How to Better Align Money Managers With Their Clients

I believe my skills as an investor (along with most investors) will improve over time. Each year I learn about more companies, more industries, and a wide variety of topics that aren’t directly related to investing. That knowledge compounds over time. I am a far better investor than I was three years ago and I expect to be able to say that same thing at any point in time going forward. Thus, the below chart gives an idea of what my investing skills should look like over time.

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If I somehow managed a fixed amount of money over my entire life (say $1 million), I would expect my returns to slowly increase over time, maybe plateauing around 20% or something like that. But managing a stable amount of money isn’t realistic. The amount of money I manage will slowly increase over time (either by getting new clients or by growing my own net worth and current assets under management). Managing lots of money acts as an anchor on returns because the opportunity set becomes smaller when managing more money. An equally skilled investor will earn higher returns managing $1 million than another managing $10 billion. Thus, below is the chart showing return potential as AUM increases over time.
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Is holding cash a good idea?

Over long enough time periods, the stock market has always performed well. There are plenty of bumps and bruises along the way, but the overall trend has always been up and to the right. In fact, the worst total return in history over a 20-year period was +54%. The worst 30-year return was +854%. We’ve all seen images like the one below that show this never-ending march up.

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Even when markets are high, as many people believe them to be now, the future expected returns from the stock market are still positive. I think this is an important distinction because I’ve talked to many people who think that because the market is high a crash must be inevitable and thus future returns will be negative. If the market is in fact too high right now (which we won’t know for another 5-10 years when we can look back), that means that future returns will be lower than historical averages—but not negative. Though I don’t put much value in people’s opinions who try to estimate future stock market returns, almost all of the estimates I’ve seen are in the low to mid-single digits—call it 4%. 4% isn’t great, but it’s a hell of a lot better than earning 0% in cash.
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2017 Annual Shareholder Letter

My 2017 annual letter is linked below. If you’re interested in the below topics you should probably check it out 🙂

  • Why I think Issuer Direct has a durable competitive advantage and can grow for many years
  • How undervalued Parks! America is
  • What I learned about myself as an investor through investing in New York REIT
  • Setting short-term goals that don’t hinder long-term goals
  • Other general musings and portfolio updates

Wiedower Capital 2017 Annual Shareholder Letter

Lessons from Jeff Bezos

I recently read through all of Jeff Bezos’ annual shareholder letters and wanted to summarize some of my takeaways. I’ve loosely followed Amazon for years just because of how interesting of a company it is (and how much of an effect it has on our economy), but I never went back and read the older shareholder letters until now. I wouldn’t say there was anything too surprising in the letters (everyone knows how obsessed with customer satisfaction Bezos is), but I came away even more impressed with Bezos than I already was. Many people refer to him as one of the best CEOs in the world and I can’t disagree—he has a combination of traits that are very rare.

Business manager + financial expertise

It’s not often you find a CEO who is both a visionary for the business and also understands the financial drivers behind it. This makes sense when you think about it. Most CEOs got to their position by being great marketers, salespeople, or inventors, but none of those roles prepare someone for being the chief capital allocator. A hired CEO may work his way through a company’s corporate ladder, never once needing to really allocate capital on a large scale, and then all of a sudden he’s promoted to CEO and that’s one of his main job roles. Likewise, a founder spends many years just growing their company any way they can—and suddenly one day the company is large and more in-depth capital allocation decisions must be made.
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Position Sizing with the Kelly Criterion

The Kelly Criterion is a mathematical formula to determine the optimal dollar amount to bet in a given wager or investment. Say you’re offered a bet where you are a 60% favorite to win and it pays 2:1 in your favor—Kelly suggests betting 40% of your net worth. If you were offered this exact bet a million times, betting 40% of your net worth each attempt (adjusting as you go) would net you the most amount of money in the end. Thus, 40% is the optimal bet size given those odds and payouts.

I’m betting no one (myself included) would actually bet 40% of their net worth in the above scenario—even if they knew the odds and payouts were legit. Most of you probably read that previous paragraph and thought 40% was insanity. I think one of the more interesting takeaways from the Kelly Criterion is how few people live their life in a way that optimizes their net worth over the long-term (again, myself included). And most of us aren’t a little off the mark, we’re not even in the ballpark of what’s optimal. If the above offer was made to all Americans, the average bet size would probably be less than 1% of each person’s net worth (with many doing a nominal amount like $10 per bet).
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Why I Prefer Founder-Led Companies

Followers of this blog won’t be surprised that I much prefer investing in founder-led companies. I will admit I am very biased when it comes to founders. I have started a couple companies myself, am a member of Entrepreneurs’ Organization, and tend to love all things related to entrepreneurship. I believe companies led by their founders often have intangible assets that are nearly impossible for a professionally managed company to replicate.

How many times have you heard a hired CEO describe the company as their baby? Probably never. But I have heard many entrepreneurs describe their own companies this way. Loving a business like it’s your own child doesn’t guarantee you’re a good CEO, but that obsession can make up for a lot of faults.
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Like Founder-Led Small-Caps? Here’s a List of All of Them.

For a while now I’ve been wanting to go through all small and micro-cap companies that are still run by their founders, but I could never find a list anywhere. So I finally decided to generate the list myself. I started by downloading a list of companies that fit the following criteria:

  1. Market cap less than $500 million
  2. Average daily volume of at least $5,000
  3. Share price of at least $0.05
  4. Only companies with up-to-date reports (so no grey or dark companies)
  5. Based in the USA
  6. No biotech or pharma

Continue reading “Like Founder-Led Small-Caps? Here’s a List of All of Them.”