Pabrai/Buffett partnership fee structure

[nkp007]

It's all family and friends, people I know well and barraged with various investor quotes over the years. Over time, they bought in to the philosophy.

 

I was lucky in that I had certain tools at my disposal (people close to me with cash balances, ample time to read and learn- started reading about investing in 2008 right out of college, and a huge tolerance for pain).

 

Luck played a huge role.  Be aware of what tools are available to you and leverage them.

 

[oddballstocks]

 

Most people don't have the opportunity to attract 7 million with no track record so I commend you on that. Are most of your investors friends and family? I'm asking this because if not you have some serious marketing skills!

 

This raises another interesting point that I'm sure I'll be lambasted for... I would argue that actual investment acumen doesn't matter, it's marketing and sales skills that matter.

 

You have ETF's raising billions of dollars and guaranteeing that people will not outperform.  Hot money does flow to managers with great records, but not if people don't know about them. 

 

If you look at opening a fund management business as a business you need to serve two things, serve your clients and make a profit.  You maximize your profit by accumulating assets, you serve your clients by not losing them money.  If you have the greatest track record in the world then have three years of 30% losses you will have no clients.  If you have an absolutely average track record but haven't lost client money you will be able to sell the heck out of your fund and gather assets.

 

There are brokers who I know who've raised 10s and 100s of millions of assets and investing them in average value funds.  They all tell me the same thing, clients don't care about performance, they care about the story, and not losing money. 

 

I feel there's a giant disconnect at times on this board, and in this thread.  There's this ideal that if you establish a great track record you will attract assets and be successful.  If you establish a great record you will be looked up to by other investors, but it doesn't guarantee assets.  I would argue that sales technique regardless of track record is much more important.  If people are able to gather assets with terrible track records why are those with great records having trouble attracting assets?  I think it's sales and marketing.

[Edward]

Can you walk me through your numbers?

 

In terms of expenses this is what I see to hit a $100k salary.  I say $100k because that's a reasonable analyst salary, why take on all this risk with all the work if you are making 50-75% of what an analyst is making?

 

$100k salary

$20k health benefits (for a family, maybe $10k for an individual)

$15k SSN/Medicare

$15k ongoing fund expenses

 

$150k in fees to provide the same $100k income.  On a $5m fund that's a 3% expense ratio.

 

The issue I have is you can bend the numbers to make this work if you hit the hurdle, and if the fund is clearing the hurdle every year everything seems to work fine.  It's what happens in a lean year, or a 2008 when it might be 2-3 years before the hurdle is met again.

 

So say you have $5m and hit 2008 and lose 40%, you're down to $3m in AUM, and 1% on that is barely enough to cover ongoing expenses and health care, looks like it's food stamp time.

 

A lot of people have clearly done well managing money, it's great to make money with other people's money, and I congratulate all of those who have started small and persevered.  The route just seems tough, and everything looks great with ideal numbers.  Personally I would rather have the numbers work on the worst case scenario and in the best of times cut the management fee or rebate it to clients.  But I'd hate to set up a business that works if everything works in a perfect scenario, and in the worst case I'd be better off making minimum wage at McDonalds.

I agree with your reasoning, but I have a different view on the numbers.

 

With 5M$ AUM, I would be making 25K$ annually as a base from the 0.5% management fee, plus the performance fee (10%). Say for argument's sake that NAV per share increases 10% annually (not a very good result but anyway), that's another 50K$ annually on average.

 

Now 75K$ doesn't look like much in the US, but it's plenty enough in my country (even the 25K$ base is OK).

 

Also consider that some expenses drop drastically and life improves in general when you don't have to drive to work every day. You save 1-2 hours a day commuting (that's huge), you don't have to pay higher rent to live near work, and you can raise your kids personally instead of paying for daycare and meeting them for the "first time" at age 14 because daddy is too busy working. I consider these very important advantages to being self employed in this manner.

 

Hence I'm quite happy with my setup.

 

This raises another interesting point that I'm sure I'll be lambasted for... I would argue that actual investment acumen doesn't matter, it's marketing and sales skills that matter.

I have the same experience. Most investors have no idea what they want or how to assess a track record, integrity, etc. Give them some buzz words and a nice hassle free offer, and it's in the bag.

