Stevens Fund 2012 Annual Report

[racemize]

Here's another letter from my fake fund.  (I'm just doing it to write things down formally and I think it's fun--maybe it will be a real fund one day)

 

http://dl.dropbox.com/u/14968/stevensfund/reports/2013-01-06%20-%20Stevens%20Fund%202012%20Annual%20Report.pdf

 

Feel free to comment or ignore!

 

Edit: Just to be absolutely clear, this isn't an actual fund and I'm posting it for informational purposes only.  It is not intended to solicit any kind of investment whatsoever

[siddharth18]

In a word—uncertain.

 

Epic. Thanks for posting!

Cheers and congrats on results!

 

Regarding Cirrus - What did you see that made you think it was undervalued? You cite attractive management & culture, but also P/E of 12 during purchase. Was it a purchase about buying growth at a reasonable (cheap?) price?

 

[giofranchi]

Joel,

thank you very much for posting this! I will read it as soon as possibile!

I have already noticed two things:

1) You finally decided not to invest in OAK: no plan to do so in the future either?

2) No cash at all in your portfolio: as long as you can find some bargains, you plan to always stay 100% invested, regardless of the general market price level?

Thank you very much and congratulations!

 

giofranchi

 

[luck]

nice letter!  was cool to learn about crus.  i am long with you on bac, aig, brk.b, luk.  unfortunately, i bought luk near 40, so it's going to be a march back for me on that one.  curious about your position in wfc.  did you buy it far earlier.  noticed buffett bought near today's price.  do you think it's a buy at today's price?  thanks in advance and happy new year!

[ragu]

[...]maybe it will be a real fund one day)

 

racemize,

 

I'll go out on a limb and predict that it will.

 

http://dl.dropbox.com/u/14968/stevensfund/reports/2013-01-06%20-%20Stevens%20Fund%202012%20Annual%20Report.pdf[...]

 

Good stuff (and that doesn't even include the returns).

 

I tend to stay away from financials where I don't know that management is trustworthy with respect to the numbers, so I have just the one comment re. Cirrus.

 

To me, when someone says they bought at a  price/earnings multiple of x and that their investment philosophy emphasizes the safety of invested capital, they are implicitly saying that the business will earn at least those earnings for the next x years and that those profits won't be either be squandered away or allocated intelligently by management in the meantime (unless you have sufficient reason to lean one way or the other). In Cirrus' case, that seems hard to reconcile with the price paid (12x earnings) and your commentary that you can't project earnings beyond the next 5 years.

 

How do you think about about a valuation based on earnings when earnings themselves are highly uncertain?

 

Best,

Ragu

[racemize]

Thanks for reading, and your kind comments!  Here's my responses:

 

Re Crus, this was one of my first positions, as I mentioned.  In 2010, I liked the Apple growth and if you assumed Cirrus' position in their products was strong, then you could use it to capture that growth.  A lot of other people were also doing this, but usually on very short time horizons--I've noticed that most of the movement is speculative in the short term (more so than any other stock I've been in or watched) and generally the market reactions haven't made make much sense at all.  Some other benefits CRUS had--if they got more space in the Apple chips, revenue and profits could go up much faster than Apple's growth (this did happen in 2012, much more than I expected), and they have some other income streams, so there is a little bit of diversification.  For the most part though, I was just buying on dips down in the 10-13 P/E range for a stock that was growing at >20% EPS (even more than that recently).  I actually could have made a lot of money if I had bought at P/E of 10 and sold at P/E of 17-20, as it was quite a rollercoaster.  Every time I think it has stopped and will flatten out, some huge change happens (e.g., the giant drop since their last Q, despite the insane guidance).

 

Gio--re OAK, I really wanted purchase, but I really didn't have much cash available to make a meaningful position and the tax consequences are just not worth it for me--right now I have really simple taxes, and I don't want to have to deal with K-1's and delaying filing until October every year, just for a small amount of distributions.  If I had a lot more money, I would have done it though, I think. 

On the cash front, my income is still significant enough that I can make positions as opportunities arise plus I have a big position in FFH, which might help me deal with large market downturns.  I'm planning on getting myself to a constant 5% or 10% cash position this year though.  I'm also so worried that my positions will shrink relative to portfolio size (due to the incoming cash flows) that I try to get as much as I can of things that are cheap, which has put me 100% in for the last 2.5 years.  This is why I eliminated Colgate and also why my WFC is so small--it used to be a 20% position I think (e.g., in 2010/2011).

