Comments on: Why Do They Want Your Money? http://www.billakanodoodahs.com/2008/04/why-do-they-want-your-money/ Trading, Investing, Politics, Whatever Mon, 01 Dec 2008 20:43:58 +0000 http://wordpress.org/?v=2.3.3 By: David http://www.billakanodoodahs.com/2008/04/why-do-they-want-your-money/#comment-73170 David Mon, 07 Apr 2008 21:08:51 +0000 http://www.billakanodoodahs.com/2008/04/why-do-they-want-your-money/#comment-73170 Yes, thanks Bill. I'll keep this post saved and refer back to it so the info makes more sense over time as well. I think you're right about the Buffett partnership's need for capital/partners. I'd have to refer back to Lowenstein's book on Buffett, but I remember that he definitely needed a certain amount of partners at the beginning. Although at one point they seemed to be getting real close to the limit in terms of new money and partners that they were able to take in. Yes, thanks Bill. I’ll keep this post saved and refer back to it so the info makes more sense over time as well.

I think you’re right about the Buffett partnership’s need for capital/partners. I’d have to refer back to Lowenstein’s book on Buffett, but I remember that he definitely needed a certain amount of partners at the beginning. Although at one point they seemed to be getting real close to the limit in terms of new money and partners that they were able to take in.

]]> By: Bill http://www.billakanodoodahs.com/2008/04/why-do-they-want-your-money/#comment-73091 Bill Mon, 07 Apr 2008 02:27:09 +0000 http://www.billakanodoodahs.com/2008/04/why-do-they-want-your-money/#comment-73091 Most ideas suitable for mutual funds have a fairly constant return to scale; it takes a lot of assets to outgrow the ability to find large-cap value, although BRK/A has done just that, and a retail schlub with a few tens of thousands of dollars can get the same results, if they want them. A tactical asset allocation scheme based on relative strength (like Rotational) is fairly constant to scale, since I can execute it with six figures by using ETFs in a retail account, and could execute it with nine figures through buying the stocks instead of the ETFs, using futures for some positions, and buying the actual bonds or options on bonds. Generally speaking, the strategies that stick with the most liquid, smallest-denominated, and highly-traded instruments have the most scaleability, and those dabbling with microcaps/smallcaps, illiquid bonds such as CDOs, and high-capital requirement assets like actual real estate or private equity, have the least scaleability. Keep in mind, no returns are perfectly constant to scale. Aside from transactions expenses and other minor concerns, pretty much every strategy has a sweet spot in terms of number of positions, market cap range of targets, etc. Past that point, entry and exit slippage and liquidity are problems, and one has to expand their universe to less effective choices; before that point, there may not be enough assets to execute a diversified strategy. If memory serves me correctly, at that point W.E.B. was more concerned with special situations, cigar butts, and arbitrage. I would think that type of fund had a relatively tight sweet spot, meaning he needed partners, but I would also think that there wasn't room for a LOT of partners. Personally I think that extreme deep-value investing in publicly-traded stocks has decreasing returns to scale, because the "value" in the large-cap space just can't compare to the broader range of values available. Once you start talking about value through activist investing, the sweet spot is larger and requires more assets to get to that spot where you can diversify the strategy. Hope that helps. Most ideas suitable for mutual funds have a fairly constant return to scale; it takes a lot of assets to outgrow the ability to find large-cap value, although BRK/A has done just that, and a retail schlub with a few tens of thousands of dollars can get the same results, if they want them. A tactical asset allocation scheme based on relative strength (like Rotational) is fairly constant to scale, since I can execute it with six figures by using ETFs in a retail account, and could execute it with nine figures through buying the stocks instead of the ETFs, using futures for some positions, and buying the actual bonds or options on bonds. Generally speaking, the strategies that stick with the most liquid, smallest-denominated, and highly-traded instruments have the most scaleability, and those dabbling with microcaps/smallcaps, illiquid bonds such as CDOs, and high-capital requirement assets like actual real estate or private equity, have the least scaleability.

Keep in mind, no returns are perfectly constant to scale. Aside from transactions expenses and other minor concerns, pretty much every strategy has a sweet spot in terms of number of positions, market cap range of targets, etc. Past that point, entry and exit slippage and liquidity are problems, and one has to expand their universe to less effective choices; before that point, there may not be enough assets to execute a diversified strategy.

If memory serves me correctly, at that point W.E.B. was more concerned with special situations, cigar butts, and arbitrage. I would think that type of fund had a relatively tight sweet spot, meaning he needed partners, but I would also think that there wasn’t room for a LOT of partners.

Personally I think that extreme deep-value investing in publicly-traded stocks has decreasing returns to scale, because the “value” in the large-cap space just can’t compare to the broader range of values available. Once you start talking about value through activist investing, the sweet spot is larger and requires more assets to get to that spot where you can diversify the strategy.

Hope that helps.

]]> By: David http://www.billakanodoodahs.com/2008/04/why-do-they-want-your-money/#comment-73080 David Mon, 07 Apr 2008 01:53:37 +0000 http://www.billakanodoodahs.com/2008/04/why-do-they-want-your-money/#comment-73080 Bill, What would you cite as an example of the "constant returns to scale" category? Can you describe some investment strategies and managers that would fit this style, and explain why? Thanks. Also, how would you categorize an investment manager who decides to set up a limited partnership in the vein of the Buffett partnership, pre-Berkshire? Would such a partnership be categorized as having decreasing returns to scale if it was focused on value investing? Bill,

What would you cite as an example of the “constant returns to scale” category? Can you describe some investment strategies and managers that would fit this style, and explain why? Thanks.

Also, how would you categorize an investment manager who decides to set up a limited partnership in the vein of the Buffett partnership, pre-Berkshire? Would such a partnership be categorized as having decreasing returns to scale if it was focused on value investing?

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