Hedge Fund IPOs – Individual Investors should be careful

I’m far from a sophisticated investor, although I guess I am an accredited investor because of my networth. As I have written before, I’m a big believer that whenever you do a business deal with people you don’t know, particularly buying and selling stocks, you always look for the sucker. If you don’t see the sucker, then you are the sucker.

I have found myself on both sides of trades. I’ve been the sucker, buying stock in companies that turned out to be far from what they said they were, or even who the principles said they were. I’ve watched in amazement as the internet bubble went to the moon with the entire world ignoring the history of technology stocks. Anyone who tells you they have never made a mistake in the market is either lying to you or never traded in the market.

Today’s boom stocks are hedge funds that are going public. Fortress could be the netscape of the boom with Blackstone and many others to follow. Would I buy ? No. I personally would never buy stock in a public hedge/private equity fund. Ever. My position is based on basic common sense and a rudimentary understanding of the hedge fund business. Here is the logic:

When you are an investor directly into a hedge fund you have 1 single element of leverage on the hedge fund , and that is the ability, often with very stringent limitations, to pull your money from the hedge fund. That is it.

That leverage is mighty however, particularly for the bigger investors in the hedge fund. Why ? Because when an investor pulls a significant amount of money from the fund, it creates a cascading series of problems.

It may cause the fund to have to sell securities in order to pay back the investor while still retaining their required or chosen cash levels.

The more leverage the fund uses, the more the cash problem is leveraged as well.

A fund’s “scoreboard” is their return and their amount of assets. Its also their marketing pitch. If they perform, they can draw more money into the fund if its open, or to their next fund if its closed. If they don’t outperform, they can usually forget about growing or their next fund. Its unfortunate, but you rarely if ever hear about the hedge funds that closed unless they were absolutely huge.

Hedge funds obviously don’t want their big investors to withdraw, so they work incredibly hard to make sure they outperform their peers. As the number of funds has grown, so has the difficulty to outperform. There are so many funds chasing the same deals in every area of specialty that the funds keep on investing in riskier and riskier deals. All in hopes of keeping their “money happy”

Bottomline is that hedge funds scramble hard each and every day to make their big investors, some of which can leave on the drop of the hat, happy.

Appeasing hedge fund investors is a very, very different business than making shareholders happy.

If a shareholder sells their share of stock, the hedge fund wont really care. Sure, they want the stock price to go up. They own shares of stock in the fund, and as the stock price goes, so goes some percentage of their networth. That should be enough for them to do whatever it takes to increase the stock price, right ? Maybe

Increasing the price of a share of stock is as much marketing to create demand for the stock as it is earnings of the fund.We also call this increasing the P/E of a stock. There are dozens of ways to increase the PE of a stock that is showing a profit. Hedge fund investors care about 1 thing. Cash. Money that is returned to them. Shareholders care about the price of the stock. One is capital returns, the other is capital appreciation.

That difference is just common sense, but its significant.

Which makes me wonder why those who put money into these hedge funds are letting them take the fund public. It will certainly change how the fund invests and manages its assets, even if the fund says it wont.

They can’t be responsive to shareholders and investors with the same story

Hedge funds are known for laying it all out on the line and doing the big deals. Often ones considered to be crazy by outsiders, but smart by insiders. They are the ones buying the lousy or stagnant public companies and taking them private, remastering them, only to reissue them to the stock buying public investor a couple years later at multiples of their investment.

How many public companies do you know that are known for their risktaking ? That gladly take outsized risks that some consider crazy,and do they do it on an ongoing basis ? How many public companies do you know that aren’t focused on hitting “the number” to keep shareholders happy ?

The hedge funds that are staying private have to be licking their chops. Competing against public hedge funds that have to deal with reporting and disclosure requirements is a lot easier than competing with a company that is stealth in their actions. They also know that despite proclamations to the contrary, the public funds will certainly change how they approach investing to make the market happy. The earnings of public funds impact the brand of the fund. If earnings are good, its business as usual. If earnings are bad, and / or the stock underperforms, then the public fund’s brand , and their ability to raise money is diminished.

