thepupil

From memory (the order may be wrong) 1. The Fed (you know that whole QE thing) 2. Banks 3. Overseas 4. Mortgage REITs (these are the most levered and sensitive) 5. Everyone else You can google around for the exact percentages. While they are certainly very risky, I think it's important to remember that the weighted average life of a 30 yr amortizing mortgage is about 18 yrs and that is assuming full extension to 30 yrs. Because people move, die, get divorced, etc. the average amount of time an individual mortgage is outstanding is closer to 10 yrs I believe. I don't mean to dismiss the risk. They are high duration, negatively convex, hard to hedge pieces of paper. But it's not as if they are actually 30 yr bonds. amort and prepayments shorten the life and duration significantly.

I agree with you guys that rights offerings would be preferable, but that presents an element of uncertainty that the bought deal financing does not. They probably could find some shareholders to have backed the rights offering as an alternative to the bought deal route, which would offer certainty and allow for everyone to participate, but maybe that wasn't in the cards. I don't follow fairfax closely at all. So the $394 BVPS is the $550 US shares so they are actually issuing at 1.4X book?

deals like this make me want to own fairfax. issue equity at 1.6X to pay for a high quality insurer at roughly the same price. I feel like Mr. Watsa is really good at monetizing his stock price when it is right to do so, and if you believe this insurer is high quality, then this deal upgrades the quality of the insurance businesses with minimal dilution in BVPS. I see it as quite shareholder friendly because it likely builds long term value (assuming nothing goes wrong with the insurance acquisition).

Tetragon Financial Group : Amsterdam listed PFIC (so US taxpayers beware), owns hedge fund interests, CLO equity tranches, and a growing alternative asset management business, trades for 58% of fully diluted NAV, 50% of gross NAV, big management discount because current management raped the company during crisis and abused fee structure that lacked high water mark, also a related party buyout of asset mgt co didn't help, they've been harvesting their book of pre-crisis CLO equity at good prices and have been diversifying the business and asset mix (was 90% CLO equity), progressive dividend policy that pays you 30-50% of steady state earnings, 6% yield, management is highly incentivized to get the stock px up in the next two years because of a large amount of options struck at $10 (where the stock is) that expire in 2017. will do a more thorough writeup sometime but VIC author covers it well. http://www.valueinvestorsclub.com/idea/Tetragon_Financial/125503

maybe he sold because the price / near term earnings power rose by a lot. I understand he is super long term, but he is not completely blind to valuation and near term fundamentals either. XOM is still primarily an upstream company in terms of profitability. The stock is arguably more expensive than ever.

all that being said, it is likely that tax efficiency and low costs will be a side affect of a reasonable approach to investing. But they shouldn't be the goal, at least until you are making/have a lot of dough and don't have any in accounts with no tax friction.

berkshire, you mentioned on another thread you spend $7K / year and save 80% of your income. Solving that math problem means you make around $35K. why on earth are you worried about taxes on what you make from investments? You are not tax particularly tax sensitive at your level of income (and I'm guessing assets). With regards to "higher fees", I'm assuming you mean commissions. Interactive Brokers has very low commissions and I see promotions to sign up for places like Chuck Schwab and Merrill Edge and get 100 or 200 free trades all the time. You have to fiendishly turnover your book for commissions to matter as a non-professional; professionals actually still pay a good amount in commissions. I would ignore taxes and commissions for now and focus solely on investing. When you're making $200K living in high tax state and paying a 50% all in tax rate on short term gains, then maybe you should worry about taxes. Generally returns you see for guys like Ackman and Loeb are net of fees, gross of tax. No one pays the same tax rate so it would be impossible to show after tax returns. Lots of investment $ don't pay or care about tax (including our personal pensions like 401ks and IRA's).

hey race, i was just curious if you ever updated your cash returns to reflect the yield of short term treasuries rather than 0? Did it change your findings in a material way?

