April 18, 2025 • 22 mins
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Alternative investments offer potential diversification but come with significant trade-offs in liquidity, transparency, and fees that many investors overlook. We explore why the famous "Yale approach" to investing that worked brilliantly in the 1980s and 1990s may not be appropriate for most investors today.
• Alternative investments lack daily market pricing, with most only valued quarterly
• The "messy middle" includes less liquid investments that lack transparency of public markets
• Private equity and venture capital investments typically involve significant lockup periods
• When financial crises hit, illiquid alternatives can't be accessed when you need cash most
• High fees (often "2 and 20") create significant performance hurdles for alternative managers
• Consider investing in public shares of PE firms like KKR or Apollo rather than direct private investments
• Warren Buffett's $360B cash position and Jamie Dimon selling JPM stock are market signals worth noting
• Most investors should limit alternative allocations to 10-20% of their portfolio
• True diversification requires maintaining adequate liquidity for short and medium-term needs
Join us next week as we welcome Stephen Gattuso to discuss the national debt, interest payments, and how these fiscal challenges will impact our financial futures.
Straight Talk for All - Nonsense for None
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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Clem Miller (00:02):
Hello everybody and welcome to Skeptic's Guide to
Investing.
I'm here with Steve Davenport,I'm Clem Miller and we're going
to be talking today about altsanother way of saying
alternatives which includethings like hedge funds and
private equity and private debtequity and private debt.
(00:27):
And so, steve, I know thatyou've been getting a lot of
calls recently about, about alts, and I know there's this sort
of impression out there that youknow alts may be, you know, are
really a defined asset classthat represents sort of, you
know, as the name implies, analternative to equity and debt.
(00:50):
But what do you think?
You're getting these calls,what are people looking for and
really, how do you respond tothem?
Steve Davenport (01:01):
I kind of like the term I heard recently, which
is, uh, diversification, um, Ithink that we always try to find
something else to add to ourportfolios because we think it's
just too simple If I have 80%in the S and P and 20% in the uh
, you know, lehman ag or I guessnow it's the Barclay ag.
(01:24):
So I look at this and I say isa simple approach, the best
approach usually?
So I think that alternativeshave this strange method of
trying to make themselves lookmore attractive because they're
not priced the same as regularstocks and bonds are.
There's not a daily market.
(01:45):
So what happens is these assetsget priced, usually on a
quarterly basis, and so there'sonly quarterly liquidity.
And when I look at people whoare looking to get out of the
chaos and the inflammatorymarkets we have, I look at them
and they say well, I'm goinginto alternatives and I say are
(02:08):
the best assets in the worldnecessarily going to be private,
or would you, as a person whoowns that asset, want to have as
many people competing to buyyour asset?
They believe, when you'restarting out, you want to keep
it private so that you have morecontrol and you have more.
And my question would be.
Don't you have less oversight?
(02:28):
Don't you have less visibility?
Don't you have less of anunderstanding of the asset
because it's newer?
So I really have trouble withthis.
Let's call it the Yale approach.
This let's call it the Yaleapproach.
So Yale had an investment, ahead of investments in Swenson,
(02:57):
and he believed that you shouldhave 60% in alts and only a
little bit of exposure to themarkets, because colleges have
an unbelievably long durationthey plan on lasting forever.
So therefore you should bebuying longer range assets and
assets that are uncorrelated sothat they can grow and because
they don't need the money rightaway, they can succeed by being
more patient.
I think when he was doing thatin the 80s and 90s and his
(03:23):
returns were phenomenal he wason the forefront of something
that was very important.
But what we've seen lately ismore and more the
democratization of alternatives.
Alternatives are very sexy whenyou go to a party and you say
I'm with hedge fund manager A,he's got some of the best ideas
(03:45):
and the brightest PhDs andthey're investing in commodities
and futures of variouscurrencies and they just know
what they're doing.
And I look at this and I'm likehow do you know what the hedge
fund's exposure is on a daily,monthly.
You only see the top 10holdings and some of these
(04:10):
things on a quarterly basis andyou're restricted from getting
out and you're paying muchhigher fees.
