Most of the world’s top stock investors aren’t great market timers.
They couldn’t pick the top of bottom of any market cycle. They don’t even try.
But they do study history of market cycles, have a deep understanding of them, and move in when things are bad and out when they’re good.
That’s why some recent major news in the financial markets, which went largely unnoticed, should be considered deeply by all investors.
After all, it will likely allow you to make a lot more money in the months and years ahead.
Is The Smart Money Cashing Out?
The big Wall Street fortunes are not made buying stocks like you and I do.
You and I mostly buy some stocks, ride them up, and sell them. Then we try to repeat that process over and over again.
Don’t get me wrong, there’s nothing wrong with that strategy. It’s simple and can be very profitable.
But the big money on Wall Street is made by using other people’s money.
Look at hedge funds. The big hedge funds manage around $10 to $50 billion. Their managers can and do make hundreds of millions, sometimes billions, of dollars each year.
There are also hundreds of much smaller funds managing as little as $50 million to $250 million. The managers of these funds do pretty well too. When you charge 2% of total assets per year and 20% of any gains, just simply buying the S&P 500 in 2009 and heading to the beach would have generated more than $50 million in fees for the manager of a $250 million fund.
The other big Wall Street fortunes have come from private equity. Most private equity involves borrowing a lot of money and buying companies. The acquired company is then stripped of non-core businesses. Many of it’s assets are sold off. Then a few years down the line it is sold outright or sold to public investors in an IPO.
All along the way, the private equity firms charge millions and millions of dollars in consulting fees for putting the whole deal together.
It’s a very lucrative business.
Even Warren Buffett wouldn’t be nearly as rich today without the massive leverage of other people’s money.
Berkshire Hathaway (BRK-A/B) is up about one million percent since Buffett got involved with it in 1965.
That would have turned every $1 invested then into $10,000 today. And considering Buffett’s net worth was about $100,000 at the time, he would only be worth about $1 billion today had he put it all into Berkshire.
But with the massive leverage and carried interest in Berkshire Hathaway, Buffett is worth more than $66 billion today.
In the end, these are all the ultimate heads I win, tails you lose structure that makes so many fortunes on Wall Street.
They are the big money and often the smart money. And when they take the chance to get out of these ultra-lucrative businesses, you better take notice.
A Pattern Makes Perfect
That’s why when your editor saw the news that famed hedge fund manager Bill Ackman was going to take his fund through an Initial Public Offering (IPO) later this year, it really got me thinking. Here’s why.
Ackman’s funds are up more than 600% in the past decade.
Yes, a great return for investors. A much better return for Ackman.
The fees for that performance have put Ackman’s net worth at around $1.5 billion.
Now, at the risk of being too cynical, we have to wonder why this man is so generous as to take the opportunity to go public so regular folks like you and I can get in on it too.
What it did was me of a long-time trend in financial markets where the big and smart money cashes out near the end of a market cycle top.
You see, each of the last two major market downturns was preceded by the big money cashing out shortly beforehand.
Think back to 1999. The market was rising 20% per year. The red-hot Nasdaq was doing double that. It was a situation that could not last.
At the time, Goldman Sachs (GS) was a privately held partnership. So there was really no way for the privately held stock in Goldman to be sold. Even though many of the partners were sitting on a fortune, they couldn’t realize it.
But in 1999, the opportunity was too tempting. Goldman’s partners agreed to take the company public. And when it IPO’d,more than 10 partners walked away with $100 million+ paydays.
Two years later stocks entered a multi-year bear market.
Then in 2007, insiders at a big money private equity company weren’t going to miss their opportunity to cash out like the Goldman partners did in the previous cycle.
Stephen Schwarzman and Peter G. Peterson, cofounders of The Blackstone Group (BX), successfully cashed out of their company in the summer of 2007.
The founders and some other high level executives they made out with a $4 billion payday when Blackstone hit the markets. A few months later stocks set a new all-time high and then dropped 50%+ across the board.
The recent news about Bill Ackman could be no different than those. And it’s why it’s very important news to be paying attention to.
Selling When You Can, Not When You Have To
Although this is hardly a perfect indicator of “this is the top,” it is something to pay careful attention towards.
All of these groups, whether it’s Goldman Sachs insiders or Blackstone founders or a hedge fund titan, know more than a thing or two about financial markets.
They are surrounded by the best minds in the business and they know the risks better than most.
After all, they’ve lived through all the cycles – both good and bad – and know when it’s time to take the big payday.
I can tell you personally, if it weren’t for the lessons I learned in the 1970s and 1980s, there is no way I would have been able to confidently tell readers of The Cheap Investor that it was a great time to be buying stocks.
Right now we still expect a general improvement in the markets. And we aren’t going to get really worried until the herd really comes back into stocks.
But we know the current boom won’t last forever either and choose to watch the smart and big money to confirm our market thesis.
We see opportunity in the current market. Bill Ackman sees opportunity. And it’s always nice to be in top-performing company.