Author Topic: SYTE - Sitestar  (Read 125884 times)

valueseek

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Re: SYTE - Sitestar
« Reply #460 on: April 13, 2018, 11:56:26 AM »
Sanjeev,

I'm curious, how do you think about your situation in regards to your investors at your fund?

They don't own PDH directly, and PDH only makes up 15% of their holdings with you.
However you are (or were) essentially spending 100% of your time working on PDH.

So my question is, the incentive fee you charge is for 100% of your fund asset's performance, but your time is only being spent on 15% of the fund's assets.

Now I'm sure given your reputation that your investors didn't even bat an eyelash at the situation, but from the outside looking in, do you think one could raise this argument?

The incentive fee is based solely on performance.  So if I don't perform, and our partners can argue I haven't over the last 2-3 years...then I don't get paid and it costs them nothing other than lost opportunity.  They may not be happy, but at least my interests and their interests are aligned. 

Let me ask you a question now:  If I had been correct on Sequant Re, and that investment had worked out perfectly and now PDH was making $1-1.5M a year in fees from Sequant Re (let's not even include the 17% annualized return on Russell Breweries, 13% annualized return on Kingswood's 1st real estate project, increase in PDC's revenue from essentiallly zero (but we'll call it $900K in 2015) to $1.5M in 2018, and the 19% annualized return I did in 2016/2017 on the investment portfolio)...all these things came to fruition except the biggest investment...Sequant Re.  If I had been right, and PDH stock was now at 25 cents...would my partners have minded my interest and time spent on PDH?  No, of course not. 

In this business, you are only as good as your last game.  Value investors, while they think they are different, are as equally short-term focused as the average investor.  How many value investors have held Fairfax shares steadily from when they bought them and not wavered?  Of those that bought at the lows in 2003, and there were hundreds, I would say you could probably count those still holding those shares on one hand.  That percentage might be a bit better for Berkshire shareholders, but I would bet that it isn't statistically much different for those that bought Berkshire shares back in 1999/2000.  Managers don't get into the business to be wrong...every decision, good or bad, we try and make the best evaluated decision we can with the information we have on hand at the time.

The lesson is that managers may not always make the best/correct decision, and their partners may not always be happy about that, but the goal is to make sure incentives and behaviors are in line with partner/shareholder interests.  That is the only thing anyone can guarantee...whether they are a hedge fund manager or the CEO of a corporation.  If you have the working fundamentals right, at least incentives are fully aligned...since performance is never guaranteed on any investment.  We live for and absolutely try to do that!

As mentioned previously on another thread, we recently closed our Canadian Fund.  Our performance was underwhelming, and operating costs in Canada for such a small fund was part of the reason...so we felt that the fund was not adding value to investors and made the decision to close.  The vast majority (about 80%) of our partners did ok or well while in the fund, but there were four more recent partners who had lost some of their capital...from 1% to about 10%.  Alnesh and I felt compelled to make them whole from our own money and we did.  While we underperformed, and of course the partners would have preferred us to have killed the indices, there are no guarantees on investment return.  But our incentives, behavior and culture was 100% aligned with partner interests...that's the only thing we can 100% guarantee.  Name me a fund manager who has made their partners whole without it being in the LP agreement?  Cheers!

 

Hi Sanjeev... Its unheard of what you mentioned of making whole... Kudos to you...


oddballstocks

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Re: SYTE - Sitestar
« Reply #461 on: April 13, 2018, 12:50:41 PM »
I applaud Sanjeev for what he did.  Running a company is very difficult, very difficult.

I wouldn't want to be public, it's a curse.  A bunch of people who made a few clicks online have the ability to make armchair decisions and second guess.  I'd hate if those same clickers take a look at my own business.  I've made excellent decisions and also bad ones.  But to those at home making a bad decision seems to be a fatal flaw, as if they've never done it themselves.

As a public CEO you can either play it safe, or take risks and when you take risks public shareholders will cry and complain.  You cannot please everyone.

I stand by my mantra that EVERY investor should try to go out there and sell something.  Try to sell a "commodity" item.  You'll realize quickly that academic finance and theories don't match the real world.  Just because you're item is similar or a lower price doesn't mean people will buy it. 
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ragnarisapirate

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Re: SYTE - Sitestar
« Reply #462 on: April 13, 2018, 02:36:37 PM »
I applaud Sanjeev for what he did.  Running a company is very difficult, very difficult.

I wouldn't want to be public, it's a curse.  A bunch of people who made a few clicks online have the ability to make armchair decisions and second guess.  I'd hate if those same clickers take a look at my own business.  I've made excellent decisions and also bad ones.  But to those at home making a bad decision seems to be a fatal flaw, as if they've never done it themselves.

As a public CEO you can either play it safe, or take risks and when you take risks public shareholders will cry and complain.  You cannot please everyone.

I stand by my mantra that EVERY investor should try to go out there and sell something.  Try to sell a "commodity" item.  You'll realize quickly that academic finance and theories don't match the real world.  Just because you're item is similar or a lower price doesn't mean people will buy it.

Very well put, Nate.