Finally, the IPO also seems to put public shareholders on the opposite side of the ledger of those that have invested in the fund directly. Shareholders participate with management in the earnings of the fund, while those who put cash into the fund participate in the returns of the investments of the fund. Of course, the higher the return on investments, the greater the income of the fund itself and the numbers allocated to public shareholders. But fund investors returns are also a function of how much or how little management takes off the top. This isnt a problem when things are going great, but its always a problem when things aren’t going great.

This post isn’t expert commentary. Its just a friendly heads up based on what I see.

If you are looking at investing in any hedge fund stock, take a long, hard look at the business,IN PARTICULAR, the tax consequences of the investment and your place as a shareholder before you buy. If you are looking at just getting in and hoping it goes up because its the hot company in a hot industry… Welcome to 1999

47 thoughts on “Hedge Fund IPOs – Individual Investors should be careful

  1. Good stock. Bad stock. It\’s all the same with IPOs. There is no way for the individual investor to know anything about the business of Blackstone (or other IPOs) because there is no past data. Sure, we know what we heard. But what do the audited financials tell us about the history of the company?

    At this point, nothing. We know the Street was/is excited. Still, if you are going to invest in stocks, why not buy into well-established businesses with consistent histories and predictable futures. It\’s a boring way to make a lot of money.

    Leave the IPOs to Wall Street\’s gamblers.

    Comment by Joe Ponzio -

  2. M-
    Not only is it 1999, but replace \”hedge fund\” with \”investment trust\” and you are describing the summer of 1929. If you have time, read the last 4 chapters of \’Only Yesterday\’ by Fredrick Lewis Allen. It can be found free on the web. It describes the real estate and stock bubble of 1926-1929. Amazing the similarities.

    Comment by Paul Lamont -

  3. M-
    Not only is it 1999, but replace \”hedge fund\” with \”investment trust\” and you are describing the summer of 1929. If you have time, read the last 4 chapters of \’Only Yesterday\’ by Fredrick Lewis Allen. It can be found free on the web. It describes the real estate and stock bubble of 1926-1929. Amazing the similarities.

    Comment by Paul Lamont -

  4. This is not a very good blog for analysis of your propositions. Most people just say \”right on Mark\” or talk about the problem of the \”masses\” and the \”system\” and the \”man\”. What a waste. Here is my comment. Hedgefunds, if understood properly by the stock investor could be a valuable investment. Number one, you need to know that the customers, e.g. the partners that have placed money into the fund, are always going to come first. No partner money, no fund. From there you should know that an investment, while related and tied to the partners returns (via the 2%/20% agreement) will be more volatile because the net present value of future cash flows will be incorporated into the shares, whereas the partners will simply see their year by year returns. Between investors and partners, heck between ANYONE and ANYONE, there may be different risk thresholds. However, if we are dividing up the same pie and getting our percentage we should all have the same goal to make that pie as large as possible. I guess your risk comment is a bit of a red herring as it will exist in ANY investement vehicle that contains multiple investors and any management oversite.

    Also, because of the need to keep customers/parnters happy, the strategy of the fund will necessarily have to please the customers. So I think that these funds will stay competitive vis a vis their competitors. The issue is that the shareholders need to be sophisticated in understanding their position (they are more or less along for the ride!).

    Comment by Scott -

  5. an excellent article as it not only warns why individual investors should be careful in investing in hedge funds/private equity firms but it also gives a very good reasoning as to why it would not be such a good idea to take a private equity firm public (capitol returns VS capitol appreciation), only thing that I feel should have been addressed here was why heavy weights such as Blackstone then chose to go public? also wouldnt you say that Berkshire Hathaway is an example of a publicly traded company that functions like a private equity firm? what makes them so successful? Warren Buffets charms?

    Comment by Faraz Yusufi -

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    Comment by chinatronic -

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    Comment by chinatronic -

  8. Isnt this whole notion just a scheme? I mean, IPOs are used to generate capital, what does a Hedge Fund need all the cash for? When you file with the SEC it states that and IPO is not responsible to pay back generated funds. Its straight out of the movie Boiler Room.

