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The guest commentary below was written by Jesse Felder of The Felder Report

The True Cost Of Ignoring True Cost - z221

With the failure of the WeCompany (formerly WeWork) IPO, many have become critical of the now obvious follies in the private markets. However, they clearly fail to appreciate what this means for the public markets.

“Asked whether they often make a gut decision to invest in a fledgling company rather than relying on analysis, 44% of venture-fund executives said yes. Which financial metrics do they use to analyze investments? ‘None,’ admitted 9% of respondents,” wrote Jason Zweig recently for The Wall Street Journal, implying the lack of discipline is to be blamed for the bubble in venture capital.

However, this begs the question: how many investors in the public market today are failing to use financial metrics to analyze investments? Certainly, with funds in passive products recently surpassing funds in actively managed ones it would appear that the answer would be over 50% of investors in public funds. So if 9% of venture capital investors are able to create a bubble in that market by buying without any regard for value, what are the 50% in the public funds capable of?

With the shift in perception towards these private market behemoths, epitomized by the WeCompany fiasco, it’s inevitable we will see a very similar shift in the public market.

Investors will soon come to realize once again that equities, private or public, are not the easy path to riches they have seemed to be over the past decade; they are worth nothing more than the discounted value of their future cash flows (and not discounted at today’s “risk-free” rates but at a more historically appropriate rate). And that true value is far lower than current prices.

EDITOR'S NOTE

This is a Hedgeye Guest Contributor piece written by Jesse Felder and reposted from The Felder Report blog. Felder has been managing money for over 20 years. He began his professional career at Bear, Stearns & Co. and later co-founded a multi-billion-dollar hedge fund firm headquartered in Santa Monica, California. Today he lives in Bend, Oregon and publishes The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.