The Value Line Mutual Fund Survey

Private Equity Hype

According to the media, the most de sired job for recent college grads is to work in private equity. The news is full of stories about how wonderful it is for managers, and the companies they oversee, to get out from under the quarterly, if not daily, scrutiny of investors on Wall Street. Moreover, for those without debt obligations, the weight of government mandated public disclosure requirements is removed as well. The hot place to be nowadays is definitely in private equity.

What should you do about it? Nothing.

Yes, companies are being taken private at what appears to be an accelerating, and definitely exhilarating, rate. Yes, those buyouts are often happening at prices that are above the price of the companies prior to the takeover announcement or hostile bid. Yes, there is money to be made on this trend.

Still, you should do nothing.

It’s foolish to think that you or I could select the next stock that’s going to be taken private any better than anyone else. Wall Street is full of very smart people trying to do this very same thing. I’m not going to try to compete with the rest of Wall Street.

That isn’t to say that you should jump into a diversified mix of index funds and go to sleep, though, in all honesty, there really isn’t anything wrong with this investment approach. If you enjoy investing, and I assume you do based on the fact that you subscribe to this product, you should instead focus on the basics and avoid the latest round of Wall Street fads—of which private equity is one.

It isn’t easy to do nothing, but it is, more often than not, the right thing to do.

My father and I often argue about investing. The question I always ask my father, and the one that always stumps him, is, “What are you trying to achieve?” You see my dad has a habit of getting sidetracked from his longterm goals by “good ideas.” I put that in quotes because every good idea isn’t a good investment.

It took me a long time (and many, many investment blunders) to hone my focus—and, truth be told, I still get sidetracked once in a while, too, but far less often than my father. One way to deal with this is so called “fun money.” Set aside a portion of your portfolio for investments that don’t fit with your long-term goals but you want to take a flyer on anyway. The trick is to make sure that this “fun money” isn’t that much money. Perhaps 5% of your portfolio would be appropriate, and I’d say never more than 10%.

So, while I say you should do nothing, if you can’t resist the urge to do something, then do a little. Just make sure it is very little.

Indeed, investing should be fun, not a chore. If it is a chore, then outsource every aspect of investing that you can and put your efforts into the saving aspect of the equation. Saving, after all, is where you will have the greatest impact on your financial future.

In the end, the best advice is to avoid fads. That said, I want you to enjoy investing because it will make you a better investor. If you need to invest in the hottest fad, such as private equity, because it makes investing fun you should do so sparingly and only so long as the majority of your assets are in vehicles that meet your long-term needs. (For those who can’t resist the private equity bug, take a look at business development companies, which are, essentially, publicly traded private equity firms.)

Reuben Gregg Brewer
Executive Director of Research
Value Line