The 'Humble' Investor Says Sell Private Equity, Sell US Tech, Buy Polish Small Caps
Jan 10, 2025
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Daniel Rasmussen, founder of Verdad Advisers and author of 'The Humble Investor', shares his unique view on investing. He argues against US tech investments and advocates for buying Polish small caps, especially with potential peace in Ukraine. Rasmussen discusses the fallacies of financial forecasting, emphasizing that despite their shortcomings, forecasts are still necessary. He highlights the advantages of value investing in international markets and warns against the AI bubble, offering a refreshing perspective on current market dynamics.
Accurate financial forecasting is notoriously unreliable, suggesting investors should adopt a humble approach rather than relying on expert overconfidence.
Market volatility often stems from collective psychology rather than economic fundamentals, highlighting the importance of understanding market sentiment in investment strategies.
The podcast critiques private equity's risks and complexities, advocating for value investing in undervalued markets as a more reliable investment strategy.
Deep dives
The Cost of Filing Errors
In 2023, U.S. businesses incurred $14 billion in penalties from the IRS due to filing mistakes, an alarming cost that could have been reinvested to fuel their growth. This statistic highlights the critical need for accurate employee and vendor information management, as errors in compliance can lead to significant financial setbacks. Utilizing services like TenCheck not only minimizes these mistakes but also allows businesses to onboard new hires and vendors swiftly and accurately, ensuring compliance from the get-go. Such proactive measures are essential for safeguarding a company's financial health and promoting sustainable business expansion.
The Futility of Forecasting
The podcast emphasizes that making accurate predictions in financial markets is incredibly challenging and often futile, as history shows that forecasts tend to be incorrect. Drawing on research by Phil Tetlock, it reveals that experts are no better at forecasting than non-experts, with arrogance being the distinguishing trait. This leads to a misunderstanding of growth projections where optimistic forecasts often correlate with poorer market returns. Investors should remember that betting on overconfidence often leads to underwhelming results, suggesting a need for a more humble approach to investing.
Understanding Market Volatility
The conversation delves into the concept of market volatility, suggesting that much of it is unrelated to fundamental economic indicators, as a substantial percentage of fluctuations is driven by biased forecasts and collective market psychology. It highlights how, even with accurate growth models, markets tend to react excessively to new information, resulting in rapid price changes that may not reflect underlying company values. This raises the notion that understanding and anticipating market sentiment is just as important, if not more, than analyzing financial fundamentals. Therefore, investors should focus on where they believe collective sentiment is misaligned with reality.
The Shipping Industry Analogy
Using the shipping industry as an analogy, the podcast illustrates the pitfalls of competitive neglect, where companies often fail to account for the actions of their competitors when making investment decisions. When shipping rates are high, multiple companies may order new vessels, leading to an oversupply that ultimately drives rates down. This dynamic mirrors current investment trends, particularly in the tech and AI sectors, where overconfidence may lead to overinvestment. Investors should be cautious and consider how widespread enthusiasm can lead to commodification and decline in value across an entire sector.
Insights on Private Equity and Value Investing
The discussion critically examines private equity, highlighting its inherent risks, especially given the leverage typically employed and its focus on smaller, less stable companies. It suggests that private equity is often mistaken for a diversifying investment, while in reality, it carries similar risks to public equities but with added complexity. In this context, value investing is portrayed as a strategy that could remain effective, albeit underrecognized in recent years, particularly in light of current market trends. The podcast advocates for identifying high-quality, cheap companies in undervalued markets as a prospective strategy for savvy investors.
Daniel Rasmussen, founder of Verdad Advisers and author of The Humble Investor: How to Find a Winning Edge in a Surprising World, joins Merryn this week.
They discuss his book, why all forecasts are wrong (and why we need them anyway), the case for selling US tech and buying small caps, whether we’re in an artificial intelligence bubble, and Japanese equities.
