Anti-stock marketing tactics

Happy Sunday!

Some GPs market their deals by claiming they are a superior alternative to stocks. While private real estate investments can play a critical role in a diversified portfolio for most people, LPs should be cautious when a GP leans too heavily on comparisons to public markets (particularly when they’re presented in a deceptive matter).

Today, I’d like to go through all the methods I’ve seen to date so that you can be more cautious.

Announcements (article continued below):

• **Conference: **I wanted to let you know that I'll be speaking at Reconvene in LA this coming Wednesday (9/17) in case you're attending or would like to.

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• “The stock market is too volatile”

• Public equities are volatile because prices are visible daily, not because they’re inherently riskier

• Private markets look calmer only because assets aren’t traded frequently - but underlying values still change on a daily basis (you just don’t see it!)

• In other words - illiquidity hides volatility and also makes it harder for LPs to exit when conditions worsen

• As a quick caveat - many GPs are out there saying they have never lost any money, but on paper their LPs are sitting on substantial losses today. More on spotting distress here and this common “we haven’t lost money” tactic here

• Here’s an example by the way - I am fortunate to get a lot of Google Ads like this :D

• “Don’t be a sheep” / “unshackle yourself from your W-2” / “escape the rat race” arguments

• I wish the counterarguments to these were obvious, nobody would fall for them, and GPs would use them - unfortunately none of these are practically true

• These pitches appeal to ego and emotion rather than analysis, and I’ve shown (through a Monte Carlo simulation which I hope you’ll enjoy) why in the vast majority of cases this simply doesn’t work

• To clarify, this marketing strategy is vastly different than the typical “we can help you grow your wealth” - I talk through about this in the above article in more detail, but in short

• “The 401(k) is terrible / returns are too low”

• Hard to know where to start here, other than the fact that a 401(k) is a tax-advantaged account that most Americans should be maxing out

• While it’s true that one could generate higher returns than the average stock return in the short term, it’s hard to find an alternative that doesn’t carry more risk or has other disadvantages (e.g. illiquidity, reinvestment risk, etc) over a long term horizon

• In short: the 401k is great, and so are some real estate investments; reminder while we’re here - the GP isn’t your financial advisor and shouldn’t be your financial coach either

• “We provide access you can’t get elsewhere” or “institutional investors do this, so should you”

• For every 10 GPs who pitch the access line, it might be true for 1 GP (see the “healthy dose of skepticism” section here)

• Institutions have large teams, strict mandates, and the ability to absorb losses in a way that you probably don’t

• PS because your risk appetite (and goals/incentives!) are likely different than that of a KRR, an Apollo, or a University Endowment, copying institutional allocation doesn’t make sense for your in the first place

• “Real assets are safer than paper assets”

• Tangibility has very little to do with risk practically speaking

• Real estate values are highly sensitive to debt costs, rent growth, and market cycles - here are 5 simple ways in which real estate can lose you money

• Stock market prices are sensitive as well, by the way, but let’s not pretend like one is strictly better than the other

I also get a version of these questions frequently during podcast appearances, so let’s address one more. A common premise is that you can get better returns with privates because you’re dealing with “real people.”

This framing misses three big points:

• Governance and controls are far more developed in public companies, even though they’re still imperfect

• The time and effort it takes to be listed is itself a filtering mechanism

• Public companies face ongoing scrutiny and transparency that weeds out most (not all, but most) bad actors

On a percentage basis, I do not believe this same filtering happens in the private world. Which is why I always emphasize to LPs: spend serious time on the first LP pillar - due diligence on the GP themselves.

Let me end with this:

• I’m all for comparing strategies, and I clearly believe that many (not all) investors should be allocated to alternatives. But I’ll also be the first to say that concentration risk is something to be very careful about, and the level of diligence required might stop you from making these investments altogether - unless you’re truly investing what amounts to a “gambling” amount of money for you personally.

• Public vs. private comparisons are worth making, but if we’re going to make them, let’s ensure they’re thorough and not biased

• e.g. how many of these mention the fact that privates are extremely illiquid and you don’t have an ability to pull out your cash if you need it? The answer is ~none!

sometimes the memes make themselves :)Have a wonderful rest of your weekend and I look forward to your feedback!

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