For all the small Fund Managers out here...

[Tim Eriksen]

When did Buffett stop taking the performance fee and start taking only a salary? Was it right when he took over Berkshire or some time after?

 

My recollection is that the gained control of BRK in 1965 and he continued the fund (with performance fees) until mid 1969. 

[Jurgis]

I agree if you can't talk with friends / strangers about your passion, it would be hard to raise money.  However, for me, I feel that if you can't talk about your passion to people, you probably aren't "introverted" (or whatever the word is), you probably just haven't found your passion yet... perhaps not being very introverted, this is an unfair statement for me to make.

 

Ben, I pretty much agree with your post (again ;) ).

 

The following is OT perhaps, since it's just my personal experience and it might be irrelevant. :)

 

I don't talk to my family and friends about investing - with some exceptions - for the following reasons. Some of these I think are cultural and I tried to mark them as such. There is some generalizations here - clearly this does not apply to everyone.

 

- Envy. "You are investing, therefore you must be rich like heck." This is mostly not an issue with Americans, but it is an issue with Lithuanians. This leads to expectations (see expectations bullet) and other difficulties. It's better not to touch the subject. ;)

 

- Expectations. "You are investing, therefore you must be rich, therefore you should do XYZ for me". This applies both to Americans and Lithuanians. ;) Americans are usually nicer about this, they sometimes just mention that perhaps you should donate a large amount of money to some cause - especially if you meet them through things related to that cause. Lithuanians (family more than friends) expect that you just give money to them. :)

 

- Misconceptions. This is a long list: "Investing? Stock market is casino/rigged". "Investing? Why not buy index funds?" - actually this one is one of the better ones that aspiring money managers should have an answer to. ;) "Investing? I bought AAPL stock and have 10X return so far. What? You only did 14% per year? And you call yourself an investor?" "Investing? Day trading with TA is where the money is!", etc. This is where I can't find a good word to describe myself. It's not "introverted", but I really don't like dealing with all of these. :) I don't find it fun to spend conversation with a friend trying to persuade them that they have a misconception about investing. I'd rather talk about movies. ;)

 

- Professional expectations. I did not get much of these, since I don't manage OPM and I don't talk about investing a lot. But this is where you hand-hold your clients/friends. I'm fine with helping them a bit, but I don't want that to be my 24/7 work. :) This includes things like: "I'm not doing anything with my money, what should I do?", "The market is high right now, should I wait for correction?". And things like: Company XXX has ESPP that gives a guaranteed 15% return - and the person is too uninformed, lazy, scared, whatever to put money into it. Company YYY has 100% matching on 4% contribution to 401(k) and the person is too uninformed, lazy, scared, whatever to put money to get the match. And these are the things that would give them higher return than investing with me. :) So, sure I tell them to do it and then a year later they still have not done these things. For me, that's a killer. :( A good money manager would not care about these things or would care just enough without getting involved. I can't do that, if I care, I care too much. :)

 

Anyway, as I said, this might not be quite relevant to the topic. :)

 

Peace

[Guest Schwab711]

I agree if you can't talk with friends / strangers about your passion, it would be hard to raise money.  However, for me, I feel that if you can't talk about your passion to people, you probably aren't "introverted" (or whatever the word is), you probably just haven't found your passion yet... perhaps not being very introverted, this is an unfair statement for me to make.

 

Ben, I pretty much agree with your post (again ;) ).

 

The following is OT perhaps, since it's just my personal experience and it might be irrelevant. :)

 

I don't talk to my family and friends about investing - with some exceptions - for the following reasons. Some of these I think are cultural and I tried to mark them as such. There is some generalizations here - clearly this does not apply to everyone.