 

However I would argue that in order to succeed professionally (as opposed to financially), one has to be patient and selective when dealing with investors. There is absolutely no need to go for 100M$+ AUM in 5 years in order to be successful as a professional. Of course, the quick buck requires a salesman :)

 

I feel there's a giant disconnect at times on this board, and in this thread.  There's this ideal that if you establish a great track record you will attract assets and be successful.  If you establish a great record you will be looked up to by other investors, but it doesn't guarantee assets.  I would argue that sales technique regardless of track record is much more important.  If people are able to gather assets with terrible track records why are those with great records having trouble attracting assets?  I think it's sales and marketing.

Again, it depends on what you're trying to achieve primarily - financial success or professional success. Getting both requires a great deal of patience, good partners, and some hard thinking.

[Tim Eriksen]

With no disrespect to folks' managing OPM, the fee structure, I find that the title of this discussion thread tying Buffett's name with Pabrai (by extension, OPM managers)  and the ensuing discussion on fee structures to be amusing at best.

 

Buffett closed his partnership, what, over 50 years ago? Besides, I don't know if the partnership was only open to "accredited investors" (whatever that meant in the 50's) when it was open.

 

Last I checked, the Pabrai fund is open to folks with net worth over $5,000,000 and a minimum $2,500,000 investment. All you need today is $120 to invest in the Buffett fund called BRK-B and you don't pay a dime in fees to Berkshire. Of course, it comes with no guarantee on performance, or does it?

 

The discussion is about the fee structure and its strengths and weaknesses. I am not sure why that is amusing.  I do have a question for you. 

Do you want your $120 managed like it is $120 billion?  If you do, then BRK is the way to go.  Over time high single digit returns is what he says to expect, and it is what you would have got over the last decade.  The huge sum he manages is quite an impediment to decent returns.  I am sure you have heard all the quotes by Buffett acknowledging it.  If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money.   

[watsa_is_a_randian_hero]

Watsa,

 

That's interesting - I always thought the mgmt fee was to cover audit, admin, legal, custodial etc...? I know hedge funds do not report an "expense ratio" like mutual funds do, but are all of these expenses taken into account in the "expense ratio"? i.e. expense ratio = mgmt fee + fund expenses?

 

Think about it this way; a hedge fund legally is structured as an LP or a LLC usually.  It is a business.  The business has management expenses (fees paid to management company), as well as other fees, such as its own audit, or its own legal expenses, etc.  These are not expenses that benefit the management company; they are expenses directly related to the business of the fund, and for the benefit of the fund.

 

I have not seen an "expense ratio" for a hedge fund advertised in the same sense as a mutual fund; but for a mutual fund your equation above would be correct. 

 

A quick google search yielded the annual report for the vanguard 500 index fund...the annual report is just like the annual report of a company; it has an income statement.  Revenue consists of investment income; Expenses consist of (1) fees to vanguard for management, admin, marketing, and distribution and (2) fund expenses such as custodian fees, auditing fees, shareholder reporting fees, trustee fees, etc.

[oddballstocks]

Can you walk me through your numbers?

 

In terms of expenses this is what I see to hit a $100k salary.  I say $100k because that's a reasonable analyst salary, why take on all this risk with all the work if you are making 50-75% of what an analyst is making?

 

$100k salary

$20k health benefits (for a family, maybe $10k for an individual)

$15k SSN/Medicare

$15k ongoing fund expenses

 

$150k in fees to provide the same $100k income.  On a $5m fund that's a 3% expense ratio.

 

The issue I have is you can bend the numbers to make this work if you hit the hurdle, and if the fund is clearing the hurdle every year everything seems to work fine.  It's what happens in a lean year, or a 2008 when it might be 2-3 years before the hurdle is met again.

 

So say you have $5m and hit 2008 and lose 40%, you're down to $3m in AUM, and 1% on that is barely enough to cover ongoing expenses and health care, looks like it's food stamp time.

 

A lot of people have clearly done well managing money, it's great to make money with other people's money, and I congratulate all of those who have started small and persevered.  The route just seems tough, and everything looks great with ideal numbers.  Personally I would rather have the numbers work on the worst case scenario and in the best of times cut the management fee or rebate it to clients.  But I'd hate to set up a business that works if everything works in a perfect scenario, and in the worst case I'd be better off making minimum wage at McDonalds.

I agree with your reasoning, but I have a different view on the numbers.

 

With 5M$ AUM, I would be making 25K$ annually as a base from the 0.5% management fee, plus the performance fee (10%). Say for argument's sake that NAV per share increases 10% annually (not a very good result but anyway), that's another 50K$ annually on average.

 

Now 75K$ doesn't look like much in the US, but it's plenty enough in my country (even the 25K$ base is OK).

