to be invested for the long term.
Liquidity is often seen as a desirable trait, but it can make you a worse investor. Illiquidity, on the other hand, can provide significant benefits, such as forcing you to stay invested and providing an illiquidity premium, not to mention the tax advantages of long-term investing.
For long-term investors, these benefits are hard to ignore. With Gridline, you can access top-quartile private market alternative investments, typically only available to sophisticated family offices and endowments. Gridline’s mission is to open up access to these investments transparent, efficiently, and lower-costly.
In a downturn, many investors look for the perfect moment to enter the markets. Even worse, around 42% of Americans don’t invest in the stock market, and even fewer have any experience with private markets.
With significant crashes on the mind of many investors, it’s understandable why some individuals are skittish about stocks. Since 1974, there have been 24 separate market corrections, so even barring a recession, stocks regularly lose 10% or more of their value.
Private markets, too, experience regular volatility. However, choosing to sit out the markets would be a dire mistake. Calpers, the largest pension fund in the United States, recently admitted that avoiding private equity during the financial crisis cost them up to $18 billion. Around 2 million members rely on Calpers for their retirement, so the implications of this missed opportunity are vast.
Moreover, sitting out of private markets means foregoing one of the essential tools for diversification. Historically, private markets have experienced less steep drawdowns, faster recoveries, and higher long-term returns than public markets.
The average private equity fund generates a 19% net IRR, more than triple the S&P 500’s projected annualized returns over the next decade. Venture funds aim to outperform broad-based market indices by 5-15 percentage points, and this outperformance continues in downturns.
In the decade following the dot-com crash, private equity returned a 7.5% average, while the PME index annual return dropped to 0.08%. Buyout funds, too, are considerably more resilient than public markets, as only 2.8% of buyout funds experienced catastrophic loss during recessions, compared to 40% of stocks.
This outperformance is particularly pronounced among first-time funds, nearly 18% of which nab an IRR of 25%, while later funds only exceed that number about 12% of the time.
The reasons for this outperformance are numerous, but one key reason is that private companies are less efficiently priced. Fewer analysts are following these companies and less public information is available, so there’s more room for mispricing. The so-called “complexity premium” results in private companies being cheaper than public companies with similar characteristics.
In addition, private firms aren’t subject to the short-termism rampant in public markets. Public companies are under constant pressure to meet quarterly earnings targets, which can lead to suboptimal decision-making. Private firms have a longer time horizon and can take a more patient approach to business.
Moreover, while downturns hit public companies hard, they present opportunities for private equity firms to “buy and build.” Private equity firms can buy up companies at a discount and then invest in them for the long term, which leads to outsize returns.
Investors who’ve written off private markets are missing out on a crucial tool for diversification and long-term growth. By avoiding private equity, Calpers lost billions of dollars in potential gains. For the average investor, the cost is no less real. In fact, according to Fidelity Investments, investors who missed the ten best stock market days missed out on 55% gains.
It’s time to get in the game. Investing in private markets can be lucrative with proper due diligence and a long-term time horizon. Gridline makes it easy to access top-quartile private market investments with low capital minimums and high liquidity. Get started today to secure your financial future.
Retail and institutional investors alike have long been enamored with stock picking. On the surface, the logic is simple: find public or private stocks undervalued by the market and reap the rewards when the market catches up to their actual value.
However, despite the allure of stock picking, the reality is that it is a challenging task to do well. One study found that individual investors consistently underperform market indices at an average of 1.5% per year. Further, a Berkeley study finds that “the vast majority of day traders are unprofitable.”
Warren Buffett put it nicely: “I don’t think most people are in a position to pick single stocks.”
One challenge with stock picking is that public and private stocks have different returns. That is, some stocks will outperform the market while others will underperform.
For public stocks, the return dispersion is relatively small. This means there is no significant difference between the best and worst-performing stocks. However, for private stocks, the return dispersion is much larger.
Another challenge with private stocks is accessibility. Many private stocks are not accessible to retail investors. They may be illiquid or require a minimum investment that is too high for even well-capitalized investors.
This lack of accessibility makes it difficult for stock pickers to find private stocks undervalued by the market.