So the benefits of these Ithink existed 30 years ago, 20
years ago, 10 years ago.
But I think that that benefitthe more you have people chasing
(04:30):
the same assets, the moreyou're going to have those
assets start to reflect a muchmore efficient idea of pricing,
and so if there was an advantage, some of that advantages
started to disappear and I lookat the Harvards and I look at
some of the how they struggledin 2008 because, guess what,
(04:52):
there was restrictions ongetting to those assets.
So when there is a financialcrisis, you want liquidity 40%
in markets you have to sellthose assets first because your
long-term assets that are inalternatives are going to be
(05:12):
harder to get.
You're going to take a haircuton that asset when you want to
take it out, and so if you'vegot an asset that has an
agreement that you need to waitthree years, when you get to
that three-year point, youreally only can take out usually
5% a quarter.
So it will take you a long timeto get out of that asset.
So I think alternatives as acategory is similar to.
(05:39):
It's an even broader categorythan hedge funds.
So when I look at alternatives,I think about private equity,
which is investments in smallstartup companies, some even
large startup companies, butthey've got rounds of funding
and you participate in thoseearly rounds if you're lucky,
secondary, tertiary rounds, andthen usually there's an event
(06:03):
where it goes public and thenyour private asset becomes a
public asset and then you arecompeting with everyone else in
the marketplace.
And so, yes, if you can get anearly round on a company that
you think you know somethingabout or you have some belief in
their product or service, itcould make sense to have some of
your investment there.
In the product or service, itcould make sense to have some of
(06:23):
your investment there.
But should you have 60% likeyielded?
Absolutely not.
What I would say isalternatives are a vehicle that
you should think about.
I like to think about this asthe messy middle.
When we look at equities, welook at the riskiest and the
safest equities and as we getinto smaller, less followed
(06:47):
areas small caps and emergingmarkets are too those areas
become less and less clear.
So there is more opportunity.
The risk return is there, lessand less clear.
So there is more opportunity.
The risk return is there.
But when you go into privateand private equity venture
capital, private real estate,you're really into a space where
there is no visibility, thereis no way for you to really get
(07:12):
a feel for is this company doingsomething?
And then that opens up.
I've had cases where you know,I've heard about people
investing in private equityfirms that put in video
protection for schools andshooters and, sure enough, this
really wasn't a system thatexisted.
(07:33):
They just had a control room.
They brought people in to demothis and it was a you and it was
a fraud.
So the more you get into these,the more likely you are to get
into something that gets on theborder of fraud and can really
be a very tangible loss to yourassets.
(07:53):
So I look at it as somethingyou don't want to give up your
liquidity.
So there are some new things40-act funds that have private
equity in them.
There have been these SPACsthat are out there.
I don't think these are for theaverage investor.
I don't think these are evenfor the sophisticated investor.
(08:14):
I think these are things thatyou should look at.
A sophisticated investor.
I think these are things thatyou should look at and if you
want to have a part of yourportfolio that is what I'll call
the speculative part, which issomewhere in that 10% in the
middle between bonds and stocks,could you buy some private debt
, could you buy some privatereal estate?
Could you buy some privateequity?
(08:36):
Absolutely, but it shouldn'tmake up more than 10, maybe 20%
of your portfolio.
I don't think the alternativespace has developed enough
clarity, enough liquidity andenough understanding in the
marketplace to warrantconsideration as a way to get
(08:57):
away from the market.
Clem Miller (08:58):
The way to get away from the market.
Steve Davenport (09:04):
The way to get away from the market.
You can hedge your risk, youcan sell.
You can do things that makesense in terms of non-correlated
assets.
I don't think you necessarilywant to give up one of your
biggest assets, which isliquidity which is liquidity.
Clem Miller (09:23):
So, steve, there's a lot to unpack and we're not
going to have enough time to gothrough everything that you just
said, but I would make onepoint well, a couple of points
maybe, but one point inparticular, which is that why
not just invest in the stocks ofthe private equity companies?
(09:45):
You know, invest in KKR.
Kkr has a stock, it has aticker.
You can invest in KKR.