 

Also consider that some expenses drop drastically and life improves in general when you don't have to drive to work every day. You save 1-2 hours a day commuting (that's huge), you don't have to pay higher rent to live near work, and you can raise your kids personally instead of paying for daycare and meeting them for the "first time" at age 14 because daddy is too busy working. I consider these very important advantages to being self employed in this manner.

 

Hence I'm quite happy with my setup.

 

This raises another interesting point that I'm sure I'll be lambasted for... I would argue that actual investment acumen doesn't matter, it's marketing and sales skills that matter.

I have the same experience. Most investors have no idea what they want or how to assess a track record, integrity, etc. Give them some buzz words and a nice hassle free offer, and it's in the bag.

 

However I would argue that in order to succeed professionally (as opposed to financially), one has to be patient and selective when dealing with investors. There is absolutely no need to go for 100M$+ AUM in 5 years in order to be successful as a professional. Of course, the quick buck requires a salesman :)

 

I feel there's a giant disconnect at times on this board, and in this thread.  There's this ideal that if you establish a great track record you will attract assets and be successful.  If you establish a great record you will be looked up to by other investors, but it doesn't guarantee assets.  I would argue that sales technique regardless of track record is much more important.  If people are able to gather assets with terrible track records why are those with great records having trouble attracting assets?  I think it's sales and marketing.

Again, it depends on what you're trying to achieve primarily - financial success or professional success. Getting both requires a great deal of patience, good partners, and some hard thinking.

 

For wherever you're at you have a good setup, in the US $25k is right around the threshold for poverty.  Someone earning that in the US could work at Costco, have less stress and make more.

 

You do have good arguments about working for yourself, but I could counter I work for a company and have all the same benefits.  I work from home, see my kids often, no commute, and I make a nice salary with zero market risk, almost zero risk in general.

 

I would say professional and financial success are closely linked.  The starving artist who paints pictures that sell for millions after their death doesn't consider themselves a professional success.

 

I would also contest the view of sales you paint.  Selling isn't all guys with slicked back hair and sport coats with elbow pads.  Selling is the process of helping a potential client find a solution to a problem they're having.  For an investor their problem is they can't manage their own money, you are providing that solution.  Nothing to feel bad about, no gimmicky stuff, no showy things either.  You aren't out selling raffle tickets here.  There is no shame in being promotional, marketing and selling.

[Palantir]

I agree with oddball, why are financial success and professional success mutually exclusive? It seems that many seem to look down on "sales", but I think that is the core of building a business, not being a mythical "capital allocator".

[Guest longinvestor]

With no disrespect to folks' managing OPM, the fee structure, I find that the title of this discussion thread tying Buffett's name with Pabrai (by extension, OPM managers)  and the ensuing discussion on fee structures to be amusing at best.

 

Buffett closed his partnership, what, over 50 years ago? Besides, I don't know if the partnership was only open to "accredited investors" (whatever that meant in the 50's) when it was open.

 

Last I checked, the Pabrai fund is open to folks with net worth over $5,000,000 and a minimum $2,500,000 investment. All you need today is $120 to invest in the Buffett fund called BRK-B and you don't pay a dime in fees to Berkshire. Of course, it comes with no guarantee on performance, or does it?

 

The discussion is about the fee structure and its strengths and weaknesses. I am not sure why that is amusing.  I do have a question for you. 

Do you want your $120 managed like it is $120 billion?  If you do, then BRK is the way to go.  Over time high single digit returns is what he says to expect, and it is what you would have got over the last decade.  The huge sum he manages is quite an impediment to decent returns.    If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money. 

 

Do I want my $120 managed like it is $120B? Absolutely why I've invested in BRK. Treating every individual investor the same as himself is how things are run at BRK.

 

Over time high single digit returns is what he says to expect I am sure you have heard all the quotes by Buffett acknowledging it. I've heard him preparing BRK investors to not expect the 20% returns of the past. If you have the quote where he pins it down to "high single digit returns", please share. Besides, if 9% is the actual return over the next 15-20 years, I'm very good with that. The choice for me is BRK or the S&P index. I don't pay fees. Not to mutual funds, not to advisors, not to anyone. I've had over 15 years of mediocre results after paying fees that lead me to this conclusion and to BRK.

