Tim Eriksen

I've always liked consumption taxes. If I want a giant boat or sports car I pay a lot of taxes for it, but if I just want to live simply I'm not paying as much in taxes. A theory of mine has been a tax system where capital gains and dividends are taxed at 0%, but incomes are taxed progressively. In theory it would create the incentive for company managers to own stock and pay dividends vs just pigging out on a fat salary. At least with dividends shareholders would benefit as well. You could probably set the threshold fairly high and it would only catch executives, lawyers, orthopedic and plastic surgeons. I understand the allure of consumption taxes, but.. If we recognize that the tax code has become ridiculous due to government tinkering, why replace it with a system that opens the door for tinkering? A consumption tax will inevitably lead to government choosing what is and what is not taxed. That leads to lobbying and eventually changes. Realtors and investors will argue that real estate is not consumption, it is investment, art collectors will argue paintings are investment, and of course gold investors will say gold, including jewelry is an investment, etc. Will buying a new car be consumption, but a classic car an investment? A flat tax, where each one is free to spend as they choose seems wiser. And for some who post on this board, it seems more consistent with their libertarian beliefs.

Yes that is the line they want us to believe. What portion goes to the "less fortunate" as opposed to the military industrial complex or fighting the war on drugs or spying on everyone on the planet or ... The only reason a few exceedingly tiny crumbs are thrown to the less fortunate or used to sure up some of the crumbling infrastructure at all is so that we can keep believing that these things are the raison d'être for their existence. They want us to believe it because it is true. The US has a 3.7 trillion budget. 600 billion goes to defense. 2.5 trillion to human resources (education, training, health, medicare, social security, veterans benefits). For fiscal 2015 defense is expected to decline while human resources spending climbs to 2.7 trillion.

Having focused on micro caps for more than a decade, only rarely has the share price been in cents. Most US otc stocks priced in the cents are crap. Of course there are some exceptions where there was a low share price and share count.

Yes SMA is different than a mutual fund. I shouldn't try to respond in one post to two different posts by two different people. SMA costs can totally vary. You could run it out of your house and focus on friends and family. You could probably do that on $1,000. Or you could open up an office and advertise, then you may need staff plus the costs of the office. You may spend $50,000 or more per year in overhead.

SMAs are cheaper to operate since it avoids the legal costs of an offering document. You still have to register as a RIA, create an advisory agreement and Form ADVs to file, etc. With SMAs you do lose out on carried interest. You also have more paperwork. For example every trade must be recorded for each account. So a hedge fund is one account and you record everything for it. For SMA's you are going to have a spreadsheet for each account. Billing each account is a pain. Interactive Brokers is nice because you don't have to have a certain level of AUM in order to do auto billing, but there statements and interface are horrible. And my experience is that a high number of clients will watch, some will copy trades in another account, and they will question mistakes much more strongly than crediting successes. My experience has been that the hedge fund client retention rate is far higher than the SMA rate. By focusing on SMA's you may have much higher office costs - rent, utilities and staff versus possible working at home. IB does billing, but they also automatically record the trades into each client's account, right? I agree IB interface is atrocious. Are there any other brokers that offer SMA service that allows you to manage all accounts at once, at not much more of an expensive cost? Would you mind outlining the start up and operating costs if you're looking to run it very lean (no rent or staff)? I just want to compare it side by side with a hedge fund cost. You do save a lot by not needing audit, admin, or tax services I believe. And I think the legal starting costs are also significantly cheaper. I love IB's billing. I know IB has a feature that allocates trades into each client's account but that is not the same as recording every entered trade, whether executed or not. As an RIA you have a fiduciary responsibility so you have to have a reason for the trade, unlike a broker/dealer who is just subject to suitability standards. Other brokers do offer SMA service just that some have minimum AUM requirements to be on the system, for example Scottrade. You would need to call each to find out. A mutual fund has a higher startup and yearly cost than a hedge fund. Breakeven is $10 to $15 million in AUM if costs are tightly controlled. Even then the fund's annual expense ratio wold probably be around 2%.

SMAs are cheaper to operate since it avoids the legal costs of an offering document. You still have to register as a RIA, create an advisory agreement and Form ADVs to file, etc. With SMAs you do lose out on carried interest. You also have more paperwork. For example every trade must be recorded for each account. So a hedge fund is one account and you record everything for it. For SMA's you are going to have a spreadsheet for each account. Billing each account is a pain. Interactive Brokers is nice because you don't have to have a certain level of AUM in order to do auto billing, but there statements and interface are horrible. And my experience is that a high number of clients will watch, some will copy trades in another account, and they will question mistakes much more strongly than crediting successes. My experience has been that the hedge fund client retention rate is far higher than the SMA rate. By focusing on SMA's you may have much higher office costs - rent, utilities and staff versus possible working at home.

