Edward
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Posts posted by Edward
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@Edward Look at the Strayer thread under Investment Ideas there are enough arguments to destroy the bull thesis. I don`t want to discuss it in this thread, perhaps we can resume the discussion there.
Sure thing, I posted there :)
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/stra-strayer-education/40/
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Ouch, i don`t think he would ever invest there. The numbers look good, but who said that education has to cost money? (There are enough countries in the world where education is free.)
Education is never free. In a lot of countries it's subsidized, and the citizens pay indirectly. In the for profit education industry in the US, the subsidies to education actually work in favor of the for profit schools because they are a lot more efficient, and the subsidy is based on the marginal cost of education in the public colleges/universities.
To kill the thesis you would need the subsidy to be limited exclusively to public education, but currently everyone enjoys access to title 4 funding. I'll grant you that a lot of public colleges and universities are funded by states, but the funding is limited - so it doesn't affect the marginal cost of education.
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My best one is probably Strayer Education Inc(NASDAQ:STRA). The thesis is described in great detail here:
http://www.beyondproxy.com/strayer-education-analysis/
The guy that has written this analysis is also the author of this excellent book:
Summary: This is a business Buffett would love (he owns Kaplan through The Washington Post). ROIC is in the order of 50% + plenty of growth potential. This particular one trades at P/FCF of around 5. No serious problems with regulators, litigation, etc when compared to peers who are deep in it. Great management.
Enjoy, fellas!
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Bitcoin is at best an exchange medium. It absolutely cannot be viewed as a store of value. A store of value can only be real stuff and businesses.
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What I believe is that I will make money in both cases! ;D ;D ;D
Gio
Same here :)
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I would go with Hugh Hendry's observation that we are nearing a profound "Market Clearing" event (i.e. another crash) a la 1932/1982. However he opines that following this event a secular bull market is bound to begin - at which point you don't need to be smart, you just need to be long.
Starting from minute 22: http://www.youtube.com/watch?v=ZrBxZDvrNHY
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This is not good advice in the least. It's advice for people with their head in the clouds. It's not realistic. It's what people want to hear. Just follow your dreams! You can do anything! The truth is most people can't do anything. It's fine to follow this path so long as someone is aware that in 10 or 20 years they may have "enjoyed" what they do, but have nothing to show for it. If you do this, have a backup plan . . . and then a backup plan for the backup plan.
No advice is any good in general without context. He is young and can make mistakes. Arguably he SHOULD make some mistakes. It's all good.
However, I agree with you - In order to try what I've suggested, you need at least two backup plans. I think I have at least three myself :).
The way I think about is that in life, you generally don't get second chances. You have a relatively short window of opportunity to "reach for the stars" and express yourself when you're young.
I don't want to be that guy who wanted to do something meaningful with his life, but passed on the opportunity.
The reason I started my investment company instead of working 9 to 5 is the following thought: What will I think of this decision looking back, 10 or 20 years from now? There are essentially 2 options:
1. If I succeed, then it's a no-brainer.
2. If I fail - so what? I can always find a day job in several fields of occupation I'm proficient in. A job will still be there for me.
But what won't always be there for me is this window of opportunity to start a business, and I know I will ask "what if" for the rest of my life if I don't have a serious go at it.
The important thing as has been said is to have some solid backup plan to fall back on, and be careful with executing plan A. Know when to quit.
THAT BEING SAID:
The best way to advance in your career is to gain a reputation as a "can-do" individual who will do whatever it takes for the benefit of your current boss and your firm. Once you succeed here (and it will take many years of effort), opportunities will follow. Lots of them. When bosses start to fight over you and you start to get job offers outside the firm, then you are making good progress!
I fully agree that in order to succeed as an employee, you must do this. That's what bosses love and reward. And if you have a good boss, you'll enjoy it too.
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I once worked in a job I did't like that much for people I didn't like that much either. After 6 months I realized that for me, that's not the way to go.
Now, I live as though as I'm already retired - I work because I enjoy what I do and have no intention of ever "retiring". For me, that's the most important thing.
It really depends on your psychological makeup as well as your opportunities. For some it makes sense to grind hard for 10 years for a high salary, then retire.
For others, it's not something they would want to do even for a lot of money.
So it's not really happiness vs early retirement. You can have both if you do what you love and can't imagine yourself doing anything else.
It reminds me a story about how Warren Buffett went to give a talk to some MBA graduates. After the talk, one of the students comes to him and they talk. So Warren asked him: "What so you plan to do now, after graduation?"
The guy answered: "Well, I have everything figured out. First I go work for X for 2 years, then 2 more years at Y, then 5 years at Z...... .....and finally at year 12 I'll get to do the job I want to do".
Warren laughed: "If you know what you want to do - start doing it right away. Why wait? It's like deferring sex to when you're 60."