You can invest in Apollo Global, apo, right, you know, carlyle,
you can invest in, you caninvest in any one of these as a
company, and you know that theirassets, their business
(10:08):
operations, are supporting thestock that you're investing in.
Steve Davenport (10:16):
I agree with you, clem.
So I agree with you, clem.
I like investing in themanagers because in my mind
they're going to have one or twobad funds but they're going to
have most of them that are runwell, and higher returns mean
the higher stock price becausethey're going to be collecting
(10:37):
more profits, so I think it's agood idea.
Clem Miller (10:38):
Even Berkshire Hathaway is, in part, like that
as well.
Steve Davenport (10:43):
Correct.
I mean, I think there areaggregators out there, like
Berkshire, like Apollo, likeCarlisle, that make sense for us
, just as though you know thereare public.
If you knew public equitieswere going to do well and you
just didn't know where wouldBlackRock make sense?
(11:08):
Absolutely.
I mean, I think that when welook at assets and we look at
companies, we try to figure outwhat is their area of expertise
and what do they add.
You can make a good point thatsome of these managers are a
good place to go.
I think the problem is that youjust don't know relative to
everyone.
It's an active risk that you'vegot to understand and I like the
(11:28):
fact that, one, they are liquidand two, some of them are
paying pretty good dividends.
Yeah, so, yes, I think that if Isaid dividends, so yes, I think
that if I said I'm going tohave this area called the messy
middle and I'm going to putREITs which don't really fit
(11:51):
clearly and they're like a smallcap equity but they're also
like a bond Some managers ofdifferent funds of private
equity funds, different funds ofprivate equity funds I think
that REITs there and some of thereal estate exposure can be
good.
Some of it can be infrastructurereal estate that gets very
close to utilities and haspretty good control over the
(12:14):
income you're receiving.
So, yeah, there are things outthere that belong in that messy
middle and I think what it comesdown to is what's your yield
requirement for the portfolio?
How important is yield?
How important is growth?
If you say I want a little bitmore growth but I still don't
want to sacrifice all my yield,I think that this instead of
(12:36):
buying a private equity companyor exposure to a private equity
company, buying one of thecompanies that manages private
equity is a good way for you toget that exposure but still have
the liquidity and the needs andthe income needs satisfied.
Clem Miller (12:53):
I mean, if you have so, there's transparency in
that and there's liquidity inthat and there's diversification
with that.
Steve Davenport (13:01):
And the fees are.
You know, these managersusually charge 120 basis points
and 20% of upside.
Clem Miller (13:07):
Yeah, so they're generating a lot of fee income.
Steve Davenport (13:10):
Correct, and my mind is you're not paying any
fee to own that stock.
Yeah, exactly, so you're notpaying an ETF fee.
Paying any fee to own thatstock, so you're not paying an
ETF fee.
So some of these and I agreewith the investors who have had
the run with Berkshire and, justas another note, we've been
following Berkshire and you lookat the cash position in
(13:32):
Berkshire.
Last night, I saw that JamieDimon sold 31 million of his JP
Morgan stock and the questionwas why is JP Morgan, the head
of the largest US bank, findingnow to be the time that he wants
to sell?
And I think he asked the samequestion of why is Warren
(13:52):
Buffett with a $360 billion cashposition.
I think these people are makingstatements and I think the
market has too much noise andpeople aren't listening.
Why do you think these peoplewant to have cash today, len,
instead of staying invested intheir companies or buying more
(14:15):
other companies?
Clem Miller (14:17):
Well, I mean, I think there's two reasons.
Well, three maybe right.
Steve Davenport (14:24):
I think it could be hundreds of reasons?
Clem Miller (14:25):
Yeah Well, one clearly is that they're
positioning themselves forfuture purchases that they think
might be more attractive thanthe ones they're continuing to
hold.
So I think that's one.
I think another one is thatthey fear that the market in
general is going to go way down,and so it's much better to hold
(14:48):
cash than it is to stayinvested.
And also, this is kind ofrelated to the first one, but
they just don't see theircurrent holdings as being that
much better than cash.
Steve Davenport (15:12):
Yeah, I mean.
I think that it makes sense todiversify and it makes sense
that when you have a place toput assets.
My question is is these peopleare making a statement about
what they feel about?
