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.
