I’ve been thinking a lot about this. I think that I have disproportionately benefited from being at the right place at the right time backed by enormous amounts of central bank money. So, I think we all have been, I think it is very difficult to be a public market individual stock picker in a world where the central banks are constantly meddling because when they do the best thing that you can do is belong to the market beta and the more concentrated you are the better returns. You would have delivered since 2008, when the central bank started to get very aggressively involved, when individual stock pickers reigned.
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The universe was when central banks were largely on the sidelines and so there was all kinds of dispersion right dispersion meaning good outcomes, bad outcomes. Lots of alpha right meaning your performance was independent of the market. But, since 2008 it’s largely been beta that’s driven the market and the folks that have done exceedingly well, were those in tech. Because we delivered the best beta and every time we confuse alpha and beta we get over our ski tips and there’s always some big blow up.
I think my my general takeaway is that if the central banks stay on the sidelines individual stock picking rains. Active management can win, if they continue to be involved and do quantitative easing. All of this other stuff index funds that are long concentrated market beta will always outperform in the long run. I was watching warren buffett answer some questions and one of the questions and this goes to the law of big numbers like blackrock. He was saying the reason. I did better earlier in my career than later in my career on a percentage basis because I had a smaller amount of capital and I was placing it on smaller bets, smaller ideas and themes. Then, as I had a bigger chip sack I had to find bigger ideas to put more money to work. Therefore, more people were looking at those and so those assets were not undervalued and so I found that very insightful in terms of when you participate in the market. If you’re trying to pick between very large bats like Kotu and TPG, and tigers in the growth space act like now. Everybody knows about these companies. Everybody knows stripes a winner everybody knew airbnb and uber were winners in the late stage of the private. Everybody knew facebook was the winner on the stage prime market.
If you’re battling that out Yuri Milner is going to come over the top and pay 2 billion more than you or Masi Yoshi-san is going to pay 5 or 10 billion more than you. Where is the alpha there. Where is the gain of the alpha’s in the fees. There you go and so they were playing a different game and I that’s I started trading this past two weeks because I’ve never traded public stocks. I wanted to add it as a skill set, so I put a couple million bucks into an account and i’m just trying to actively figure out how value work there. I’m just starting to make trades that I want to hold for 10 or 20 years. We’ll see if I can beat the market that’s. The other thing is what do you want to spend your life doing if the index. If you can put money in a passive index and not do any work well that’s attractive as well. So, saks what you think in terms of active management in these public markets and the size of the bets that have to be like. I said I think it’s very hard to beat the market consistently. I think it’s a very tough profession, I’m sure there are people who can do it.
But, I don’t know if it’s easy to predict who those people are. So, look,I think it’s something that can be done. But, I just think it’s a tough game. I mean what we do as private investors is a little different because not everybody is in a position to buy shares right. So, you’re not available to you don’t. Even know the company access is limited and information is limited. In exchange for that sort of preferential access that we get we actually have to do work. So, when you’re a public investor in a company Disney or whatever you don’t do any work you’re not involved at all. We do a lot of work for the companies. That’s why they choose us and so it’s not. You’re not competing against the whole world. I think the public markets are just so competitive. Are you tempted though looking at these prices? Because I was looking at a company that was trading at 50 times revenue last year. They’re racing again and they double their revenue so now they’re at 20-25 times revenue. They’re rising at last year’s valuation.
Then I looked at the public market comps and they’re trading at six times. So, now I’d like to wait a second and obviously look at the growth rate. You got to look at the growth. The growth rate in this example was three times greater than the public market comp so how would you assess that. Then, well, what we’re seeing right now is that pretty good sas companies that are growing maybe on a trailing basis they grew 3x. Prospectively, they’re growing, call it two and a half X they’re trading right now not trading. But, basically deals are getting done at 20 times arr 20, which are this year’s current run rate the current arr. You’re not getting that bonus like here’s your projected next year we’re going to give it based on that this is current no no current arr is about 20-22-23 times are from what last year 100. It was like 100 times was the rule of thumb, so now there are some where there are deals getting done in the high 20s. I’d say or even 30, if you believe that by the end of the year.
It’ll be more like 20. So, but I i think the new levels are landing at 20 20 something times. Now why does that make sense relative to the public sas companies well like you said the sas index is trading at roughly six times. But, that’s only an average growth right. So, if you’re bringing in reactions ten times the growth right right and the high growth saas. Companies are trading it like seven times that’s for like a forty percent grower. We’ve talked about this before. So, listen, if you’re tripling year over year and you pay 20 times that’ll be seven times next year. But, if you’re going two two and a half three X next year that’s way faster. So, I think there’s actually an arbitrage there. I mean this is why we like doing private sas investing right now.
If you’re really trying to generate alpha, you have to have a sense of what’s actually happening in the world right now. If you’re just trying to deliver the market beta and run an index. Then you’re right you should ignore this idea that there could be more price adjustments. But, if you look at the public markets again. The ultimate terminal buyer they have more cash than they ever had since 2008 which means that there is no reason to buy. You’re talking about private companies it all ultimately ends up in the public markets and so if the public markets are saying. There is no reason to buy this stuff. It trickles down. So, then the crossover investor who has a public private business says what on the public side I’m completely de-risked and in cash and so on the private side. I’ll just be a little bit more circumspect. Wait as david said, I’ll just wait six months and put even more money in later. I’ll actually have a better irr and I’ll make the same profit dollars. So, then the series B and C firm who used to feed those deals to the crossover folks are.
If you’re waiting, I don’t want to have to write a check to support these folks. My whole point was to have you mark up the deal. So, I could raise a new fund. They slow down and then that goes back to the series a person who’s like well wait a minute. The reason I paid at 50 pre was because I thought you’d step in and buy it at 100. And then they slow down, so all I’m saying is I think that we are at the point of the cycle where constipation is setting it and this is why you’re seeing such a downtick in deal velocity and dollars put to work. I’ll say it even more if you’re a venture investor who took a longitudinal view on public market stocks. Then have now seen 60 to 70 percent write-downs of those same stocks that you could have distributed.
This article is a transcription of a video made by Jamie Tree
Original video: https://youtu.be/f-JY1JLOTYE