 

- Envy. "You are investing, therefore you must be rich like heck." This is mostly not an issue with Americans, but it is an issue with Lithuanians. This leads to expectations (see expectations bullet) and other difficulties. It's better not to touch the subject. ;)

 

- Expectations. "You are investing, therefore you must be rich, therefore you should do XYZ for me". This applies both to Americans and Lithuanians. ;) Americans are usually nicer about this, they sometimes just mention that perhaps you should donate a large amount of money to some cause - especially if you meet them through things related to that cause. Lithuanians (family more than friends) expect that you just give money to them. :)

 

- Misconceptions. This is a long list: "Investing? Stock market is casino/rigged". "Investing? Why not buy index funds?" - actually this one is one of the better ones that aspiring money managers should have an answer to. ;) "Investing? I bought AAPL stock and have 10X return so far. What? You only did 14% per year? And you call yourself an investor?" "Investing? Day trading with TA is where the money is!", etc. This is where I can't find a good word to describe myself. It's not "introverted", but I really don't like dealing with all of these. :) I don't find it fun to spend conversation with a friend trying to persuade them that they have a misconception about investing. I'd rather talk about movies. ;)

 

- Professional expectations. I did not get much of these, since I don't manage OPM and I don't talk about investing a lot. But this is where you hand-hold your clients/friends. I'm fine with helping them a bit, but I don't want that to be my 24/7 work. :) This includes things like: "I'm not doing anything with my money, what should I do?", "The market is high right now, should I wait for correction?". And things like: Company XXX has ESPP that gives a guaranteed 15% return - and the person is too uninformed, lazy, scared, whatever to put money into it. Company YYY has 100% matching on 4% contribution to 401(k) and the person is too uninformed, lazy, scared, whatever to put money to get the match. And these are the things that would give them higher return than investing with me. :) So, sure I tell them to do it and then a year later they still have not done these things. For me, that's a killer. :( A good money manager would not care about these things or would care just enough without getting involved. I can't do that, if I care, I care too much. :)

 

Anyway, as I said, this might not be quite relevant to the topic. :)

 

Peace

 

I definitely agree with benhacker. I understand there are limitations for some because they are introverted/shy, but you really can't use it as an excuse if you'd like to do this as a career (where you are the portfolio manager). As a former [extreme] introvert, it takes a ton of work to become comfortable starting conversations and speak publicly. I am still not where I'd like to be, but I went through most of school never speaking in class or the like, so sometimes I have to remind myself of my progress. It's taken over 10 years and I've had to take a lot of what I consider large risks to become more extroverted (joined a fraternity, started saying "yes" to any offer to go out, try a lot of things I don't necessary like or would normally do, ect).

 

Anytime you are trying to make major changes you should expect [A LOT of] failure. My progress has not always been pretty. One of the first times I led a major project, I was presenting the results and my suggestions to executives of a major bank and I had to excuse myself halfway through the meeting because I was sweating so much I soaked my shirt. You really have to be willing to put yourself out there and face your fears. If for no other reason, there are always others willing to.

 

This is not directed at Jurgis, just in general. Again, I agree with ben that folks that aren't willing to make any necessary personal changes or don't have a desire to constantly talk about markets/finance/investing may not be as passionate about markets as you need to be to make it a career. I come from a traditional family that didn't have much money and certainly didn't talk about money. My family changed to some degree because I wouldn't shut up about money from a young age (it can be tough to change good Germans, too haha). Sometimes it's better that something you like is only a hobby.

 

[Jurgis]

Schwab711, yes, I agree.  8) +1

[crastogi]

When did Buffett stop taking the performance fee and start taking only a salary? Was it right when he took over Berkshire or some time after?

 

Wasn't it when he liquidated his funds and offered partners choice of holding on to Berkshire stock?

[MrB]

Generally speaking you can come at it as a GP or LP.

For a GP the most important thing is to understand your own personality very well and create a firm around that without ignoring business realities. Anything else will be a mistake and no amount of money will compensate; life's too short!!

For a LP the most important thing is to ensure your incentives are aligned. Anything else is just stupid.

 

[oddballstocks]

Let me rant about sales and marketing for a few minutes.

 

I've worked professionally in technology for years and my impression is that most developers are similar to those interested in investing.  They are introverted and would rather deal with a problem (code/system/company/analysis) rather than people.  They both hold this belief that if you build something great people will somehow magically discover it and the product will be successful.  This is the same group that will say things like "I can't believe such and such is so popular, doesn't everyone know x product is 5x better and cheaper?"

 

Let me define two terms:

Marketing - Telling people about a product or service offered.  Telling in a way that helps potential or likely users of the product self select.

Sales - Connecting people who have a problem with people who can solve the problem.

