Eggs in One Basket

A few mornings ago I read a quaint story about one Mr. Johnny Depp.  It is a cautionary tale and how it will end is anyone guesses in fact it might be the guess of twelve individuals.  From the very limited data at hand I suspect that both sides have a hand in the blame, the question is who has the preponderance of the blame?

Now we learn that the Department of Labor page on Fiduciary Standards is restricted.  This writer is not upset about this last turn of events he however is concerned.  Long before there was talk much less legislation or rules about fiduciary standard and the adherence to these standard by “Investment Professional” (Does this creature actual exist to any significant number?).  We (our family office) always operated under a set of rules in which those who were the repositories of our funds were in no way shape or form connected with those individual that we might use from time to time as sources for advice on our funds.  We did not nor do we believe in “Chinese Walls” to us it is a myth.  The “Chinese Wall” is nothing more than the fox watching the hen house.

Our family office are and have been considered for some time by the SEC to be a “Qualified Investors” which according to SEC sort of kind of means that we are big boys and therefore are allowed to invest in more sophisticated investment.  Just because I can sleep alone does mean that I want to and in the same vain just because we can invest in “sophisticated investments” does not mean that we have to or that we do.  We do not stray into this deep territory of Buyer Beware.

We are not large by many measurement standards but we not insignificant either.  We have been quite precocious in that we have a habit of changing who are the repository of our funds and more importantly those who we seek advice from on our funds.  We continue to be precocious.   When we seek advice we use an Oracle process for outside advisers.  Our driving motto is  “WE TRUST NO ONE WHEN IT COMES TO OUR MONEY”.  We up front with these advisors in that we tell them that we are not soliciting specific advice, and we have no intention of placing any funds in their trust.  We are looking for a “Big Picture” report.

We have been using less and less of these adviser in recent times.  They are not very good at predicting the future.  Note it is easier to change advisor, which we do much more often then we switch repositories. Even with NDA when need to supply numbers to these advisers we will only allow the advisers to see “Normalized Data”.  Range of values is between 0 and 1.  Names of the Herds are coded.  Yes we are paranoid.  But a little paranoia can be quite healthy for your investments.

We have NO LOYALTY other than to ourselves, get use to it.  One of our repositories decided that they were going to change their fee structure associated with some investments.  Granted they were charging a very low fee but they said that they were going to have increase their fees, in this case it was to double, but even after the doubling of their fees their fees would still be lower than 75 percent of their competitors.  The result was that we moved our funds to one of those competitors who charged lower fees.  We got a call from the account representative and at least 1 Vice President asking us to reconsider.  WE did reconsider and still moved the funds to another institution, because “A Buck in Your Pocket is not a Buck in My Pocket”.  We would rather pay the tax on increased dividends than the commission or the fee.  At least according to theory the tax goes to the public good versus and individuals good.

Recently we received a call from an account manager at one of the institution where some of funds are being held.  They had “great news”, they were now offering to certain class of customers “Free as in Beer” investment advise.  We thanked them for the offer and informed them that our internal operating procedures precluded us from accepting this generous offer.  The question from them was what would it take for us to use this new service.  Our answer was that they could either be the holder of the funds or they could be the investment adviser, but that they could not be both.  So what did they want to be, pick one.  They decided to continue to be the holder of some of our investments.

Even if there are requirements for “Investment Professional” to adhere to some Fiduciary Standards we will continue to operate as we have for the last 40 Years when there were no such requirements.  We will continue “Not To Trust Anyone When It Comes To Our Money”.

A second condition that we use in our management of our portfolio is “We Do Not Believe Your Number”.  To Quote Greg House “Everybody Lies”.  We discount your books, even if they conform to GAAP.  We will not even entertain Non-GAAP reports or that old bugaboo proforma reporting.  We do not believe your earnings reports.  We do believe your dividend, which is actual cold hard cash in our pockets.  In particular we do not believe a great deal of your accounting and in particular it’s that “Goodwill” item that is carried in the Books, that we consider being a most bogus number.  We normally discount your books by at least 20 percent.

We were quants before quants were a thing.  For most of our existences we have been and continue to be in the mode where we were buy a herds of stocks, we do not buy individual stocks or as we call them cows.  Our overall allocation is derived from Kelly Criterion.  At the highest level we are aiming for 80 percent Stock and 20 percent Bonds.  We call are tool “Elroy” (Name after the son of one George Jetson of Spacely Sprockets).  We are now at version 6.01.  Elroy 7.0 is in the works at this time.  We are firm believers in evolution rather than revolution.  Elroy is designed to take the percentage shot if and when it is presented. We have gone fairly long periods where Elroy says wait, so we wait.

We do not believe that one can consistently really beat the market, but we do believe that we can have a very robust return on our investments.  We sacrifice some up side gain to reduce our down side losses.  What typically happens is that we are buying what is “out of favor” or we are buying when there is a lot of selling going on in the market.  We know that Mr. Market has no soul and act accordingly.  We are patient, very patient.

We have gone for extremely long periods where we just pace the market.  We call this process “HYNAB” Hold Your Nose And Buy.  During this phase of the market we make a monthly minimum purchase across all of our herds.  It lets the croupier know that we are still in the game.  When things get interesting we will switch to ASMS (Aim Small Miss Small) program.  Here we add monies to the various herds that are down and out at a measured rate.  We will not get in a hurry.  Some have said that what we do is akin to throwing spaghetti at the wall and see what sticks.  Funny thing is that it all seems to stick.

Elroy keeps us from getting emotional.  Elroy keeps us from using our gut.  Elroy keeps us from acting on “Hot Tips”.  Elroy is designed to minimize revenue-recognizing events on our part.  We have been using Elroy for almost 4 decades.  Elroy has produced an IRR of 8.50 Percent for the nearly 40 years that we have been using a version of him.  We are quite satisfied with his performance.  Our last big sustained foray into the market was from 14 August 2015 to 11 May of 2016, we call it going into burners.