Daily Archives: January 27, 2016

Investors Piling into Illiquid Assets to Avoid Discipline of Market Prices

Naked Capitalism has the article Investors Piling into Illiquid Assets to Avoid Discipline of Market Prices.

Now the entire point of illiquid investments is that they supposedly don’t go boom in such a dramatic way. But the crisis just past showed that they lead investors to underestimate the risks of those strategies and overdo them in a very big way. And the undue enthusiasm for investments with flattering valuations evident in the BlackRock survey suggests the odds of a recurrence of bad outcomes, meaning major losses, is high.

I was wise enough to resist the dot com bubble which took quite a few years to blow up in people’s faces. This article mentions one of the things that I observed at the time.

One of the factors that keeps pushing investors into greater risk taking is competitive pressure. If your performance lags, even if it is because you are making better risk/return decisions, you will lose assets (and if you are at a big firm, you will be replaced). Yet we see remarkably little impetus to change a system which rewards the fund managers and gatekeepers (who have a particularly powerful role in keeping this system intact) since they earn….annual fees! A classic “And where are the customers’ yachts?” problem.

It was so discouraging to see wise mutual fund managers being replaced by ones that were willing to take unwarranted risks.

I am not touting my enduring superior wisdom. In the real estate bubble I was fooled into thinking I was taking less risk than I was. It wasn’t disastrous for me because I did at least maintain some diversification. However, I am glad to see article like this one to remind me to stick to my plan, and not get drawn into false senses of security. The strategies that stand the test of time, are the ones that have passed that test for good reason. History has shown over and over again that strategies that claim to beat the market ultimately fail to do so. They usually fail in dramatic ways if you wait long enough for the final outcome. More importantly, you never know very much in advance when the final outcome is about to happen.