 

 

Everyone is selling, and sales is important.  Investors think there is no sales and that somehow investing is this thing that's the highest virtue, but that's false.  Think about two investment writeups.  Why are some writeups compelling and others aren't?  It's how a company is explained, how it's presented.  Here's an example:

 

Item 1: "The company has a 10% ROE and should experience 3% growth next year."

Item 2: "Compared to peers that are all losing money a 10% ROE is incredible.  The company shows their strength by expecting to post a 3% growth number in a difficult year."

 

Same facts, presented differently.  The second is catchy, the first is flat.  This is sales, the second is selling the idea.  It puts context around the idea, highlights the strengths of the company. 

 

People are attracted to a story, a narrative, or a context.  If I were writing one of those for this audience I might even add something like "This is the type of company Buffett would have purchased in the 1960s."  Now readers can connect.  Readers here like Buffett, now they can see that if this is something Buffett might have liked then they might like it as well.

 

Everyone has needs.  No one has a need for "15% a year" or "10% a year".  Outside of a fund of funds or institutional money potential clients aren't looking for returns.

 

A potential client has extra capital that needs to be invested.  They are probably looking for something safe, or something that will grow.

 

Think about purchasing any security.  Why do I purchase the S&P for my kid's college account?  Is it because I want 10% returns?  No it's because it's easy and I know it'll match the market.  I am buying a product for its ease of use. 

 

Sometimes on this board there is this disbelief that funds of funds work.  To me it's no mystery.  A fund of funds is genius.  They look out and see a bunch of investment managers afraid to sell to clients.  So the FoF assembles a sales team and finds these managers.  They do the selling.  Fees are high for sure, but guess what, it appears clients aren't basing a buy decision based on fees.  They are basing their buy decision on something else.

 

Every investment manager needs to determine what is different about themselves and talk about it.  That's your unique selling proposition.  You want to find clients for whom that USP is key.  What do you offer?  What if you offer nothing undifferentiated?  What if you have average returns and invest in the same large caps everyone else is?  Not a problem, maybe your USP is your customer service.  Or it's how you are willing to talk to clients about business issues outside of investing, or the safety you provide, or liquidity, or tax help, or that you invest like Buffett etc.

 

Tim mentions that until recently hedge funds couldn't market or advertise.  But I don't believe there was any restriction on a hedge fund manager giving a talk and saying "I manage xyz fund" or writing an article with a tag "Manager of xyz fund."  Both are great forms of marketing, and for the audience that's likely to buy an investment product writing and speaking is MUCH better than taking out an ad in Bloomberg Markets.

 

There is nothing sleazy about sales if you have a good product and find someone who needs it.  To me I think it's fulfilling to find this match.  It feels good to solve someone's problem.  When you look at sales like this it makes the process easier.  When I talk to people on the phone I'm doing the same thing I'm doing when I analyze an investment.  I'm trying to figure out as quick as possible if they aren't a match.  If a person isn't a match for my product I don't want to waste their time or to take up any more of my time.  If they are a match then it's worth pursuing.

 

Sometimes people don't know if they need your product or not.  The role of the sales person is to ask questions (like an investor probing an investment) to find out more.  People aren't offended when you ask these things.  When I'm on the phone with a sales person I expect these questions.  As a potential client I'm also probing them to find out if I can use their services.

 

If I were an investment manager and I were looking for funds this is what I'd be doing.

1.) Writing a lot about specific investments and investments in general.

2.) Speaking at events where potential clients gather.  This means non-investor events (are other fund managers going to invest in you?) when possible.

 

If anyone is scared of writing I'd recommend the book On Writing Well by Zinsser: http://www.amazon.com/Writing-Well-30th-Anniversary-Nonfiction/dp/0060891548/ref=sr_1_1?ie=UTF8&qid=1434376805&sr=8-1&keywords=on+writing+well

 

The bottom line is this; If you build a better product no one will come if they don't know about it.  You need to TELL others about your product and get the word out.

[oddballstocks]

If after reading my last monster post you're looking for some visibility maybe consider coming on the Bulldog Investor Podcost with Fred Rockwell and myself: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/nate-tobik-(oddballstocks)-is-now-co-host-of-micro-cap-investing!/

 

See what I did there?  I offered an opportunity for visibility while at the same time shedding a bit of light on something I work on.  Yes, it's mentioned in a different thread, but maybe readers on this thread won't read that one.