 

Finally, re: WFC--I bought it in 2010 and 2011, but then stopped as I started accumulating BAC.  Basically, I was buying financials and choosing WFC at the beginning as it was more conservative, but shifted to BAC as I understood it more (in great part because of reading this board).  Given that I have over 30% in financials (BAC, BAC warrants, WFC) I probably won't buy any more banks for a long while.  I think I'd still choose BAC over WFC right now, just due to the price differences, though. 

[racemize]

 

To me, when someone says they bought at a  price/earnings multiple of x and that their investment philosophy emphasizes the safety of invested capital, they are implicitly saying that the business will earn at least those earnings for the next x years and that those profits won't be either be squandered away or allocated intelligently by management in the meantime (unless you have sufficient reason to lean one way or the other). In Cirrus' case, that seems hard to reconcile with the price paid (12x earnings) and your commentary that you can't project earnings beyond the next 5 years.

 

How do you think about about a valuation based on earnings when earnings themselves are highly uncertain?

 

Best,

Ragu

 

I responded a bit about this above, but to answer directly, I was much more confident about Apple/Cirrus in 2010/2011 when I was buying.  At this point, Cirrus has gotten a ton of surface area, so I'm not sure they can expand within Apple that much, and I'm less confident on Apple's future than I was (though I'm not a bear on them).  Thus, imo, the growth over the next 2-3 years is essentially just Apple growth and I could buy Apple at a similar price at this point--however, I do really like the company and what they are doing in other areas (e.g., LED and motor control).

[Kraven]

I tend to stay away from financials where I don't know that management is trustworthy with respect to the numbers, so I have just the one comment re. Cirrus.

 

How would you know this?

[giofranchi]

 

Gio--re OAK, I really wanted purchase, but I really didn't have much cash available to make a meaningful position and the tax consequences are just not worth it for me--right now I have really simple taxes, and I don't want to have to deal with K-1's and delaying filing until October every year, just for a small amount of distributions.  If I had a lot more money, I would have done it though, I think. 

On the cash front, my income is still significant enough that I can make positions as opportunities arise plus I have a big position in FFH, which might help me deal with large market downturns.  I'm planning on getting myself to a constant 5% or 10% cash position this year though.  I'm also so worried that my positions will shrink relative to portfolio size (due to the incoming cash flows) that I try to get as much as I can of things that are cheap, which has put me 100% in for the last 2.5 years.  This is why I eliminated Colgate and also why my WFC is so small--it used to be a 20% position I think (e.g., in 2010/2011).

 

 

Thank you Joel,

hope someday we will be partners in OAK!  ;)

 

giofranchi

 

[Palantir]

Looks really impressive. How much money are you managing for this portfolio? (If you don't mind). You mentioned it is not a real fund, so essentially is an LP closed to outside investors or is it basically your personal account?

[racemize]

Looks really impressive. How much money are you managing for this portfolio? (If you don't mind). You mentioned it is not a real fund, so essentially is an LP closed to outside investors or is it basically your personal account?

 

It's just my account (the other partner is my wife!).  I have quite a few friends who want me to set up a small fund, but the overhead is so high that it doesn't seem worth it until I can get a few million AUM.  In any event, I'm managing mid 6 figures now.

 

Edit: Also, I want to be sure I know what the hell I'm doing before I start managing my friends'/family's money.  Unfortunately with investing, you can just be lucky for a long time...

[constructive]

I liked the report, quite informative and professional.

 

What do you estimate as the minimum overhead for launching a fund? I'm thinking mainly IT, accounting and legal, not rent, marketing, or your own salary.

[racemize]

I liked the report, quite informative and professional.

 

What do you estimate as the minimum overhead for launching a fund? I'm thinking mainly IT, accounting and legal, not rent, marketing, or your own salary.

 

I don't know the ongoing overhead very well, but I think just start-up legal fees are in the 20-50k range--without a lot of AUM to cover it (particularly if I go with no static fee), that's just not worth it for me.

[constructive]

That's pretty steep.

 

$895 here: http://www.miramar-research.com/kits/hedge/hedge.htm

[racemize]

That's pretty steep.

