BG2008

Gents, Anyone here with a chemical/compounding/pharma manufacturing background who can provide an opinion on how costly it will be to produce a mystery compound? Reward is a potentially interesting investment idea. Compound is a polycyclic peptide. Questions will be on cap ex needed, yield, input cost, etc. Thanks!

I second Tim's point about the "value add" of fund admin. One of the best advice from my attorney during the process is to go with a fund admin who really gets it. Everything seems simple, until you have to start tracking your balance at month/quarter end, who added capital, who withdrew capital, what to value some of your illiquid/non-traded securities. I couldn't be happier with my fund admin. They are worth ever penny that I pay them. It seems easy, until you have to properly accrual for expenses. There were topics that came up that you only know when you've gone through the exercise.

Plain Vanilla PPMs can be done at $20-30K, I've heard some as low as $12K. For customized documents with side pockets, gates, share classes, etc, it can easily be $40-50k. Cost to form entities, fund itself, GP entities, management companies depend on how much entities you have. Yeah, $12 to 20K for operating sounds about right. You can get audits done for about $7.5k, another 2-3k for taxes, fund admin is minimally $500/month. Those are entry level figures. PB doesn't really cost much, just use IB. Throw in another $2-5k for attorney in case you have some ad hoc questions. If you can launch with $5mm, it's actually not too shabby. Feasibility depends on your fee structure. If you charge 0,6,25, you're living on performance fees which can be tough and unpredictable. If you've got a management fee and the LPs pay for the operating expenses, you're looking at $50k/yr net to you @ 1% management fee. My word of advice is that "you will definitely be surprised by who gives you money and who doesn't"

I'll list 10 books actually. I find that the first five books are great for teaching people how to thinking about investing. The latter books are great for application. It's always great to teach people to work hard, eat right, etc. But it's just as important to teach people how to squat, bench, bend your knees etc and "when it comes to protein, less legs are better. Fiber is your friend. Eat your calories, don't drink them." Top 5 for Philosophy - Not in any order 1. Buffet Annual Letters 2. Snowball 3. Securities Analysis 4. Margin of Safety 5. One Up on Wall Street Top 5 for application 1. Buffet Partners Letters (prior to Berkshire) 2. You can be a stock market genius 3. 10 Ways to Improve your Investment Process 4. Other smaller fund managers' investment letters that details specific investments and their thought process 5. Michael Porter's - Competitive Strategy

One of the reasons why I don't actively look for compounders is the really tough decision deciding when to sell vs hold. Anyone has any insights regarding when to sell compounders? SAM is one I found early, I bought it at $21.50 in 2005, and sold way too early ($113 in 2012). I unfortunately no longer own it.

I'm in my early 30s, I can probably get a 25 yr term fairly easily

Packer, ARCP trades at 7.6% dividend yield. I've been thinking about a Long ARCP and short O and NNN trade for a while now. NNN is trading at 4.67% and O is trading at 5.09%. It's a positive carry trade and you're betting that the spread will tighten over time. Can you expand on the liquidity and tax advantages? I don't follow how private REITs can be better than public REITs. Assuming Broadstone can mark property values pretty accurately, it seems that there are probably public REITs trading at greater discounts. I looked at the publics (NNN players like LXP and O) but they all trade at lower yields with no depreciation tax sheltering associated with the distributions at the personal level. If you can find a public NNN with a yield higher than 6.8 percent I would like to know about it. Thx. Packer

Back in 1992, my family bought me a whole life policy. After 22 years, I realized that the cash surrender value is only $15,420. Annual premium was $664 for a face value of $100k. Cover has gone up by about $21k. Adding in the actual cost of buying term life insurance over the years, I figured that the CAGR on this only about 2-3%. This makes me wonder, an insurance product is basically a term life policy plus putting that annual premium towards investments. While I am not confident about a lot of things, I think I can do better than a 2-3% CAGR a year. To mimic the current policy, it seems to make sense to synthetically create this life insurance product. 1) Turn in the policy and take the cash surrender value 2) Buy term life insurance for $100K 3) Invest the cash surrender value and compound at a rate higher than 2-3% Had the investments been compounding at 10% in the last 22 years, the cash surrender value should be $45k now. Being a value investor, it seems like I should synthetically create this product rather than continue to burn $664/year. The checks I will write in the future will be the term life policy premiums. I believe these policies are supposed to be paid off within 10-15 years, the investment should have compounded enough to pay for the annual premiums so that they are self sustaining going forward. However, the low interest rate environment has made this nearly impossible. Am I missing anything?

