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Managing OPM versus PA


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My approach was to invest everything that I had outside of personal-use real estate in the same fund as my clients, on the exact same terms. So I didn't treat them differently. I was investing my money and if others cared to join, they did so on my terms. Of course, I had to make it attractive for them to take the risk, so I followed the Buffett/Graham partnership fee model (0% fixed, 25% of profits above 6% annualized return). This put the cart where it should be, firmly behind the horse. The result was defensible.

 

Think of Jack Bogle, when he said: "Investment management used to be a profession, now it is a business." My attempt was to be a professional, not a business. To make money with my investors rather than just off them.  I wouldn't recommend the approach unless you can afford to starve for a few years. A track record takes at least 3 years (more like 5 years), and a good track record takes something else than time. But it feels good.

Edited by returnonmycapital
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I used to manage money for others. Now, primarily just my own. Still have a few legacy guys that are great people and low maintenance so I dont mind it. But basically its totally different. I take wayyyy more risk with my own money. If I lose it its on me. With OPM, unless they explicitly tell me they dont care if they lose it all, I generally try to stay within the lanes of conventional approaches. For OPM Ill heavily concentrate, or do things similar to what I do with my own money, but scaled down. You cant rely on someone else to act the way you need them to every time theres an actionable market situation. People are people. They get scared. They fall for convention WS wisdom. They dont understand the difference between a business and a stock. They succumb to greed. etc. 

 

Its impossible not to have better results on my own funds simply because I can do what I need to and stick to a long term gameplan. Cant tell you how many times I had shit during my career where a random client would be like "yea I need 25% of the account for a home renovation"....its like dude you are currently 1.3x levered, we are in the middle of a pullback...sit the fuck down. If you pull money now you increase your leverage and reduce your buying ability and just in general fuck yourself. Even without leverage, you sell here and you're just throwing money out the window. Dont know how many friends and acquaintances I have collected over the years who do the OPM stuff and shit ranges from short term thinking to unreliable investors/clients, to an inability to pivot from previous strategies do to the confines of ego and salesmanship. So basically when you manage OPM, you are stuck managing way more than just their money. 

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I get the attraction of having permanent capital and not having to become a fee based AUM hunter/gatherer type. I guess that's what all the Buffett clone re-insurers are about. I have always owned the same stuff as my LPs but have owned it in larger proportion to net worth and in more concentrated form than people would normally be comfortable with. We are also beginning to start and own small operating businesses. Let's see how that goes! Why even do it when you can own parts of scaled world class businesses by pushing a button?  A lot of people on here are discussing investing as a part of their larger life endeavors. I think that helps keep things in perspective. As Greg implies, it's diminishing returns when you need to play therapist while holding your nerve in a bear market draw down.

 

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Good topic, and it hits close to home.

 

I run a fairly conventional RIA. Berkshire has been a core holding for everyone for 20 years, and I've used mostly low-cost ETF's and opportunistically bought blue chips along the way to fill things out. I've used Buffett's wisdom to help teach them how to think about investing. Possibly for that reason, my clients have been probably been less difficult / mercurial than Gregmal's were. They've made my life easy, and they've had decent performance as a result ( by not selling at bottoms, chasing fads, etc).

 

I consider myself insanely lucky to have these people as clients.

 

Meanwhile - getting to the subject - in my PA, I've completely trounced my client's results, not because I'm that skilled but because I've been a good cloner and can be a lot more opportunistic and concentrated with my own money. The gap got my attention a few years ago, and it just kept growing. By 2021,  it really started to gnaw at me.

 

So, about 18 months ago I picked a dozen or so clients that I thought could handle the conversation - they are really friends by now - and asked if they wanted to partake in some of my personal stock picks. I was very transparent. I warned them it would be volatile. I also told them we would be in this together, meaning I would buy and sell along with them. 

 

I got agreement, of course, and so we began with 2% positions in the stuff I hold in size- CASH, HQI, and Constellation Software. Well....

It has not been a blazing success. Constellation has been flat, at least, but HQI and CASH are down ~30-35% from where we bought. No one is complaining, and it's too soon to say this was a mistake, but I'm questioning if I should have done this. If you buy MSFT and it drops, the client blames MSFT. If you buy an unknown Iowa bank and it tanks, that's 100% on me. The last thing I want to do is introduce doubt in their minds. (Well, actually, the last thing I want to do is lose them money). 

 

So, I'm at a crossroads. I REALLY want to to add JOE here, for everyone, but I don't have the stomach for it. Now, watch- it will triple, and would have made the whole approach a winning one in the aggregate- and they won't own any of it.

 

Anyway, that's my story. The whole PA VS OPA thing is very complex.

 

 

Edited by Libs
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23 hours ago, returnonmycapital said:

My approach was to invest everything that I had outside of personal-use real estate in the same fund as my clients, on the exact same terms. So I didn't treat them differently. I was investing my money and if others cared to join, they did so on my terms. Of course, I had to make it attractive for them to take the risk, so I followed the Buffett/Graham partnership fee model (0% fixed, 25% of profits above 6% annualized return). This put the cart where it should be, firmly in front of the horse. The result was defensible.

 

Think of Jack Bogle, when he said: "Investment management used to be a profession, now it is a business." My attempt was to be a professional, not a business. To make money with my investors rather than just off them.  I wouldn't recommend the approach unless you can afford to starve for a few years. A track record takes at least 3 years (more like 5 years), and a good track record takes something else than time. But it feels good.

Kudos on an ethical and successful strategy. You should be proud.

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30 minutes ago, Libs said:

Good topic, and it hits close to home.

 

...

 

Anyway, that's my story. The whole PA VS OPA thing is very complex.

 

 

 

Thanks for sharing your experience Libs.  So should I avoid concentrating other people's life savings into Biglari Holdings at these prices?  Asking for a friend

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I don’t want to manage OPM until it’s almost completely on my terms. here’s how I invest mine, you will be alongside me, here are the terms, no promises other than alignment. Makes the whole thing a bit of a pipe dream potentially, but don’t think I’d navigate well otherwise. Would rather stay in w2 land if not.

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I’ve seen a lot of different variations of the OPM stuff and there’s just always headaches. If you are too prudent or cautious, folks get tired of not seeing things go anywhere. Some even wonder why you didn’t buy those tech stocks that do nothing but go up. If you’re too aggressive it is great but then how come we pulled back more than the market? If you balance things it is generally like why don’t we own more of what is doing well? I had a friend who last November lost one of his largest HNW clients despite returning over 50% ytd because the guy said he could make more trading options on his own. So you see a lot and to pupils point, the only way that works is on your own terms and with a hardline on that. But with all of this, you certainly learn to understand and respect the psychological element that is in the market. When you see dozens of investors and hear their thoughts throughout the cycle you learn a ton about what moves markets. 

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