It is my intention to explain in plain English how you can expect this fund to operate and how you should hold me accountable. This follows the form of Berkshire Hathaway’s Owner Manual and may contain many similar principles. It is important, for both you and I, to agree on these principles before beginning this endeavor as it isn’t hard to imagine what upset misalignment may cause. Without further ado:
1. Investing philosophy
This will be the thickest section terminology-wise and the longest overall, but it is important for you to understand.
The vast majority of investors consider this to be highly risky and extremely contrarian. I do not follow the tenets“modern portfolio theory” and“efficient market hypothesis” as they teach in most finance schools(both of which say that markets are always prices correctly and therefore no discount can be gotten).
The fund will have very focused investments, likely between 4-10 companies, at any one point in time. Many think this places a huge risk on a portfolio, and it certainly can be if they have not done their homework.
If you want exceptional returns, however, owning 100+ companies, as many money managers do, will necessarily mean that even if you do choose winners that double or triple, you have diversified away your winnings as well your losses.
I am most directly a student of Phil Town, who you probably haven’t heard of. He, in turn, is a student of Warren Buffett, Charlie Munger, Mohnish Pabrai, Guy Spier,(all fund managers) and overall the style of Graham-Dodd(many of whom who have consistently compounded at 20%+ a year for over 20 years). I definitely cannot promise those returns, but that would be great, wouldn’t it?
It is my expectation for us to do roughly market-average in up-years but to do far better in years directly following a crash or other major event, when the companies I’m looking at are at a large discount to“intrinsic value”(a value for the company that is logical and can be justified).
I want to love a company, through-and-through. I want a company that will compound our money year after year. Of course, they won’t all be wonderful, but that is what I am looking for.
Once I find a company that I love, I then insist that it must be“on sale”. This usually means it’s half off its intrinsic value. It is during these major events that good companies go on sale(also known as the“margin of safety”).
I make little to no effort to time the market, and to my knowledge all those who have tried have eventually failed.
I do employ options trading, which many people think is very dangerous. Rather than go into the specifics, I’ll just you let you rest assured that I only do it with a very small portion of the portfolio and with strategies that have earned many of my investing-brethren a 20-30% compounded rate for over 10 years.
It is important for you to know that I am still a student. I am still learning. I still attend a masters class and have weekly discussions with other like-minded investors.
As of right now, this is my side-hustle. While I spend a considerable portion of my free-time researching and investing, it is not yet a full-time gig. It is my goal and intention to get there, where I can only hope the extra time and effort will be seen in the returns.
You are helping me achieve that goal, thank you.
2. You are not clients; you are partners
While we may have legal bindings to the specifics of our arrangement, the intention is to treat you as a partner in this business. While I will be directing the allocation of funds to the best of my ability, it is important to think of this in a long-term view.
If you are expecting a quick turn around of funds between 1-3 years, that might happen, but the intention is much longer. At the time of this writing, March 19th, 2020, I do believe there is a great opportunity to make significant gains within that time frame, but my hope is to continue compounding growth for many more years.
3. Skin in the game
I believe all fund managers, if they’re honest, will have a significant portion of their own net worth in the fund that they manage. I will therefore have ~85% of my net worth in this fund.
Why is this important? It means that I believe I can do well by you as we are aligned. My own money is heavily invested and will not make any rash decisions that I don’t believe will have a high probability of success.
I am not guaranteeing success, and I would engage in social distancing from anyone who does. I am simply promising that your returns will match mine in every step that I make.
4. Honesty and transparency
It is my promise to you to be honest and transparent with how the fund is going. You will hear of my errors, and I promise you there will be errors, as well as my successes.
In the words shared from one of my favorite entrepreneurs, Ben Horowitz, I promise not to“blow sunshine up your ass”. It’s of no use to either of us for me to sugarcoat the news.
I will be taking responsibility, and if at any point I don’t think I’m able or fit to be your capital allocator, I’ll return your money to you with haste.
1. Investing philosophy
2. You are not clients; you are partners
3. Skin in the game
4. Honesty and transparency
5. Goal and accountability