 

If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money. Agree wholeheartedly. Only issue is for the investees, they get to find that out after 5 or 10 years or longer and lots of fees that this is how it turned out. While on the subject of fees, I'd like to point out that Warren has also been cautioning ordinary investors (the Gotrock family story in the AR a few years ago) against paying fees. There is also the bet he has going on with the ror of the fund of hedge funds vs the index. Time will tell and I suspect Buffett will be correct.

 

The Buffett partnership of today is free. Pabrai's is not. Not everyone can invest in Pabrai's fund (or something like that). That's my point about the title, seen from the perspective of an investee.

 

[Edward]

For wherever you're at you have a good setup, in the US $25k is right around the threshold for poverty.  Someone earning that in the US could work at Costco, have less stress and make more.

I live in Israel.

 

I could work in a regular day job earning about the same, but the reason I'm not doing it are:

 

1. I love what I do (which is the most important reason). It's also strangely less stressful than most jobs around here.

 

2. I have a lot more flexibility in my schedule and more free time.

 

3. I can easily increase my earnings over time, because it doesn't take twice the work to manage twice the money. It's hard to convince your boss that you deserve twice as much for the same job.

 

I feel that there are definitely ways to be worse off in my situation :) Also results have been good so far overall.

 

You do have good arguments about working for yourself, but I could counter I work for a company and have all the same benefits.  I work from home, see my kids often, no commute, and I make a nice salary with zero market risk, almost zero risk in general.

Well, congrats!  8)

 

I would say professional and financial success are closely linked.  The starving artist who paints pictures that sell for millions after their death doesn't consider themselves a professional success.

 

I would also contest the view of sales you paint.  Selling isn't all guys with slicked back hair and sport coats with elbow pads.  Selling is the process of helping a potential client find a solution to a problem they're having.  For an investor their problem is they can't manage their own money, you are providing that solution.  Nothing to feel bad about, no gimmicky stuff, no showy things either.  You aren't out selling raffle tickets here.  There is no shame in being promotional, marketing and selling.

Agreed, they are linked. If you have something good to offer, it's important that people know it's there.

 

I am just more inclined to the professional side of things and less motivated in the marketing department. Lucky for me that I now have a wonderful business partner that has had 20 years of experience as a CEO of her own company, and she knows how to sell.

 

I think that in this business, finding great business partners and investors is as important as the actual portfolio management.

 

 

[Parsad]

 

Most people don't have the opportunity to attract 7 million with no track record so I commend you on that. Are most of your investors friends and family? I'm asking this because if not you have some serious marketing skills!

 

This raises another interesting point that I'm sure I'll be lambasted for... I would argue that actual investment acumen doesn't matter, it's marketing and sales skills that matter.

 

You have ETF's raising billions of dollars and guaranteeing that people will not outperform.  Hot money does flow to managers with great records, but not if people don't know about them. 

 

If you look at opening a fund management business as a business you need to serve two things, serve your clients and make a profit.  You maximize your profit by accumulating assets, you serve your clients by not losing them money.  If you have the greatest track record in the world then have three years of 30% losses you will have no clients.  If you have an absolutely average track record but haven't lost client money you will be able to sell the heck out of your fund and gather assets.

 

There are brokers who I know who've raised 10s and 100s of millions of assets and investing them in average value funds.  They all tell me the same thing, clients don't care about performance, they care about the story, and not losing money. 

 

I feel there's a giant disconnect at times on this board, and in this thread.  There's this ideal that if you establish a great track record you will attract assets and be successful.  If you establish a great record you will be looked up to by other investors, but it doesn't guarantee assets.  I would argue that sales technique regardless of track record is much more important.  If people are able to gather assets with terrible track records why are those with great records having trouble attracting assets?  I think it's sales and marketing.

 

It's both Oddball...performance and marketing.  But marketing can sure hide a lot of underperformance, as you can see it through the industry!  Whereas if you underperform, and are not good at marketing, then you may be done.  Cheers!

[Tim Eriksen]

With no disrespect to folks' managing OPM, the fee structure, I find that the title of this discussion thread tying Buffett's name with Pabrai (by extension, OPM managers)  and the ensuing discussion on fee structures to be amusing at best.

 

Buffett closed his partnership, what, over 50 years ago? Besides, I don't know if the partnership was only open to "accredited investors" (whatever that meant in the 50's) when it was open.

 

Last I checked, the Pabrai fund is open to folks with net worth over $5,000,000 and a minimum $2,500,000 investment. All you need today is $120 to invest in the Buffett fund called BRK-B and you don't pay a dime in fees to Berkshire. Of course, it comes with no guarantee on performance, or does it?