I have been thinking about this topic lately as well. Being an emerging fund manager myself, I immediately started thinking "which one of my fund manager friends would I entrust my million dollar life insurance payout with?" Unlike most people, I regularly talk to a dozen of young managers. We swap ideas and we have a feel for each other's "blow up risk, runway, expected returns, marketing prowess, etc" I believe the most important factor in the decision is how ethical the manager are. Has the manager exhibited behavior or made comments that forces you to reassess your perception of his/her ethics? Blow up risk is the next most important factor. 40% CAGR is meaningless if there's a potential -90% year because the manager utilizes leverage or has certain cognitive biases that he/she doesn't realize or even worse refuses to realize. I think a humble fund manager is important as well. Someone who knows that they don't know enough yet. I believe my solution would be to allocate capital to 4-5 of my fund manager friends. I believe that those 4-5 fund managers over time will beat the S&P and the larger fund managers. I believe that I can safely entrust 1 of them to be the trustee/advisor on how to re-allocate capital as these 4-5 fund manager will eventually have different % returns over time and the portfolio will likely have to be re-balanced in 3, 5, 10 years. Regarding financial planning, I would never let my wife work with a financial advisor alone. I would definitely have my best friend or my brother act as a in between of my wife and the financial advisor. I have enough experience with financial advisors to know that they are driven by transactions and pitch their own products. As a 21 year old intern, I knew that financial advisors did not have the best interest of the clients. Their advise revolves around how much fee can I generate from this product and what bps of the AUM can I generate from placing the assets with "insert big bank" internal hedge fund etc. I am not saying that financial advisors are bad people, but when your commission is driven by the products that you sell, you tend to sell the product with the highest commission. The last thing that I would mention would be that I seriously need to increase the notional on my term insurance. Living in New York, I would imagine that a $3-5mm figure would be needed to buy a house without a mortgage and have enough left over to grow over time while taking small withdrawals when needed.

Any accountants here who can provide some commentary on whether a particular hedge fund structure is correct for a NYC based hedge fund

http://www.nypdrecruit.com/benefits-salary/overview *Newly hired NYPD officers can expect to receive nearly $2.2 million in pension payments and City paid health benefits over 32 years of retirement, based on the current average salary including overtime pay and other compensation; the average age of 26 for newly hired Police Officers; retirement at age 48 after 22 years of service, and assuming the average life expectancy of 80 years. Persons retiring above the rank of Police Officer will earn higher retirement payments based on their respective ranks. Maybe we are in the wrong business

I second many's view here regarding fitting frugality to your and your significant other's personality. I am sure that Buffet's extreme frugality likely resulted in friction between him and Susan and his children. Personally, my wife and I do not pay full price for clothing, except if we need an item right away. This is 99% of the time. Everything is from the clearance aisle, Rue La La, outlet stores, etc. Exercise clothing/equipment is an exception as I've found over time that the right gear lasts longer and pays dividends in that you're not distracted by lack of proper gear. I'll pay a premium to keep me motivated to work out. Although, I did buy a Concept 2 rower for 40 cents on the dollar by buying it off a guy who only used it for a few sessions before he realized "it's different than canoeing" Since we are both foodies, it can get expensive in a town like NYC. We do eat out. But when we do, we limit to cuisines that we cannot prepare at home. There are great ethnic restaurants like Thai, Mexican, Korean, etc in Queens for $15-30 per person. We both agree that we can skimp on others, but we need to enjoy good food. We arbitrage our food expenses by buying at wholesale prices from restaurant depot (if you have a large family, you should look into this). We can buy lobster, gulf shrimps, oysters, hangar steaks, portabella mushrooms, tomatoes, etc at deep discounts to supermarket prices. Although, you do have to commit to buying in bulk. I think that the discount is likely 50% ($10 for a 10 pound box of portabella mushrooms!!). This also eliminates the wasted time that the groceries sits on shelves at the supermarket. We probably gain 2 days of freshness. Food is certainly one of our largest expense items. But it's well worth it. We are delaying the purchase of a house until our children are 4-5 years old when the school district that they attend starts to matter. Vacations and travel are rare except when we find a good deal on Travelzoo. So, we pay for things that are at the bottom of the Maslow's Hierarchy of Needs. Food, Water, Shelter, Warmth. Many pay for the the stuff on top of Maslow's pyramids by splurging (or even going into debt) on luxury products and a bling lifestyle, we get them for free by associating with friends and family who share similar values and by pursuing careers that are meaningful. I can't stress enough the importance of the spousal buy in for a lifestyle like this. On a sliding scale where the left is spendthrift and the right is Buffet. I think most value investors will do well to veer closer to Buffet, but not exactly copy him. Interesting article about Mick Jagger's girlfriend http://nypost.com/2014/03/23/scotts-suicide-reveals-tragic-side-of-citys-glitzy-scene/

