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Patient Capital - Spring 2015 Newsletter


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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/

 

It's funny that a wikileaks cable was just released at the end of 2014 that revealed DOJ communications where they mention a fear that Saudi oil reserves are significantly overstated, there is likely to be production issues in the near-future, and that Peak Oil may have already occurred. Then oil dropped so the Guardian dropped coverage of the story.

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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/

 

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!

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I think Tim is correct and Patient Capital is using the wrong benchmark.  If Patient Capital were 100% invested in large cap stocks over the period of investment, then his record would be outstanding.  However, he was not.  The correct benchmark is closer to a balanced fund.  In that case, Vanguard Wellington with a expense ratio of 26bp returned 314% vs. Patient's 305%.  The 1.25% of fees per year turned this from a slight outperformer @ 320% (with the same fees as Wellington) to a laggard (where more than the excess return went to the manager).  The 1% fee difference compounded is about 15.5%.  Given that we are all know that value funds on average outperform the market, you could have bought Vanguard SCV and had a return of 446% over the same period.  For most US value funds, I think this is the best benchmark, since we can all invest in it with a cost of only 8bp.  In this case, it is great for the manager not so good for the investor.

 

Packer 

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I think Tim is correct and Patient Capital is using the wrong benchmark.  If Patient Capital were 100% invested in large cap stocks over the period of investment, then his record would be outstanding.  However, he was not.  The correct benchmark is closer to a balanced fund.  In that case, Vanguard Wellington with a expense ratio of 26bp returned 314% vs. Patient's 305%.  The 1.25% of fees per year turned this from a slight outperformer @ 320% (with the same fees as Wellington) to a laggard (where more than the excess return went to the manager).  The 1% fee difference compounded is about 15.5%.  Given that we are all know that value funds on average outperform the market, you could have bought Vanguard SCV and had a return of 446% over the same period.  For most US value funds, I think this is the best benchmark, since we can all invest in it with a cost of only 8bp.  In this case, it is great for the manager not so good for the investor.

 

Packer

 

I would be more confident putting my money into Patient Capital though. If I am a forced hand when the crap hits the fan, I will not have tanked with PC. If anything they exhibit exemplary fiduciary behavior. I'm not one who shies from variance but I think it matters a great deal when you're managing OPM.

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But is that comfort worth an additional 1% a year?  PC reminds me of the Charles Allmon of GSO and Frank Martin, folks who over time hold so much cash that they underperform.  I have yet to see someone who holds this much cash alot of the time waiting for the decline to beat an index over time (unless you are Baupost) and this guy is not Baupost.

 

Packer 

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But is that comfort worth an additional 1% a year?  PC reminds me of the Charles Allmon of GSO and Frank Martin, folks who over time hold so much cash that they underperform.  I have yet to see someone who holds this much cash alot of the time waiting for the decline to beat an index over time (unless you are Baupost) and this guy is not Baupost.

 

Packer

 

Generally I agree.

But how then has Maida succeeded in going from

virtually no assets under management in March 2000 to a business managing almost one billion dollars
???

 

Gio

 

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But this question doesn't actually ask anything.  Why do people do irrational things?  Why is there money in mutual funds if 85% underperform?  Probably the answer is, he's good at selling.

 

Selling a bad product/service over the course of 15 years... I cannot imagine a hardest thing to do! ;)

 

Gio

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@Gio - I think the crux of the issue is exactly this "selling a bad product" - first, most investors would not know how to tell a good from a bad product - the fact they have money to invest says nothing about their financial education, general intelligence, etc (nor that of their advisors for that matter). Second, the performance itself has not been horrific IMHO because in absolute terms this guy has not lost the principal, whose protection is more or less his goal AFAIK

 

 

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Second, the performance itself has not been horrific IMHO because in absolute terms this guy has not lost the principal, whose protection is more or less his goal AFAIK

 

Well, imo the performance has been good. I might agree with what Packer has said, but I also think the performance has been satisfactory enough. And to go from 0 to 1 billion is no small feat at all! ;)

 

Gio

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I suggest that the focus on a comparison to a particular benchmark may be misplaced. In the case of Patient Capital the performance comparison to the S&P 500 is for illustrative purposes only. Is it the "right" benchmark---perhaps yes perhaps no---but in reality who really cares. Let me explain. Although I do not currently invest with Patient Capital---they are on a very short list of managers for my wife to contact should something happen to me. Why is this---because Mr Maida is fanatical about protecting the capital already in place. For me personally---this is the key criteria. Having achieved a level of capital that is sufficient for us to achieve our goals and satisfy our obligations --- protecting that capital is what it is all about. The very satisfactory return that Mr Maida produces is for me only an added bonus. In other words--I believe it is critical that each of us sets a personal return benchmark --- if that personal benchmark is achieved it really matters not how our individual performance compares to the returns on the S&P 500 or any other arbitrary index. BTW---Mr Maida's performance well exceeds my personal benchmark and has for sometime.