 

The discussion is about the fee structure and its strengths and weaknesses. I am not sure why that is amusing.  I do have a question for you. 

Do you want your $120 managed like it is $120 billion?  If you do, then BRK is the way to go.  Over time high single digit returns is what he says to expect, and it is what you would have got over the last decade.  The huge sum he manages is quite an impediment to decent returns.    If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money. 

 

Do I want my $120 managed like it is $120B? Absolutely why I've invested in BRK. Treating every individual investor the same as himself is how things are run at BRK.

 

Over time high single digit returns is what he says to expect I am sure you have heard all the quotes by Buffett acknowledging it. I've heard him preparing BRK investors to not expect the 20% returns of the past. If you have the quote where he pins it down to "high single digit returns", please share. Besides, if 9% is the actual return over the next 15-20 years, I'm very good with that. The choice for me is BRK or the S&P index. I don't pay fees. Not to mutual funds, not to advisors, not to anyone. I've had over 15 years of mediocre results after paying fees that lead me to this conclusion and to BRK.

 

If someone investing in equities can't outperform BRK I would argue they should not be managing other people's money. Agree wholeheartedly. Only issue is for the investees, they get to find that out after 5 or 10 years or longer and lots of fees that this is how it turned out. While on the subject of fees, I'd like to point out that Warren has also been cautioning ordinary investors (the Gotrock family story in the AR a few years ago) against paying fees. There is also the bet he has going on with the ror of the fund of hedge funds vs the index. Time will tell and I suspect Buffett will be correct.

 

The Buffett partnership of today is free. Pabrai's is not. Not everyone can invest in Pabrai's fund (or something like that). That's my point about the title, seen from the perspective of an investee.

 

Thank you for clarifying that you were looking at it form an investee perspective.  The discussion was clearly from the manager perspective. 

 

Regarding BRK.  What makes sense for you is not necessarily true for others.  Many on this board (including those managing OPM) have done significantly better than BRK over the last 5 or 10 years, not because they are smarter than Buffett, but because they are not handicapped by managing such a large sum.  A 15 to 20% return compounded over time is substantially greater than 8 to 10%. 

 

Buffett was quite clear at the 2008 meeting, and I am fairly certain subsequently, that he would be very happy with 10% pre-tax returns on the investment portfolio: "We would be very happy if we earned 10%, pre-tax" on the additions to Berkshire's equity portfolio, said Buffett. "Anyone that expects us to come close to replicating the past should sell their stock; it isn't going to happen. We'll get decent results over time, but not indecent results."

 

Buffett's actions show that he believes in active management.  He hired Weschler and Combs over indexing.  Why?  He is paying them modest hedge fund like fees to manage part of the portfolio. Thus you actually are paying fees in BRK for the managers to invest the portfolio and someday when Buffett is gone you will pay even more. 

 

[merkhet]

I'm glad we have this thread because a lot of these questions have been brewing inside my head as well. So thanks for the contributors here.

 

For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved?

 

At $3M+ of AUM, my asset base is almost exclusively friends and family. I had a PM discussion with another forum participant about whether it was realistic to believe that performance would eventually do most of the marketing work for you... Anyone have further thoughts on that?

[oddballstocks]

I'm glad we have this thread because a lot of these questions have been brewing inside my head as well. So thanks for the contributors here.

 

For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved?

 

At $3M+ of AUM, my asset base is almost exclusively friends and family. I had a PM discussion with another forum participant about whether it was realistic to believe that performance would eventually do most of the marketing work for you... Anyone have further thoughts on that?

 

No it will not, no one will know your story unless you tell them.  Why is your fund different, not why better?  There will always be the best performing fund, you need to move away from absolute performance and discuss what differentiates you from the pack.  You have returns as a result of <something>.  Here's the other thing, moving away from returns helps keep investors, maybe you're invested in owner operators, you believe over time they outperform, so investors have a reason to invest, but it won't happen every year.  You want investors to buy into your story, your philosophy, so when you have down years, and you will they'll stick with you.  They're still invested in the story, not the returns.

 

Just my $.02.  If you're marketing returns and returns alone don't be surprised when investors run for the door when returns disappoint.

[Parsad]

I'm glad we have this thread because a lot of these questions have been brewing inside my head as well. So thanks for the contributors here.

 

For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved?

 

At $3M+ of AUM, my asset base is almost exclusively friends and family. I had a PM discussion with another forum participant about whether it was realistic to believe that performance would eventually do most of the marketing work for you... Anyone have further thoughts on that?