For those that have the ability to assess young fund managers, I would imagine that a younger, hungrier, startup fund manager would outperform. If one examines Buffet, Watsa, or any of the successful fund managers today, their returns earlier on were much higher with a smaller amount of AUM. However, this introduce an element of selection bias as you assume that you rightfully picked Buffet, Watsa, etc. However, I know a dozen of young managers who survived 2008/2009 and have compounded at CAGR of ~20% from inception. It forces me to think that they are not as rare as one thinks. But one does need to dig around and get to know them well.

Back in 2004-2005, I was working out at a gym and a meat head was telling his friend how he made $40,000 flipping houses in three days. His friends kept badgering him how this is even possible. He just said "I don't know, but that's how it is" In the last 3 years, I have heard from a slew of NYC based RE developers how they are not making money fast enough in the US. Their project is too small in the US. They want to work on a mega project in China. There are all sorts of ways to finance the purchase of the land without putting up real equity. People wait in line to buy RE by taking tickets just like they do at the deli counter. When asked if they think the RE market in China is overheated and what happens if it crashes, they give you reasons like the government will bail it out, it can't (which are very scary words), urbanization, it has never happened before (another scary thought), etc. There is very little institutional memory of bad times investing in Chinese RE. There certainly exist a sense of genius a la the tech bubble. I've purposely stayed out of commodities for this very reason.