Further, high-quality data is an industry of its own and is critical for stock picking. Unfortunately, there are many challenges associated with such alternative data.
One challenge is data quality. Private companies are not required to disclose their financial information the same way public companies do. This lack of transparency can make it difficult to assess the actual value of a private company.
Another challenge is data sparsity. For many industries and countries, there is a lack of comprehensive data sets on private companies. This lack of data can make it difficult to find undervalued stocks.
Even when data is available, it may not be timely. For example, a company may announce earnings after the stock market has closed for the day. When investors access this information, the stock price may have moved significantly.
In the 1970s, academic John Bogle popularized the concept of indexing. The idea is simple: instead of trying to pick stocks, investors should buy a basket of stocks that represents the market as a whole.
This approach diversifies away individual stock risk, reduces transaction costs, and gives investors access to the entire market, not just the stocks they can find and research.
Indexing is an effective investment strategy for both public and private markets. It’s difficult for managers to outperform the S&P500 consistently. And when it comes to private markets, while individual startups have a high probability of failure, a highly diversified portfolio, such as a VC fund of funds, can be relatively low risk.
In that way, diversified investing in private markets can both offer risk reduction and greater returns. For example, a study by Cambridge Associates found that top-quartile VC funds outperformed the S&P by ~2X over the last 5-, 10-, 15-, and 25-year periods. Even the median private equity fund’s return of 19% is far higher than that of public stocks.
Stock picking is a difficult task made even more difficult by the challenges associated with accessibility and data. However, indexing provides a simple and effective solution for investors who want to participate in the private markets without picking stocks.
With Gridline, you can index the private markets and gain exposure to a wide variety of assets with low capital minimums, transparent fees, and greater liquidity.
Mandated quarterly earnings reporting and activist investor pressure have created a short-term orientation in public markets that is detrimental to long-term value creation.
The world’s largest asset manager, BlackRock, recognizes this bias toward the short term. In a letter to CEOs in 2015, Laurence Fink warned that “the effects of the short-termist phenomenon are troubling … more and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”
These words have been borne out by research. For example, a survey of 401 financial executives found that 78% would sacrifice long-term value to smooth earnings. Other researchers point to corporate dividends and buybacks as evidence of the short-term orientation of public markets. Public companies have paid out a stunning 90% of their profits in dividends and share repurchases, leaving little available for investment in the long term.
While it’s difficult to quantify this bias’s economic impact, Singapore’s research provides some insights. In 2003, the country implemented a listing rule that required firms with a market capitalization above S$75 million to publish quarterly financial statements. A study found that this hurt small firms, with a 5% decrease in firm value.
Decades of legislation have created a burdensome disclosure regime for public companies. Once public, firms must disclose an ever-increasing amount of information to satisfy the demands of regulators, investors, and the general public.
This disclosure imposes costs in terms of time and money and can impede a firm’s ability to compete by revealing information that would be a better-kept secret. In addition, the quarterly earnings reporting process creates pressures that can lead management to make suboptimal decisions to meet short-term targets.
In contrast, private companies are not subject to these exact disclosure requirements. They can choose to disclose information voluntarily and are not under the same pressure to meet short-term targets set by analysts and investors. As a result, private companies can take a longer-term view, making decisions that are in the business’s best interests without having to worry about the short-term fluctuations of the stock market.
When it comes to deploying capital, private companies have an advantage over public companies. They can choose to reinvest profits in the business rather than allocating them to dividends or share repurchases. They can also make longer-term investments, such as in R&D or new products, without worrying about the short-term impact on earnings.
The evidence is clear that private market investors enjoy persistently higher returns than public market investors. The degree of causality is still being debated. Still, intuitively it makes sense that a longer-term orientation and the ability to deploy capital without the shackles of quarterly earnings reporting would lead to superior returns.
Other factors, such as inefficiencies in the private market and the lack of liquidity, also play a role. Research suggests, for instance, that the liquidity discount premium can be as high as 65%, with more conservative estimates in the range of 20-30%.
The resulting outperformance of private markets has led institutional investors to allocate an ever-increasing amount of capital to private equity, venture capital, and other private market strategies.
For a long time, private market investing was reserved for institutional investors and wealthy individuals. But that is changing. Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds and enables access for individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.