 

No friends and family other than a couple in the Canadian Fund.  Almost all of our partners came through referrals.  I've found that many friends and family tend to treat the fund as a personal piggy bank..."Oh, I need money to start a new business", "Oh, I'm going to buy a new car", "Oh, I'm thinking of buying another investment property", etc.  Once we cut back on the friends and family, we found the fund grew much better. 

 

All of our partners are individuals, families, family trusts or personal corporations.  No fund of funds, no endowments, etc.  We are also terrible at marketing, thus the small size of our funds.  Fortunately, I don't have to live off the incentive fees in our funds, so I can do this forever.  Instead, they get reinvested back into the funds and our investment gets bigger.  I think I'm going to be like Francis...grow slowly for 20 years and just blow up to $1.2B after!  ;D  Cheers!

[Edward]

Put it in another way - if the index earns 8%, the hedge fund has to earn 11.5 - 12% just to break even for the investor after costs, fees and taxes. Berkshire is better than the index as it doesn't pay dividends ( less taxes ) and doesn't have the index overhead. ( 0.18% or 0.1% )

 

cheers!

I think this is a real smart way to invest for a passive investor that can't be sure that he is buying the "right" hedge fund. I think only a few % outperform the indices over time so why take the risk really.

 

But if you can find some fund manager with "the right stuff"(whatever that is) that can work amazingly well. It makes sense to invest in Berkshire, while searching for a suitable money manager.

[Tim Eriksen]

Regarding BRK.  What makes sense for you is not necessarily true for others.  Many on this board (including those managing OPM) have done significantly better than BRK over the last 5 or 10 years, not because they are smarter than Buffett, but because they are not handicapped by managing such a large sum.  A 15 to 20% return compounded over time is substantially greater than 8 to 10%. 

 

While the underlying premise above is true, I would say that most retail investors that invest with hedge funds will trail the index ( and berkshire) after paying for costs, fees and short-term/long-term taxes. Personal portfolio is a different story as the investor has control over when to sell and what to buy.

 

Put it in another way - if the index earns 8%, the hedge fund has to earn 11.5 - 12% just to break even for the investor after costs, fees and taxes. Berkshire is better than the index as it doesn't pay dividends ( less taxes ) and doesn't have the index overhead. ( 0.18% or 0.1% )

 

cheers!

 

If most retail investors who invest in hedge funds lag the index it is due to making the same mistakes those investors make in investing in common stocks or mutual funds.  They assume bigger is better and don't rationally evaluate if the future will be like the past.  For an individual to outperform the market he/she has to find value (i.e. an undiscovered stock).  To outperform in a mutual or hedge fund, I would argue you have to find a manager who follows that strategy.  Which likely means he or she is an undiscovered manager managing less than $200 million as well because it is near impossible to substantially outperform with a high level of assets.  That is basically what Buffett's bet was about.  There is no way he would take that bet against smaller managers.   

     

 

[Edward]

For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved?

Started with family, moved on to friends and acquaintances, some referrals. I like to get to know shareholders before they become shareholders.

 

You want investors to buy into your story, your philosophy, so when you have down years, and you will they'll stick with you.  They're still invested in the story, not the returns.

It's very important that investors develop a "story" around you the same way it works for stocks. Generally, if you understand what a company is about you'll have much easier time sticking around in a crash, maybe adding more!

 

For the last 5 years I have been managing a nice forum where we discuss ideas, very similar to this one but in Hebrew: http://long.co.il/index.php/forum/index

 

That helped a bit. I think setting up a forum, blog or some other place where you can showcase your way of thinking will do wonders for your "brand recognition" over time.

 

[skanjete]

My experience is that marketing in this type of job is less important.

If you have a decent track record and you have a reputation of integrity and honesty, the money comes automatically. Money tends to attract more money.

 

I honestly never marketed our partnership, but over the years, people came asking by themselves if they could join. Psycologically that's very important, because that way, they don't feel like they were being sold anything. They were the asking party and were convinced of the investment strategy beforehand.

 

I also select people so they mentally fit in in our partnership. 3 years ago I had someone interested and his investment could have grown my AUM with 50%. However I turned him down because he told me he couldn't stand volatility. I knew I couldn't guarantee him this, thus it made no sense to start pretending. A partnership on such a pretext would never have worked, and although it was tempting, I wouldn't have done myself or my partners a favor by letting him in.

