Ponzi Scheme - Investing in the Time of Free Money

Negative yields on government bonds. Inflation going up.. Temporary or permanent? What will the Fed do? When? Multiples are unreal: what should we do? We live in unsettling times. What we know though is that debt balances are going up and that what is unsustainable, won’t last forever. We are living in a giant Ponzi scheme albeit sans Mr. Ponzi. What we don’t know is the timing. How should investors then prepare for the reckoning?

There are things that are obvious: invest in businesses that will be resilient in a downturn. Past downturn performance may be a good indicator.   As well, make sure to get a good understanding of why customers will continue to purchase even when times get tough. But there may be other, less obvious avenues for growth – even as the ‘punch bowl’ is being removed from the party. For example, what are the growth opportunities that haven’t been tapped by the target or portfolio company?  Unusual add-on dynamics? Other factors?

As an investor, there is one more very important question to ask. In the current deal making frenzy, this question is: what differentiated insight do I have that others are not likely to have? If you don’t have it, be cautious. But also, why not get creative and try to develop such an insight?  Do the hard work; burrow into the industry; talk to insiders; paw through data.   Finding good opportunities that will be able to weather the ‘bad times’ ahead just might make the difference between being a ‘star’ versus and staggering forward and developing the reputation as an ‘also ran.’