There is an interesting imbalance in the public and private markets. Private capital will pay substantially more for an inferior company—and hold it longer. Cathie Wood at Ark Invest has pointed this out repeatedly. Listen to her interview with Azeem Azhar. Analysts have become very backward looking in their search to understand valuation. Because, perceiving a different reality in the present (versus the past) is tantamount to saying “it’s different this time.” Let’s postulate a few truths:
- Innovation is happening across more platforms than anytime in history
- Platform level changes (i.e. electricity, transportation) change everything they touch
- We live in a world of excess capital and surging numbers of knowledge workers (more money and more minds to solve problems than ever)
- The vast majority of public money is trapped in capitalistic dead-ends (i.e. funding zombie governments)
- Valuation is always understood backwards, while capital must be invested forwards
- Private markets are closed to the non-wealthy. Public market become the only option for most people.
- But the wealthy are just as vulnerable to herd-behavior is anyone.
How do we profit from the herd-behavior in private equity (that is rightly seeing the stunning changes coming across broad technology platforms and therefore paying wild valuations for inferior companies) while remaining agile and liquid?
We here at ThinkGlobalMacro are doing it by focusing on the indexes that capture that change (Nasdaq and similar) while avoiding or hedging with the indexes that reflect the past (DJIA). Then, we create health monitoring algorithms (that look back) to define the health-zones of the index, the economy is which it is placed, and the government structures that regulate it.