 

Of course, you grow somewhat slower this way, but the money that comes in, tends to stay. This allows me to truly invest and think on a long term basis. Over the last 10 years I only had 3 partial redemptions for a total of 0,4% of current assets, although partners can exit every quarter. In 2008, I had no redemptions at all. On the contrary, the existing partners invested an extra 30% although (or because) 2008 was terrible.

[Edward]

My experience is that marketing in this type of job is less important.

If you have a decent track record and you have a reputation of integrity and honesty, the money comes automatically. Money tends to attract more money.

 

I honestly never marketed our partnership, but over the years, people came asking by themselves if they could join. Psychologically that's very important, because that way, they don't feel like they were being sold anything. They were the asking party and were convinced of the investment strategy beforehand.

This is the exact same way we do it. Many people are actively looking for places to invest and they tend to ask around.

 

However I would like to stress that it works best when you spread a big "net" of acquaintances and referrals, so people can reach you. Call it "passive marketing".

[Guest longinvestor]

Regarding BRK.  What makes sense for you is not necessarily true for others.  Many on this board (including those managing OPM) have done significantly better than BRK over the last 5 or 10 years, not because they are smarter than Buffett, but because they are not handicapped by managing such a large sum.  A 15 to 20% return compounded over time is substantially greater than 8 to 10%. 

 

While the underlying premise above is true, I would say that most retail investors that invest with hedge funds will trail the index ( and berkshire) after paying for costs, fees and short-term/long-term taxes. Personal portfolio is a different story as the investor has control over when to sell and what to buy.

 

Put it in another way - if the index earns 8%, the hedge fund has to earn 11.5 - 12% just to break even for the investor after costs, fees and taxes. Berkshire is better than the index as it doesn't pay dividends ( less taxes ) and doesn't have the index overhead. ( 0.18% or 0.1% )

 

cheers!

 

If most retail investors who invest in hedge funds lag the index it is due to making the same mistakes those investors make in investing in common stocks or mutual funds.  They assume bigger is better and don't rationally evaluate if the future will be like the past.  For an individual to outperform the market he/she has to find value (i.e. an undiscovered stock).  To outperform in a mutual or hedge fund, I would argue you have to find a manager who follows that strategy.  Which likely means he or she is an undiscovered manager managing less than $200 million as well because it is near impossible to substantially outperform with a high level of assets.  That is basically what Buffett's bet was about.  There is no way he would take that bet against smaller managers.   

   

 

Which likely means he or she is an undiscovered manager managing less than $200 million as well because it is near impossible to substantially outperform with a high level of assets.  That is basically what Buffett's bet was about.  I beg to disagree, that was not the bet Warren made. His bet was that the hedge funds' 2 & 20 fee structure would guarantee mediocre results over the long term. He has been very vocal about this, even in this year's annual meeting.

 

There is no way he would take that bet against smaller managers.   Agree he would not. Of course size is an impediment. "Berkshire has gotten too big" is urban myth. Where people are missing the point of the BRK of today / tomorrow is that, in a sense, there are many "small managers" within Berkshire today. Starting with Todd & Ted, the insurance heads either growing the float at low CR or the operating unit heads making capital investments, tuck-in acquisitions etc. The need to find "elephants" is diminishing all the time and will be "occasional", Warren calls this out in this years annual report.

 

A 15 to 20% return compounded over time is substantially greater than 8 to 10% I prefer the relatively high probability of 8-10% over the certain fee structure that comes attached with just a promise of 15-20%

[APG12]

Agree he would not. Of course size is an impediment. "Berkshire has gotten too big" is urban myth.

 

Buffett said at his annual meeting that the 7.9% growth rate over the past 5 years was partially a result of Berkshire's size. So is this a myth disseminated by Buffett himself? Are you just arguing to argue now??

[benhacker]

Regarding questions about how those of us who started small have grown.  My AUM / client history is below (formed business in late '06) which I think is typical of a small RIA with only minimal / medium connections to wealth who lives far off the Street:

 

YE '07 - $0.31m / 11

YE '08 - $0.31m / 15

YE '09 - $1.06m / 19

YE '10 - $2.42m / 30

YE '11 - $3.25m / 34

YE '12 - $3.82m / 39

 

Probably will close out this year with $6-6.5m and 50+ clients.

 

For what it's worth, I think there are many ways to success, and they mostly depend on what you want / define as success.