In August 1998, Long-Term Capital Management (LTCM), a large hedge fund, collapsed. LTCM had taken on too much risk and eventually went bankrupt. The fall of LTCM led to a financial crisis and the loss of millions of dollars for investors.
Individual investors can also learn from the mistakes of LTCM. Below are five investment decisions that could haunt you for decades if you’re not careful.
In the 1970s, John Bogle, the founder of Vanguard, popularized the concept of index investing. Analysts argued that it was impossible to beat the market, so a better strategy was simply investing in the entire market.
This investing strategy has become known as “passive investing.” It’s a sensible strategy for many investors because it’s low cost and easy to implement.
That said, private markets have consistently outperformed public markets over the long term. In addition, public markets suffer steeper drawdowns and longer pullbacks during bear markets.
While the last 13 years have seen an unprecedented bull market in public equities, it’s important to remember that markets don’t always go up. Analysts reveal that public markets are in a “super bubble” that could pop anytime.
The Fed’s policy of unlimited quantitative easing has created asset price inflation, but as 40-year-highs in inflation loom, the Fed is now shifting gears and sharply raising rates.
A rule of thumb states that out of 10 early-stage companies, only one or two will produce substantial returns. Given these odds, it doesn’t make sense to put all your eggs in one basket by investing everything you have in a few companies.
Given the tremendously large dispersion of returns in private markets, owning a large portfolio of positions is critical. A more diversified approach increases the chances that you’ll have those one or two companies that produce returns that justify the risk.
SPVs, or special purpose vehicles, became popular after the financial crisis. SPVs are legal entities used to hold assets or debt and isolate risk.
The problem with SPVs is that they’re often used to invest in risky assets, such as junk bonds, without any skin in the game. This can lead to big losses if the underlying asset defaults.
Moreover, SPVs are often opaque and lack transparency. It is difficult to understand the risks involved and make informed investment decisions.
Cryptocurrencies, such as Bitcoin, and collectibles, such as sports cards, have become popular investments in recent years. While these assets offer high returns, they’re also highly volatile and risky.
Investors should be aware that cryptocurrencies are not legal tender, are not backed by the government, and are often unregulated. In addition, there’s no guarantee that you’ll be able to sell your crypto assets for cash.
Collectibles, such as sports cards, are also risky investments. Speculation and emotion rather than fundamentals often drive the collectible market. This makes it difficult to predict when the market will turn.
Leverage can be a useful tool to magnify returns. However, it can also magnify losses. This is why it’s important to use leverage only after you’ve done your homework and understand the risks involved.
While institutional investors have teams of experts to manage leverage risks, individuals typically don’t. This makes it all the more important to understand the risks before you use leverage.
With Gridline, investors can avoid these common mistakes and access top quartile investments with low capital minimums, fee transparency, and greater liquidity.
The refrain “there is no alternative” is favored by politicians to market pundits when faced with tough decisions. “TINA” has been used to defend bank bailouts, quantitative easing, and austerity measures. It’s also the basis for many individuals’ investment decisions.
As the stock market enjoyed an unprecedented 13-year bull run following the financial crisis, the TINA mindset prevailed. With interest rates at historic lows and bond yields offering little return, investors believed they had little choice but to take on more risk in search of higher returns.
The ZIRP (zero interest rate policy) environment has changed, with rates now rising and the Fed tightening its monetary policy – which has justified a recent market selloff on the equity side as valuations have come under pressure.
But now, with plummeting stock prices and virtually risk-free bond yields exceeding 4.3%, many investors are questioning TINA. However, more important than the growing attractiveness of bonds is the light TINA has cast on the underlying assumptions of the stock market.
The current macroeconomic picture no longer bodes for equities, not only because of higher rates and inflation but also due to ongoing geopolitical risk, supply chain risks and zero-covid policies abroad, central bank confusion and intervention, and the upcoming US mid-term elections.
For investors seeking high-risk-adjusted returns, bonds are still not the answer. While bond yields have increased, they still fail to keep up with inflation, let alone generate real legacy wealth.
