The Secret Broker: Shaking the tree to see who falls out
The Secret Broker
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After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
This week, we have seen the falling of valuations.
Whether it be your house or your holding in Tesla, the last week has shaken the tree on valuations and the ripple-on effect is just starting.
But it gets a bit deeper than just ripples, as behind the scenes you will get bitten in more places than you think, or you actually don’t consciously want to recognise.
It was only this week that a fund wrote down their valuation on the Australian VC backed pin-up, Canva.
Canva’s last valuation came in at $55bn on their last round of fundraising.
However, after NASDAQ’s fall of 22%, a fund that had an investment in them wrote down their holdings’ valuation by over 30%.
As Canva are unlisted, and like all others, this creates a grey area in valuations.
If you take Tesla, their valuation fell $125bn in one day, as the money tree got a shake. But as they are listed an instant revaluation can be recognised.
This is where it bites.
Until an auditor comes along, the value of a fund’s unlisted holdings may not be reflected in its current true value.
This is particularly true if a manager of the said funds earns a fee on the funds held under management.
They have no incentive to write down a valuation.
There is a push in America to readjust how hedge funds are rewarded with their fees.
In the good times, big fat performance-based fees are created but in the bad years, the hedge fund managers never get penalised for the losses they create.
The current push is to have performances fees partly locked up and balanced out against future years’ performance.
Also, they want them pro-rata, so if you invest in a bad year, your investment funds get a better return than if you had invested in a good year.
This method of only writing down valuations when pushed to was why companies like FAI took longer to hit the wall than they should have done.
Or why hedge funds like Melvin Capital, who lost 39% of their clients’ capital in one trade (shorting Game Shop), still collected their fat fees, even though they then managed to lose another 20% in the last quarter.
If your super fund manager is slow on reflecting lower valuations, then anyone withdrawing funds will be better off than someone who is adding funds.
As super is a monthly paid, long term investment proposal, this is one area that will bite your returns.
If you can absorb the fact that Canva’s last round of funding, which shot its valuation up to $55bn, involved less than 1% of new equity being issued, you will start to understand how the game is played.
In fact, how we are all played.
It’s only when the valuation tree is shaken hard enough or when Elon bids $54.20 a share for Twitter (he had to get 420 in there) – a loss-making company – with borrowed funds to take the US$44bn company private.
So, if you are top heavy in companies which are not producing positive cashflow, then you may want to get the shears out and start to do some pruning, ahead of winter setting in.
Then you will need to wait to see what has died and what has little green shoots appearing when things warm up again.
As the great investor Peter Lynch would say: “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”
It’s times like this that the sausage sizzle at your local Bunnings should become your breakfast of choice and not the smashed avocado on toast with an almond latte.
Just try not to step in the manure on the way out.
Feel free to contact him with your best stock tips and ideas.