 

$895 here: http://www.miramar-research.com/kits/hedge/hedge.htm

 

yeah, so I'm pretty suspicious of these do-it-yourself with form kits.  I work in the law field, and doing something you don't totally understand without good help can lead to really costly mistakes.  The 20-50k is for custom forms with good lawyers, I believe.

[Parsad]

I liked the report, quite informative and professional.

 

What do you estimate as the minimum overhead for launching a fund? I'm thinking mainly IT, accounting and legal, not rent, marketing, or your own salary.

 

I don't know the ongoing overhead very well, but I think just start-up legal fees are in the 20-50k range--without a lot of AUM to cover it (particularly if I go with no static fee), that's just not worth it for me.

 

Hi Racemize,

 

The best advice I ever got was from Prem...he said "just start it with whatever capital you have and can raise, and build a track record."  I would suggest you just start.  We started with only $400K, even though we had verbal commitments of over $2M!  So, just start with whatever you have and can raise.

 

The cost to start would be about $20K or less if you do your research and find quality advice at a reasonable fee.  You can amortize it back to your partners over five years like we did...as did Mohnish and a number of other managers.  I think our early partners had no qualms about paying a few hundred dollars a month in amortization costs to cover the legal overhead. 

 

We saved some money early on, as Alnesh did the accounting.  We are of size now, where hiring our own bookkeeper/accountant to do the work on both funds is reasonable.  All the administrative and day to day stuff was/is handled by me.  We have terrific service providers in terms of our brokes, legal, auditors.  It's alot of work, but I can tell you that I wouldn't have it any other way.  If I had waited to see that $2M in verbal commitments materialize, I would still not have a fund today!  Cheers!   

[txlaw]

Good job, racemize! 

 

I'm surprised you're willing to disclose personal financial info like that, but it makes sense since you're trying to build a track record.  Just curious, why not start a virtual portfolio (like with Marketocracy or Covestor or whatever) that tracks your real portfolio instead?  Just an assessment that people won't be as convinced as if they see your actual results with your own money?

 

Also, did you get the idea for CRUS after seeing their building on West 6th going up? 

[eclecticvalue]

Or you can become an RIA and manage seperate managed accounts. Check this site out it gives you a good overview http://www.fwallstreet.com/article/170-how-to-start-your-own-hedge-fund/ . Your letter was written so well that I thought you were running a fund. Thanks for sharing.

[zarley]

Or you can become an RIA and manage seperate managed accounts. Check this site out it gives you a good overview http://www.fwallstreet.com/article/170-how-to-start-your-own-hedge-fund/ . Your letter was written so well that I thought you were running a fund. Thanks for sharing.

 

I was thinking something along these lines as well.  What is the benefit of formally starting a fund vs. becoming a RIA and managing accounts?  I've read that the Interactive Brokers platform for RIAs makes it very easy to run a collection of accunts in a unified way that really simplifies things. 

 

I think Ben Hacker may have linked to some of that info here in the past.

[Kraven]

That's pretty steep.

 

$895 here: http://www.miramar-research.com/kits/hedge/hedge.htm

 

yeah, so I'm pretty suspicious of these do-it-yourself with form kits.  I work in the law field, and doing something you don't totally understand without good help can lead to really costly mistakes.  The 20-50k is for custom forms with good lawyers, I believe.

 

These types of offers always remind me of Earl Scheib.  "I'm Earl Scheib and I'll paint any car, any color for $99.95!"

[racemize]

Thanks for all the input and feedback! 

 

So, here's the reasoning on a lot of it:

 

1) I've still got a full-time job and I have an amazing job/boss, so I'm doing investing part time (though it is a significant amount of time/week), but am not yet willing to go full time investing/fund unless I was convinced it could pay commiserately

2) I haven't passed the texas required certification to do money management

3) I still have only done this for 2.5 years, so I'm not convinced I'm good enough to manage other people's money

4) In the same vein, I'm not sure I'm willing to manage other people's money while I'm working/not devoting my full attention to it

 

1), 3), and 4) will be taken care of over 3-10 years, and then I'll make a decision on whether I should actually do it or if I should just manage my money on my own. 2) is just laziness at this point. 