Wait... You said if I register as an RIA and do managed individual accounts, I would not be allowed to charge performance fees at all? In order to charge performance fees the investor must be considered a "qualified investor" meaning having a net worth of $2 million or greater excluding their primary residence), or at least $1 million invested with the advisor. The requirement is the same for clients whether in a hedge fund or separate accounts. The figures were raised in 2014, it was $1.5 million and 750k, respectively. You can have accredited investors ($1 million minimum net worth, excluding primary residence, or income of $200,000 plus, or $300,000 combined with spouse) in a hedge fund but you cannot charge them performance fees.

You should probably talk to a lawyer (I am not one). If it is in the sole discretion of the manager it is probably ok. But if it is in the advisory agreement it is probably considered a performance based fee. For instance if the agreement states that the manager must refund the fee if the performance is below some threshold. In my state (WA) you can waive fees, but if you do it for one client you must do it for all. If it is expressly stated in the agreement based on returns I think they would clearly deem it a performance fee. Even if not expressly stated, regulators aren't stupid, they would figure out if it is really just a creative way to charge a performance fee. A few mutual funds have received approval for a "fulcrum" where the fee adjusts a bit (25 to 50 bps) based on rolling performance versus a benchmark, but I don't know if any states would let an RIA do that in managed accounts.

In addition to the tax implications of going from invested back to 80% cash, is that for the first 8 years they invested mostly in T-bills so most of their returns in those years would be ordinary income (based on US tax rules). It is hard for me to understand why someone who is primarily focused on preservation of capital would choose Patient Capital over BRK. While BRK has had greater volatility, it has meaningfully outperformed PC, and after taxes would have materially outperformed. Obviously it must be the unwillingness to stomach volatility.

What also bothers me is that Patient Capital's performance numbers do not add up. If you use their yearly returns you come up with a higher compound number than what they show on the historical return slide. I get 8.2% annualized through 12/31/14 and they report 7.03% through 3/31/15. I doubt they lost 14% in Q1. It is probably just a math error, it is bothersome.

How anyone can say this after looking at their chart versus the S&P500 boggles the mind! You are talking about performance that is in the top half of the top 1% when examining risk versus reward, and this is not impressive?! It's like telling a brilliant scientist..."Well, you're no Einstein!" It just shows me how far-fetched expectations have gotten in a rampant bull market. I'm hearing this sort of stuff from some of my clients and all I can say is I can't wait for the next correction! Cheers! No it was not impressive to me, and it was easy to say: 1. because 2000 to 2005 was one of the greatest periods for value investors - tons of quality stocks were at single digit PE's. 2. I did not see any disclosure about what risk levels they took 3. They report gross of fees, which is entirely unhelpful in terms of how their investors actually did (adjusted for 1.25% annual fees their out performance is about 20 bps). 4. If not for the perfect storm of 2000 to 2002 they have materially under performed. 5. It overemphasizes volatility minimization. Mot people on this board crap on Whitney Tilson and he has better historical returns than that gross of fees, and I am not sure who had higher net exposure. How in the world you translated my comments into "expectations" boggles the mind. Cheers!

Based on this chart it looks like in 14 years they have tripled investors money gross of fees. Considering it was an incredible period for value investors that is not impressive in my book. Granted they have taken very little risk in the process. http://www.valuewalk.com/2015/02/patient-capital-management-so-much-for-peak-oil/

A couple of books that I found helpful back in 2006 when I launched my fund: US Regulation of Hedge Funds by Shartsis Friese LLP (law firm) about $100 it was updated in 2014. Explains how to avoid registering as a broker/dealer or Investment Company, private offering exemptions, blue sky laws, etc. THE RIA's Compliance Solution Book by Demby about $60 and looks like most recent is from 2006 but it walks you through a lot of rules and Form ADV filings should you do them yourself.