    The problem is people are like sheep. In the early 90\’s everyone chased Tech. It was more about money than product, thus a few survived and the rest crashed. For the last 8 years real estate was the bright idea. People over extended well beyond their means, into an industry that is very complex. Phoenix alone has 46,000 homes in current foreclosure. With the average American buried in nearly $9,300 of consumer debt, whats next? In many ways I am glad the market is getting its revenge. Its forcing people to realize how careless they have been.

    As Americans, when did we decide it is better to follow the leader hoping for crumbs? I must have missed that vote. While everyone was going in debt chasing the latest trend, I built a company that is debt free. My company is original with no major competitor, we are soon to be the only company traded in our profession, we provide a viable service and unlike most major corporations, our only major expense is our employees.

    Mark, I sent you a few emails and now posted this. I am requesting your help/advise on this project. You are always looking for the next big thing, well let me bringing it to you.

    Jerry R. Reynolds

    P.S. Get KG!

    Comment by Jerry R. Reynolds -

  9. Love the post. I\’ll have to check in more often now that I found this. What a diamond in the rough. Great stuff, keep it up!

    365 Days… One Dream… Can I Do It?

    Comment by 365 Days -

  10. What does Mark Cuban and Vanilla Ice have in common?

    Artificial Hip

    Seriously though, get well soon Mark.

    Comment by Paul Cyopick -

  11. Mark, I must say you hit the mark! Thanks for the info.

    Comment by Yolanda Pasillas -

  12. mark, seriously. have you considered chauncey? c\’mon!!!!!!!!! he\’s perfect. this one player and no other tweaks are needed i tell ya. CLUTCH. shooter. (somewhat) of a passer. good defender. BIG point guard (to match up with dwayne, kobe maybe, manu, baron!). i don\’t know the logistics of getting him, honestly. but we gots money. c\’mon! i love jet, harris is a nice little up-and-comer (no superstar), but chauncey. chauncey is clutch, man. that\’s what we need. a superstar leaser. nowitzki = superstar, not leader. jet and stack = leaders, not superstars. case and point. throw money at him, sign and trade, i don\’t care. he\’s on the market for the taking!!!! get him! ya keep a team who\’s won a whole lot the last couple seasons, but you add one player to put us over the top. do it!

    Comment by vince -

  13. Looks like it\’s time to buy Blackstone. Last time Mark advice about investments it concerned gold – and he didn\’t like it. I did and still do and have profited handsomely. True, gold may go down to the $600 support level very soon, but when Mark was bashing it, gold was about $480.

    Comment by Steve -

  14. Excellent take on investing… all too true.

    I\’ve always been extremely curious Mark;
    Do you consider your gains to be twist of Fate and Luck? OR do you consider your gains to be Skill and Intelligence?

    And yes, there is always a sucker.

    Comment by Adam Gates -

  15. What do you think makes him a great businessman?
    You\’re only a sucker if you feel like you got a raw deal.
    Everyone has intentions of getting a great deal, but things don\’t always work out. Just hope you\’re on the winning end the greater percentage of time.

    Comment by Ed -

  16. The sucker comment….all you need to do is look at Mark\’s history. He has left countless suckers at the table thinking they got the bargain of a lifetime. Why do you think he is a billionaire…..:)

    Comment by Eric -


    Comment by Laker fan -

  18. Great Post. re 1999…..Prince said to party but he didn\’t mention the hangover 🙂

    Mac, your comments are spot on about the evolution of hedge funds over time. It\’s the latest cash cow to be milked and the IPO era is just part of that process and brings to an end a 14 year credit expansion in the global economy. It\’s a good move from the HF boys to lock into this space but for investors……caveat emptor.

    Comment by Raf -

  19. The sucker thing may be true for some business transactions, but I think it\’s arguable that its true for all publicly-traded financial instruments.

    Comment by Andy P -

  20. Mark,
    Stop worrying about crap that is insignificant and work on bringing an NBA championship to Dallas! We do not need a good will ambassador to the hedge fund business, we need some players with heart! Come on bro.!

