skanjete

Damn Right is great. Even greater is Poor Charlie's almanack, but these two aren't the easiest kind of books to start with. There is simply to much wisdom in it to get it in one go. The snowball is easier to digest I think. But the best for a business student is the raw stuff itself : the Buffett shareholder letters.

I just tried re-doing this where the year before the market as a whole goes down. e.g.: Year 1: 15% Year 2: 15% Year 3: 15% Year 4: -15% Year 5: 15% where in years 1-4 in x% cash, year 5: 100% allocated. This makes the idea work a bit better. If you assume this occurs every 5 years, with the above returns, your extra cash only has to make 45% the fifth year to match the returns. At 6 years: 67%, at 7 years: 78%. That starts to be similar to Pabrai's rules, assuming he can pull off those big returns on the down years. However, note that the % cash does not matter. If the rule holds, then you should just be 100% in cash in years 1-4 and then 100% in at the high returns on year 5. Thus, I haven't seen anything where having a low percentage of cash is better than a high percentage, it either breaks the threshold or it doesn't. Have you tried to simulate more volatile circumstances? In your example (+15,+15,+15,-15,+15), your fully invested result after 5 years is almost 50%, actually 48,7%. Consider the following, more volatile, series : +10, +35, +0, -50, +100. The fully invested end result after 5 years is also about 50% (48,5%). But if you would have kept 20% cash until the crash and then be fully invested in the last year, your total result would have been 58,8%, and this with less volatility. The system works better with higher volatility, and the incremental system from Pabrai is even better than this simplified example, because the last 20% of his investments won't generate the 100% from the last year, but 200% for example, due to his higher return requirement for his last 20%. This way he would end up with a total return of 78,8% after 5 years in our example. Some people here suggest that holding cash is akin to trying to time the market. This is not what Pabrai suggests. He suggests to up your return requirement as you invest your cash balance. You require a higher return on your last 5 or 10% of investment than on your first 80%. Due to the volatility of the markets, this only has a indirect effect of timing the market, but timing the market in not the purpose per se. In fact, the same can be said about value investing. By insisting on buying value and getting a margin of safety, you are indirectly timing the market, because there is simply more value available at the bottom of the market than at the top. Market timing here again is not a purpose, but a side effect.

I also like to have some cash around, even if it hurts my short term performance. The cash helps you to stay detached and opportunistic. If you're fully invested, you partly loose that optionality, because you have to be right. Things have to play out as you expected, any other scenario will disappoint you. If I have some cash around, whatever happens is all right. If things go as expected, I earn some money, if not, I have the flexibility to adjust. It makes me think about the "Rich Man, Poor Man" analogy from Richard Russell. There's a lot of thruth in it : "In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS. I can't begin to tell you what a difference that makes, both in one's mental attitude and in the way one actually handles one's money."

In my view Chanos fund has to be considered as a service, not an investment. There is a market demand for short exposure, and he provides that service. That's all there is to it. He has carved out a niche in the fund management business and his service has a good reputation. I would be very supprised if he invested all his personal net worth in short investing. But that wouldn't be contradictory, because Chanos is not really investing and aiming the highest possible absolute return, he is providing a service, fulfilling a market demand. And he's good at it. Actually, if he would invest his personal net worth into long situations only, that would be a perfect hedge with his fund activities.

One of my biggest mistakes (plural, I have a collection) was one of stinginess. Back in the first quarter of 2009 I was steadily buying some incredibly cheap stocks. One stock was quoted at a P/E of about 1. However, my first investment in the security was made at a P/E of about 4,5 in the first half of 2008 and although I thought I had a margin of safety, the stock went lower and lower. So during the slide, I did some extra purchases. At a certain point, I put an order in the market to buy an extra amount that would have augmented my position with 50%. The market price was at about 61 at that point and I put in a limit order to buy it at about 60,5 for a nice prospective P/E of 1). With the daily volatility, I was certain that the order would be filled, but alas the opposite happened. The order never got filled. In the 2 years that followed, the stock multiplied by about 30 for a cool annualised return of more than 500%/y! Of course, I had a good investment with the established position, and the cash got invested in interesting other situations, but the cost of this lost opportunity is quite huge after some years.

It depends on whether you want to make a career in the firm. If that's the case, you simply don't have much of a choice. If you refuse such a "request", you can shelve your ambitions in the firm or even more broadly the firm's industry (the world can be very small in certain circles). If you don't intend to stay indefinitely with the firm or in the industry, you're free to choose. However be sure to have an alternative then.

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. Psycologically 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. I also select people so they mentally fit in in our partnership. 3 years ago I had someone interested and his investment could have grown my AUM with 50%. However I turned him down because he told me he couldn't stand volatility. I knew I couldn't guarantee him this, thus it made no sense to start pretending. A partnership on such a pretext would never have worked, and although it was tempting, I wouldn't have done myself or my partners a favor by letting him in. Of course, you grow somewhat slower this way, but the money that comes in, tends to stay. This allows me to truly invest and think on a long term basis. Over the last 10 years I only had 3 partial redemptions for a total of 0,4% of current assets, although partners can exit every quarter. In 2008, I had no redemptions at all. On the contrary, the existing partners invested an extra 30% although (or because) 2008 was terrible.