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My experience is that marketing in this type of job is less important.
If you have a decent track record and you have a reputation of integrity and honesty, the money comes automatically. Money tends to attract more money.
I honestly never marketed our partnership, but over the years, people came asking by themselves if they could join. Psychologically that's very important, because that way, they don't feel like they were being sold anything. They were the asking party and were convinced of the investment strategy beforehand.
This is the exact same way we do it. Many people are actively looking for places to invest and they tend to ask around.
However I would like to stress that it works best when you spread a big "net" of acquaintances and referrals, so people can reach you. Call it "passive marketing".
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For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved?
Started with family, moved on to friends and acquaintances, some referrals. I like to get to know shareholders before they become shareholders.
You want investors to buy into your story, your philosophy, so when you have down years, and you will they'll stick with you. They're still invested in the story, not the returns.It's very important that investors develop a "story" around you the same way it works for stocks. Generally, if you understand what a company is about you'll have much easier time sticking around in a crash, maybe adding more!
For the last 5 years I have been managing a nice forum where we discuss ideas, very similar to this one but in Hebrew: http://long.co.il/index.php/forum/index
That helped a bit. I think setting up a forum, blog or some other place where you can showcase your way of thinking will do wonders for your "brand recognition" over time.
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Put it in another way - if the index earns 8%, the hedge fund has to earn 11.5 - 12% just to break even for the investor after costs, fees and taxes. Berkshire is better than the index as it doesn't pay dividends ( less taxes ) and doesn't have the index overhead. ( 0.18% or 0.1% )
cheers!
I think this is a real smart way to invest for a passive investor that can't be sure that he is buying the "right" hedge fund. I think only a few % outperform the indices over time so why take the risk really.
But if you can find some fund manager with "the right stuff"(whatever that is) that can work amazingly well. It makes sense to invest in Berkshire, while searching for a suitable money manager.
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For wherever you're at you have a good setup, in the US $25k is right around the threshold for poverty. Someone earning that in the US could work at Costco, have less stress and make more.
I live in Israel.
I could work in a regular day job earning about the same, but the reason I'm not doing it are:
1. I love what I do (which is the most important reason). It's also strangely less stressful than most jobs around here.
2. I have a lot more flexibility in my schedule and more free time.
3. I can easily increase my earnings over time, because it doesn't take twice the work to manage twice the money. It's hard to convince your boss that you deserve twice as much for the same job.
I feel that there are definitely ways to be worse off in my situation :) Also results have been good so far overall.
You do have good arguments about working for yourself, but I could counter I work for a company and have all the same benefits. I work from home, see my kids often, no commute, and I make a nice salary with zero market risk, almost zero risk in general.
Well, congrats! 8)
I would say professional and financial success are closely linked. The starving artist who paints pictures that sell for millions after their death doesn't consider themselves a professional success.
I would also contest the view of sales you paint. Selling isn't all guys with slicked back hair and sport coats with elbow pads. Selling is the process of helping a potential client find a solution to a problem they're having. For an investor their problem is they can't manage their own money, you are providing that solution. Nothing to feel bad about, no gimmicky stuff, no showy things either. You aren't out selling raffle tickets here. There is no shame in being promotional, marketing and selling.
Agreed, they are linked. If you have something good to offer, it's important that people know it's there.
I am just more inclined to the professional side of things and less motivated in the marketing department. Lucky for me that I now have a wonderful business partner that has had 20 years of experience as a CEO of her own company, and she knows how to sell.
I think that in this business, finding great business partners and investors is as important as the actual portfolio management.
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Can you walk me through your numbers?
In terms of expenses this is what I see to hit a $100k salary. I say $100k because that's a reasonable analyst salary, why take on all this risk with all the work if you are making 50-75% of what an analyst is making?
$100k salary
$20k health benefits (for a family, maybe $10k for an individual)
$15k SSN/Medicare
$15k ongoing fund expenses
$150k in fees to provide the same $100k income. On a $5m fund that's a 3% expense ratio.
The issue I have is you can bend the numbers to make this work if you hit the hurdle, and if the fund is clearing the hurdle every year everything seems to work fine. It's what happens in a lean year, or a 2008 when it might be 2-3 years before the hurdle is met again.
So say you have $5m and hit 2008 and lose 40%, you're down to $3m in AUM, and 1% on that is barely enough to cover ongoing expenses and health care, looks like it's food stamp time.
A lot of people have clearly done well managing money, it's great to make money with other people's money, and I congratulate all of those who have started small and persevered. The route just seems tough, and everything looks great with ideal numbers. Personally I would rather have the numbers work on the worst case scenario and in the best of times cut the management fee or rebate it to clients. But I'd hate to set up a business that works if everything works in a perfect scenario, and in the worst case I'd be better off making minimum wage at McDonalds.