[Packer16]

I think there maybe two groups of folks interested in starting funds.  First are what I would call lifestyle funds where a manager is not trying to get rich but investing enough to pay his salary and possibly a few part-time staff members, similar to lifestyle businesses.  They use the fund to offset some of the investing costs they have, more akin to a co-op versus a fee generating firm.  Second are emerging funds trying to perform well but they can generate more fees by maximize AUM.  Marketing is a part of the first but the core of the second.  The incentives in the first is to maximize performance but not in the second. 

 

A major issue with investment management is information asymmetry.  There is a lot of money being spent on sub market performance in part due to marketing stories.  You can say that the investors are getting what they want but the manager is acting a seller of services versus a fiduciary.  This is why Bogle's low-cost argument makes a lot sense for just about everybody.  I would have a hard offering a product knowing that in most cases someone would do better holding index funds.  Not that marketing is not needed but is the marketing the core or the product?

 

Packer   

[Jurgis]

Oddball, some things I agree with, some things I disagree.

 

I've worked professionally in technology for years and my impression is that most developers are similar to those interested in investing.  They are introverted and would rather deal with a problem (code/system/company/analysis) rather than people. 

 

Correct.

 

They both hold this belief that if you build something great people will somehow magically discover it and the product will be successful.

 

No, I don't. I agree with you that you have to sell the product for it to be successful. But this does not mean that I should want to sell the product. I make a conscious choice not to go on paths where I would need to sell the products. And, yes, I am aware that even if I am a programmer, I still need to sell myself and things I do, etc. I am also aware of the fact that if I went on the paths where I sold the product (or myself) aggressively, I'd probably have made much more money than I did otherwise. So you live your life and you make your choices. :)

 

Some people are fine with limited selling to friends and family and with limited funds that raises. That's their choice.

 

(There are products, investors, etc. that are so good they sell themselves without effort, but that's usually an exception).

 

Item 1: "The company has a 10% ROE and should experience 3% growth next year."

Item 2: "Compared to peers that are all losing money a 10% ROE is incredible.  The company shows their strength by expecting to post a 3% growth number in a difficult year."

 

Same facts, presented differently.  The second is catchy, the first is flat.  This is sales, the second is selling the idea.  It puts context around the idea, highlights the strengths of the company. 

 

People are attracted to a story, a narrative, or a context.  If I were writing one of those for this audience I might even add something like "This is the type of company Buffett would have purchased in the 1960s."  Now readers can connect.  Readers here like Buffett, now they can see that if this is something Buffett might have liked then they might like it as well.

 

Just be careful that you don't look too pushy cause that's a big turnoff. ;)

 

Everyone has needs.  No one has a need for "15% a year" or "10% a year".  Outside of a fund of funds or institutional money potential clients aren't looking for returns.

 

Not true. I am looking for 15% a year.

 

Sometimes on this board there is this disbelief that funds of funds work.  To me it's no mystery.  A fund of funds is genius.

 

FoF is a piece of garbage. Luckily they are sold to people who can afford garbage. :)

 

[MrB]

I think there maybe two groups of folks interested in starting funds.  First are what I would call lifestyle funds where a manager is not trying to get rich but investing enough to pay his salary and possibly a few part-time staff members, similar to lifestyle businesses.  They use the fund to offset some of the investing costs they have, more akin to a co-op versus a fee generating firm.  Second are emerging funds trying to perform well but they can generate more fees by maximize AUM.  Marketing is a part of the first but the core of the second.  The incentives in the first is to maximize performance but not in the second. 

 

A major issue with investment management is information asymmetry.  There is a lot of money being spent on sub market performance in part due to marketing stories.  You can say that the investors are getting what they want but the manager is acting a seller of services versus a fiduciary.  This is why Bogle's low-cost argument makes a lot sense for just about everybody.  I would have a hard offering a product knowing that in most cases someone would do better holding index funds.  Not that marketing is not needed but is the marketing the core or the product?