    Comment by jeff -

  21. It seems you\’re missing a fundamental issue that most people miss with the hedge fund / private equity IPOs. You are not investing in the fund per se. The investors (they are called LPs or Limited PArtners) that actually put up the money that is invested are on one side and IPO investors are on the other. what you essentially are buying is the stream of income that the hedge fund / private equity fund managers can generate. Instead of paying themselves the 2% / 20% structure, they are paying investors the 2% / 20% and then paying themselves just regular old salaries like regular public companies. so the fact that investors and LPs has disparate interests comes as no surprise.

    Comment by Bipit -

  22. Hi,Cuban, what do u think about Rudy Fernandez, the spanish boy, to me will be the draft biggest steal:

    Sendspace link if you want to download HQ Mix, 95 megas: http://www.sendspace.com/file/nl8bgc

    Comment by Pait -

  23. I am currently facing foreclosure on my home. I don\’t live in a fancy home, but I love what I have. I have been unemployed for two years now and I don\’t want to be out on the streets. What information can you offer me?

    Comment by Lisa Hall -

  24. If I may quote from freeway2000…

    Many interpret the word \”sucker\” too literally, as in \”fool\”. Replace the word \”sucker\” with the phrase \”needing the deal\”, \”willing to give up more\”, or \”desperate\”. Then the saying takes on a greater dimension.

    You took the words right out of my mouth.

    Sadly, my portfolio is non-existent, but I\’ve worked with and for many people that ended up \”suckers\” because they \”needed\” something within the deal… and even then, some \”suckers\” end up bad in the short term, better in the long run… it\’s rare, but it happens.

    Comment by Matthew James Didier -

  25. There is more to raising money than cashing out at the top. Everyone is focused on Schwarzman and the unprecedented personal windfall he gets (due to a relative lack of partners), but it wouldn\’t make sense for him to do this purely for the money, given that he\’d be a billionaire + legend with Blackstone public or not. And since he has such a dominant share position within the firm, it can\’t really be a pressure situation from a large group of partners who are looking to enter the ultrarich club, and otherwise would not get the chance through purely collecting profits.

    This only becomes a \”sucker\” situation if one believes the value-addition generated by Blackstone is unsustainable and has run out of growth potential. However, public money may simply be greater ammunition in providing this growth, given that its safe to assume that the investment is being made into a top-class group of talent, as opposed to a run-of-the-mill hedge fund / private equity firm, where indeed extra capital support may only be squandered.

    In other words, if you wanna short \”hedge fund style money management\” as a investment vehicle, it makes sense – but Blackstone stands to lose the least in a general hedge fund bubble, and will only come back stronger as it now has the money (and always had the talent) to wither a bigger storm than anyone else, and $$$ are usually made in these storms by the few that can survive.

    Comment by Justin -

  26. if you are invested in a company that is saying \”no thanks\” to hedge funds, you have a winner. Ask the top dogs if they are turning down HF\’s and it will give you a little glimpse.

    Comment by wally -

  27. Couple of comments to add-

    First, about the \”you always look for the sucker. If you don\’t see the sucker, then you are the sucker\” blast, I would agree in part. Its certainly true in a poker game. Its certainly true in the stock market. Its not true in every business deal, but it is something to be wary of of you don\’t know who you are dealing with.

    Second, you have to wonder why a fund which has always claimed \”we buy companies because they shouldn\’t be public\” suddenly wants to go public? Why the change of heart? The answer is obvious, because insiders want to cash out, or \”diversify\” as they call it in wall street terms. Once you realize that, you might wonder if it really is that good of any investment. Why do they want out now?

    Third, I do trade a lot, and your comments about the market got me interested in this blog. And if you are going to own something, you have got to understand it and the rational for it to move up, if only so you know when to sell it. How can anyone understand something so complex without a team of people to analyze it, in other words why would any individual investor buy it?

    Comment by ER -

  28. Many interpret the word \”sucker\” too literally, as in \”fool\”. Replace the word \”sucker\” with the phrase \”needing the deal\”, \”willing to give up more\”, or \”desperate\”. Then the saying takes on a greater dimension.