You know, why isn't Berkshire,if it has all this cash, just
buying its own stock?
(15:32):
Cash just buying its own stock?
Is it because the price of it'sgone up enough that they feel
like maybe my relationship tobook value isn't as good as it
should be, maybe we'reoverpriced?
And so I think that we need tolook for signals around us,
(15:53):
because we can all say, sixmonths from now, if the market's
down 10, 15, 20, oh, it wasclear that this was going on.
Or we could say I didn't seeanything.
And I would like us, asskeptics, to be able to say we
were skeptical when we saw someof these things and we acted.
We didn't act perfectly.
(16:14):
We are not going to find thepeak or the bottom, but we did
things in ways that made us feelmore comfortable in the market
and better positioned to takeadvantage of a downturn when it
occurs.
End of sentence.
We don't want perfection.
We're not trying to timemarkets.
(16:35):
What we're trying to do isadjust our allocation so that
it's positioned for what wethink the near-term outlook is.
And we could be wrong.
It could be that there aregoing to be 90 agreements signed
in the first 90 days and all ofthe tariff things are going to
be resolved, and then we'regoing to resolve the budget.
(16:56):
Then we're going to resolve thebudget and we're going to
increase the tax cuts and we'regoing to increase the debt
ceiling.
And you know, I think thatsomeone, some writer, recently
made a comment that Trump musthave magic beans that he's going
to, you know, put on, the, putin the ground and those beans
are going to take them to thepromised land.
I don't think there are magicbeans.
(17:18):
I don't think there are clearindications that alternatives
are better than the stocks youcan own publicly.
I think what you need to do isput it in perspective and say, I
do realize there are $17trillion in equity assets and I
think there are $3 trillion inthe private assets that are
(17:43):
available for sale, and we'regoing to say, ok, there is a
proportion I should have, maybetoo private, but I'm going to
still be conscious of fees,liquidity and the things that
matter to me, so that I don'tget surprised by something that
occurs here.
As long as you understand whatyou're getting in terms of
lockups and you can live withthat, I think that you could
(18:07):
have a good opportunity in someof these assets.
Is it the thing that should be40% to 60% of your portfolio?
I will say convincingly no.
You shouldn't no.
So I think that that might be agood point, to kind of call it
a day.
Any other comments?
(18:28):
Clem on alternatives, do youever get desire to own like a
startup company that's based inBaltimore or Maryland and could
be the home run you've alwaysdreamed of.
Clem Miller (18:38):
So let me just tell one quick story, and I'm going
to fuzz up the details a littlebit.
But you know, there was a timethere was an instance where,
because of my internationalexperience, I was brought in to
try to and my internationalexperience I was brought into
try to, and my workoutexperience I was brought into a
(18:59):
particular circumstance and itwas.
It involves loans that wereunsecured to some Latin American
commodity companies, commodityproducers, commodity companies,
commodity producers and why, forthe life of me, anybody would
(19:19):
make unsecured loans workingcapital loans to Latin American
commodity producers, I don'tknow.
But you know that was somethingthat happened and investors
were sort of caught up in thatand there were some losses.
So I mean, as an investor, youshould know that you, you should
(19:45):
be aware that you're gettinginto something like that, and if
you are unconvinced that youcan avoid something like that,
then I would just stay away fromthat particular hedge fund or
private equity.
Steve Davenport (20:00):
Yeah, I think that there are good actors and
bad actors out there, and Ithink that the more you can have
information sunlight usuallyhelps you understand a lot of
things.
When things are obscure, whenthings are difficult to
understand, when things are madeparticularly difficult for you
(20:23):
to get information on thatshould serve as a little bit of
a warning to you that perhapsthis is something I don't fully
grasp and therefore thisalternative could result in
de-worsification.
We want to avoidde-worsification.
We want to make things better,not worse, and in doing that, we
(20:45):
want to make sure that we haveenough liquidity, enough assets
in place to cover what ourshort-term and medium-term needs
are and then allow ourselvesthe opportunity to invest in
things that we feel good aboutand we have good clarity and
information about.