 

I started at the urging of some friends, who persisted to harass me for several years after college.  They suggested to me my business model based on my concerns, which at the time were:

 

1) I liked investing, I don't like dealing with clients / running a business (I wouldn't describe myself as entrepreneurial)

2) I had a full time job, and I hated the idea of marketing financial services to get a size which would sustain itself

 

My friends just said to manage the assets of clients the same as my own, no exceptions, and just tell clients to take it or leave it.  They told me to setup shop with the expectation that clients wouldn't talk to me, and keep it that way.  Seemed reasonable to me, so that's what I did.

 

For those who think this is so hard, I can only say that "yes" it take a long time commitment... but I think it's simple (maybe not easy).  I would say that if you are managing your own money *and* you strongly believe you are exceptional at managing assets, I think the stretch to managing money isn't a big one.  So what if you don't make money for 5-7 years... what does that matter?  If you want a "job" that can generate high income immediately, well then I agree it sucks, but how many people really are doing this for that reason (maybe a lot, but I doubt it)? 

 

This is a job you can do on the side (obviously not ideal, but if you are managing your own money you likely are already doing that right?).  Also, as with almost any business, the value (NPV) of the business lies deeply out in the future cash flows, and I think if you think of this as creating a business (not really my focus, but it's certainly an aspect of what I do this) you have to think the same way.  Assuming you can do 2-3% above market after fees for 10 years (not 5) I can *guarantee* you that unless you are trying to hide, you will be found whether you doing any marketing at all.

 

For me, I have always done no marketing, just word of mouth, mostly because I truly believe that what I wrote above.  Your clients at the start aren't really what create the most business value (or value for clients themselves)... in the long term what creates value is a long run of above average performance coupled with clients who stick it out because they believe and understand what you are doing so they actually experience your above average performance (so many great investors fail this second test).  There is no value in tricking / marketing clients to join you because they will be the first to bail on you (whether you are doing well or not) for the smallest reasons.  They will then spread bad words about you and it won't do you any good - again, in the long run.  It's much better to get clients / assets only when they are a good match for your philosophy, and to be continually clear about what your strategy is so that over time you can create a clear and accurate honest representation of yourself and your business.  I believe genuine honesty coupled with performance (as well as clear speaking / presentation skills) are key to this business.  Marketing is not remotely required if you only care about terminal value as opposed to near term income.  The behavior of the money management business in general is clearly geared in the opposite way, and that is probably the biggest opportunity to those of us doing this on a small scale with a long time horizon.

 

When I started my plan was that I would have to do it as a side business until I had $4-5m (with my fee / cost structure that means about $45k in income) which has proven to be pretty accurate based on my personal / family expenses.  Also, I had the assumption that many clients would be on the fence until I had a 5-7 year track record because from I what I knew of psychology that is when a track record becomes "real" to most regular folks.  Both of these assumptions have held true generally from what I have seen.

 

Overall, I think I have experienced what could be described as typical business results for someone doing this solo without marketing.  I think I've had some lucky breaks getting some big clients, or maybe also having some higher net worth friends than others may have, but I also started right before the Great Recession (and my portfolio focus is on financials generally) so maybe it balances out.

 

Just my perspective, I appreciate others sharing their experience.  My comments above weren't meant to disagree or argue with anyone with a different perspective, I just wanted to share my own thoughts as a small data point.

 

Ben

 

[premfan]

It's all family and friends, people I know well and barraged with various investor quotes over the years. Over time, they bought in to the philosophy.

 

I was lucky in that I had certain tools at my disposal (people close to me with cash balances, ample time to read and learn- started reading about investing in 2008 right out of college, and a huge tolerance for pain).

 

Luck played a huge role.  Be aware of what tools are available to you and leverage them.

 

Great job having the guts, conviction, and patience  to go for it! I think its a win/win for you and your clients the way you have the fund structured. Short term pain ( not earning a income) and potential long term gain ( by establishing a public track record).

[oddballstocks]

Regarding questions about how those of us who started small have grown.  My AUM / client history is below (formed business in late '06) which I think is typical of a small RIA with only minimal / medium connections to wealth who lives far off the Street:

....

Ben

 

Ben,

 

Really appreciate the honesty and transparency, it's cool to see how your business as grown over the years.  You took the ideal route, starting on the side and growing into something sustainable.  I think for younger managers this is probably the best way to start, invest on the side and grow into a bigger asset base.

 

Nate

[no_free_lunch]

Ben,

 

Do you care to share your results over this period?  It is quite useful as far as correlating performance to growth rate.  If not, it's all good and thanks for sharing your AUM figures.