    Comment by www.freeway2000.com -

  29. M –
    Your insight into hedges and how difficult it is for them as they face when going public in right on the mark…

    An additional good read is Jim Cramer\’s book \”Confessions of a Wall Street Addict…\”

    Thanks ( I don\’t want to be the sucker…)

    Comment by benn dunn -

  30. Common sense usually prevails. The historicity of these issuance has been in three steps, with the recent IPOs being the third.
    First step was in the 90s, incubators would start a hedge fund with a keystone 50MM block and get paid by the hedge fund owners a 3 to 6 times multiple of the latest years fee income at the \”sunset clause\” time of the deal. By that time the fund had, so the plan goes, grown from a 50MM to a 500MM to 1 Bil fund at the \”sunset\” point in time, and the 4X multiple representing for a $500MM hedge fund a $80MM to 100MM payout to the incubator. The fund owner had been able to compound his fees received to date in his offshore account basically tax free, so even with the \”incubator\” taking about 30% of his fees ongoing, the owner basically had compounded his money tax free so he coudl easily buy out the incubator. After shedding his \”incubator\” the fund manager then would start to make 24MM to 30MM per annum, kept tax free off shore. So a good deal was had by all. In short, the hedge fund guy enjoyed tax and economies of scale not seen since the days of the \”Robber Baron\”. It is much easier to grow rich in a tax free environment.
    Then Highbridge Capital owners Sweica and Dubin in 2004 set a new standard by selling a majority stake to JP Morgan. They managed to sell a majority stake for about a 9 times multiple of the 2004 fee income of 140MM per annum. Furthermore, size started to become a harsh barrier of entry for smaller \”mere\” 50MM to 100MM hedge fudn startups, so the multiple Highbridge received and the pressure of barrier of size, started to fade the hedge fund \”incubator\” business.
    But the number of strateguc partners/buyers are limited in the Highbridge world in this \”stage 2\” world, so then IPOs started to be considered. The IPOs are placing an even higher multiple than JP Morgan placed on Highbridge. JP Morgan can rationalize their pruchase of Highbridge as likely they were already receiving close to 50MM to 100MM per annum fees from security transactions and custodial services supplied to Highbridge. Also, the Highbridge LPs were/are a whos who of endowments and investors which complimented JP Morgan business. As perverse as it sounds, the high multiple JP Morgan payed can be seen as a ratinal \”loss leader\” considering the decade of busness and clients Higbridge would spin off for them.
    IPO buyers share none of those strategic positions.
    Hedge funds are invariably partnersnips, like a law firm or a accouting shop. It is the only sensible structure with which one can control the ego that goes up and down the elevator every night (and the ego of the avergae hedge fund trader is not to be underestimated) as well as provide control. But LPs are basically a \”what did you do for me last year\” business based on immediate cash flow and it makes little sense to apply equity structure on them as by definintion they cannot contain the strategic framework required over the long run for a stock company. However, one hedge fund type which are basically \”banks in drag\” can perhaps have a equity structure, just as any bank can have such a structue. But it should be noted banks are usually structured with an operating company as the equity participant and then the bank asset structure held in a subsiduary. That is not the case in Fortress or Blackstone. These bank like hedge funds which may have the best possible entry point for equity investors, but they also have an \”unfair\” tax advantage versus banks over and beyond the offshore tax shelter hedge funds have as noted above. Banks pay taxs on interest paid on loans. Hedge fund to date do not. It is my understanding that the IRS is closely examining the tax basis for hedge fund flows, not only in the areas Mark and others have noted, but also in the \”heart\”, the identification of interest and feees and ordinary income so the hedge fund is on a level playing feild veruss the banks. Such tax changes would be a calamity for the likes of Fortress and Blackstone, though I am aware various structures and arrangements are being pursued by the larger \”asset based\” hedge funds in anticipation.

    Comment by Mac Robertson -

  31. Mark, I appreciate your insight. I have always been wary of the whole \”hedge\” sector.
    You have laid out your judgement on hedge funds in an easy to understand argument. Thanks for your insight.


