Frequently asked questions

Tell me about your portfolio management philosophy? I seek to invest in five-year doubles, ie companies whose stocks can double in five years. This equates to a 15% compound annual growth rate (CAGR). In 150-years of S&P return history (1871-2021), there have been 38 five-year periods of +15% returns. I think it is a reasonable goal and I think its achievable by buying companies that grow in value and, as importantly, avoiding companies that lose value.

What do you think is your edge? Four attributes come to mind. 1) Due diligence: As a former private investigator and reporter, I’ve long practiced asking the right questions and finding resources to learn about companies and their management. 2) Experience: As a sell side analyst at BMO and CSFB, I had a lot of repetitions analyzing public companies. 3) Patience: When I buy a stock, it’s with the intention of owning it for several years, which is why the front end due diligence is so important. 4) Variant perspective: Investing is my way of interacting with the world and engaging deeper curiosity about the things that surround us.

How do you expect to beat the market if they are supposedly efficient? Investing is a practice dependent on an unknowable future. Where I can develop my own set of expectations that differs from the market, and that difference is reflected in a divergent valuation, then I think we will do well. With a concentrated portfolio of well researched businesses, I expect our results will be different.

What do you look for in an investment? What makes a good investment? I am comfortable making concentrated investments (+10% positions at cost) in companies that can generate FCF and reinvest it at high rates of return. But I also make room in the portfolio for smaller positions (typically less than 3%) in net / nets, turnarounds and pre-profit companies where the opportunity set is large and management is in an advantaged position for long term success.

More broadly, I’ve long observed that objects that retain or grow in value tend to be rare and unusual. Based on this observation, I look for companies that are rare and unusual; in their products or market niche, in the way they are managed or operate, etc. I regularly share my reasons for owning our stocks in my quarterly letters.

Are there sectors you focus on? Are there sectors you avoid? Given my sell-side experience covering industrials and industrials services (with a brief detour into transaction processing), I have a tendency towards those sectors that’s reflected in the portfolio. Since integrity is a critical factor in evaluating management, I avoid companies when that’s evidently not a priority.

Why did you choose Separately Managed Accounts (SMA’s)? SMA’s offer total transparency and low cost. Considering the +/- of an SMA vs a partnership, all the benefits of a partnership go to the Managing Partner. In other words, a partnership solves a problem for the manager and not the client. The SMA’s primary drawback is the lack of accessibility to alternative investments, but there are other solutions to this.

Do you use a model portfolio? No. Purchase price is an important factor in returns and it feels unsettling to leave it to the randomness of an account opening date. I don’t endeavor for every account to be identical but aim for “patiently similar” accounts over the course of new purchases.

How do you manage rebalancing a portfolio of SMA’s? Over the years running Long Cast Advisers, I have developed a way of managing SMA portfolios that works for my clients, doesn’t cause me brain damage and hones the practice of Portfolio Management without relying on the arbitrariness of a model portfolio. Here’s a peek on how I do it. If I can come up with two or three good ideas a year, I’m happy. When I come up with a new idea, I want every account to own it. When I purchase a new investment it is allocated across all accounts based on available cash. Therefore, in older and more fully invested accounts, sometimes something need be sold in order to own a new idea in proportion to everyone else. This constraint gives rise to two principles. First, a new idea must have a higher IRR than current investments. Second, if the new idea satisfies this requirement, I’d look to sell the holding with the lowest expected IRR. Thus, the “SMA complexity constraint” enforces a practice of consistently upgrading the “bottom” of the portfolio, ie getting rid of stocks with the lowest expected IRR’s and replacing it with stocks with higher expected IRR’s. It also narrows my focus of Portfolio Management to available cash. I write more details about Portfolio Management in my Form ADV-2B.

Can you send me a presentation or “some materials? I don’t have a presentation. I write quarterly letters, which offers insight into my reasons for owning the stocks in our portfolio and other thoughts I want to share.

What are your fees? Fees are warranted given the amount of work, time and effort that goes into discovery and allocation. Clients who identify as accredited investors have the option of paying a performance fee or an AUM fee; non-accredited clients can only pay an AUM fee. The Form ADV-2B has more details on fees. I am above all looking for long term partners at a reasonable price.

Why don’t you charge 2/20 or 1/10? I keep my overhead low and as a result of low fees, I don’t need to go out on the risk spectrum for net returns. The way it is, I do well when we all do well.

How do we connect? I am looking for clients who share the long term perspective. If you’d like to consider working with me as an investment manager, I’m first interested in talking about your intentions and how I can help. If you sign up for the quarterly letters and select “Yes …” I’ll send you an email and we can find a date for a call. I don’t use these lists for anything but distributing the letters and communicating with you.

What resources do you recommend for new investors starting out? This is a question I get annually from high school students on the Wharton Investment Competition team my uncle coaches, so I’ll throw it in here.

As with every endeavor, and with rare exception, everybody starts out knowing nothing, learns as they go and stops when they think they know enough, or give up. Which is to say, those who stay curious and keep learning should do fine in securities analysis. Putting money behind that analysis is the essence of investing.

Read Greenblatt, Lynch or Graham. Read the Berkshire Hathaway shareholder letters. Spend just a little time on Technical Analysis to appreciate the herd tendencies and spend more time on accounting, which is the language of finance. One must speak it at least passably.

It is essential to understand how a P&L works and how it interacts with a Balance Sheet and Cash Flow statement. I recommend Bernstein’s “Analysis of Financial Statements” but there are many ways to learn how to do this. Then read Schilit’s “Financial Shenanigans” to understand how companies abuse those same Financial Statements.

Finally, keep it simple. Any business can be imagined as a grocery store and all business exists to solve a problem for a customer. Understanding the value of the solution to the customer and their alternatives offers a useful perspective beyond the numbers.