So I appreciate everybodylistening and I want to tell
everyone that our next podcastis going to be with Stephen
(21:07):
Gattuso, who is doing a lot ofwork on debt, the national debt
and interest payments and how weare going to try to manage our
way out of it.
So we talked to him next weekand we look forward to that, as
all of these discussions aroundtaxes and government and what's
(21:27):
happening start to really matterto our pocketbooks, so I think
our information and the way weapproach it is a good way for
individuals to try to gain moreunderstanding and improve their
financial IQ.
Thanks for listening and pleasegive us some support and likes
(21:48):
and we look forward to talkingto you again next week.
Thank you, have a good Easterweekend.
Hello everybody and welcome to Skeptic's Guide to
Investing.
I'm here with Steve Davenport,I'm Clem Miller and we're going
to be talking today about altsanother way of saying
alternatives which includethings like hedge funds and
private equity and private debtequity and private debt.
(00:27):
And so, steve, I know thatyou've been getting a lot of
calls recently about, about alts, and I know there's this sort
of impression out there that youknow alts may be, you know, are
really a defined asset classthat represents sort of, you
know, as the name implies, analternative to equity and debt.
(00:50):
But what do you think?
You're getting these calls,what are people looking for and
really, how do you respond tothem?
Steve Davenport (01:01):
I kind of like the term I heard recently, which
is, uh, diversification, um, Ithink that we always try to find
something else to add to ourportfolios because we think it's
just too simple If I have 80%in the S and P and 20% in the uh
, you know, lehman ag or I guessnow it's the Barclay ag.
(01:24):
So I look at this and I say isa simple approach, the best
approach usually?
So I think that alternativeshave this strange method of
trying to make themselves lookmore attractive because they're
not priced the same as regularstocks and bonds are.
There's not a daily market.
(01:45):
So what happens is these assetsget priced, usually on a
quarterly basis, and so there'sonly quarterly liquidity.
And when I look at people whoare looking to get out of the
chaos and the inflammatorymarkets we have, I look at them
and they say well, I'm goinginto alternatives and I say are
(02:08):
the best assets in the worldnecessarily going to be private,
or would you, as a person whoowns that asset, want to have as
many people competing to buyyour asset?
They believe, when you'restarting out, you want to keep
it private so that you have morecontrol and you have more.
And my question would be.
Don't you have less oversight?
(02:28):
Don't you have less visibility?
Don't you have less of anunderstanding of the asset
because it's newer?
So I really have trouble withthis.
Let's call it the Yale approach.
This let's call it the Yaleapproach.
So Yale had an investment, ahead of investments in Swenson,
(02:57):
and he believed that you shouldhave 60% in alts and only a
little bit of exposure to themarkets, because colleges have
an unbelievably long durationthey plan on lasting forever.
So therefore you should bebuying longer range assets and
assets that are uncorrelated sothat they can grow and because
they don't need the money rightaway, they can succeed by being
more patient.
I think when he was doing thatin the 80s and 90s and his
(03:23):
returns were phenomenal he wason the forefront of something
that was very important.
But what we've seen lately ismore and more the
democratization of alternatives.
Alternatives are very sexy whenyou go to a party and you say
I'm with hedge fund manager A,he's got some of the best ideas
(03:45):
and the brightest PhDs andthey're investing in commodities
and futures of variouscurrencies and they just know
what they're doing.
And I look at this and I'm likehow do you know what the hedge
fund's exposure is on a daily,monthly.
You only see the top 10holdings and some of these
(04:10):
things on a quarterly basis andyou're restricted from getting
out and you're paying muchhigher fees.
So the benefits of these Ithink existed 30 years ago, 20
years ago, 10 years ago.
But I think that that benefitthe more you have people chasing
(04:30):
the same assets, the moreyou're going to have those
assets start to reflect a muchmore efficient idea of pricing,
and so if there was an advantage, some of that advantages
started to disappear and I lookat the Harvards and I look at
some of the how they struggledin 2008 because, guess what,
(04:52):
there was restrictions ongetting to those assets.
So when there is a financialcrisis, you want liquidity 40%
in markets you have to sellthose assets first because your
long-term assets that are inalternatives are going to be
(05:12):
harder to get.
