oddballstocks

JEast, I don't have anything to add except that I'm glad you continue to create threads like this. I like your perspective on the macro. I also have a fascination with how the real world never fits into neat and tidy story lines. Nate

I heard he was giving out a stack of 500 pages plus a quiz about the material. If you answered the quiz right and gave it back to him by the end of the day he'd give you a secret stock tip. Word going around Omaha is "c c b d a a d..."

Nope, for all the reasons I posted. Instead I'm working on a tech startup (url in my signature) and a few other ventures. I like product companies because they're scalable. With my banking product I can grow it and eventually hire management to run the company. Hiring people to run a product is straight forward. With an investment management company investors are investing with the manager, it's hard to hire a replacement for that role. You are probably better at sales than you think you are. Sales is simple, if you have a great product that solves a problem for a client it's easy to sell. Don't think about what you have to sell, rather think about what you provide for the client and why they need you.

depends on your pedigree and connection/how much you are starting with/how good of a salesman you are/and a big dose of luck. assume you can raise 10-50 mil from yourself/family/connections, you basically have 3 years to show strong (30%+) and consistent returns. If you are still in the business after 2-3 years, your fund should be at least $100 mil by then. Then you are investable to the institutions. Good fortunes can snowball from here. That's my understanding of the state of the industry right now. Vast majority of the potential investors are outcome focused and only care your performance so luck plays a big part especially you only have a year or two to show good performance yea the thing is, Im pretty confident about my picks. ANd I think i could with little extra work invest like 10-20 million$ in those stocks. My goal isn't really to make enourmous amounts of money. Just leverage what I am currently doing, with little extra effort. Even 5 million$ would be ok, Im ok with living everywhere, so i figure I could cheaply set up a fund for that. I guess I would first have to try and get my family in then. All the non-investment stuff has the biggest potential for sucking away your time. What for example? You give a presentation once a year on all your holdings and how it is going, and that is that. If they constantly harrass you about stupid day to day market movements you just kick them out? Investing in a fund really seems like a catch 22 tho. If you know how to pick a money manager you might as well manage yourself with those skills. And if you cannot manage your own money actively, then you also don't really know what to look for. I bet a lot of those underperfoming hedgefunds talk the talk really well, but dont walk the walk. You can throw around EV/EBITDA and warren buffett and talk about competitive advantages in a way that looks very professional, while your stock picking ability's are just speculative and undisciplined. I would invest in a fund who follows buffett's and graham's principles, but if they then turn around and proceed to make all kinds of risky crazy attacks and shorts on company's like OMEX... You are running a business, an asset management business. You have clients who want details on how their money's doing, you're not just managing your funds. So you have calls to take with current clients. Then you need to prospect for new clients, maybe this is with marketing, maybe networking. Maybe it's writing letters or articles for magazines, but it's something. You also have the legal and compliance aspect of everything you do. Don't underestimate the paperwork involved in running the fund. You also have a lot of special situations and requests from clients. Writing the quarterly letters, measuring performance, preparing statements for clients. Then you have to research and invest the actual fund. I don't believe you need great performance to be successful, you need to be great at sales. There are some well known hedge fund managers with high AUM's and terrible track records. Why haven't all their clients fled to all of the up and coming guys with 30% a year returns and $3m in AUM? It's not a visibility thing, it's because investors believe the story of their manager. You want to craft a story, there's a reason investors should invest with you. You can't guarantee great returns. So you sell by saying you're an expert on airlines or on distressed credit. That niche that you're an expert in is why investors invest with you. If you're an expert and you've giving exposure you're not released from the performance grind. Investors want distressed credit, as long as you can do well compared to your specific index, or give diversified exposure you will be able to retain investors. I know there's this feeling that all you have to do is hang your hat out the window and $10-15m will come flowing to you, but I'd posit it's much harder to raise a substantial amount of capital. Unless you're from a wealthy family it's going to be really hard to get money if you don't have an audited track record, great connections or a seed from a well known fund. If it were easy then there'd be no small funds. If you ask around you'll find a lot of people on the board here running small funds with excellent performance numbers. If it were only performance then they should be running a lot more money. Asset management is just like any other type of business. There is a product to be sold, and someone who needs to sell it. Apple can make the greatest device in the world, but unless they tell people about it, tell them why they need it, and create a product out of the device it will never sell. Engineering creates devices, marketing makes products. Asset management is no different, investment managers invest for performance, but a marketing department needs to create a product out of the manager.