Selling securities? So if I run a hedge fund and try to sell some shares of my hedge fund, that would require series 7 right? But for investment advisory, that's probably not needed because I am not selling securities right? I have no plan to become a broker. no you would not need the Series 7 to sell interests in your own hedge fund. Just the 65, and not every state requires that. WA does. Ok. So my friends will be the main guys trying to get clients and I will mostly be trading and researching. Only I need the series 65 and my friends won't need series 7, is that right? So how can I ensure that my friends talk about the right things and right promises when they tell their clients? Do I have to train them? You are getting into complex area with your proposed arrangement. I recommend finding a good lawyer. It is my understanding that if your friends are not officers or directors of the LLC or fund they will need to have a Series 7 in order to receive any compensation for bringing in clients. Even if they are officers or directors their compensation may not be able to based on how much assets they bring in without being considered selling and subject to either a Series 65 or 7, you needing to file U-4's for them, and being responsible for oversight and at risk of being sued if they violate securities laws. It is another reason why you end up with one man shops.

Selling securities? So if I run a hedge fund and try to sell some shares of my hedge fund, that would require series 7 right? But for investment advisory, that's probably not needed because I am not selling securities right? I have no plan to become a broker. no you would not need the Series 7 to sell interests in your own hedge fund. Just the 65, and not every state requires that. WA does.

My recollection is that the gained control of BRK in 1965 and he continued the fund (with performance fees) until mid 1969.

It is viable; however, a public company, other than a insurance company, is usually a poor vehicle for buying stocks due to taxes. I don't know what the laws were in the 1950's, but most of Buffett's early clients would be ineligible to be assessed performance fees under today's rules.

Indeed, I feel like I talk to a lot of guys out there who invest sub<10M, and seem to use the "I don't market" as a badge of honor. It could also be from a desire to "I'd rather focus on finding undervalued securities" rather than selling your service and building a business. It is not as simple as you make it out to be. Sub<10M means you are under state regulation. If you started with a hedge fund structure you could not legally market, it was against the law. So you are in a catch 22 when you can't start with $15 to $20 million like Alpine did due to its past connections and relationships. The costs to open an office, hire staff, advertise and focus on retail means you likely won't be profitable until you break $20 million). Or start a mutual fund and shell out $150k to start and you still need $15 million plus in AUM to break even (that number has come down in recent years it used to be closer to $40 million). In addition you are for the most part restricted to base management fees and have a lot more business risk as well as administrative and business headaches. Or you can start as a one man shop, possibly working out of your house, run a fund with performance fees where your time and energy are on gaining returns and trying to build contacts. Your start up costs are lower. Your chance of making a living is higher. Your chance of better investment performance is higher. You just have to learn to accept the sneers that you manage less than 10 million.

How so? Even if he did sell the stock too cheaply, that would be his own fault. He did get sued by Mancheski over the pre-IPO funding. Regardless, he can't make up for it by excessive compensation. For the 10 years I have followed Gamco, it always seemed obvious that their margins were a bit lower than other asset managers, and that Gabelli was the reason. When you think the company is worth more if the key person gets hit by a bus, then you know the person's compensation is excessive. On a side note I do find Gamco interesting. The proposed split should unlock some value.

I feel like the author has little concept of the CUs. They are the banking equivalent of mutual insurance companies and provide a great service by providing pricing competition. The "profits" made are just partial rebates on the costs of owning a bank and services are limited regionally. I hope technology will allow CUs to thrive again (atm deals aren't cheap). Ha! That was a joke right? On a serious note, Mutual Savings Banks were tax-exempt until the Revenue Act of 1951 changed their status. They now pay taxes along with the banking industry. Credit Unions have also moved away from the purpose of their tax exempt charter. Haha I should have put a little more thought in to the wording of my comment but I still agree with my overall opinion. A lot of this distinction goes back to the restrictions of charters in the past. The govn't choose to specifically exempt CUs in the Rev Act of 1951 because of their local focus and the restrictions on authorized investments. MSBs do not have the same geographical restrictions that CUs have. The current system highly incentivizes CUs to loan at competitive rates within a community even when national banks (or other lending institutions) will not given the lack of other investment options. In theory, because of the highly homogenized customer base, the CU should be able to provide services that better meet the needs of local customers. Without the incentives for CUs to exist we may end up with large geographical areas that are undeserved for banking/credit needs. These areas generally have a higher reliance on local economic conditions which is the reasoning behind CUs. Do you view the "profits" of CUs as representing something other than rebates on the costs of banking/credit services or do you have an issue with tax rebates for this purpose? CU profits only exist because the CU was overly conservative on NPL rates or charged to high of an interest. In a perfectly predictable community, these profits would not even exist. I believe communities deserve to fully pay for their banking/credit costs if they choose to do so. Do you have any sources on CUs moving away from their local credit-providing responsibilities? Can you provide some numbers/justification for your opinion or do you agree with the author? Just like any other NPO classification there will certainly be abuse, but on the whole I think they provide a much needed service. The stated purpose behind the tax-exemption of CUs is extremely similar to the reasons behind Fannie/Freddie existing. I disagree with your view of why CU profits exist. IMO they are run just like banks but benefit from no taxation. They do not strive to have zero profits. Their rates for savings are not materially higher, nor are their loan rates notably lower. They seek profits in order to grow. Many are regional and not local. The credit union I have been a member of for nearly thirty years covers most of California. It has grown to a multi billion dollar assets. It wasn't through raising capital. It was through profits. In fact they nickel and dime their customers just like banks.