I'm confused Tim. Assuming the index performance is positive over time, how does an index hurdle result in charging more if outperformance is significant? Structure A: 1% and 20%, no hurdle Structure B: 1% and 20% over index Substantial outperformance year Index return 5% Manager return 20% Structure A: 1% mgt fee + 20% * (20% gross) = 4% fee Structure B 1% mgt fee + 20% * (15% outperformance) = 3% fee Unless the index is negative, isn't structure B always going to pay less (and therefore more LP friendly)

oh and it takes a very confident manager to have an index hurdle! If you can raise money at unhurdled fees, why bother with more LP friendly terms?

highest* I've seen is 40% above S&P. this was one of 6 or so fee structures offered by a manager who was very senior at a multibillion hedge fund and was starting out w/ 20MM of his own money in fund and 5mm of working capital to fund operating expenses (4-5 analysts, IR,rent, etc.) for a few years if they didn't raise money. I think he had an option that was lower % (like 25 or something) if you locked up for 3 yrs. The reason you don't see this structure often is because 1) allocators are adverse to paying such a high %, even if it is for outperformance AND in particular if there is no lookback or if is earned fully over a short period of time (like a year). this creates a lottery payout structure where one year can make someone inordinately wealthy or possibly inspire the manager to take "shoot for the moon" bets. Even with a high water mark, if the fees vest in a year, you pay out a ton for short term performance that may prove illusory. There is also an aversion to paying an incentive on long-only money. 2) most managers need a management fee to pay the bills, the math of a management fee + a BIG incentive, even if hurled, is a huge headwind to net returns; you need to have a low or no management fee if you are going to do the "high percentage over good hurdle" route. The example I provided did not need a management fee in this offering since he had several years operating expenses capitalizing his firm and was already worth 8 figures. He also offered a 2% mgt. fee class, I believe. *this does not include the heavily levered trading shops like Rennaissance, SAC, Millennium who charge ungodly fees + expense pass thrus. they are different animals with 100's of employees and teams, more like owning a prop desk of a bank.

Dshachory, those MM would be people that are starting out with very little capital. For example, if you put your money with Einhorn in the 1990s ya. But he is too big now IMHO. Sure we'd all love to know who is the next upstart. If I knew I'd be rich. But I think it is as difficult as picking the next top draft pick in the NFL. I would add that it would be like trying to pick him at the age of 7... I respectfully disagree guys. Einhorn is in his late 40's, Kevin Byun is probably is in his 30's as is Mecham. If you took this approach with Buffett saying Berkshire was too big in the 80's you would have left A LOT of money on the table. A long/short fund is not nearly as scalable as an insurance-based conglomerate. It's hard to run a BIG short book. I don't know my answer to this question, but I wouldn't pick a full fees $10B+ long/short fund. The proliferation/institutionalization of hedge funds makes generating alpha (much less absolute returns) on the short side much more difficult than the day of old. When you read FSPAOTT, you see that Greenlight was involved in things like bank demutualizations and finding frauds like Allied in small - mid cap land. It's a lot different than owning gold, apple, and shorting Chipotle. Don't get me wrong I think he's great, but it is a lot harder for him ( and any other giant L/S) to kill it than in the early days.

Liquidity structure: The liquidity structure (lockups, notice periods, gates) of the fund should match the liquidity of the strategy and the sophistication of the LPs/clients. If you offer daily liquidity for a concentrated micro cap strategy where you may own several months volume of a stock, you are exposing your investors to tremendous risk and in that instance "investor friendly" lenient liquidity terms are anything but. On the other hand, if your fund is going to own the likes of Berkshire, Google, Apple and other "sell with a click" stocks and simultaneously have a 3 yr lock up 6 months notice and all kinds of gates, you're going to look like you just want to create impediments to people taking out their money. Obviously those are the two extremes. One solution that is not often used is the minimum management fee guarantee (i.e. I as client agree you to pay 3 yrs of mgt. fee on the original commitment but can withdraw my money when I want to) or a sliding scale redemption penalty (5% year 1, 2.5% year 2, 0% year 3). As far as mgt. and inventive fees go, the key is alignment of interests and stability of firm, and what works for one client may not work for another. Each component (management fee, hurdle, incentive fee) has its own issues. Too high a management fee and too large the the AUM and the manager's incentive is too preserve capital rather than grow it. Too low and the manager cannot pay the bills. There is a big variance in terms of strategy. A distressed credit trading oriented firm can't have a 0% management fee (who would pay the army of analysts, traders and lawyers? also hard to attract talent unless you are in a decent city). An already rich guy working from home can. The best management fee structures ensure stability while also disincentivizing growth at any cost by scaling down with AUM. For an individual this may be something like 1% on the first $10MM. For a more institutional size manager it may the first $100MM. Clients should share in the benefits of scale that comes with a firm's growth, since they definitely get hurt by a decline in richness of opportunity set as managers get bigger. The most important part of the incentive fee is figuring out what the right hurdle is. If you are running a market neutral long short fund that will be very tightly managed in terms of exposure, maybe you can get away with no hurdle, but for everyone else, there should be something that strips away the "beta" of a managers return. A lot of people love the "Buffett Structure" (0, 6, 25). I think the market of the past few years illustrates the flaw of an absolute hurdle. A manager would be paid a TON of money without outperforming. The Russell 2000 went up 37% in 2013. Performance in line with the Russell would deliver 7.75% to the manager in a year like that. I think the most fair thing to do if you go with a strictly absolute hurdle is have a lookback, or multi-year vesting period. Alternatively, you can go with a blend of an absolute hurdle and an index hurdle (0, 20% over 0.5X Russell + 0.5 X 6%). A nice compromise that pays a manager well in the crazy up years but also rewards the manager when he preserves capital (losing 10% instead of 25% deserves an incentive fee which an absolute positive hurdle doesn't do). Or offer different ones to different clients. High net worths may only care about absolute performance. Institutions may care more about long term performance relative to an easily replicable benchmark. I have a lot more thoughts on this because this is kind of what i do , but that's enough bloviating for now