The valuation resets we’ve seen this year, and those that are to come over the next 6-12 months, provide significant opportunity for private market investing–in both emerging and disruptive technologies (via VC) as well as picking up cash-flowing businesses for much more reasonable multiples (via PE, growth equity, and buyout firms).
These investments don’t need to be tremendously risky to succeed. To be sure, investing in an individual startup is a roll of the dice. But investing in a venture capital or private equity fund exposes you to a portfolio of companies, which decreases your overall risk. And plenty of hedge funds pursue relatively conservative strategies while still outperforming the stock market.
Just as index funds offer a low-risk way to invest in stocks, there are index funds that track private equity and venture capital performance. These funds offer investors a way to participate in the growth of these industries without the need to pick individual winners.
An analysis by the Institutional Investor shows that a private market portfolio of 500 randomly-selected deals significantly outperforms the S&P 500 with even less risk. Real-world returns bear this finding, with the median private equity fund returning a net IRR of 19.5%.
If private markets offer higher returns with less risk, why aren’t more investors fleeing the stock market?
The answer, in part, is that private markets are still relatively opaque. It can be daunting to assess the riskiness of individual venture capital or private equity fund, let alone an entire portfolio.
Moreover, private markets are primarily restricted to accredited investors, including individuals with a net worth of $1 million or more or annual incomes exceeding $200,000. Most Americans don’t meet these criteria, which leaves them effectively shut out of these investment opportunities. As a Nasdaq article explains, retail investors own about 77% of stocks’ market value.
Even investors with deeper pockets may be reticent to put their money into less liquid investments, assuming they can access them in the first place. While “access-constrained funds” generally enable higher returns, they exclude many potential investors.
Gridline, a digital wealth platform, is changing all of that. Gridline provides a curated selection of professionally managed alternative investment funds and enables access for individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.
Adverse selection occurs in any market where one party has more information about the quality of a good or service than the other party. In the context of investment platforms, adverse selection can result in lower-quality projects being funded, resulting in lower returns for investors.
Startup investor Julian Shapiro has written about this problem, saying, “the enemy of returns in venture is adverse selection.” The same issue can occur on investment platforms that act as marketing or placement agents for funds, as some platforms are compensated for the placement of funds on their platform, which could have negative implications for fund quality.
Further, investment platforms that act as “funding of last resort” can also create a downward spiral of adverse selection. When companies turn to these platforms, it can signal that the company is not able to raise money from more traditional sources.
In another example, research from HBS found that “co-investments underperform the corresponding funds with which they co-invest due to an apparent adverse selection of transactions available to these investors.”
To mitigate the problem of adverse selection on investment platforms, it is crucial to consider the following:
By considering these factors, platforms can work to mitigate the problem of adverse selection and ensure that only high-quality investments are being offered.
Gridline takes a proactive approach to mitigating adverse selection on its platform. The company is focused on top-quartile, professionally managed funds and has a rigorous manager selection process. Gridline also ensures that its compensation structure does not incentivize lower-quality projects.
Gridline’s investment team has over 20 years of experience running private market portfolios for top endowments and family offices. One member was the CIO of a $13 billion family office, while the other ran UTIMCO (one of the largest endowments in the US). This experience has given them a deep understanding of the private markets and how to identify high-quality managers and projects.
Gridline begins its manager selection process with a comprehensive market analysis, drawing on various sources, including third-party data providers, contacts within the Investment Manager’s network of fund managers, and other limited partners. This analysis is used to identify funds deemed worthy of further consideration based on a set of quantitative screening tools.
The screening tools review past performance and compare it to a customized peer group of funds with similar investment styles (e.g., sector, stage, strategy). This allows Gridline to better understand the strategy’s risks, the consistency of management’s investment approach, and whether outperformance may be sustainable over a long time horizon.
Once a fund has been identified as worthy of further consideration, Gridline engages with the manager to better understand the fund’s strategy and investment thesis. This process allows Gridline to select managers that it believes display preferential access to investments (e.g., strong sourcing & networks), exhibit superior portfolio management skills (i.e., through exit), have a strong track record of success, anticipate market movements, and have a deep conviction in their thesis & strategy to “deliver alpha.”
By taking this proactive and thoughtful approach to manager selection, Gridline can mitigate the problem of adverse selection and ensure that its investors have access to high-quality investment opportunities.