That's commendable-- I have a lot of respect for that. Same for you Parsad! Thank you, JBird. Sanjeev says he couldn't have done it with a spouse and children. I think I couldn't have done it without my wife. That's why I talked about "we" instead of "I". She has no interest whatsoever in investing, but makes everything possible by taking care of the family, while she also has her own business. I think that's a way greater achievement (combination of big family with business) than a man who combines 2 jobs.

I like the idea of a manager who is already financially independent. Because if he has a track record that is worthwile, he'll be already a long way towards financial independance. Secondly, as a partner, you don't want your manager to be pressured to take unnecessary risks because he needs the fee money to survive. For an investor, patience is no luxury, it is a neccessity, and if your manager is being pressured by debt or by income problems, the first thing to go is the patience, and with it the rationality and prudence. This is the current reality, the only people who can get into investment management either are young and have no expenses, or those who are older and already made enough money that day to day expenses aren't an issue. This eliminates anyone who decides they'd like to have a family, which is probably why working all of the time is lauded for investment managers, they're either young or beyond kids. Why would someone who's financially independent take on someone else's money to manage? Managing money for someone else is not the same as managing your own money, it's much more stressful, with more responsibility. If you are well off why add that to your life. If I were financially independent I would not be managing outside money as something fun, I would probably manage my own money and spend time on things I wanted to do like skiing, biking etc. The way for someone to manage money who has a family on their own appears to be as a RIA who builds a considerable book of business and earnings a straight fee, or for someone who's wealthy parents/relatives bankroll their living expenses while they build up AUM. The second route is all about connections, if you come from a wealthy family I'd imagine it would be easy to collect assets which means you wouldn't need to live on your parents money for long. There is actually a third way, as suggested by Pabrai : you can combine a day time job with investing for some years until you have the needed funds. That's the way we did it. We are not from wealthy families, haven't been supported, didn't have a financial background, we never inherited anything and we now have 4 children to support. But after some 10 years of combining a day time job with investing, we could choose to do whatever we wanted. I agree with you however that it wouldn't be as easy to replicate this if you already have the kids. We could combine my day time job with managing the partnership and my wife's job until the 4th child came. Then I had to choose and give up my day time job.

I like the idea of a manager who is already financially independent. Because if he has a track record that is worthwile, he'll be already a long way towards financial independance. Secondly, as a partner, you don't want your manager to be pressured to take unnecessary risks because he needs the fee money to survive. For an investor, patience is no luxury, it is a neccessity, and if your manager is being pressured by debt or by income problems, the first thing to go is the patience, and with it the rationality and prudence.

And that is where the high watermark becomes incredibly important for incentivizing the manager. You lose money, and it may be years before you get paid again. Thus, you better be making good decisions short-term and long-term regardless of where the market goes! Cheers! That's essential. As a partner or client you want you manager to be focused on the most important thing, which (in my view) is risk. In the example of Buffett/Pabrai, if they lose the first year 20%, they have to make make more than 40% (i.e. 1.06 x 1.06 / 0.8) the second year just to start earning something. If it takes them 2 years to make up, they have to make 22% annualised for 2 years before earning something (i.e. sqrt(1.06 x 1.06 x 1.06 / 0.8)) . So losing big percentages is a disaster. and the only way to do well for the manager is to deliver consistent and substantial overperformance. The manager has a fantastic advantage since he is asymetrically leveraged, just like Berkshire Hathaway with it's float. So I think it's only fair to have some downside as well in that an underperforming manager could have to wait a very long time to earn something. If you don't add the downside, the thing gets to positively skewed for the manager, and he'll be tempted to focus too much on the rewards, and not enough on the risks of the investment process.

I believe that section indicates that the previous structures were 1, 2, or 3, and that he was consolidating into the 6%/25% structure. Yes, I think you're correct. I was to fast with my conclusion. But is profit participation then calculated individually or not? Because differences between partners can be quite substantial after years as 2008, 2009, depending on their follow up investments. Yes, profit participation is calculated individually, as income, dividends, gains, losses have to allocated every time capital comes in or out. So if you are accepting capital monthly, then you have to allocate income/losses monthly and set the new high watermark. It is definitely the most equitable way to pay a manager and also incentivize them. You lose money for partners, it takes longer and longer to get paid. You make money, you get paid. You make a lot of money for partners, you get paid very well! But, I believe that level of compensation works best in a system where capital can be taken away from the manager, not one where they have permanent access to it. The more permanent the capital, the lower the incentive fee should be, as the amount of risk to the manager reduces over time. Just my opinion! Cheers! Parsad, Thank you for your clarification. We work very similarly, the only difference being that the treshold is 0% (instead of 6%) and 15% instead of 25%. I guess I was less confident when we started than Buffett or Pabrai, rightfully so, I might add. ;) Actually, I hadn't read the Buffett partnership letters yet when we got started, but the arrangement just seemed to be a correct way of working. I had a day job back then managing construction projects, and my experience in that job too was that 15% was a cut that most people considered fair and correct. More than 15% didn't last because some people got frustrated, jealous or feeled like being taken advantage of. Later on, I read the 6%-25% arrangement of Buffett (and Graham before him I think), and I proposed this way of working to some partners because I think it's even fairer for the partners, but most of them preferred our 0%-15% arrangement (this was before 2008 ;)), so it stayed that way.