The problem I see with your situation is that American CC's offer the best benefits, but generally don't have chips, which can cause some issues. I would recommend the following Citi Double Cash Mastercard: 2% on everything (1% when you charge, 1% when you pay) American Express Blue Cash Preferred (6% groceries, 3% gas, 1% everything else), $75/ year. If you buy a good amount of groceries and gas, you make back more than the fee. Also Whole Foods currently has a holiday promotion for an additional 2%, so that's 8% back during the holiday's (though that may not happen again). Pen Fed (5% Gas), if you buy a lot of gas, you can join the Pentagon Federal Credit Union through some maneuvering The Fidelity ones already mentioned. Once you have a base of 2 or 3 cards with generous cash back and low fees. You can add 1 or 2 / year to get the promotions (sometimes as high as $1000). You have to watch for too much opening/closing accounts affecting your credit score. But it's free money otherwise.

fair enough. I guess I just associate deflation with economic slowdown and I don't think any real estate asset, regardless of quality, is immune to decreasing rent. Washington DC (EQR's largest exposure) has already seen a bit of a rough patch and rents have come down by a hair (DC metro area revenue was down 0.5%, looking at their recent presentation). Associating short lease real estate with treasuries tingles my spidey sense but the crazy rise in the REIT index so far proves my spidey sense without merit. Triple net lease to a bunch of Walgreens and BoA's, yes. But not a bunch of nice yuppie apartments rented to financial analysts and government consultants.

can you explain how a high multiple levered real estate company with short lease terms is a deflation hedge?

Wow! $15K for property taxes in Arlington...crazy. You guys better have the best sewer system, roads, transit and city services than anyone else I know. Cheers! judging by the size of the taxes, maintenance, and utilities relative to mortgage, I think Mr. Redskin dropped a big chunk of cash on a down payment. Redskin, I appreciate you sharing. I'll probably end up in the DC area in a 1.5 yrs so I found the breakdown useful.