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One consideration however IMO is indexing in selecting as an alternative if you are not there.  Warren Buffet has chosen the index option for his loved ones who have little interest in investing and I think this is a reasonable benchmark to evaluate other options against.

 

Packer

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One consideration however IMO is indexing in selecting as an alternative if you are not there.  Warren Buffet has chosen the index option for his loved ones who have little interest in investing and I think this is a reasonable benchmark to evaluate other options against.

 

Packer

 

A good response Packer! The question then becomes which index? I am based in Canada so using the same index selection as Buffett likely does not make sense  for me without also considering the currency hedged vs non-hedged issue which greatly complicates things.

 

I also believe we should not take Buffett at his word---his "capital" far exceeds most humans (certainly exceeds mine) so really does it matter what he chooses to do with his money when he passes? For example-- Buffett likely has $1-2 billion in cash set aside for his wife with the rest being allocated to the index. In any case---Buffett's wife will be well cared for regardless of how his money is invested.

 

I think it is critical that when selecting a third party manager that one also looks at how they did in 2008/09. Many managers especially index managers or index-huggers took severe performance hits in that period. Then they hid behind---"I beat the index "when questionned on why they did so poorly. Again---perserving capital is my #1 critertia---growth of that capital at a very modest rate is a distant second.

 

Personally my overall "balanced" portfolio lost 4.39% in 2008 and gained 10.55% in 2009. Taking a look at Patient Capital's annual returns:

 

http://www.patientcapital.com/calendar-year-returns

 

LOL---perhaps I should be moving my money to PC now?

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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/

 

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!

 

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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. 

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I honestly have an issue with a company charging fees when they are 80% in cash.  That's kinda crazy.  They should prorate the amount they charge based on how much cash they have once they get over a certain %.

 

Reminds me of this plumber joke..

 

This couple was having problems with their plumbing. The plumber got under the sink, looked around, then hit an elbow joint as hard as he could with a hammer, and the problem was solved. The couple was overjoyed and asked how much they owed him. The plumber said $75.25.

 

The couple said, "That's ridiculous. All you did was hit a pipe with a hammer. We want an itemized bill."

 

So the plumber took out a piece of paper and wrote out:

 

25 cents for wear and tear on the hammer and $75.00 for knowing where to hit the pipe.

 

Obviously their fee is for knowing when to be in cash and when to invest (and in what).

 

Whether that's worth it for their services is another question, and I don't know the answer, and I'm not familiar with them.

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Maida's profile from Feb 2009:

 

http://www.macleans.ca/economy/business/patience-pays-off/

 

Vito Maida is arguably the most stubborn money manager on Bay Street, and he has paid dearly for it. A decade ago, when he was lead Canadian portfolio manager at mutual fund giant Trimark Financial Corp., he insisted soaring Canadian bank stocks were overvalued and stayed away from then-hot Nortel Networks. Instead, he invested in unpopular commodity stocks and gold. Investment advisers called for his head and pulled their clients’ money from his funds, and he was fired. Then the Internet bubble burst, Nortel crashed and commodities soared in value.

 

So Maida started his own money management firm, Patient Capital Management, based on the premise you should never, ever lose your clients’ money. For more than eight years, he kept 80 per cent of assets in government treasury bills, holding steady to the belief everything else was overvalued. As the TSX posted double-digit returns from 2004 through 2007, Maida earned between three per cent and seven per cent a year. Business was depressingly slow. “It was tough to sell a product that was 80 per cent cash,” Maida says.

 

80% cash is nothing new for him.

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Maida's profile from Feb 2009:

 

http://www.macleans.ca/economy/business/patience-pays-off/

 

Vito Maida is arguably the most stubborn money manager on Bay Street, and he has paid dearly for it. A decade ago, when he was lead Canadian portfolio manager at mutual fund giant Trimark Financial Corp., he insisted soaring Canadian bank stocks were overvalued and stayed away from then-hot Nortel Networks. Instead, he invested in unpopular commodity stocks and gold. Investment advisers called for his head and pulled their clients’ money from his funds, and he was fired. Then the Internet bubble burst, Nortel crashed and commodities soared in value.

 

So Maida started his own money management firm, Patient Capital Management, based on the premise you should never, ever lose your clients’ money. For more than eight years, he kept 80 per cent of assets in government treasury bills, holding steady to the belief everything else was overvalued. As the TSX posted double-digit returns from 2004 through 2007, Maida earned between three per cent and seven per cent a year. Business was depressingly slow. “It was tough to sell a product that was 80 per cent cash,” Maida says.

 

80% cash is nothing new for him.

 

Damn! Can't say he didn't earn his name!

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