The Secret Broker: Shake the tree to see who’s falling

After 35 years of brokerage for some of Australia’s and the UK’s biggest houses and investors, the Secret Broker regales Stockhead readers with his colorful war stories – from the trading floor to the dealer’s desk.

This week we have seen valuations fall.

Whether it’s your home or your stake in Tesla, the past week has shaken up the valuation tree and the ripple effect has only just begun.

But it gets a little deeper than just ripples, because behind the scenes you’ll be bitten in more places than you might think, or you actually don’t consciously want to acknowledge it.

It was only this week that a fund noted its valuation on VC-backed Australian pin-up Canva.

Canva’s latest valuation was $55 billion when they last raised money.

However, after the NASDAQ fell 22%, a fund that had invested there reduced the valuation of its holdings by more than 30%.

As Canva is not publicly traded, and like all the others, this creates a gray area in valuations.

If you take Tesla, their valuation plummeted $125 billion in one day as the money tree shook. But since they are listed, an instant revaluation can be recognized.

This is where it stings.

Until an auditor arrives, the value of a fund’s unlisted holdings may not be reflected in its current true value.

This is especially true if a manager of such funds receives a commission on the funds held under management.

They have no incentive to write a review.

There is a push in America to readjust the way hedge funds are rewarded with their fees.

In good times, big performance-based commissions are created, but in bad years, hedge fund managers are never penalized for the losses they create.

The current trend is to partially lock in performance fees and balance them against performance in future years.

Plus, they want them prorated, 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 noting valuations until they were pushed was the reason companies like FAI took longer to hit the wall than they should have.

Or why hedge funds like Melvin Capital, which lost 39% of their clients’ capital in one trade (bypassing Game Shop), still collected their big fees, even though they then managed to lose another 20% in the last trimester.

You sleep, you lose… your super

If your super money manager is slow to reflect lower valuations, then anyone taking funds out will be better off than someone adding funds.

As super is a long-term investment proposition paid monthly, this is an area that will bite into your returns.

If you can digest the fact that Canva’s last funding round, which boosted its valuation to $55 billion, involved less than 1% new equity issuance, you’ll begin to understand how the game plays.

In fact, how we are all played.

It’s not until the valuation tree is shaken enough or when Elon offers $54.20 a share for Twitter (he was supposed to get 420) – a loss-making company – with borrowed funds to take the 44 company private. billions of dollars.

So if you’re on top of businesses that aren’t producing positive cash flow, you might want to get out the shears and start pruning, before winter hits.

Then you’ll have to wait to see what’s dead and what has little green shoots that appear when things heat up again.

As great investor Peter Lynch would say, “Selling your winners and retaining your losers is like cutting the flowers and watering the weeds.

It’s times like this that the sausage sizzle from 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 your way out.

The Secret Broker can be found on Twitter here @SecretBrokerAU or by email at [email protected]

Do not hesitate to contact him with your best stock advice and ideas.

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