here is the link that hitting "post" just now took me to. http://lemode-mgz.com/sc/9334/special-report.html?voluumdata=vid..00000000-5386-4cf3-8000-000000000000__vpid..c4013800-9874-11e4-85f0-0015721d84a9__caid..421c6fa2-56dc-4806-b48a-6b536e9f021f__lid..0c35a75a-ccc3-4c5e-8f05-4d734a3e7189__rt..R__oid1..58151160-8760-4dbb-9b51-28e039a81b3b__oid2..5f0b3bc9-c480-4b8f-9860-94c259e819e0__var1..adwynne__var2..us__var3..1__var4..728-90__var5..1420859832911__var6..http%3A%2F%2Fgoogleads%5C.%5Cg%5C.%5Cdoubleclick%5C.%5Cnet%2Fpagead%2Fads%3Fclient%3Dca-pub-3304925738982736%26format%3D728x90%26output%3Dhtml%26h%3D90%26slotname%3D2808171815%26adk%3D266842322%26w%3D728%26lmt%3D1420877829%26flash%3D16%5C.%5C0%5C.%5C0%26url%3Dhttp%3A%2F%2Fwww%5C.%5Ccornerofberkshireandfairfax%5C.%5Cca%2Fforum%2Fgeneral-discussion%2F%26dt%3D1420859831541%26bpp%3D27%26shv%3Dr20150106%26cbv%3Dr20141212%26saldr%3Daa%26prev%5C_%5Cfmts%3D728x90%2C728x90%26correlator%3D2823721805825%26frm%3D20%26ga%5C_%5Cvid%3D467758751%5C.%5C1388090390%26ga%5C_%5Csid%3D1420855199%26ga%5C_%5Chid%3D677942445%26ga%5C_%5Cfc%3D1%26u%5C_%5Ctz%3D-300%26u%5C_%5Chis%3D82%26u%5C_%5Cjava%3D1%26u%5C_%5Ch%3D800%26u%5C_%5Cw%3D1280%26u%5C_%5Cah%3D711%26u%5C_%5Caw%3D1280%26u%5C_%5Ccd%3D24%26u%5C_%5Cnplug%3D5%26u%5C_%5Cnmime%3D46%26dff%3Dverdana%26dfs%3D12%26adx%3D82%26ady%3D1472%26biw%3D1240%26bih%3D617%26eid%3D317150304%26oid%3D3%26ref%3Dhttp%3A%2F%2Fwww%5C.%5Ccornerofberkshireandfairfax%5C.%5Cca%2Fforum%2Fgeneral-discussion%2F%3Faction%3Dpost%26rx%3D0%26eae%3D0%26fc%3D8%26brdim%3D0%2C22%2C0%2C22%2C1280%2C22%2C1240%2C711%2C1240%2C617%26vis%3D1%26abl%3DNS%26ppjl%3Du%26fu%3D0%26bc%3D1%26ifi%3D3%26xpc%3DdvKpL2VBwC%26p%3Dhttp%3A%2F%2Fwww%5C.%5Ccornerofberkshireandfairfax%5C.%5Cca%26dtd%3D37&account=adwynne&campaign=us&adgroup=1&banner=728-90&it=1420859832911&refurl=http://googleads.g.doubleclick.net/pagead/ads?client=ca-pub-3304925738982736&format=728x90&output=html&h=90&slotname=2808171815&adk=266842322&w=728&lmt=1420877829&flash=16.0.0&url=http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/&dt=1420859831541&bpp=27&shv=r20150106&cbv=r20141212&saldr=aa&prev_fmts=728x90,728x90&correlator=2823721805825&frm=20&ga_vid=467758751.1388090390&ga_sid=1420855199&ga_hid=677942445&ga_fc=1&u_tz=-300&u_his=82&u_java=1&u_h=800&u_w=1280&u_ah=711&u_aw=1280&u_cd=24&u_nplug=5&u_nmime=46&dff=verdana&dfs=12&adx=82&ady=1472&biw=1240&bih=617&eid=317150304&oid=3&ref=http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/?action=post&rx=0&eae=0&fc=8&brdim=0,22,0,22,1280,22,1240,711,1240,617&vis=1&abl=NS&ppjl=u&fu=0&bc=1&ifi=3&xpc=dvKpL2VBwC&p=http://www.cornerofberkshireandfairfax.ca&dtd=37

For the past day or two I've been clicking on links and getting redirected to weird websites like "fit mom" and "rachel ray" and other not inappropriate but just random adware stuff. this is the only website that is causing issues for me. the site is called something like lemodegmz

"This conversation isn't for the person trying to make 15% per year" what does that mean? 15% / year over time is spectacular.