I'm by no means an expert, or even a novice, but I'm familiar with the industry. I have a family member who ran an industry training program professionally. It was a school funded by a company. It was in a trade, HVAC. From our discussions it's a really really tough industry. Costs are high and it's hard to find students. Students might want to take courses to further their career, but employers can be tentative about paying. Sometimes training means the student will be skilled beyond their position and will either leave or want a raise. The companies paying for training are running on shoestring budgets. Think smaller service companies, plumbing companies with five trucks, or a HVAC company with ten trucks. There can be a lot of overhead for these trade programs as well. You need fully outfitted labs to instruct on. I own shares in LabVolt (good luck getting information..) and they develop products for this purpose. A training module might run $30-40k per piece. A lab might need 5-10 of these modules. You can't push a ton of students through the class because lab size is limited, there's only so much space and only so much time for hand-on learning. I understand how the crummy for-profits worked. They pushed kids through with sub-par education. Quality education is costly, and unfortunately not many students want to pay for it. They simply want the certificate so they can apply for a better job. One aspect that's always fascinated me are these seminars. Things like value investing seminars. You get 200 people to pay $2k a pop which is $400k gross. Then you pay $20k to rent a room, $50k to speakers, and another $10-15k for food. It's a really profitable event, the problem is you can only have a few a year, and they don't scale well. For-profit education is a great example of extremely high returns that aren't scalable. If you become an expert in a field you might be able to get speaking or training gigs for $20-30k an event or more. The problem is this is limited by time. A single person could make a great salary doing this. It can be profitable for a small training group as well, but once things scale returns drop dramatically.

For those who are cheap but want a comprehensive overview of banking check out the regulator's handbook on the OCC website. There are a collection of maybe 25-30 PDF's that make up the body of work regulators use when evaluating a bank. From the description of this book it sounds like they cover the same material. I recently finished reading the capital handbook, it's about 20 pages of information describing different types of capital and how to grade it. Then maybe 10-15 pages of checklists for how a regulator should evaluate capital. The handbooks cover almost all types of banking, from private equity and LBO's to thrift lending. Here's the website: http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/index-comptrollers-handbook.html

This stuff is rampant at banks. Was reading the proxy of a tiny bank recently, the CEO had $11k reimbursed for his country club fees. Why is the bank paying his dues and fees? When I see these things I don't think about the money. $11k is $11k, it's not going to make or break the bank. It's a power thing, this is an executive who's making $400k+ a year in salary. We're talking about an expense that's 3% of his salary. He can easily afford the country club, but it's the power he welds over the bank to make it pay, and not have the fees come out of his own pocket.

"Invert, always invert." Right guys? Right? The post just reminded me of that lyric from the Rush song Freewill.

"If you choose not to decide, you still have made a choice"

I'm a little confused, my only interaction with them was in that picture you see there. I went out with some others later and came back to my hotel alone. Sorry... Yes!!!

Wow, now that's a ticker I recognize! Have you talked to anyone who's familiar with the place? I talked to someone who knows management and has spent a lot of time up there. It doesn't matter how cheap the stock is, it's essentially a transfer of wealth from shareholders to homeowners, and not even that well run. No annual report from them again, guess it's time to write another letter...

Maybe a mismatch of perceptions? Is Buffett looking for someone who actively thinks the stock is overvalued and should be shorted? I'm guessing there aren't many vocal holders out there who think that. What I think does exist is a large contingency who have some serious questions about the company and its viability post-Buffett. The problem is these aren't bears, maybe long term skeptics. Personally I see no reason why the company shouldn't earn market returns, but will they be able to earn above that? I doubt it over the next 5-10 years, they're simply too big. Does this make me a bear? No, I just see opportunity in other companies. If BRK were to fall significantly in a downturn I'd be buying, why not? I do wonder about 20 years out from Buffett. I personally don't think the empire he's created will stay together for generations. Conglomerates never do, and for how hands-off Buffett is he's still the magic formula that makes his creation work. There are a lot of managers who like working for him, how many will like working for his successor's successor?

Touche!!! I tried sarcasm on a thread recently and it fell flat as well...I know your pain!

I'm a little confused, my only interaction with them was in that picture you see there. I went out with some others later and came back to my hotel alone. Sorry...

Thanks for posting these. I will out myself, I'm the guy wearing the gray sport coat in picture 100(14).