You're going to take a haircuton that asset when you want to
take it out, and so if you'vegot an asset that has an
agreement that you need to waitthree years, when you get to
that three-year point, youreally only can take out usually
5% a quarter.
So it will take you a long timeto get out of that asset.
So I think alternatives as acategory is similar to.
(05:39):
It's an even broader categorythan hedge funds.
So when I look at alternatives,I think about private equity,
which is investments in smallstartup companies, some even
large startup companies, butthey've got rounds of funding
and you participate in thoseearly rounds if you're lucky,
secondary, tertiary rounds, andthen usually there's an event
(06:03):
where it goes public and thenyour private asset becomes a
public asset and then you arecompeting with everyone else in
the marketplace.
And so, yes, if you can get anearly round on a company that
you think you know somethingabout or you have some belief in
their product or service, itcould make sense to have some of
your investment there.
In the product or service, itcould make sense to have some of
(06:23):
your investment there.
But should you have 60% likeyielded?
Absolutely not.
What I would say isalternatives are a vehicle that
you should think about.
I like to think about this asthe messy middle.
When we look at equities, welook at the riskiest and the
safest equities and as we getinto smaller, less followed
(06:47):
areas small caps and emergingmarkets are too those areas
become less and less clear.
So there is more opportunity.
The risk return is there, lessand less clear.
So there is more opportunity.
The risk return is there.
But when you go into privateand private equity venture
capital, private real estate,you're really into a space where
there is no visibility, thereis no way for you to really get
(07:12):
a feel for is this company doingsomething?
And then that opens up.
I've had cases where you know,I've heard about people
investing in private equityfirms that put in video
protection for schools andshooters and, sure enough, this
really wasn't a system thatexisted.
(07:33):
They just had a control room.
They brought people in to demothis and it was a you and it was
a fraud.
So the more you get into these,the more likely you are to get
into something that gets on theborder of fraud and can really
be a very tangible loss to yourassets.
(07:53):
So I look at it as somethingyou don't want to give up your
liquidity.
So there are some new things40-act funds that have private
equity in them.
There have been these SPACsthat are out there.
I don't think these are for theaverage investor.
I don't think these are evenfor the sophisticated investor.
(08:14):
I think these are things thatyou should look at.
A sophisticated investor.
I think these are things thatyou should look at and if you
want to have a part of yourportfolio that is what I'll call
the speculative part, which issomewhere in that 10% in the
middle between bonds and stocks,could you buy some private debt
, could you buy some privatereal estate?
Could you buy some privateequity?
(08:36):
Absolutely, but it shouldn'tmake up more than 10, maybe 20%
of your portfolio.
I don't think the alternativespace has developed enough
clarity, enough liquidity andenough understanding in the
marketplace to warrantconsideration as a way to get
(08:57):
away from the market.
Clem Miller (08:58):
The way to get away from the market.
Steve Davenport (09:04):
The way to get away from the market.
You can hedge your risk, youcan sell.
You can do things that makesense in terms of non-correlated
assets.
I don't think you necessarilywant to give up one of your
biggest assets, which isliquidity which is liquidity.
Clem Miller (09:23):
So, steve, there's a lot to unpack and we're not
going to have enough time to gothrough everything that you just
said, but I would make onepoint well, a couple of points
maybe, but one point inparticular, which is that why
not just invest in the stocks ofthe private equity companies?
(09:45):
You know, invest in KKR.
Kkr has a stock, it has aticker.
You can invest in KKR.
You can invest in Apollo Global, apo, right, you know, carlyle,
you can invest in, you caninvest in any one of these as a
company, and you know that theirassets, their business
(10:08):
operations, are supporting thestock that you're investing in.
Steve Davenport (10:16):
I agree with you, clem.
So I agree with you, clem.
I like investing in themanagers because in my mind
they're going to have one or twobad funds but they're going to
have most of them that are runwell, and higher returns mean
the higher stock price becausethey're going to be collecting
(10:37):
more profits, so I think it's agood idea.
Clem Miller (10:38):
Even Berkshire Hathaway is, in part, like that
as well.
Steve Davenport (10:43):
Correct.
