BG2008

TAXI is interesting. It is a bet on NYC Taxi/limo commission's power versus Uber and Lyft car rides. NYC taxi medallions are known to trade for over $1mm each. If Uber and Lyft are allowed to roam free in NYC, those medallions will be worth a lot less. TAXI's collateral may collapse in value and the whole company can go under. It's amazing that three years ago, taxi medallions are viewed as recession proof assets.

Found the following interesting regarding Michael Burry's arrangement with Greenblatt and White Mountain Insurance. Anyone here aware of other seeding arrangements with start up fund managers? Just prior to the opening of the Fund, I was approached by two interested parties – neither of whom I solicited – who separately expressed an interest in owning a part of Scion Capital, LLC. The first party, Gotham Capital V, LLC, is run by Joel Greenblatt, who has been involved in money management for the better part of two decades. An author, professor and portfolio manager, Mr. Greenblatt is an extraordinary special situations investor with whom any professional value investor should be proud to be associated. The second party is White Mountains Management Company, a subsidiary of White Mountains Insurance Group, Ltd (symbol WTM on the New York Stock Exchange). Led by Warren Buffett associate and insurance guru Jack Byrne, White Mountains is an extraordinary company managed in a manner to warm a shareholder’s heart. Once called the “Babe Ruth of insurance” by Mr. Buffett, Mr. Byrne himself is legendary among value investors as the man who turned around GEICO for Mr. Buffett and subsequently turned around Fireman’s Fund. White Mountains is his latest venture, and Mr. Buffett himself recently stepped in to acquire nearly 20% of White Mountains. After some discussion, separate agreements were made with both parties whereby a family trust and I would option portions of our interests in the management company to these parties. The option agreements, now consummated by premiums paid, give Gotham Capital V, LLC the 5-year option to acquire 22.50% of the management company and give White Mountains the option to acquire up to 15.44% of the management company. The agreement with White Mountains is structured such that 5% of the interest would be acquired upon investment of a substantial amount of capital in the Fund for a little over three years. In this manner, I have given up a portion of my own future profits in an effort to jump-start assets under management and hence reduce the expense ratio experienced by investors in the Fund.

I can totally see the first date being Farmer Gal "So, what's your favorite brand of tractor?" Investor pretending to be interested in Dairy "The bigger the better! Now, does so and so product have pricing power? What are the factors in determining whether you treat a cow or cull it from the herd?" I have to respectfully disagree with Oddball's approach. If you want to talk to farmers asap, you have to understand that "city folk just don't get it". Try this site instead -- www.farmersonly.com

That's hilarious. Yes, Dairy Farmers please.

Any Diary Farmers on the board? Anyone knows any diary farmers with herds that exceed 500?

Interestingly the 6% rate was also the rate that Buffet will pay LPs if they wish to send money prior to a scheduled opening. It is a form of financing for the fund. Regarding a fee structure for a fund, I spent a ton of time trying to devise a clever fee structure that would align my interest with my LPs. I thought about setting the 10 year treasury as the hurdle and let it float each year. You start running into issue with the fund admins with a floating rate fee structure. I know some individuals who use 0,6,25 and actually ran into trouble with fund raising because of the 0. From prospective LPs' perspectives, some of them want to pay the GP during lean years. Great fund managers with great moral compass tend to be easier to pick in hindsight. Most fund managers who are down 40-50% would often just close down the fund and start a new fund. Hence, the prospective LPs understand that a 0,6,25 fee structure can lead to a GP not having any cashflow for 2-3 years. Hence, having a 1,6,25 fee structure will motive the GP to work his/her way out of the hole. If I were an LP, a 0,9, 25 would make me uncomfortable (my 2 cents). The GP can't cover expenses unless there is substantial out performance.

Does anyone know what happened to Denali Investors from Q4 2009 to Q4 2012? The fund since inception in late 2007 is up 187.9%. From inception to end of Q4 2009, the fund was up 59%. 2013 was 66% and 6 months ending Q2 2014, the fund was up 33.7%. If we take out 2010, 2011, and 2012, the gains from 2007 to 2009, and 2013-Q2 2014 should be 252%. So, from beginning of 2010 and end of 2012, Denali was down 26%. Down 26% in a three year time period is substantial. Short term volatility tends to work out in a 3 year period. Anyone know what happened during that time period? In the G&D interview, Kevin mentioned that he had a "Come to Jesus" moment in 2011 regarding his strategy. Can anyone shed any lights on this? http://manualofideas.com/files/content/kevin_byun_denali_investors_letter_2009-q4.pdf

In the JCP case, many investors favored the 2016 bonds because they figured that JCP can at least survive till then. The investor favor the longer duration less since they don't know how JCP will do in the long run. That's probably too little info to make a generic response. Obviously, longer duration bonds are more susceptible to interest rate movements.

Makes me wonder how many value investing LPs Steve Eisman really has. It's amazing that a fund can go out of biz with 2 years of single digit returns. However, this might have to do with Steve Eisman's personality as he was quite a character a couple years ago speaking at the Columbia Conference.

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.