Daniel Rasmussen: ‘Be Very Wary of Illiquid Asset Classes’

Episode Summary

Executive Summary: Daniel Rasmussen argues that successful investing requires humility, meta-analysis, and attention to how markets price others’ forecasts. He favors value, small/micro caps, international stocks, crisis investing, and skepticism toward private equity/private credit, while using high-yield spreads as a key macro signal for regime shifts and opportunities.

Main Topics: Humility and meta-analysis in investing (Priority: 5/5): Rasmussen says investors should focus less on predicting the future directly and more on analyzing the forecasts embedded in market prices, competitors’ actions, and the limits of human foresight. Forecastability and what investors can actually know (Priority: 5/5): He distinguishes between largely unforecastable outcomes like equity market direction and more predictable variables like volatility and correlations, arguing these matter for portfolio construction. Value investing as betting against hubris (Priority: 5/5): Value is framed as a trade against overly optimistic growth assumptions embedded in expensive stocks, with long-term performance driven by multiple reversion and forecast error. International, small-cap, and crisis opportunities (Priority: 4/5): Rasmussen explains why he prefers global and small/micro-cap markets, especially where inefficiencies are larger and passive capital has less reach, and why crises create outsized opportunities. Critique of private equity and private credit (Priority: 5/5): He argues private equity is overallocated, levered micro-cap investing with high fees and illiquidity, and that private credit offers 'fool's yield' because high yields mostly reflect default risk. High-yield spreads as a macro indicator (Priority: 4/5): The spread between high-yield debt and Treasuries is presented as a strong indicator of credit stress, crisis conditions, and future returns across asset classes. Behavioral lessons from experience and history (Priority: 3/5): The conversation repeatedly links historical study and lived market experience to better decision-making, especially during crises and periods of style underperformance.

Key Arguments: Investing is a game of meta-analysis, not just analysis; you must consider what everyone else believes and how those beliefs affect prices. Many major forecasts are intrinsically unreliable, so investors should avoid overconfidence and rely on base rates where possible. Equity market direction is essentially unforecastable, but volatility and correlations are meaningfully more predictable and useful for portfolio decisions. Value investing works because expensive stocks embed overly optimistic assumptions; over time, fundamentals and valuation multiples tend to mean-revert. The U.S. has outperformed partly because of an unusual innovation wave, which has hurt value in the U.S. but not necessarily abroad. Small and micro caps are attractive because they contain more inefficiencies and permit more extreme factor exposures than large-cap markets. International stocks look cheap relative to U.S. stocks even after adjusting for fundamentals, and U.S. listing status itself carries a large valuation premium. Emerging markets are riskier because crises are more frequent and recoveries are less reliable, especially where property rights and rule of law are weaker. Private equity is an overallocated, highly levered, illiquid micro-cap strategy that does not clearly justify its fees or risk versus public markets. Private credit is 'fool's yield': high yields are mostly compensation for default risk, and the highest yields often produce the worst realized returns. High-yield spreads not only reflect credit risk but also influence refinancing conditions, making them both a signal and a causal driver during stress. Crisis investing can be systematic: when spreads exceed a threshold, size, value, and reversal factors tend to work much better than normal.

Data Points: Assets under management at Verdad Advisors: a little over $1 billion - Rasmussen describes the scale of his hedge fund. Largest slave revolt in U.S. history: about 500 enslaved people - He recounts the 1811 New Orleans revolt described in his first book. Shipping delay in Greek ship-owner example: 2-3 years - Used to explain competition neglect and why ship profits collapse by the time new ships arrive. Predictive horizon for market direction: next month / day over day - He says equity market returns are essentially impossible to forecast at short horizons. Volatility forecastability: about one month out - He argues last month's volatility predicts next month's volatility fairly well. Correlation volatility: stocks and bonds can switch between positive and negative correlations - Used to explain why safe-asset selection matters across regimes. Passive investing timeframe: since college / over the last decade - Rasmussen notes passive already had significant share when he entered finance. U.S. innovation-wave cadence: roughly every 50 years - He explains why U.S. large-cap growth has been unusually strong. Revenue-share regression result: U.S. revenue share slightly negative; U.S. listing highly statistically significant - Used to explain why U.S.-listed stocks command higher valuations. Developed-market crisis recovery rate: in the 90s / 100% in the U.S. and England - He contrasts developed markets with emerging markets. Emerging-market crisis frequency: about four times as many crises as developed markets - Supports his skepticism toward EM buy-and-hold investing. Private equity share of aggregate profit pool: about 2% to 4% - He argues the opportunity set is too small to justify huge capital allocations. Median private equity market cap: less than $200 million; about $180 million - Used to characterize private equity as micro-cap-like investing. Typical allocator exposure to private markets: around 40% - He cites endowments, foundations, and pension funds as heavily overweight private assets. Private credit yields: 10% to 12% - He contrasts these with Treasury yields and argues the spread implies substantial default risk. High-yield crisis threshold: above 600 basis points - Verdad defines a crisis using this spread level. Current non-crisis spread example: around 300 basis points - He says refinancing is much easier when spreads are this tight. Severe stress spread example: around 700 basis points - At this level, only the strongest borrowers can refinance. Equity factor power during crises: about 4x as much predictive power - He says size, value, and reversal factors matter far more in crises.

Pivotal Quotes: "Investing is not a game of analysis, it's a game of meta-analysis." — Daniel Rasmussen: He explains his framework for thinking about competition, forecasting, and market pricing. "You have to be holding efficient markets hypothesis in your mind and considering how your actions are influenced by the same ideas that everyone else's actions are influenced by." — Daniel Rasmussen: Used to define humility and the need to account for other investors' behavior. "Private equity is the single biggest mistake that investors are making in markets today." — Daniel Rasmussen: He introduces his critique of private markets, fees, leverage, and illiquidity.

Implications: Listeners should expect fewer simple forecasting answers and more emphasis on positioning, diversification, and regime awareness. Rasmussen’s approach favors cheap, ignored assets and disciplined crisis preparation over consensus private-market or growth narratives.