I mean, I think there areaggregators out there, like
Berkshire, like Apollo, likeCarlisle, that make sense for us
, just as though you know thereare public.
If you knew public equitieswere going to do well and you
just didn't know where wouldBlackRock make sense?
(11:08):
Absolutely.
I mean, I think that when welook at assets and we look at
companies, we try to figure outwhat is their area of expertise
and what do they add.
You can make a good point thatsome of these managers are a
good place to go.
I think the problem is that youjust don't know relative to
everyone.
It's an active risk that you'vegot to understand and I like the
(11:28):
fact that, one, they are liquidand two, some of them are
paying pretty good dividends.
Yeah, so, yes, I think that if Isaid dividends, so yes, I think
that if I said I'm going tohave this area called the messy
middle and I'm going to putREITs which don't really fit
(11:51):
clearly and they're like a smallcap equity but they're also
like a bond Some managers ofdifferent funds of private
equity funds, different funds ofprivate equity funds I think
that REITs there and some of thereal estate exposure can be
good.
Some of it can be infrastructurereal estate that gets very
close to utilities and haspretty good control over the
(12:14):
income you're receiving.
So, yeah, there are things outthere that belong in that messy
middle and I think what it comesdown to is what's your yield
requirement for the portfolio?
How important is yield?
How important is growth?
If you say I want a little bitmore growth but I still don't
want to sacrifice all my yield,I think that this instead of
(12:36):
buying a private equity companyor exposure to a private equity
company, buying one of thecompanies that manages private
equity is a good way for you toget that exposure but still have
the liquidity and the needs andthe income needs satisfied.
Clem Miller (12:53):
I mean, if you have so, there's transparency in
that and there's liquidity inthat and there's diversification
with that.
Steve Davenport (13:01):
And the fees are.
You know, these managersusually charge 120 basis points
and 20% of upside.
Clem Miller (13:07):
Yeah, so they're generating a lot of fee income.
Steve Davenport (13:10):
Correct, and my mind is you're not paying any
fee to own that stock.
Yeah, exactly, so you're notpaying an ETF fee.
Paying any fee to own thatstock, so you're not paying an
ETF fee.
So some of these and I agreewith the investors who have had
the run with Berkshire and, justas another note, we've been
following Berkshire and you lookat the cash position in
(13:32):
Berkshire.
Last night, I saw that JamieDimon sold 31 million of his JP
Morgan stock and the questionwas why is JP Morgan, the head
of the largest US bank, findingnow to be the time that he wants
to sell?
And I think he asked the samequestion of why is Warren
(13:52):
Buffett with a $360 billion cashposition.
I think these people are makingstatements and I think the
market has too much noise andpeople aren't listening.
Why do you think these peoplewant to have cash today, len,
instead of staying invested intheir companies or buying more
(14:15):
other companies?
Clem Miller (14:17):
Well, I mean, I think there's two reasons.
Well, three maybe right.
Steve Davenport (14:24):
I think it could be hundreds of reasons?
Clem Miller (14:25):
Yeah Well, one clearly is that they're
positioning themselves forfuture purchases that they think
might be more attractive thanthe ones they're continuing to
hold.
So I think that's one.
I think another one is thatthey fear that the market in
general is going to go way down,and so it's much better to hold
(14:48):
cash than it is to stayinvested.
And also, this is kind ofrelated to the first one, but
they just don't see theircurrent holdings as being that
much better than cash.
Steve Davenport (15:12):
Yeah, I mean.
I think that it makes sense todiversify and it makes sense
that when you have a place toput assets.
My question is is these peopleare making a statement about
what they feel about?
You know, why isn't Berkshire,if it has all this cash, just
buying its own stock?
(15:32):
Cash just buying its own stock?
Is it because the price of it'sgone up enough that they feel
like maybe my relationship tobook value isn't as good as it
should be, maybe we'reoverpriced?
And so I think that we need tolook for signals around us,
(15:53):
because we can all say, sixmonths from now, if the market's
down 10, 15, 20, oh, it wasclear that this was going on.
Or we could say I didn't seeanything.
And I would like us, asskeptics, to be able to say we
were skeptical when we saw someof these things and we acted.