It says right in the first link that they can liquidate the positions for you and you have no control over what they sell. You are also required to post more collateral if the value of the assets go down in value Read the section titled "Understanding risks associated with your LMA account" Yes, I saw that. A mortgage is callable too if the lender deems that you are no longer qualify to meet the required obligations. It's a safety measure the lender usually states upfront. That's something I'll clarify at the meeting. I don't plan to leverage 100% of my portfolio. At most, it's 25%. So my portfolio has to drop 75% before I'll start to have a margin call. I'm more interested in having the ability to define the loan duration and the fixed-rate option for the monthly payments. Hopefully it's not too good to be true. Most mortgages are not callable. Seconds (HELOCs) often are.

I am going to have to strongly disagree with you that "the nature of the business is such that it molds the behavior of all the participants and absorbs them, rather than the other way around." I think you have it backward and are excusing their actions (i.e. greed, or if you will, sin). The nature of the business reflects the nature of the people. They put money before people. The reason usury is against the law in many places is precisely because it frequently impoverishes even if you are able to make the payment. I am on the opposite end of the political spectrum as Elizabeth Warren, but it seems like the right thing to have the government put a limit of say 4% above average mortgage rates means that the lender they either make the loan or the person continues to rent, which is far better than a high interest rate loan. To borrow in part from the Federalist #51 which says " If men were angels, no government would be necessary" I would amend to "If men were angels usury laws would not be necessary." (The principle is also clearly taught in the Old Testament.) One other thing that seems clear to me is that if it is not already required is that manufactured home sales should be required to have a disclosure with a graph showing the decline in vale of a typical manufactured home versus the stable or climbing value of a traditional home.

In other words, 70 percent of the time the appraisal was higher. :o I don't think you can put a positive spin on it. This isn't a transaction between two "unsophisticated" private parties where it may be more likely that the price is higher than appraisal. How many traditional home builders have 30% of their sales come in below appraisal? Probably none. How many manufactured home sellers? That would be interesting to know.

The articles are very similar. It makes sense to me. They are saying Clayton is abusing the poor. They sell them overpriced mobile homes at high rates, often with last minute substantial rate changes, push them (or build it into the loan) to use related Clayton companies for overpriced insurance, etc. Of course Clayton hopes the buyer makes every payment on their depreciating home, but if they don't they get the benefit of having done the loan as personal property instead of real estate. This allows for quick repossession. They fix it up and try and sell it to another sucker at a much higher price. Wash, rinse, repeat. So in other words, what Buffett says about Clayton doesn't match up at all with how Clayton operates. It presents itself as helping the poor person get a an affordable home, but in reality it is further impoverishing them. The graph on Clayton's rates versus competitors is pretty damning. To charge on average 7% points (~ 11%) higher than a typical home loan (~4%) for a house that depreciates at about 3% per year, entraps the poor. Based on Berkshire's annual reports I would have assumed that Clayton was benefiting form a lower cost of funding, and issued loans at similar rates. These articles paint a much different story. I too would love to hear Berkshire's response. BTW I will go on record as predicting that Buffett's reputation is going to take a huge swing for the worse over the next 20 years.

Congrats. But how did you calculate your cost base with all the various mergers and splits? It is hard to believe that Kraft has done 16% CAGR over such a long period. Yes I just calculated it from the original MO shares. Each KRFT share came from 33% of the original MO share @ $25. Well this is how I calculate the basis for tax purposes anyway. I wonder how the actual KFT shares did, by itself. I could be wrong but I think the actual Kraft shares have done terrible. Kraft was spun off at $31 and was at $41 when Mondelez spun it off. You got one share of Kraft for every three of Mondelez. The Kraft stub has doubled in a short period of time but Mondelez has struggled. For example if you had three shares to start with (3 x $31 = $93). Today you would have 1 share of Kraft at $89 and 3 shares of Mondelez at $35.50. (1 x $89 + 3 x $35.50 = $195) Not much more than a double in 14 years excluding dividends. Am I missing something?