 

Packer 

Speaking of asymmetry to underscore your point about Bogle; you can spend 5 minutes selecting your index fund and outperform 85% of professional fund managers right out of the block...and then go back to fishing.

[MrB]

Nate I think what you've done in terms of identifying a niche and making a name for yourself in that space is impressive. Well done.

 

As to your comments on marketing I agree and this recent video, which you most likely would have seen, but is well worth watching for anyone else out there.

http://www.opalesque.tv/hedge-fund-videos/bryan-k-johnson/1

 

He also have a few good presentations worth reading; obviously talking his book, but some great stats.

 

89% OF ALL HEDGE FUNDS FAIL TO REACH $100 MILLION AUM

81% OF ALL HEDGE FUNDS HAVE NO MARKETING PLAN.

 

http://johnsn.com/uploads/MUTINY_FUND_STRATEGIC_CONSULT.pdf

 

https://www.google.co.uk/search?sourceid=chrome-psyapi2&rlz=1C1_____enGB494GB494&ion=1&espv=2&ie=UTF-8&q=filetype%3Apdf%20site%3Ajohnsn.com&oq=filetype%3Apdf%20site%3Ajohnsn.com&aqs=chrome..69i57j69i58j69i59l3.14364j0j4

 

 

 

 

[Guest longinvestor]

I think there maybe two groups of folks interested in starting funds.  First are what I would call lifestyle funds where a manager is not trying to get rich but investing enough to pay his salary and possibly a few part-time staff members, similar to lifestyle businesses.  They use the fund to offset some of the investing costs they have, more akin to a co-op versus a fee generating firm.  Second are emerging funds trying to perform well but they can generate more fees by maximize AUM.  Marketing is a part of the first but the core of the second.  The incentives in the first is to maximize performance but not in the second. 

 

A major issue with investment management is information asymmetry.  There is a lot of money being spent on sub market performance in part due to marketing stories.  You can say that the investors are getting what they want but the manager is acting a seller of services versus a fiduciary.  This is why Bogle's low-cost argument makes a lot sense for just about everybody.  I would have a hard offering a product knowing that in most cases someone would do better holding index funds.  Not that marketing is not needed but is the marketing the core or the product?

 

Packer 

+ 1

For those of you (us) who are not fund managers out there, keep all your senses alert. Esp your sense for smell. Especially around the internet.

 

In the securities business anything that can be sold, will. - Buffett

[ScottHall]

Item 1: "The company has a 10% ROE and should experience 3% growth next year."

Item 2: "Compared to peers that are all losing money a 10% ROE is incredible.  The company shows their strength by expecting to post a 3% growth number in a difficult year."

 

Same facts, presented differently.  The second is catchy, the first is flat.  This is sales, the second is selling the idea.  It puts context around the idea, highlights the strengths of the company. 

 

People are attracted to a story, a narrative, or a context.  If I were writing one of those for this audience I might even add something like "This is the type of company Buffett would have purchased in the 1960s."  Now readers can connect.  Readers here like Buffett, now they can see that if this is something Buffett might have liked then they might like it as well.

 

Just be careful that you don't look too pushy cause that's a big turnoff. ;)

 

Everyone has needs.  No one has a need for "15% a year" or "10% a year".  Outside of a fund of funds or institutional money potential clients aren't looking for returns.

 

Not true. I am looking for 15% a year.

 

Sometimes on this board there is this disbelief that funds of funds work.  To me it's no mystery.  A fund of funds is genius.

 

FoF is a piece of garbage. Luckily they are sold to people who can afford garbage. :)

 

 

Jurgis, there's a difference between you and most people. You're clearly very interested in this field personally, so you're not really the same type of mark. What works on selling to laymen doesn't necessarily work when selling to people who have some knowledge about the field or product in question; you have to use different tactics.

 

It's somewhat akin to getting a new customer in the door vs. upselling or cross-selling to an existing customer. The new customer doesn't know what you have to offer, so you have to present that to them. Once you have them, and if they're happy with your service, it's easier to sell them something else because you've built the relationship.

 

It does depend what you're going for, how aggressively you'll advertise yourself. If you're fine being a minor league sole proprietor - and there's really nothing wrong with that - you can get away with doing less than if you want to build a $100 million business. But understanding the concept is important in any field.