The Comfort Trap
Finance has become more democratised apparently with the introduction of the vehicles only the big end of town could afford. Private markets, our lord and saviour!
One of the neater features of private markets is that they allow allocators to be lazy. Post-08, we obsessed over "behavioural finance". But since being blessed by the great democratisation, we've stopped working on our counter-cyclical behaviours. Instead, we just allocate to assets that don't mark-to-market during a drawdown.
A bit of vol laundering doesn't go astray between friends aye?
We can argue about why this is right or wrong (Risk cannot be destroyed, only transformed!) but rather we can simply acknowledge that this is becoming more prevalent across all portfolios.
The Cost of Laziness
Why did I say lazy? Frankly, if you hold enough private assets, you can ignore major market moves (I'm looking at you, 2022) and be lazy from a rebalancing perspective.
Dear reader, I am absolutely going to accuse you right now that you're allocating to private markets because it makes your life easier.
But when you hide in private markets to avoid volatility, you lose the ability to exploit volatility. Right now, we are watching a live-fire exercise in volatility. We are roughly 30% off the highs in the wildest asset class of them all.
Rather than sitting around being reactive, let's build a framework that allows you to act.
A Live-Fire Exercise: Bitcoin
I've spent time on this because the ultimate limiting factor in investing is ALWAYS psychology. We react emotionally because we don't have a plan, instead we just react to headlines, price action, and whatever your favourite bear is saying.
Source: Oxford St mural circa 2022
For this exercise, I'm going to use the wildest asset you can allocate to, Bitcoin!
The 1064 day cycle, some of you may have seen this internet lore floating around since 2023.
Remember, trust but verify. I'll do the hard work here:
This is distressingly accurate.
Why does this work? It doesn't! Our brains are merely wired to appreciate symmetry and repetition. It means absolutely nothing!
However, it does give us something to anchor on. If history stands, the 2025 high is behind us and we are now in a drawdown phase. The above suggests we are hunting for a bottom sometime in the next 12 months. We don't know the path, but if we believe a bottom exists, we know the destination.
Choose Your Own Adventure
Let's build a little framework around this:
- We don't know when it will bottom
- We don't know how far it will go
- You may think this is stupid, but I believe we will recapture all-time highs again at some point in the future.
If you agree with me that we can get back to ATH, then we can from here choose our own adventure:
At some point, for any investor, the price becomes attractive again.
Someone yesterday possibly bought with the view that we return to ATH within the year. Clearly, they were happy with a ~40% IRR if you took that view.
My point is, choose your own adventure!
This is a basic example of looking at forward returns. Read between the lines: this is about becoming a buyer in public markets. It doesn't have to be Bitcoin; it can be equities or credit. (And if you're not using AI to model these forward-looking outcomes by now, what are you even doing?)
Don't Be a Passenger
If you want to buy the dip effectively, you need the ability to rebalance. You must become a liquidity provider when there is no liquidity! But you need liquidity yourself to achieve this outcome.
If you have fully embraced the democratisation, you might be feeling smug because your portfolio didn't mark down this month. But you also can't rebalance into a -30% drawdown if your capital is locked up in a private credit fund.
Private markets are great for smoothing returns, but they are terrible for capturing dislocations. Don't let laziness strip you of your ability to be a liquidity provider when the market actually pays you for it.