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The 400% Man!


Parsad

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One of our boardmembers, and a friend of mine, Allan Mecham of Arlington Value Management, had a great story written about him in Smart Money.  I told you guys some time ago, that the best numbers I've seen based on risk/reward over the last ten years, was Allan's record.  Maybe the rest of the world is catching on!  Cheers!

 

http://www.smartmoney.com/invest/strategies/the-400-man-1328818316857/?cid=yahoofinance

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Good article.  His investment style seems to be a favorite of this board, own a few positions, hold for a long time, buy companies with moats.

 

The question I always have when I read about these people starting funds is how do they live fees from such a small AUM when starting out?  Allan had $200k AUM, 2/20 ain't gonna cut it unless you double or triple it pretty quickly.  Do these guys live in their offices eating Ramon until they achieve some sort of critical mass AUM?

 

Seems like a lot of small money managers are in the same boat?  Do they all have second jobs to actually pay the mortgage?

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Good article.  His investment style seems to be a favorite of this board, own a few positions, hold for a long time, buy companies with moats.

 

The question I always have when I read about these people starting funds is how do they live fees from such a small AUM when starting out?  Allan had $200k AUM, 2/20 ain't gonna cut it unless you double or triple it pretty quickly.  Do these guys live in their offices eating Ramon until they achieve some sort of critical mass AUM?

 

Seems like a lot of small money managers are in the same boat?  Do they all have second jobs to actually pay the mortgage?

 

He's got over $20M in AUM now.  So I think he gets by on a little more than peanut butter and jam sandwiches!  ;D  The first time we met in person, I actually sat down on a stool in the bar at the Omaha Marriott, and Allan and I just started talking.  Eventually we figured out we were both investment managers, and he was a member of the Corner of Berkshire & Fairfax message board.  I think we were watching hockey.  But he has never seemed like the type to live well above his means and enjoy life's excesses.  In most respects, he's just like almost everyone else I know and meet in Toronto at our dinners all the time...a die-hard value investor.  Cheers!

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According to the article he has $80 million under management. Does he get the usual 2/20?

 

No, I believe he has the same structure as Mohnish, myself, Shai et al...25% above a 6% hurdle.  Have to double-check with him.  Cheers!

 

Good man. I like to see when good people do well.  :)

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For nearly two hours, they peppered him with questions. Where did he get his business background? I read a lot, he replied. Did he have an MBA? No. I dropped out of college. Did he have a clever computer model or algorithm? No, he replied. I don't use spreadsheets much. Could the group look at some of his investment analyses? I don't have any of those either, he said. It's all in my head. The investors were baffled. Well, could he at least tell them where he thought the stock market was headed? "I don't know," Mecham replied.

 

Bravo.

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Sorry, I was incorrect on the fee structure.  Here is Allan's response:

 

When we started our fund it wasn't possible/realistic (laws mandate being a accredited & qualified investor to charge performance fee) to implement a performance based fee structure.  So to help afford the Ramon noodles we charged 2.4% flat.  We now have two funds with the option of the original 2.4% flat, or a 1 and 15 performance structure - no hurdle, but with a high water mark.

 

With $80M under management...no more Ramon noodles!  ;D  Cheers!

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As well, some comments on lockups:

 

Also, if people are inquiring, it's worth noting we have soft lock ups - 3%, 2%, 1% for the first 3 years.  Trying to attract compatible capital to help let our philosophy and actions sync up.  After 3 years there is no withdrawal fee.

 

Cheers!

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Sorry, I was incorrect on the fee structure.  Here is Allan's response:

 

When we started our fund it wasn't possible/realistic (laws mandate being a accredited & qualified investor to charge performance fee) to implement a performance based fee structure.  So to help afford the Ramon noodles we charged 2.4% flat.  We now have two funds with the option of the original 2.4% flat, or a 1 and 15 performance structure - no hurdle, but with a high water mark.

 

With $80M under management...no more Ramon noodles!  ;D  Cheers!

 

 

Thanks for that, Sanj. I would imagine that over time the 2.4% flat would be better for clients. Right?

 

Here are my quick calculations. I don't have my financial calculator so my assumptions might be off.

 

If he's had a 400% return over 12 years. I think that is about 12% per year. I'm also assuming that is after fees.

 

So if he made 15% before fees, under the old structure that 15-2.4 = 12.6%

 

Under the new structure, that 15% * .85  = 12.75 -1% = 11.75.

 

Why would anyone choose the new structure?

 

Even something as low as 8% before fees is pretty close.

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Very interesting story, thanks for sharing.

 

He must have pretty solid sources of capital to survive the 1/3 drop in 2005. How many ~5 year old firms get through that period?

 

He had a solid supply of Ramon noodles, Orange Crush and Fritos!  ;D  Cheers!

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Is it a 400% profit(net of fees) or a growth to 400% over 12 years ? For a cumulative 400% profit (net of fees), he must have returned ~14% annualized. A very enviable and stellar record !!

