Safe to say, individual investors don’t have the same degree of pull in Washington that financial institutions do. What’s more, the overall market environment in which these beasts thrive may even be at odds with the market environment that best suits long-term, retirement-focused retail investors.
While retail investors view volatility as risk and cause for nail-biting, asset managers like Blackstone Group (NYSE: BX) thrive in volatile markets. In fact, they need volatility to spur the price movements that generate profits for the leveraged bets they make.
As you’ll see in the chart below, Blackstone Group’s stock is up nearly 250% since early 2009. Arguably, these returns wouldn’t have been possible in the absence of the financial crisis, which many can blame on the privileged relationship financial institutions, and their lobbyists, have with the U.S. government and its regulatory bodies.
One example of how financial institutions capitalize on the volatility yo-yo game that’s characterized the last decade is Blackstone’s merger and acquisition (M&A) deals.
In 2004, the firm bought hotel chain Homestead Studio Suites for about $2 billion, merged the company with Extended Stay America, which it bought using the Homestead assets as collateral, then sold the combined company for $8 billion just three years later… just before the property market crashed.
Yet Blackstone, apparently, did very little to enhance Extended Stay’s business prior to selling it in 2007. Just three years later the hotel chain was on the verge of bankruptcy. That gave Blackstone a golden opportunity to buy Extended Stay America again, at a 50% discount to what it’d sold it for in 2007.
Today, just three years after buying Extended Stay America again, this time for just under $4 billion, Blackstone is preparing its IPO with the aim to cash in on its investment.
Could retail investors pull off deals like this? Absolutely not.
The combination of artificially low interest rates and a seat at the regulatory table no doubt tips the scale of power in favor of large financial institutions. Retail investors become mere spectators, or worse, pawns in a well-orchestrated game of financial chess.
Of course, retail investors can just buy stock in Blackstone Group and ride the tide with the company. But I wouldn’t recommend doing that today.
Relative to the homebuilder stocks (XHB) and hotel/motel REITs (i.e. HST), Blackstone’s stock price appears overextended.
Better to let the next financial crisis knock Blackstone back a bit before buying in. Remember, you may not like an up-down-up-again market… but Blackstone loves it!
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