 

On the personal financial info, hopefully I'm not letting out too much, but it's just my positions and how much I'm managing.  I figure most people on the board (except the college/just out of college guys) are in the 6 figures, so it isn't a huge surprise.  Besides, if anyone gets targeted on the amount of money, it will be Eric.  =p

 

With respect to why I'm doing this versus other tracking stuff, I just started keeping more rigorous track of my records to accurately see how I was doing, then I was letting my family know how it was going in emails, and finally it morphed into me formalizing it into "partner" letters just for fun. 

[Parsad]

With respect to why I'm doing this versus other tracking stuff, I just started keeping more rigorous track of my records to accurately see how I was doing, then I was letting my family know how it was going in emails, and finally it morphed into me formalizing it into "partner" letters just for fun.

 

Hi Racemize, I can totally understanding tracking your own results and see how they do over time.

 

I'll tell you one thing though.  I won't give an ounce of recognition to personal account track records if I was investing with someone managing my money or running a fund.  It's just not the same thing.  You've got to look at a record running public money. 

 

- The capital in a public fund, especially with no lockup, is fluid.  Personal capital is totally captive and pretty much permanent. 

- In a personal account, you are dealing with one personality...your own.  In a public fund, it is completely schizophrenic in terms of the emotions and personalities. 

- With personal capital...one mistake and you are still in business.  In a public fund, one mistake and you may be history!

- Few, if any really, frictional costs in a personal account.  In a public fund, you have accounting, legal, custodial, administrative, audit, mailings and setup costs.

- In a personal account, you can go to 100%, leveraged position in one stock.  In a public fund, you will rarely see a manager take a 20%, unleveraged position.

 

There are a couple of advantages to managing OPM though:

 

- Your fees are leveraged as the fund gets bigger from additions of capital, whereas your own personal account only grows based on your returns and your contributions.

- If the fund is of size, you can start to do more esoteric things that a smaller sum of capital would not allow you to do...control positions, activist positions, etc.

 

So, as much as I admire everyone's personal track records, and I hope everyone continues to build plenty of wealth, getting an actual track record of managing public capital is more important for potential investors.  Give you an example...my personal portfolio was up over 125% in 2012...all BAC!  MPIC Fund I, LP and MPIC Canadian LP did better than one tenth of that, because most of our partners would leave if I put everything into one stock!  ;D  Cheers! 

[racemize]

Thanks Parsad, your comments and feedback are definitely appreciated.  I totally agree that the returns aren't comparable (congratulations on your individual returns this year btw) and probably won't be worth anything to a potential investor, particularly one that doesn't know me personally.  I want to convince myself I'm good before inflicting myself on anyone else though, and formalizing my thoughts in writing helps me develop both my investment thinking and my potentially useful letter-writing skills. 

[locatevalue]

Prasad, Thanks for sharing all these details, Rearly anyone already in this  business do this kind of mentoring!. I stumbled on this board luckily while googling in late 2011 to see if anyone in market share my enthusiasum for BAC warrants and share and all my searches lead to this form.I work for BAC so its easy for me to see things but i realized the research eveyone do here really impressed and read everything on this board then on.

I agree with your comments aboslutely, My personal portfolio is doing great but lot of volatility with 2010 40% up and 2011 34% down and 2012 75% up. I am able to do it fine beacuse i can always takes comfort on Intrinsic Value and can do concentration on 2 or 3 ideas and that would be very hard to replicate to manage public money and of if they drove out at end of 2011 then my 2012 results would be very different. The more i think it would be very hard to do this kind of concentration in public fund.So, I agree personal invetment skills will help managing public fund but your personal records will not be meaningful.

After lot of reading on starting a fund i finalized on 2 things, Either to manage my fund as LP(hedge fund) or seperate accounts on IR. I really like LP as you have more flexibilty in investing and dont like static fee structure done on seperate accounts on IR. LP will help me setup similar to buffet partnership but the only concern is can i take funds from non accredited investor(i know i should ask a lawyer but i am cheap) since most of my friends willing to fund are non accredited investors with around 50k to invest. I am willing to do all overhead of LP if their is a way for this otherwise my only option is seperate accounts with IR which is easy.

Any ideas/sugestions on this topic is very much appreciated!

 

[constructive]

You can have up to 35 non-accredited investors.

http://www.hedgefundlawblog.com/non-accredited-investors-in-hedge-funds.html