The Best Investment Writing Volume 5: Dan Rasmussen, Verdad Advisers – Crisis Investing: How To Maximize Return During Market Panics

Episode Summary

Executive Summary: Dan Rasmussen argues that financial crises are the best time for disciplined investors to earn outsized returns, especially through small-cap value and simple quality/value factors. After studying U.S. crises since 1970, he concludes that panic worsens human decision-making, widens spreads, and creates temporary but powerful opportunities that public equities—more than private equity or distressed debt—are best positioned to exploit.

Main Topics: Why crises create investment opportunity (Priority: 5/5): Rasmussen explains that fear, forced selling, and impaired decision-making during recessions make markets especially mispriced and make simple factor strategies more effective. Small-cap value as the best crisis asset class (Priority: 5/5): Across spread regimes, small-cap value outperforms other asset classes, with especially strong relative performance when high-yield spreads indicate distress. Quantitative factors work better in downturns (Priority: 5/5): Size, value, and conservative investment factors perform more consistently during crises than during expansions, and much of their long-run excess return comes from crisis periods. Behavioral and credit-market mechanics of panic (Priority: 4/5): Investor and lender panic reduces lending and investment, creating a financial accelerator that deepens downturns and rewards profitable, cash-generative firms. Why private equity is poorly suited to crises (Priority: 4/5): Although PE should theoretically benefit from distressed conditions, capital deployment slows when opportunities are best because financing is scarce and decision windows are short. Why distressed debt underperforms public equities (Priority: 4/5): Distressed funds target troubled credits, but they still lag a simple public equity multifactor approach because they own weaker businesses with higher bankruptcy risk.

Key Arguments: Crises are more predictable than bull markets, and standard return models become far more informative during recessions. Small-cap value is historically the strongest crisis-era asset class, outperforming all others by a wide margin when credit stress is high. Fama-French factors such as size, value, and conservative investment earn a disproportionate share of their excess returns during crisis periods. Investor panic and lender de-risking shrink credit availability, which amplifies economic damage and creates mispricing. Private equity is structurally procyclical: it deploys capital most when markets are calm and least when spreads are widest and returns are most attractive. Distressed debt is not the optimal crisis vehicle because it still buys weak, fragile businesses; a public multifactor equity strategy can outperform it substantially. A dedicated allocation to public small-cap value, with rules triggered by credit stress, is the most practical way to exploit crisis opportunities.

Data Points: Firm assets under management: about $500 million - Verdad Advisors’ stated scale across small cap value, high-yield bonds, and tactical asset allocation Crisis study sample period: every financial crisis in the U.S. since 1970 - Research base used to analyze panic-period behavior and asset performance Observed market history for factors: 1953 to 2019 - Period over which crisis returns accounted for most factor excess returns High-yield spread threshold: 6.5% - Cutoff used to distinguish tranquil periods from crisis/panic periods Private equity deal volume correlation: -69% - Correlation between high-yield spreads and quarterly PE deal volume from 2006 to 2018 PE vintage-year IRR when spreads above 6.5%: 17% - Average IRR for vintage years in higher-spread environments PE vintage-year IRR when spreads below 6.5%: 12% - Average IRR for vintage years in lower-spread environments Private equity return window: 2 to 3 months - Approximate period after spreads hit 6.5% when equity returns are maximized and deployment is hardest Crisis-model predictive power: 8x - Standard models for predicting equity returns are described as 8x more predictive during recessions than expansions Multi-factor model vs distressed debt: 4.5 times - The multi-factor equity model is said to outperform distressed debt by 4.5x Bull market length referenced: 10 years - The talk opens by describing one of the longest bull markets in history Crisis period examples: March 2009, February 2016, December 2018 - Examples cited of moments when investors hoped to buy the dip

Pivotal Quotes: "Fortuna eruditis favit. Fortune favors the prepared mind." — Dan Rasmussen: Used to frame the central thesis that preparation matters most in crises "Markets are the opposite. Bull markets are all bullish in their own ways." — Dan Rasmussen: Contrasts the uniqueness of bull markets with the recurring nature of crises "We have done this work for your benefit so that you will keep your head when all about you are losing theirs." — Dan Rasmussen: Describes the purpose of the crisis-investing research

Implications: Listeners should treat crises as structured buying opportunities, not just emotional tests. The episode argues for pre-committed public equity rules—especially small-cap value—over illiquid alternatives, because discipline and speed matter most when spreads spike.