PID 3245


Market Commentary: December 2022 – What Lies Beneath the Surface

What Lies Beneath the Surface

December 2022

By Ward Williams

Hurricane Nicole hit the east coast of Florida earlier this month and washed away vast amounts of sand from various beaches. The erosion revealed mysterious debris on Daytona beach. When low tide came, archeologists determined it was likely the remains of a shipwreck from the 1800s.


This was an exciting discovery that reminded us that sometimes wonderful things are buried beneath the sand and the ocean. However, this metaphor tends to have a more worrisome meaning when we are discussing investments.

“It’s only when the tide goes out that you learn who has been swimming naked.” –Warren Buffett

When markets are going up, interest rates are low, the outlook is rosy, and everyone looks like a genius. When the tide turns, not only does it lower all boats, but it also exposes any number of unexpected, and sometimes unwanted, issues.

One of the most well-known occurrences was in 2001 when Enron, formerly a sleepy gas pipeline company, was found to have grown on a scaffold of dubious, interlocking, and unsustainable debt. When interest rates turned, Enron became one of the largest bankruptcies in history, and caused the downfall of Arthur Andersen, one of the largest auditing firms in the world.

Currently, we are witnessing the collapse of FTX, a crypto currency exchange founded by Sam Bankman-Fried. Amid claims of utter negligence, and counter claims of “our intentions were good, but we were out of our depth,” two things are certain. First, billions of dollars are missing and may never be recovered. Second, FTX used client funds for its own purposes, thus breaking the cardinal rule of financial management, “it’s not your money, it’s your client’s.”

Could the downfall of FTX been avoided? That is a question for the courts. However, should the problems have come to light sooner? Absolutely. There was no corporate governance, no transparency to clients, apparently no auditing oversight, and in the end, no real business.

Other, much less nefarious, revelations are also taking place. Large non-traded REITS (Real Estate Investment Trusts) are limiting withdrawals from their funds during December. Blackstone and Starwood have already announced, and certainly other, smaller firms will follow.

The problem isn’t that they are going out of business. In fact, the Blackstone REIT (BREIT) has returned 9%+ this year. Instead, as investors have losses in other public asset classes they are taking profits from the private REITS to balance their portfolios. However, BREIT and similar funds have an often-overlooked clause in their prospectus that the sponsor (Blackstone) can “cap withdrawals.” This is done to prevent the REIT from having to liquidate properties to fund cash withdrawal requests. Typically, the cap is 5% of net assets per quarter. Hitting the cap has always been a possibility but rarely realized.

There is nothing untoward happening – the assets still exist and are earning profits, but the client cannot necessarily access all of their funds. Thus far, Blackstone has fulfilled 46% of the redemptions requested for December on a pro-rata basis, correctly fulfilling the terms of their prospectus.

“Be fearful when others are greedy, and greedy when others are fearful.” ~ Warren Buffett

The greater the risk the greater the reward is not just a cliché; it is a fact of investing. This is why cutting edge, unregulated entities (i.e., FTX) must offer outsized returns, and why regulated, but illiquid products (i.e., Blackstone) offer returns over their public counterparts. A rational investor requires extra return to compensate for the extra risk, be it risk of loss or risk of liquidity.



“Know what you own and know why you own it.” ~ Peter Lynch

It’s easy to buy securities that “everyone else” owns, that you see touted in the media, or that have charismatic promoters. However, if you don’t understand what you really own, what it does, and how it generates returns for investors, it is probably not a great investment. Different seasons of life have different investment profiles that can be tailored to your needs, and an investment in a business that creates value through cash flow should fit into the risk vs. reward plan that you have established with your Wealth Coach.

It can be difficult to avoid the crowd and skip the newest trend. However, it is much more satisfying to simply read the headlines regarding the latest financial blowup than it is to be in the middle of it. Whether investing for a specific need, a lifetime, or a legacy, you are in control. Don’t be swayed by the crowd or the fear of missing out (“FOMO”). If that worked, everyone would be a successful investor.

Shannon Dermody

Shannon DermodyTEST

Leave a Comment