I'll share a bit of my experience of walking away from a decent job and using personal savings to launch a HF. This is a bit different situation than what most people talk about. In early 2011, I walked away from a finance job that paid well but involved long hours, travel, and politics. Working during Christmas break was what broke the camel's back. Given that I live in NYC, the overhead is a bit more expensive. From 2011 to early 2013, I invested mainly in my PA and experimented with various strategies. My main goal during this time was trying to figure out how to weather a storm akin to 2008/2009 without the following government bailout. There are two reasons for this. Although I do not believe that volatility is risk, extreme volatility like 2008/2009 coupled with the need to withdrawal for living expenses can create a death spiral like others have mentioned on this board. Second, many people were 100% invested going into 2008/2009, their portfolio suffered deep mark downs and some suffered permanent impairments. When finding triples is like shooting fish in a barrel, they had very little cash to take advantage of the situation. I wanted a strategy where I can earn a decent rate of return and yet have cash on hand during 2008/2009. I also believe that this will lead to out performance in the long run if you can achieve >100% every 10 years. (Hence my handle BG2008 - Ben Graham 2008) So, I stressed myself out and kept looking for opportunities that are truly market neutral. The most ideal candidate is an investment that pays out cash upon certain liquidity events. During that time, I've been ridiculed by other fund managers along the line that "if you can't take the heat, maybe you shouldn't be in the kitchen." Perhaps, I'm an hardcore fan of Seth Klarman and his view that the investments need to survive a depression. Perhaps, I'm just stubborn that way. I refused to compromise and eventually did stumble upon a few niches/strategies where I can earn a reasonable rate of return that is totally market neutral. I am not saying they are abundant, but they do exist. During this 2 year period, I experimented with shorting, buying puts, etc. Nothing worked to my satisfaction. Eventually, I found the ideal answer in Buffet's early partnership structures. Buffet allocated 1/3 of his strategy to workouts and special sits. It is ironic that the answer was there all along. Keep in mind though, Buffet was able to earn 20% IRRs doing merger arbitrage in the 60s. Those opportunities are not available. So you have to find your own market neutral strategies. I can't divulge mine. I share this experience with others who are contemplating leaving a recurring revenue source and invest full time. It maybe worth it for you to discover your own workouts/special sits when your burn rate is higher than what you are comfortable with. Also, keep in mind that many market neutrals did not prove to be market neutral back in 2008/2009, i.e. certain merger arb strategies or spread trades. I believe that I have uncover a few that are truly market neutral even under those circumstances. The alternative recommendation that I have is if you believe you can earn a reasonable rate of return while sitting on 40-50% cash, then you're likely good to go. Once I figure out my market neutral strategies (a portion of my portfolio), I launched the fund in Q2 of 2013. From an expense perspective, we we moved out Manhattan into Queens. Given that my wife and I are foodie's, we eat out less often and cook more at home. We are particularly proud to say that we arbitrage the quality of food by shopping at restaurant depot paying wholesale prices for high end foods like gulf shrimps, lobster, and steaks. We cut out the middle man (wait staff and chefs and taxes) since I grew up in the food business. For a normal budget, we are able to eat pretty well which ranks very high on our quality of life ranking. Maybe, I'll start a monthly dinner club at my apartment for those in the NYC area to share ideas and investment process. Regarding the effects of loneliness, structure, etc. Having a network of like minded individuals is very important. I'm on the phone for at least a few hours a week talking to others about investment ideas. Not having co-workers takes some time to get use to. But, you also don't have to deal with big egos in the office, bosses, and difficult co-workers. When working on your own, there is a ton of flexibility which can be good or bad for certain individuals. Some people tend to thrive in a more regimented environment. However, I recommend all to buy the book The Pomodoro Technique as it forces one to focus on the task at hand and avoid suffering from "option galore paralysis" http://www.watheeqa.com/App_Themes/watheeqa/pdf/10%20%20Ways%20to%20Improve%20Your%20Investment%20Process%20l%20Greg%20Speicher%20l%202011.pdf Having buy-in from your spouse is very important. There are stretches where you can't find decent ideas. Both you and your spouse need to be able to understand the long term objective. On that front, I believe I have hit the lottery. Lastly, to SwedishValue, I believe that you will be doing a wonderful service to mankind if you devote your life to compounding capital at a high rate and giving it away at the end or along the way. My reasoning is that losses and gains are natural in the investment world. There will be winners and losers. The world is a better place if you are the beneficiary who intend to give it away for philanthropic causes rather than another New York City hedge fund managers blowing it on $100 million apartments, mansions, and bottles and models. I too plan on giving away some wealth once I know that my family is taken care of.

Monday, Macau government data showed last month the territory hit an all-time high in monthly gambling revenue. Gambling revenue in February rose 40% on year to MOP38 billion ($4.75 billion)—or nearly three-quarters of what the Las Vegas Strip generated in all of 2013. Stuff like this worries me. $4.75 billion per month equates to $57 billion that the Chinese lost via gambling on a run rate basis per year. This makes Vegas seem like a bunch of boy scouts.

I've thought a lot about what makes a value trap. I think a value trap is an investment where you think you're paying 50 cents for a dollar. But that dollar is a melting ice cube and becomes 25 cents over time. I don't think anyone will argue that the fundamentals are indeed getting better over time. So, you pay 50 cents for a dollar and that dollar becomes $2 in 7 years. If there is a catalyst, i.e. dividend initiation, take over, debt recapitalization (just take out a mortgage and dividend out to shareholders), in the near term, that's great. If you have to wait, you quadruple your money in seven years. Should probably move the discussion to the J.W. Mays thread since someone recently created one.

To be honest, at today's price, Mark Greenblatt just need to "not f*** up" for this thesis to work out really well for shareholders. It's an one foot hurdle at these prices.