I have a friend who manages a fund, I told my wife to call him up. He would be able to manage my portfolio plus life insurance proceeds. My wife has zero interest in investing, she doesn't love risk, and we have kids. I could care less if she beats the market when I'm gone, I care that she has money to pay for the things she needs. A safe and cheap (low expenses) portfolio that generates income to live on is probably the best for her. As for passwords I'm not sure if it's necessary. As long as all of the accounts and brokerages are identified a death certificate is all that should be needed to release the money to beneficiaries. And if accounts are forgotten they will eventually be turned over to unclaimed funds and can be retrieved through the state.

Good post. I think most people have stopped believing in large market declines after the bull market of the past 5 years. When valuations decline, and it inevitably will, the results will show a different story. I like what FFH is doing. They haven't forgotten the first rule of investing: never lose money. This is a theme I've seen on the board recently. It's as if the good times will never end and markets never decline. Somehow 2008/2009 is viewed as a fairly harmless blip that we navigated through without issue. I don't remember it like that at all. I remember how the fear was so strong, not just for investors but everyone. Friends who had never invested a dime were watching the news to see how bad the stock market was doing and wondering how things would survive. Since that time I've kept cash on the sidelines. In retrospect it's been stupid because I could have juiced my returns a little more for the past five years. Yet no one knows when the next crash or downturn will happen, and the last one caught a lot of people off guard. I'd rather be patient and be able to seize opportunity than miss out.

Thanks for the meeting notes. Common share holder equity is about $7 billion and Stock/Preferred stock investments are about $5 billion. So I cannot see how even a 50% loss on equity/preferred stock would wipe out Fairfax. It does not make sense to consider a loss of 25% on the entire investment portfolio consisting of stocks, bonds, cash. The hedges only protect the equity portion. Vinod There were two points that clarified this hedging issue for me, one point at the Railcar event, and one during the shareholder dinner. At the Railcar one of the FFH guys mentioned that the Canadian regulators would at most give 50% credit to their equity investments. This is a major issue, so they have two choices. They can invest in bonds and cash and get full credit, or hedge the equity to get full credit. They could potentially also raise equity by selling shares, although I don't consider that much of an option. So in order to satisfy the regulators they need to be protected against a lost. At some point the market will fall, it's not a matter of if, but of when. When the market falls they can dump the hedges and make more investments without a hedge. The math on this works because they're able to double down on investments and with a 50% regulatory penalty they don't lose any ground. At the dinner Paul made a few comments reinforcing this but also went a step further. It's almost as if there are two things going on here. The team is investing as they always have, they are generating the types of returns they want. They're very confident in the investments they have now, that Greek REIT, restaurants etc. It's a timing issue, they expect the market to fall before these investments are realized. And to be able to invest at all they need to show to regulators that their capital won't be wiped out. So they are forced to hedge. The hedge protects them in a downdraft, but it's almost independent of the underlying investments. Someone quoted Prem as saying that protecting capital is the most important issue, and that AIG took decades to build billions in equity that was wiped out in a year. Remember that Fairfax is first and foremost an insurance company. They are not a hedge fund, or a mutual fund. All of their activities support their insurance, and this is how regulators view them as well. So why haven't they ever called this out explicitly? It doesn't seem in good taste to call out regulators. But I think it's even simpler then that. I think that Prem and his team take this for granted. They are an insurance company, they deal with regulators and capital issues all the time. This is the lens they think in, I think they presume that investors understand this as well. I don't know, my knowledge of Fairfax went from zero to everything I know by attending the events in Toronto. In the US if you're a holding company that owns a bank you are regulated even though the subsidiary does the banking. My guess is that insurance is similar, the actual operating entity is regulated, but the holdco is as well. This is to prevent a situation where the holdco makes decisions that could financially jeopardize the subsidiaries.