I agree with your reasoning, but I have a different view on the numbers.
With 5M$ AUM, I would be making 25K$ annually as a base from the 0.5% management fee, plus the performance fee (10%). Say for argument's sake that NAV per share increases 10% annually (not a very good result but anyway), that's another 50K$ annually on average.
Now 75K$ doesn't look like much in the US, but it's plenty enough in my country (even the 25K$ base is OK).
Also consider that some expenses drop drastically and life improves in general when you don't have to drive to work every day. You save 1-2 hours a day commuting (that's huge), you don't have to pay higher rent to live near work, and you can raise your kids personally instead of paying for daycare and meeting them for the "first time" at age 14 because daddy is too busy working. I consider these very important advantages to being self employed in this manner.
Hence I'm quite happy with my setup.
This raises another interesting point that I'm sure I'll be lambasted for... I would argue that actual investment acumen doesn't matter, it's marketing and sales skills that matter.
I have the same experience. Most investors have no idea what they want or how to assess a track record, integrity, etc. Give them some buzz words and a nice hassle free offer, and it's in the bag.
However I would argue that in order to succeed professionally (as opposed to financially), one has to be patient and selective when dealing with investors. There is absolutely no need to go for 100M$+ AUM in 5 years in order to be successful as a professional. Of course, the quick buck requires a salesman :)
I feel there's a giant disconnect at times on this board, and in this thread. There's this ideal that if you establish a great track record you will attract assets and be successful. If you establish a great record you will be looked up to by other investors, but it doesn't guarantee assets. I would argue that sales technique regardless of track record is much more important. If people are able to gather assets with terrible track records why are those with great records having trouble attracting assets? I think it's sales and marketing.
Again, it depends on what you're trying to achieve primarily - financial success or professional success. Getting both requires a great deal of patience, good partners, and some hard thinking.
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That's interesting - I always thought the mgmt fee was to cover audit, admin, legal, custodial etc...? I know hedge funds do not report an "expense ratio" like mutual funds do, but are all of these expenses taken into account in the "expense ratio"? i.e. expense ratio = mgmt fee + fund expenses?
Indeed,
I know of some larger Hedge Funds that in addition to the management and performance fees, saddle partners with all manner of fixed expenses and even salaries for staff.
Generally, if the expense structure is not fully disclosed you can assume the worst.
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thanks racemize. I think it comes to around 1-2 Mn AUM to break even (With several assumptions ofcourse). So to give up your day time job , I think we are talking of 5Mn AUM or higher if you have to support your family and feed them something beyond ramen :)
5M$ AUM is consistent with my own calculations for a full fund structure to break even after a reasonable salary/incentive for the investment manager.
The quotes I received for setting up a full fund structure in the BVI are similar - 20-30K$ initially, and around 15K$ annually. Needless to say with such costs you might have a few rough years in the beginning and I would advise to start with at least 300-500K$ AUM. However, 90% of success is showing up - so don't be discouraged.
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RUN FOR THE HILLS!
Oh wait. I didn't buy the S&P500. ;D
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Edward, you might look into registration wherever you reside. And be careful how you distribute your investment company shares. In the US/Canada/UK, and probably the rest of the developed world, an investment company is considered a fund, much like any group investment structure (or "scheme" in the UK). By distributing your investment company's shares to others, you are likely seen by regulators as advising. From a regulatory point of view, it also matters where those owners reside. If you solicit or are seen to be soliciting in any country that requires adviser registration, you could be forced to register in that country or face penalties.
Correct.
When setting up such a structure as we have, you can't widely distribute shares. You're limited to around 50 shareholders and can't go on soliciting widely - you have to limit the offer to select private investors. Otherwise, you definitely need to set up a full fund structure with all the bells and whistles to appease local regulators.
The way to deal with this limit is to list the company on a stock exchange at some point when assets reach 5-10M$. This way you can widely distribute shares, gain permanent capital and shareholders retain liquidity. But until then you have to abide by certain limitations.
Repeat - this is not a traditional structure. Use with caution :)
I like that idea. Do you know what the expenses of listing and staying listed on a stock exchange are? I have heard of some listing in Ireland but don't know the costs involved.
I did a preliminary check on listing at the AIM in London. Supposedly, it costs around 20-30K$ for the initial listing and then around 10K$ every year after. This includes only the fees related to the exchange, I suppose that there could be some additional expenses but haven't figured out what those might be. I'm thinking this may actually be not a lot more as there are very little regulatory requirements at the AIM.