Spike Lee's 7 minute rant about gentrification in Brooklyn - The audio file is down below http://www.uproxx.com/up/2014/02/spike-lee-went-seven-minute-rant-motherfcking-hipsters-brooklyn-last-night/

Google Bruce Berkowitz, he has a list of 10 or 11 checks for an investment. It is a pretty "short and sweet" checklist. From my experience, sizing is very important. Anything that you size large, you should do a pre-mortem. Ask yourself what could go wrong. Sometimes we can get caught up in an interesting idea and how much upside it has. Ask yourself what you would do if price moves against you. If the response is "I would gladly double down", it's likely a worthy idea. If the response is "it depends on what happened to the fundamentals" you should size that smaller. If the response is "lower price could be related to an impairment in the investment" then you ought to size it as a speculative position. My other suggestion would be to find what works for you. I started out thinking that I will buy great businesses at a fair price. I found out that I am much better at special situations, asset plays, and reading 300 page prospectus that no one bothered to read. Over time, you too will develop your skill. If you're 6' 5" and 300 pounds, don't try to play wide receiver. Groom yourself to be a left tackle. Of course, at this point you don't know what you are. So experiment with different investments and accept the fact that you will make mistakes with your assumptions and analysis. Size your positions so that if it goes to zero, it will not materially impact your life. It's also important to get some hands on time. A lot of Buffet books are great. The key is understanding some of the fundamental concepts such as voting machine versus weighing machine. Doubling down rather than sell your losers and ride your winners. After that, you need to start rolling up your sleeve and take the deep dives. Learning to invest is kind of like learning how to drive. You can ace the written test and understand all the concepts, but you really need the actual driving to understand how much to turn your steering to make a 90 degree turn or whether it's safe to make that left turn with oncoming traffic in the opposite direction. The big picture is to buy something worth $100 for $50. Well, how do you find such a thing? How do you know it's not a $50 masquerading as a $100 that's on fire. This is where the reverse engineering is very helpful. Research others' ideas and you will start seeing trends. A company selling a money losing division results in higher valuation for the remaining profitable company etc. Last but not least, have "situational awareness". In 2006/2007, all the financials appear cheap based on P/E multiple. What many failed to see is that Wall Street had an unsustainable business model of packaging dodgy subprime loans. Many of the home building stocks looked cheap, but were trading at peak earnings. These things are clear in hindsight but very difficult to see forward. Do your best and ask yourself where are we in the cycle? Is this really sustainable in the long run. Best of luck.

You guys are cracking me up with your comments about the webpage. Juniors is literally a stone throw away from J.W. May's building. I wonder what the $/ buildable SQFT came out to be

Yeah, I'm trying to figure out what the penalty is exactly if the AGI exceeds 181k. I wonder if I'm better off just putting money into the traditional IRA giving the uncertainty.

I want to take advantage of the IRA contribution early during the year so that the money can compound early on. Since investing is a full time job for me, it's unclear what my income will be for 2014. How do I choose between traditional vs Roth under these circumstances? 1) If contribute to Roth and income exceeds $181,000 for married filing jointly, then the contribution and earnings will have to be withdrawal or re-characterized as traditional. How does a re-characterization work? What is the penalty if the income is withdraw? 2) If contribute into a traditional and wish to convert into Roth at year end? What are the penalties and process? 3) Someone had mentioned that it's a good strategy to open up a separate account for the new contribution to isolate earnings associated with the new contribution. Thanks guys

Great feedback. Is there a way that you can provide an overview of the chemical space. All I know about the chem space is from what I remember back in HS chem classes. I guess we can start with what's in the generic camp and what's in the specialty. Is the space divided by the molecules, i.e. organic vs inorganic, etc. Is it know how? Is it barriers of entry due to permitting? What makes something generic and what makes something specialty? Is it fair to include something like Lubrizol and Valvoline in this category? How much does cheap shale gas improve profitability? With nat gas being at $5+ recently, is the advantage still there? Your feedback would be greatly appreciated.

I have noticed a lot of specialty chemical companies getting high valuations lately. Is there a fundamental shift in the pricing power and return on capital on specialty chemicals industry in recent years? Any chemical engineers on this board who can help with this?