Startup companies spend more time — and raise at more significant valuations — in the private markets. At the turn of the century, the median equity volume raised pre-IPO was just $42 million. In 2020, that number quadrupled to $167 million.
Private rounds allow businesses to build up a war chest of retained earnings before going public. Companies choose to stay private longer because they see the advantages of having more time to grow their businesses and raise ever-larger private rounds, almost like aging fine wine. Companies are staying private longer, across sectors including software, marketplaces, subscription, and e-commerce, according to Crunchbase research.
Research by Jeremy Abelson and Ben Narasin showed that between 2012 and 2015, companies that entered public markets with a market cap above $1 billion reached a 60% higher valuation than companies with a market cap under $500 million.
Private businesses also face fewer requirements for reporting. They aren’t mandated by the SEC to submit complex annual reporting and third-party auditing, which are costly, time-consuming, and distracting. Private businesses can retain their focus on strategy instead of meeting the expectations of public markets.
IPOs bring risks on every level. Businesses planning an IPO face regulatory risks, shareholder-related risks like alleged listing misstatements, and contemporary risks such as indemnification to the underwriters.
Businesses can avoid these risks by staying private while retaining control and amassing capital. If and when a business chooses to go public, it’ll achieve a much higher valuation by having grown privately.
Investing in pre-IPO gives you access to private companies before they go public. With pre-IPO equity, you tend to get much more for your money.
When a company goes public, it issues shares and sells them to the general population. In the early days of a company’s life, however, investors interested in getting in on the ground floor can do so by purchasing shares from venture capitalists, private investors, or even employees instead of waiting for the initial public markets valuation.
Pre-IPO investing offers investors a more significant opportunity to grow their stake faster early on in the company’s lifecycle than after it goes public and begins to distribute dividends.
Buying into these companies early on gives you an advantage over time as the business grows and distributes returns to shareholders via dividends and share price appreciation.
Countless headlines read something like “If You Invested Right After Facebook’s IPO” or “If You Had Invested Right After Tesla’s IPO,” showing how you’d be a millionaire today. These returns pale in comparison to what’s possible by investing before these companies went public.
Pre-IPO fundraising has the advantage of increased control and capital in the long term.
Public companies must distribute profits to shareholders through dividends and share buybacks. But when a company is private, executives can choose whether or not to sell their shares at any time.
This option allows companies to build up enough cash reserves before going public so that distributions can be lower once they are listed. Companies that choose not to use this cash reserve benefit by building shareholder value through increased buyouts or acquisitions rather than dividends.
Pre-IPO transactions have been more favorable than IPO transactions for both founders and shareholders.
Affirm, Qualtrics, UiPath, Roblox, Coinbase, and others went public in 2021.
Affirm popped nearly 100% in its market debut. Qualtrics priced its IPO at $30 a share, but it only became available to regular investors at around $45. These shares were worth around $18 just a couple of years prior.
That exponential gain rarely (if ever) continues after a public debut.
The pre-IPO equity market is increasingly becoming the place for investors seeking higher returns from their capital. It’s growing in parallel with the demand for alternative investments. Gridline makes investing in diverse pre-IPO equity strategies effortless.
Interest rates are a crucial driver of asset prices. The Dow fell over 1,000 points after Fed Chair Jerome Powell said a “restrictive policy stance” was needed to keep the economy from overheating. Earlier, better-than-expected inflation readings acted as catalysts, driving 20% gains in the Nasdaq. Investors believed that these readings would result in a more dovish Fed, and even the idea of a more relaxed policy was enough to support asset prices.
The effect of higher rates is two-fold: first, it raises the cost of borrowing for companies, and second, it reduces the demand for loans as businesses and consumers alike become more cautious about taking on new debt. These effects can lead to slower economic growth and cause a recession.
While private markets are also subject to these same interest rate dynamics, there are a few key ways in which they may be less impacted than the public markets.
Both public and private market investors enjoyed an unprecedented bull market following the global financial crisis. Central banks worldwide kept rates low to spur economic activity, and asset prices rose as a result.