We didn't act perfectly.
(16:14):
We are not going to find thepeak or the bottom, but we did
things in ways that made us feelmore comfortable in the market
and better positioned to takeadvantage of a downturn when it
occurs.
End of sentence.
We don't want perfection.
We're not trying to timemarkets.
(16:35):
What we're trying to do isadjust our allocation so that
it's positioned for what wethink the near-term outlook is.
And we could be wrong.
It could be that there aregoing to be 90 agreements signed
in the first 90 days and all ofthe tariff things are going to
be resolved, and then we'regoing to resolve the budget.
(16:56):
Then we're going to resolve thebudget and we're going to
increase the tax cuts and we'regoing to increase the debt
ceiling.
And you know, I think thatsomeone, some writer, recently
made a comment that Trump musthave magic beans that he's going
to, you know, put on, the, putin the ground and those beans
are going to take them to thepromised land.
I don't think there are magicbeans.
(17:18):
I don't think there are clearindications that alternatives
are better than the stocks youcan own publicly.
I think what you need to do isput it in perspective and say, I
do realize there are $17trillion in equity assets and I
think there are $3 trillion inthe private assets that are
(17:43):
available for sale, and we'regoing to say, ok, there is a
proportion I should have, maybetoo private, but I'm going to
still be conscious of fees,liquidity and the things that
matter to me, so that I don'tget surprised by something that
occurs here.
As long as you understand whatyou're getting in terms of
lockups and you can live withthat, I think that you could
(18:07):
have a good opportunity in someof these assets.
Is it the thing that should be40% to 60% of your portfolio?
I will say convincingly no.
You shouldn't no.
So I think that that might be agood point, to kind of call it
a day.
Any other comments?
(18:28):
Clem on alternatives, do youever get desire to own like a
startup company that's based inBaltimore or Maryland and could
be the home run you've alwaysdreamed of.
Clem Miller (18:38):
So let me just tell one quick story, and I'm going
to fuzz up the details a littlebit.
But you know, there was a timethere was an instance where,
because of my internationalexperience, I was brought in to
try to and my internationalexperience I was brought into
try to, and my workoutexperience I was brought into a
(18:59):
particular circumstance and itwas.
It involves loans that wereunsecured to some Latin American
commodity companies, commodityproducers, commodity companies,
commodity producers and why, forthe life of me, anybody would
(19:19):
make unsecured loans workingcapital loans to Latin American
commodity producers, I don'tknow.
But you know that was somethingthat happened and investors
were sort of caught up in thatand there were some losses.
So I mean, as an investor, youshould know that you, you should
(19:45):
be aware that you're gettinginto something like that, and if
you are unconvinced that youcan avoid something like that,
then I would just stay away fromthat particular hedge fund or
private equity.
Steve Davenport (20:00):
Yeah, I think that there are good actors and
bad actors out there, and Ithink that the more you can have
information sunlight usuallyhelps you understand a lot of
things.
When things are obscure, whenthings are difficult to
understand, when things are madeparticularly difficult for you
(20:23):
to get information on thatshould serve as a little bit of
a warning to you that perhapsthis is something I don't fully
grasp and therefore thisalternative could result in
de-worsification.
We want to avoidde-worsification.
We want to make things better,not worse, and in doing that, we
(20:45):
want to make sure that we haveenough liquidity, enough assets
in place to cover what ourshort-term and medium-term needs
are and then allow ourselvesthe opportunity to invest in
things that we feel good aboutand we have good clarity and
information about.
So I appreciate everybodylistening and I want to tell
everyone that our next podcastis going to be with Stephen
(21:07):
Gattuso, who is doing a lot ofwork on debt, the national debt
and interest payments and how weare going to try to manage our
way out of it.
So we talked to him next weekand we look forward to that, as
all of these discussions aroundtaxes and government and what's
(21:27):
happening start to really matterto our pocketbooks, so I think
our information and the way weapproach it is a good way for
individuals to try to gain moreunderstanding and improve their
financial IQ.
Thanks for listening and pleasegive us some support and likes
(21:48):
and we look forward to talkingto you again next week.
Thank you, have a good Easterweekend.
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