To be continued I suppose... ::)
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Edward, you might look into registration wherever you reside. And be careful how you distribute your investment company shares. In the US/Canada/UK, and probably the rest of the developed world, an investment company is considered a fund, much like any group investment structure (or "scheme" in the UK). By distributing your investment company's shares to others, you are likely seen by regulators as advising. From a regulatory point of view, it also matters where those owners reside. If you solicit or are seen to be soliciting in any country that requires adviser registration, you could be forced to register in that country or face penalties.
Correct.
When setting up such a structure as we have, you can't widely distribute shares. You're limited to around 50 shareholders and can't go on soliciting widely - you have to limit the offer to select private investors. Otherwise, you definitely need to set up a full fund structure with all the bells and whistles to appease local regulators.
The way to deal with this limit is to list the company on a stock exchange at some point when assets reach 5-10M$. This way you can widely distribute shares, gain permanent capital and shareholders retain liquidity. But until then you have to abide by certain limitations.
Repeat - this is not a traditional fund structure. Use with caution :)
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I am curious. With such low overheads, are you exempt from registering as an investment manager or adviser? In Ontario, I cannot professionally advise (or market) a fund, no matter what the fund structure, if I am not registered with the Ontario Securities Commission. Registration requirements include: annual registration dues ($1,000), liability insurance ($3,000), annual audit of the management company ($4-5,000), and minimum working capital at the management company ($100,000). Annual expenses of at least $8,000 and a constant existence of $100,000 of unencumbered capital.
I understand the annual expenses are much higher in the US, and the UK requires a professional address for the management company (or, at least, it used to).
We do not operate in the US or Canada, so I'm not familiar with your particular regulations.
However, I don't think that such registration would be required since the structure is a private company investing on the behalf of its shareholders, not outside investors or clients. The company does not advise anyone. Hence there is no need to register.
The usual fund structure includes a company acting as adviser to limited partnerships, and then you need to register because the company is providing advice to outside clients (the limited partners).
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I like your structure, also enjoyed reading the letters on your site. Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
Thank you for the compliment! ;D
25k?! how can that be, the administrative/legal cost is almost hat no?
Not really if you do it frugally. We launched our company with about 150K$ initially.
It cost 7K$ all in all to set up and costs around 3K$ to maintain annually, including all fixed costs.
Actually, thinking about it, knowing what I know today I could do the same thing for 3K$, and 2K$ in annual maintenance. No need to go for expensive fund structures before you have at least a few M$ AUM.
Hi Edward,
The $3K doesn't include your audit costs does it? Do you do the books yourself? What about K-1's for the partners and the fund tax return...do you do them? Way to keep it lean! Cheers!
3K$ annually is a very minimalist structure. No auditor fees (as substitute we attach the bank and broker balance statements to the financials as these include 99% of all assets). No trustee, no administrator. What it does include is annual company maintenance fees, and fixed annual bank/broker fees.
No general/limited partners structure - we incorporated in BVI as a "C" corporation with one class of shares. As a result we do not deal with tax authorities on the behalf of shareholders as a company but advise shareholders to file their own returns in their country (as the company is a separate corporate entity).
The upside is that there are almost no expenses/hassle in general. We set our own rules and avoid unnecessary expenses. Essentially, we leapfrogged towards the "Berkshire" structure without first going through a limited partnership route.
The obvious downside - it makes for a harder "sell" to prospective investors and advisers who are used to traditional, domestic, full fund structures.
Also there are some possible international taxation repercussions that vary from country to country and these have to be carefully examined before attempting this setup.
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I like your structure, also enjoyed reading the letters on your site. Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
Thank you for the compliment! ;D
25k?! how can that be, the administrative/legal cost is almost hat no?
Not really if you do it frugally. We launched our company with about 150K$ initially.
It cost 7K$ all in all to set up and costs around 3K$ to maintain annually, including all fixed costs.
Actually, thinking about it, knowing what I know today I could do the same thing for 3K$, and 2K$ in annual maintenance. No need to go for expensive fund structures before you have at least a few M$ AUM.
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The structure is fair, but has a hole in my view. If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.
We have a fee structure of 0.5% - 10% in our company. I absolutely agree with the sentiment voiced by oddballstocks and this is the reason we chose this structure.
If you take only a performance based fee and bear the expenses, it is a very risky proposition. You might be unlucky for a few years and if your cost structure isn't very low you're going to be under massive pressure, not to say anything about trivial stuff such as food and shelter while you're at it.
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Herzliya, Israel. 8)
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Rough I saw this yesterday.
Confirms his preference for slow and boring, makes you wonder about BYD...
This sounded like a great business plan, but I guess they always do.
BYD is a commodity battery manufacturer. I have no idea about their management.
The whole business of electric vehicles is a tiny sideshow for them, they made an awful hybrid and some half decent petrol cars. Currently they are making electric buses and not electric cars apparently.
Underperforming Portfolio -- (Friendly Contest)
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I'll give it a go:
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Textura Corp (NYSE:TXTR)
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