    Comment by Frank -

  32. private hedge fund + no regulation = $$$$$$$$$$$$$$$$
    public hedge fund + regulated = $

    Comment by Ed -

  33. Thanks for a very insightful article. Most of the time, the media plays up the euphoria of the impending IPO and the small time investors will always become the victims. Are they paid to suck their readers? Can\’t they raise the red flag when the need arises?

    Comment by Chen -

  34. You are right of course about all the hedge fund stuff, and the \”sucker rule\” does apply there, but I also believe you don\’t always need a sucker in every business deal.

    When I sold my first company I got paid and the acquiring company got the assets. They were happy with the assets, and I was happy to get paid.

    The thing is, Mark, if someone from Yahoo! reads this, they are going to think, \”We were the suckers when we bought Broadcast.com.\”

    The thing that concerns me is that Yahoo! or some other big outfit may want to buy my next company, and when you say that I think it makes potential acquiring companies just a wee bit less likely to make an offer, not wanting to be the sucker.

    Comment by Scott Yates -

  35. mark my words,
    the whole agenda of hedge funds going public is about one thing – hedge fund captains do expect drastic drop in their performance in horizonte of 3 years which they plan to offset by influx of public money, really. after the \”slow period\” and right before the world markets pick up (when their stock price will be hoovering around all time lows) they\’ll go private again, pockecting nice price difference. that is all there is to it. just another deal where profit this time will come from the ordinary investor that is molded by the cnbc and other marketing machinery. that is why the big money hedge investors are allowing this move (or going along with it by simply not withdrawing) on funds part – they know that the easiest way to make money is to lure the public – the tools for that are obvious & easy.

    take care everyone and invest with future on you mind.
    kostalo13 (at) yahoo.com

    Comment by -I3runo- -

  36. Great Post – I couldn\’t agree more, these public hedge funds are going to be a short lived gain, then a bust. Your dead on, incredible insight.

    Comment by Deeter Prater -

  37. ( This is not doing an apples to apples comparison about the soon to be IPO hedge funds and your proposed hedge fund…I just saw you mention the word \”hedge fund\” and it triggered remembrance)

    Hey Mark I remember a few years back you mentioned having some sort of hedge fund involving sports arbitrage. Whatever happened to that?

    I heard about it from the Wall Street Journal Online and since then I haven\’t seen or heard anything else regarding this.

    What happened?

    Also let me say something else. I really don\’t know you or your team and have stumpled upon articles about you from various online sources. Most things don\’t impress me but one thing which you have said which caught my eye was when you said that success for an entrepreneur is:

    2% ideas and 98% execution.

    I\’m a young Realtor and let me tell you that competition for listings and sales is high. I see so many people with their great ideas and their loud mouths spouting how their going to do this and that…what it boils down to is WHEN are you going to do what you talk about. In other words walk the talk.

    You\’re right this is a zero sum game, and I don\’t say it to kiss up to you but when I negotiate for my clients, whether buyers or sellers, something HAS to give. Buyers want all closing costs paid and they want the lowest price they can get for the home AND they want to seller to buy down the interest rate.

    Sellers are on the exact opposite of that spectrum…you really have to negotiate down to favorable terms for both parties and even then you don\’t always please everyone. But the bottom line is…is everyone satisfied to the point of continuing with the deal? Thats what counts.

    Buyer wants closing costs paid.
    Seller doesn\’t.
    Seller wants to increase price to cover CC\’s
    Buyer refutes counter offer.
    Buyer pays half CC\’s
    Seller Pay Half CC\’s

    Zero sum is the right word.

    Oh yeah…what happened to that sports arbitrage hedge fund? ^_^

    Comment by Edgar -

  38. Thanks for the insight. Do you feel you learned more from just making mistakes or making well-informed decisions and trying to learn before investing?

    Comment by Ross Middleton -

  39. While every fund has interest in profit, only some are interested in increasing the stock price. Publicly traded organizations only care about their stock price in two situations, when they are offering stock and when managers are being paid stock options. If a company isn\’t heavy on stock based compensation and doesn\’t have public offerings often the management doesn\’t have much reason to want the price to increase. Of course the management does need some sort of compensation based on performance otherwise you end up with another Yahoo when it was run by Terry Semel.

