One wonders why behavioral scientists (BS) have not identified “unavailability bias” given how obvious and also catchy a term it is! Let’s officially announce it, and hope it finds a textbook somewhere!
Indian election results caused significant volatility in public markets. Would private investments' NAV be similarly affected? Public markets must reflect not just business fundamentals but also political, economic, and other external factors. This chaotic pricing environment often drives long-term investors towards private investments, where their lack creates an illusion of stability, much more than even other illiquids like real estate.
Of course, BS recognizes "availability heuristic," but for decisions influenced by the most immediate data. The unavailability bias differs: investors apply different criteria for public versus private investments due to the presence or absence of daily prices.
Unfortunately, private investments’ perceived stability is dangerously deceiving in the post-GenAI era, where rapid and volatile innovations have reshaped risks and opportunities. It is good for private investors not to worry about drawdowns, outperformance, peer comparisons, consultants and their Greeks, etc., but if this results in an insufficient analysis of fundamental investment risks, it is far worse.
As we have discussed countless times, the old business rules are crumbling with hyper-rapid technology growth and instant copiability of any idea. Cash-cow behemoths – largely a set of listed companies - are able to plan for large, long-term investments required in hardware infrastructure and to outlast others. This is reflected in their sharply rising investments in the recent era. As Cisco’s recently announced USD1bn fund again proves, listed giants more and more decide the fate of smaller companies they want to see thrive – another new force that is not sufficiently evaluated for implications.
Privately funded companies’ plans are always a function of the funding availability, which is a huge worry when the time and big Dollars required for revenue and cashflow success are rising so massively. This is no longer an era of a small team working in a garage, giving rise to products that begin to attract revenues or attention to secure funding for the next stage: innovation investments have more in common with investment cycles to build a bridge these days.
Continuous announcements and transparency can be negative for public companies, especially in less growth-oriented investor communities outside the US. Yet, market risks are less concerning than operational risks of the type discussed above since valuations in private markets for similar businesses at similar times are not necessarily better.
Markets are what they are, and as BS guys say, investor behaviors are what they are. Disciplined investing is perhaps the way to overcome such irrationalities – a topic we plan to address in our upcoming fund newsletter.