I believe that section indicates that the previous structures were 1, 2, or 3, and that he was consolidating into the 6%/25% structure. Yes, I think you're correct. I was to fast with my conclusion. But is profit participation then calculated individually or not? Because differences between partners can be quite substantial after years as 2008, 2009, depending on their follow up investments.

JBird, I suppose that's Buffett vintage. I think I read it in one of his partnership letters at the moment when he consolidated his separate partnerships into 1 partnership. So since his partners had the choice between 1,2 or 3, I suppose the profit sharing is calculated per partner individually.

In that case, the partners indeed do get a fair deal! And is profit participation calculated for the partnership in its entirety or for each partner individually? I'm asking this because, depending on extra investments or liquidations along the way, the result can be different for each partner individually. If one partner invests extra money after year 1 (a down year), his losses will be recouped faster than the partner who doesn' t invest extra money, and thus profit participation should kick in quicker for the extra investing partner.

I understand that Pabrai copied the fee structure in his partnership from the Buffett partnerships : 25% on the profit above 6%. I was wondering what happens after a down year. In a down year, there is no profit participation of course, but what happens thereafter? If I remember correctly, in the Buffett partnerships, there was no profit participation until all losses were made good. But does this also count for the 6%? One never had the chance to check this for Buffett, because his partnerships never had a down year. For example : year 0 : start with 1000$ year 1 : - 20% : result 800$ year 2 : +50% : result 1200$ As I understood the fee structure from the Buffett partnership, (and I suppose thus now from Pabrai), the managing partner gets 0.25 x (1200 - 1000 x 1.06 x 1.06) = 19.1$ after the second year. Does anyone know if this is correct?

Steph, Can you tell us something more about Duro Felguera? Aggreko is a company I already follow and indeed a very nice company.

Aahh, just reading this reminds me of the thrill of a first date. It's a great feeling and I can remember well the same feeling on my first date with my wife. That's why my wife and I still hold dates together. Just an evening out, without the children, to step out of the rat race for a few hours and get in touch again. It reminds us of the sensation and feelings of our dating period. It's not the same as a first date of course, but a good reminder and great for the relationship.

I would suggest to be careful not to be to overly talkative and elaborate about your passion for investments. ;) In my experience, stories about undervalued stocks are not exactly an "aphrodisiac" for most women. My wife in any case doesn't faint if I passionately try to explain an investment case. ;D And if you are so passionnate about investing that you can't imagine any other subject to talk about, no problem : listening seems to work as well as, if not better than talking...

Singapore stocks : I've been a shareholder since a year or 8 of the Jardine group of companies. The main company is Jardine Matheson. It's a holding that has stakes in diverse companies as Jardine Strategic, Jardine Cycle and Carriage, Hong Kong Land, Dairy Farm, Astra International, Jardine Lloyd Thompson, Mandarin Oriental. It's an interesting group to study, with a controlling family and a nice track record. Maybe it could be of interest to somebody as Giofranchi. It doesn't look to expensive at the moment.

I suppose the German has a fish? I tried it in my head, but since English is not my mother tongue, but I only got halfway. I couldn't memorize all different terms sufficiently, so I needed a paper. Is it correct?

I think the ETF market has a fair chance of being part of the next crisis. Terry Smith of Tullett Prebon wrote some insightful articles on his blog about possible problems with ETF's.

I finally read his book "the Dhandho Investor". Before starting I was expecting another classic value investing book, but I got more and more impressed while reading. It's clear that mr. Pabra has a very bright mind. Sometimes, if you view some of his lectures, his message seems a bit oversimplified. (Well, I suppose he would be flattered by the remark since he considers "simple" to be the supreme form of "genius") The book explains the concepts behind these "simple" ideas in a great way. I think it is a great book and my respect for mr. Pabrai has deepened a lot!

Well, we don't have to assume anything about the prospective widows investment capabilities, since we can just ask her. If she has no interest in investing, it doesn't make any sense to expect her to have any interest after you're dead. And if one doesn't have any special interest or motivation, you can't expect any attractive returns, on the contrary. An insurance is a possibility of course, but this is a solution that is quite contrary to our current mindset on investing. I would prefer a low risk investment with such a long term view that it can easily survive the investor by a multiple of years. I think Berkshire Hathaway as Buffett has shaped comes closest to the objective. However, how will Berkshire and it's culture change when Buffett himself is in the case?

No, I'm no US resident. Do they take European based investors? On this side of the pond, I only know of Bestinver with a similar strategy. The involvement in the investment process has already started, but although the 2 eldest seem to be captive and interested, they still are a little young to take over (the eldest is 9 :)). Annuity : I'm not a great fan of an annuity as an insurance. I consider my capital, and the return it can generate as a way better insurance.