    Comment by Snowmobiles -

  40. Well said, mark

    Comment by David -

  41. There\’s a very important distinction in these IPOs that Mark seems to get but the readers might not. The financial press has done a terrible job of explaining this distinction as well.

    Blackstone and Fortress are selling shares in the fund management company to the public. Not in an actual hedge fund or private equity fund. Hedge funds and private equity funds are by definition private, and cannot legally be sold on public exchanges in the United States.

    Public investors in Blackstone or Fortress would make money from the fees paid by investors in private investment funds, rather than making money directly from the actual investments of these funds.

    In SAT speak (where : means \”is to\” and :: means \”as\”)…

    Blackstone : private equity fund :: Fortress : hedge fund :: Fidelity : mutual fund :: Washington Mutual : bank account

    Just as there is a very big difference between buying shares of WAMU versus putting your money in a bank account, there is also a very big difference between buying a share of Blackstone versus investing in a private equity fund.


    Comment by Martin Unsal -

  42. Good post Mark, I totally agree! The crazy thing is that CNBC just reported that the Blackstone IPO is 10-12 times over-subscribed!! Maybe there is a sucker born…..

    Comment by Acetrader -

  43. Mr Cuban,
    Your closing line on this topic is awesome! I am still writing off my loss from 1999.

    Comment by David Roberts -

  44. Mark: As usual, you are very insightful. I wrote a similar-themed piece regarding private equity/hedge fund investment in feature film portfolios that may be of interest. At http://fmvla.com/the_dangers_of_portfolio_film_pricing_models

    David Davis

    Comment by david davis -

  45. thanks for the insight on this topic.

    but how about another post on the first paragraph quote –

    \”I\’m a big believer that whenever you do a business deal, including buying and selling stocks, you always look for the sucker. If you don\’t see the sucker, then you are the sucker.\”

    there\’s always a sucker? are you saying businessmen can\’t make a trade one that benefits both parties?

    the buying and selling of goods and services (business deals) happens every day among free market capitalists…is somebody always the sucker?

    those who read your quote think you are endorsing the philosophy of \’practice your art of deception boys because you always want to be the \’suckee\’ not the sucker\’, work on getting rich by ripping off the suckers, rely on the ignorance/evasion of others, etc…. if this is true – we are going to have a whole new wave of TV Evangelists raising more money than the private equity funds going public,oh, wait, they are already doing that… nevermind.

    back to the sucker/suckee relationship.

    only way to do business deals?

    Comment by karl meisenbach -

  46. Unless you have a lot of liquid assets — somewhere north of $100,000, maybe; again, liquid — your best bet is probably to invest in a low-expense-ratio index fund, something that tracks the S&P, for example. Something without a 12b-1 fee, for sure. 12b-1 fees are something that funds charge you so they can market their own funds. Yes, you pay so the fund you\’re already invested in can attract new investors. You pay for their advertising!

    The thinking at the time of the law\’s creation was that by attracting more investors, the costs of managing the fund would be absorbed across a wider pool of investors, thus lowering the overall costs for all investors (i.e., those paying 12b-1 fees). But the law is dated and it exploits individual investors. There are plenty of funds without 12b-1 fees, so don\’t fall prey.

    Business periodicals need to sell magazines, which means they need to convince you that something is different now than it was last year or the year before (e.g. hot new stocks!) but the truth is: The principals of investing don\’t really change all that much, though occasionally small stuff changes when laws change, e.g.

    Bottom line: Steer clear of too much risk unless you have a lot of money to lose. Index funds are the way to go for most regular folks. It\’s nearly impossible to beat the market, so why try? Track the market; dont fight it (in most cases for most investors).


    Comment by Dewey -

  47. Very good article. Except I refuse to believe that there is always a sucker in every business transaction. There are many transactions where it\’s a win-win situation. It always is nice to do a transaction where the other party is clearly a sucker, and it sucks when you realize you were the sucker — but a large number of transactions don\’t fall into either one of those categories.

    Comment by D K -

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