Private equity firms took advantage of this low-interest environment to raise large amounts of capital, resulting in an enormous amount of “dry powder” waiting to be deployed. Now, buyout firms can find undervalued companies and assets will be well-positioned to generate solid returns for their investors.
That’s one reason private equity funds fared better than public markets in both the Great Recession and the dot-com bubble. Moreover, research shows that only 2.8% of buyout funds experienced catastrophic losses during recessions, compared to 40% of stocks.
Private equity firms also have access to a significant amount of long-term capital from large institutional investors, such as pension funds and insurance companies. These investors have a long-term outlook and are looking for diversification away from traditional asset classes like stocks and bonds.
Of course, private markets are not immune to the effects of higher interest rates. Portfolio companies will be impacted by the higher energy, labor, and goods cost. Additionally, leveraged buyouts become more expensive when rates rise.
Nevertheless, private equity firms are well-positioned to weather the storm and take advantage of opportunities that may arise from a shift in market conditions.
Another impact of higher interest rates is that it may lead to consolidation in the private equity industry. Larger firms will be able to compress fees and have more dry powder to invest in. This will pressure smaller firms that are less diversified and more reliant on debt financing.
Smaller firms need to re-strategize and find ways to differentiate themselves to survive. For example, firms may focus on specific sectors or geographies where they have a competitive advantage.
Higher interest rates will have an impact on both public and private markets. However, private markets are better positioned to weather the storm due to the ability to deploy large amounts of capital and the access to long-term financing that’s not tied to quarterly reporting. Market consolidation is likely to occur, with larger firms becoming more dominant in the industry.
Investors should consider allocating more capital to private equity and other alternative investments to take advantage of these trends. Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds and enables access for individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.
After years of strong stock market returns, many analysts now warn of low public market returns ahead.
This is a tough pill to swallow for investors who have enjoyed years of supersized gains. In a stock market frenzy, everyone wants to get in on the action – but markets are now (still) in a “super bubble” of historically super-high valuations, ready to pop at any moment. That’s according to Jeremy Grantham, the famed investor who predicted Japan’s 1989 market crash, the dot-com bust in 2000, and the 2008 financial crisis.
Criticism against this analysis is in no short supply, but even mainstream investment analysts caution that public market returns will likely be lower in the coming years. In a recent article in the Wall Street Journal, analysts forecasted nominal annual returns of US stocks over the next ten years between 2% and 4% – a sharp contrast to the double-digit gains of recent years.
The concept of “reversion to the mean” is powerful in investing. It says that after periods of outperformance or underperformance, assets will tend to return to the average. This is why Grantham sees big trouble ahead when he looks at today’s market valuations.
All equity bubbles eventually burst and, according to Grantham, we are now in one, largely caused by the Fed’s mass liquidity injected into the economy. This has driven asset prices (including stocks) to artificially high levels.
A pervasive notion that “stocks only go up” has taken hold, as have excessively optimistic views about the future. However, the post-Volcker era is ending, which will have major implications for stock prices. Turning off the tap of easy money may dissolve the notion that stocks only go up, and with it, the super bubble.
For long-term investors, market corrections present an opportunity to buy quality assets at a discount. This is easier said than done, of course, but patient and disciplined investors will be rewarded.
In the meantime, there are other opportunities to consider. For example, private markets have been outperforming public markets for decades, which is likely to continue. Private markets have historically outperformed in downturns as well, for several reasons.
For one, private equity firms “buy and build” companies, which they can do at a discount during periods of market duress. Further, these firms tend to be more nimble and adept at dealing with headwinds than public companies. Moreover, they can take a longer-term view without the pressure of quarterly earnings reporting.
Alpha-generating managers provide additional value beyond the liquidity premium and lower correlation with public markets, which should continue to attract a loyal following. So, while public market returns may be lower in the years ahead, investors still have opportunities to generate strong returns in private markets.
However, investing in a diversified portfolio of private market assets can be difficult and expensive. In particular, high-return funds are often access-constrained and have high minimum investment requirements, limits on who can invest, and illiquidity provisions. For these reasons, private markets have largely been off-limits to individual investors – until now.
Gridline is a digital wealth platform that provides a curated selection of professionally managed alternative investment funds and enables access for individual investors and their advisors to gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.