 

In any case..thanks for sharing the nice post and Congrats to Allan if he is reading this post !

 

Btw, I am curious as to how he managed to grow the fund from 200K to $80 million? What were the biggest challenges? What hurdles did he overcome and how did he convince his early investors to put money in his fund?

 

Also can unaccredited investors even charge a fee?

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Sorry, I was incorrect on the fee structure.  Here is Allan's response:

 

When we started our fund it wasn't possible/realistic (laws mandate being a accredited & qualified investor to charge performance fee) to implement a performance based fee structure.  So to help afford the Ramon noodles we charged 2.4% flat.  We now have two funds with the option of the original 2.4% flat, or a 1 and 15 performance structure - no hurdle, but with a high water mark.

 

With $80M under management...no more Ramon noodles!  ;D  Cheers!

 

Thanks for that, Sanj. I would imagine that over time the 2.4% flat would be better for clients. Right?

 

Here are my quick calculations. I don't have my financial calculator so my assumptions might be off.

 

If he's had a 400% return over 12 years. I think that is about 12% per year. I'm also assuming that is after fees.

 

So if he made 15% before fees, under the old structure that 15-2.4 = 12.6%

 

Under the new structure, that 15% * .85  = 12.75 -1% = 11.75.

 

Why would anyone choose the new structure?

 

Even something as low as 8% before fees is pretty close.

 

In Allan's case, as well as a handful of others, I make the exception on the fee structure because the results are there.  But I'm a huge, huge proponent of the original Buffett partnership fee structure.  The manager makes nothing in bad years, and more than the normal set fee in good years...the incentives are more in alignment.  But if you are a good manager that has proven results like Allan, than you can make exceptions to the fee structure. 

 

His soft lock-up is also one that I think is a much better idea than the hard lock-ups some managers have.  There are some funds out there with five-year hard lockups.  I could get my investors 20%+ a year with such a thing.  That takes alot of pressure off a manager when they are looking at long-term investments.  We may start another fund over time with a soft lockup and even more concentrated, but I like our clients having a fund like we have with no lockup.  More work for us, but I think it gives them more comfort knowing their capital is completely accessible without penalty.  Cheers!

 

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Is it a 400% profit(net of fees) or a growth to 400% over 12 years ? For a cumulative 400% profit (net of fees), he must have returned ~14% annualized. A very enviable and stellar record !!

 

In any case..thanks for sharing the nice post and Congrats to Allan if he is reading this post !

 

Btw, I am curious as to how he managed to grow the fund from 200K to $80 million? What were the biggest challenges? What hurdles did he overcome and how did he convince his early investors to put money in his fund?

 

Also can unaccredited investors even charge a fee?

 

 

Please contact them directly for any performance-related questions.  Their website is:  http://arlingtonvaluemanagement.com

 

Cheers!

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Guest bengrahamofthenorth

If I remember correctly, Buffett's original partnership had him taking one quarter of the downside. What do you guys think about that, seems like an incredible deal for the client.

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Mecham attended a community college and the University of Utah for two years -- but soon after starting an investment club, he says, he found his schoolwork boring by comparison. He would read books about investing and business. "I was 19," he recalls. "I was staying up till 3:30 a.m. devouring this stuff."

 

It's almost like I'm looking in a mirror!

 

Great and interesting story!

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Mecham attended a community college and the University of Utah for two years -- but soon after starting an investment club, he says, he found his schoolwork boring by comparison. He would read books about investing and business. "I was 19," he recalls. "I was staying up till 3:30 a.m. devouring this stuff."

 

It's almost like I'm looking in a mirror!

 

Great and interesting story!

 

Yup, pretty much the same.  I remember I was in my last year of University, and my Dad had just died.  I didn't like being up there at the campus, as he worked there and I would see him every day.  Just the same memories every day!  In my lectures I would be reading investing books, and then just showing up to write the biology, biochem exams after cramming and memorizing the entire textbook a week before.  My mind was completely elsewhere.  I quit shortly after that to go work, because I felt I needed to help my Mom and 9-year old brother after my Dad died. 

 

Now over 20 years later, I cannot put investing books, 10-Q's, 10-K's, articles on investing, etc down at all.  Crazy!  I think part of it has to do with the school system not recognizing and nurturing the interests of students.  I was always interested in money...even as a young boy.  I like the idea of creating schools that hone a students keenest interest.  Allow them to study only that subject at their own pace.  I've read and studied more on my own, than I ever did in all my years of formal schooling.  Just never the subjects I was being taught in school!  ;D  Cheers!

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folks this might sound naive

 

400% return what does that mean?

 

what is his annualized return?

 

does that mean if he has 80mil aum that means 20mil is the starting point?

 

would like to know the annuazlied return #, going from 20mil to 80mil can be done in many different ways (1 awesome 2011 year?)

 

not saying that is the case, just wondering what his annuazlied return is, just saying 400 AUM  is not complete

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