move to a smallish college/university town. the public schools will be dominated by the children of the university employees and will be of high quality. real estate prices are usually reasonable, at least in relation to coastal us cities. haha, that's funny. I already moved from NYC to such a town since I didn't like my Wall Street job. You all would get a kick out of my former co-workers' answers to retirement numbers/required income. My boss was probably worth $20MM and didn't think he had enough; he was the best of my desk in terms of managing money, he bought growth stocks and just held on forever a la Phil Fisher. Others were terrible including one who was all gold and timber and lots of older guys who lost close to 100% of net worth in 2008 (company stock). My 29 yr old superior probably made $500K and probably spent 110% of it. Nevertheless, in my college town most of the professors/doctors/lawyers/wealthy professionals send their kids to a very strong private school that is about $20K/year. We don't live in a meritocracy and fancy educations (and I mean actually high quality schools, a lot of expensive schools are terrible, as in investing you have to figure out which ones offer real value) offer a leg up and increase the odds of being able to do what you want to do and having a fulfilling and rewarding career, not to mention the network. You have to work hard and take advantage of it of course. EDIT: I don't want to continue to hog this thread with my "why I want to make a lot of money and spend massive amounts on education" elitist rant but here is an article that popped up today http://finance.yahoo.com/news/u-colleges-fill-more-seats-100000116.html

True. But the Mr. Money Mustache lifestyle is probably more like retiring on 600k, so 4 million is more like Mr. Money Monocle :) assuming a 4% withdrawal rate, $4mm = $160K isn't exactly champagne and caviar. that's just getting by (albeit nicely) in some parts of the country when you factor in housing/kids/private education a decent vacation here and there etc. I don't know what 40 yr old or 50 yr old wife'd and kids'd up me will spend since that's 15 or 25 yrs from now, but it's probably a lot more than $160K. Either you live in a very high cost of living area, or you've worked in a high paying job for a while. Earning $160k in most of the country (not the coasts) is a crazy high amount. As Liberty posted the median family of four is living on $53k a year. I have a family of four and up until recently our annual living expenses were in the $30-40k range a year. We aren't extravagant, but we're not Mr Mustache either. Kids are as expensive as you want them to be. It's not like having an extra light on or two costs much, and when they're young they eat like birds. They destroy clothes (boys do) so we have purchased ours second hand. That way when they decide it's fun to slide on the carpet until the knees on the pants rip we don't feel bad because we only paid $3. If you want to live a higher class lifestyle then it's going to cost a lot more. Most families have a few 'leaks' in their budgets that are easy to close. Eating out lunch and dinner daily is expensive. I can't leave a restaurant for under $45-50, and I'm talking diner type places are that much. Eat out daily for lunch/dinner, have kids in an expensive daycare and suddenly the salary starts to get pinched. It's an expectations thing. If you always expect to drive a BMW a Toyota will never be nice enough. Some people can't imagine living in a smaller house, or not buying every new gadget. For them more money is going to be necessary. But I'm very satisfied with life and it hasn't been that expensive for us. Ah, one last piece of advice. If you're not married (and your post indicates this) try to find someone who came from A) the same sort of money background and B) has the same outlook on spending. You'll reduce a lot of fights that way. I'm an education snob. Sending 2 to my high school (or 1 to my college) would cost what you spend in total on your household. I'd like to provide the same privilege to my future kids. And while that expense is finite, it is still hefty. Can some public schools provide the same quality? Sure, but not all of them and if they do they are probably in a pretty high cost area with high property taxes. I think that's the main delta between my view of a sustainable retirement amount at 30 or 40 (the proverbial "f you" money) and that of others. I also am a snob in other aspects of life, but less so than in education.

ya i agree that you can do it with a lot less and personally, relatively cheap things make me happy (and the very likely future mrs. pupil isn't exactly a profligate spender). I get by on lower than that median since I save a high %. But I still want to live in a safe, nice area and send my future kids to great schools debt free; education (private high school, college, grad school) can be well into the seven figures for a few kids. a 4% withdrawal rate typically accounts for inflation (7% nominal return, 3% inflation = 4% real return, so at the withdrawal rate you maintain your wealth and don't dip into principal).

True. But the Mr. Money Mustache lifestyle is probably more like retiring on 600k, so 4 million is more like Mr. Money Monocle :) assuming a 4% withdrawal rate, $4mm = $160K isn't exactly champagne and caviar. that's just getting by (albeit nicely) in some parts of the country when you factor in housing/kids/private education a decent vacation here and there etc. I don't know what 40 yr old or 50 yr old wife'd and kids'd up me will spend since that's 15 or 25 yrs from now, but it's probably a lot more than $160K.

How much a person feels he needs to retire is totally up to him. There is no right number. And not everyone wants to live the Mr. Money Mustache lifestyle. yep, I thought $4mm was too low.