Dan Rasmussen, founder of Verdad and author of 'The Humble Investor,' dives into innovative investment strategies shaped by his unique background. He discusses the importance of skepticism in investing, warning against blind reliance on expert predictions. Dan advocates for global diversification, highlighting the benefits of including international stocks. He emphasizes the enduring appeal of value investing during market downturns and critiques the risks associated with private equity, underscoring the real returns possible in public markets.
Dan Rasmussen highlights the importance of historical analysis in investing, asserting that informed decisions are better than relying solely on intuition.
He introduces the concept of radical skepticism, urging investors to scrutinize both individual analyses and market consensus to avoid collective errors.
Rasmussen advises geographic diversification in portfolios, emphasizing that including international stocks can mitigate risks associated with overexposure to the U.S. market.
Deep dives
The Genesis of an Investor
The founder of Verdad, Dan Rasmussen, discusses how his passion for investing emerged from his background in history and literature. He emphasizes that investing is fundamentally about betting on ideas, which requires a strong understanding of historical financial data to inform future decisions. This blend of historical analysis and practical application allows investors to make informed decisions rather than relying solely on intuition. By analyzing past trends, he has cultivated a research approach that leverages historical lessons to guide current investment strategies.
The Role of Radical Skepticism
Rasmussen explains the concept of radical skepticism in investing, which involves scrutinizing not only individual analyses but also the broader market context. He highlights the importance of understanding the efficient market hypothesis and knowing how one's insights compare to market consensus. Using the example of Greek shipping companies, he illustrates how collective errors in analysis can lead to poor investment outcomes, a phenomenon he terms 'competition neglect.' This skepticism extends to forecasting, where he argues that historical data and base rates are often more reliable than subjective predictions made by experts.
The Challenges of Forecasting
Rasmussen elaborates on the inherent difficulties in predicting future earnings and revenues, likening the challenge to human limitations in foresight. He argues that future uncertainties are exacerbated by unforeseen life events and market dynamics, making accurate predictions nearly impossible. This realization fosters a humbler approach to investing, advocating for strategies that capitalize on surprises rather than attempting to forecast them. He particularly notes that historical analysis can offer better guidance for estimations than speculative forecasts.
The Case for Geographic Diversification
The discussion emphasizes the necessity of geographic diversification in investment portfolios, countering the trend of focusing solely on U.S. equities. Rasmussen argues that limiting exposure to only the U.S. market is based on flawed assumptions regarding long-term performance. He explains that incorporating international stocks can provide valuable diversification, especially in times of U.S. market weakness. As correlations between international and U.S. markets continue to decline, the potential benefits of holding diverse global assets become even more significant.
Private Equity and the Misguided Investment Trend
Rasmussen critiques the growing trend towards private equity investments, positioning them as a significant mistake for investors. He argues that small, riskier companies receiving large amounts of debt are not fundamentally sound investments, especially given the lack of substantial historical returns compared to public markets. He draws a parallel between private equity and addiction to risky debt, describing the current landscape as dangerously inflated due to excessive liquidity. By emphasizing the need for common sense and empirical analysis, he warns against the pitfalls of chasing trends without rational justification.
Dan Rasmussen is the founder and portfolio manager at Verdad. Verdad runs capital with rules-based ideas and a strong focus on leveraged small cap value stocks. He has published fascinating research across multiple topics. Today we’re going to talk about his new book, The Humble Investor, which summarizes many of his key ideas for a wide audience.
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