Thanks for the meeting notes. Common share holder equity is about $7 billion and Stock/Preferred stock investments are about $5 billion. So I cannot see how even a 50% loss on equity/preferred stock would wipe out Fairfax. It does not make sense to consider a loss of 25% on the entire investment portfolio consisting of stocks, bonds, cash. The hedges only protect the equity portion. Vinod There were two points that clarified this hedging issue for me, one point at the Railcar event, and one during the shareholder dinner. At the Railcar one of the FFH guys mentioned that the Canadian regulators would at most give 50% credit to their equity investments. This is a major issue, so they have two choices. They can invest in bonds and cash and get full credit, or hedge the equity to get full credit. They could potentially also raise equity by selling shares, although I don't consider that much of an option. So in order to satisfy the regulators they need to be protected against a lost. At some point the market will fall, it's not a matter of if, but of when. When the market falls they can dump the hedges and make more investments without a hedge. The math on this works because they're able to double down on investments and with a 50% regulatory penalty they don't lose any ground. At the dinner Paul made a few comments reinforcing this but also went a step further. It's almost as if there are two things going on here. The team is investing as they always have, they are generating the types of returns they want. They're very confident in the investments they have now, that Greek REIT, restaurants etc. It's a timing issue, they expect the market to fall before these investments are realized. And to be able to invest at all they need to show to regulators that their capital won't be wiped out. So they are forced to hedge. The hedge protects them in a downdraft, but it's almost independent of the underlying investments. Someone quoted Prem as saying that protecting capital is the most important issue, and that AIG took decades to build billions in equity that was wiped out in a year. Remember that Fairfax is first and foremost an insurance company. They are not a hedge fund, or a mutual fund. All of their activities support their insurance, and this is how regulators view them as well. So why haven't they ever called this out explicitly? It doesn't seem in good taste to call out regulators. But I think it's even simpler then that. I think that Prem and his team take this for granted. They are an insurance company, they deal with regulators and capital issues all the time. This is the lens they think in, I think they presume that investors understand this as well.

They've asked me as well. I'm not sure how the payment system works, but they had offered me a flat $500 per article. I have heard of others getting $750 an article flat rate. I'd try to negotiate something like that.

Aren't all UK stocks penny stocks? Everything I've seen over there is quoted in pence. You might have shares trading for £.04 or 4p, which is a normal price without any stigma attached. Are there stocks that trade sub-penny? I've never heard of any although I'm sure they might exist.

Sanjeev, Thanks for putting on a great event, it exceeded my expectations. I'm glad I made the trip, it was well worth it. I'm planning on making this an annual occurrence.

I think it's a shame that people feel like they need to know where they're headed in life 10-15 years in advance. When I look back at my life I haven't followed any traditional paths, yet the things I've taken the time to learn have benefitted me in many ways. I will second or third whoever else posted that you shouldn't study something you don't care about. Study something you enjoy. I would also recommend studying something that helps you learn how to think. I have a degree in Systems Analysis (hybrid math & computer science) with a minor in Sociology. If I step back and think about college I can pull out a few lessons. The first is that you don't need to do as much work as assigned. Find the shortcuts and use them. Maybe this is a bad lesson, but I've learned that in everything in life there is the long way and the short way. Take the shortest way that doesn't jeopardize quality. With my new-found time I tinkered with computers on my own, I taught myself a lot of things that I built my career on. I also hung out with as many people as possible. I learned how to work with different people, but also how to connect/network etc. But the most important lesson was learning how to think. My sociology classes were great for this, they challenged how I thought about things. Study what you enjoy, do well, meet other people and build yourself the ideal job. It won't happen right away, but it'll happen sooner rather than later. SD is correct, you need to figure out a way to work for yourself as well. I've realized I will never get to where I want to go on any conventional route. I started my own business as a way to get to my goals too. No boss is ever going to pull you aside and tell you to work for yourself, or that combining a hobby interest with something else would make you invaluable. They just want you to do your job. You, and only you know how to take your best traits and package them in the best way. My last word of advice, this is a lifelong journey. You're not going to know when you graduate, or in five years, or 10 years. Everything takes longer that you'd ever expect. Yet when the time comes it happens quickly, so be prepared. I appreciate the compliments on the blog, although I doubt I teach more than a college class. I have never taken a finance class in my life. Maybe that's why I march to my own drum, I was never taught what is 'right' or 'wrong' with finance. I read a lot of value investing and accounting books and though through things on my own. So all is not lost.

I doubt HFT is happening to the types of stocks I buy, small illiquid ones, but I know of something worse. That's the physical market makers who are buying the shares at $14 in little bits and pieces then offering them for sale at $14.50 in round lots. Or buying the lots at $14 and selling at $14.50. This is absolutely true because I know people who do this, that's the definition of their job. I wish there was HFT for some of the stuff I am buying. Then there'd be some liquidity, and bid ask spreads smaller than 30-40%. I know market makers who sit on ask's in the 1000's for a $15 stock just so no one can enter an order online. As someone said earlier in the thread, if your investment thesis is wrecked by a penny or two then you need to step back and question what you're doing.

Your financial situation is probably a little different than mine then. I don't make nearly enough to max out the 401k and IRA's. I guess if I were in our situation I'd probably make sure to max out the Roth IRA first, then the 401k after the match.