On a personal note, this is something that I have been thinking on- both since, and before selling my business to SYTE. I already know that a lot of people won’t understand what’s going on at Mt Melrose, and how we run things. It is also going to be hard for people to understand the intrinsic value of Mt Melrose, based solely on the balance sheet, income statement, and the like. I think that this is also the case for many companies, not just ones that are SYTE related. Certainly, we will do our best to communicate this in the future at the annual meetings (because that is the time efficient and ethical way to do this), but, there are 364 OTHER days in the year that people have to make assumptions about what is going on. Kinda one sided when putting that against arm chair quarter backing.

On that same note, (in general) it is hard for people to understand what goes on inside of a business as an outsider. 2 of our employees were literally working til 4 AM yesterday morning. One was our financial controller working on financials, and the other was our project manager. They are not the only people that work super long hours at Mt Melrose, nor are they the only people that are like this at SYTE and its subs. Everyone at Mt Melrose is all about the business, and does everything in their power to improve it. Many of the employees own stock, and want to build something. Again, this is the same for SYTE and it’s subsidiaries.

When reading things online that are so far off base and half informed, it does damage to that ethic. This also works the other way, if there is too much praise given to an organization- the ramifications can be dire. I have gotten a ton of praise on how great my real estate business is, yet, only a few people have seen it in action how credible does that make any of the claims? I don’t know. I think that we will do well for SYTE/ENDI... AND I think that people should view things objectively. If results of a business seem excellent, maybe ask “why? Are they really that good?” And if they seem terrible, maybe ask “Are they really that bad?” And try to get going with what is actually going on.


Certainly, we all try to sum up thousands (and with a company alike AAPL, MILLIONS if not BILLIONS) of hours of labor and such... all in the 15-60 minutes that we spend reading an annual report and whatever other research we do (even message board posting). I know I often do that. But maybe, just maybe, we should all remember and think about the implicit time leverage that is being employed, while we are making assumptions- it could improve the analytical process.

Jurgis

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Re: SYTE - Sitestar
« Reply #463 on: April 13, 2018, 03:50:06 PM »
ragnar and oddball, you definitely have good points.

Although you may feel that you only get second guessing and critique, you are likely also getting support and investments. Though like ragnar said, it's not clear whether even the support is a great thing.

Looking from investor's point of view, you as an investor meet the management, read their stories, hear about guys working until 4am, about efforts put into the business. You might hear from the management on the forum or meet them at a meetup. You see and hear how smart and nice people they are. And that affects your attitude as an investor too. You think "maybe I should cut them some slack, they are really trying, they are good guys, etc.". But is that good from investing point of view? Maybe, maybe not. I guess like ragnar says objectivity would be good. But it's quite hard if not impossible to be objective and even harder the more you know people involved.

In any case, best in your businesses.  8)
"Before you can be rich, you must be poor." - Nef Anyo

Spekulatius

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Re: SYTE - Sitestar
« Reply #464 on: April 14, 2018, 01:34:34 PM »
We only know a fraction of what is going on in any company. As an investor, all we can do is put these scraps of information into context and make an decision whether we like it enough to invest or not. SYTE is not different in that regard than any other company.

Investors have no choice to make a judgement based on the incomplete information. It is Managements job in a public company to communicate as clearly as feasible so that investors can make a somewhat informed decision. I also think that if someone does not like, that the public holds their feet to the fire, they should not run a public company, but stay private. Then they can do whatever they want with their company.
To be a realist, one has to believe in miracles.

Spekulatius

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Re: SYTE - Sitestar
« Reply #465 on: April 14, 2018, 01:49:11 PM »
Let me offer my two cents, as someone in a very similar position to Steve:

In terms of compensation - Our fund owns 42% of PDH...I receive a salary from PDH as CEO and I receive only incentive fees I earn from our fund.  PDH makes up about 15% of the fund. 

Now some people would argue I'm double-dipping, since I receive my fees from the fund and I receive a salary as CEO of PDH.  That would be true if PDH was a passive investment like Bank of America, Macy's or some other stock we own in the fund...where I have no direction over, nor any day to day responsibilities.  And believe me, the day to day duties are extensive...especially in the beginning when we got involved and I was working 14 hour days six days a week for the first 2 years trying to turn it around.  Or it could be perceived as double-dipping if we received a management fee from the fund...but we don't...totally incentive-based.

Also, my CEO salary is on par or less than what anyone else would have gotten for that position...depending on the fluctuating market cap and book value over the years...you could argue either way, and because of that I won't try and debate it.  It will either look cheap or look expensive 5-10 years out.  But I capped it from day one...I will never get a raise!  How many CEO's would do that?

Whether we should or should not have gotten involved with PDH can be debated either way.  But it is what it is, and we are intent on growing it over time and making it into something special.  I have a very direct influence over the success or failure of PDH...not like passive investments in our fund.  It consumes an enormous amount of time, work, energy and even costs you mentally (stress).  So while I'm sure some would like to continue arguing that it is double-dipping, it certainly isn't in our case.  And from what I've seen, Steve's circumstance is very similar.  Cheers!

15 % of the fund is probably not enough overlap to justify this calling double dipping, but this would be different, if the majority of the fund’s assets were invested in PDH. Then those entities start to become more like the same legal entities and can you really habe two jobs within one organization?

Then, there is an issue with the control pyramids when you have circular ownership in related companies, which means that with small amount of capital (which isn’t really your own, if you run a fund) you could control a company, similar to what Mir Big does at BH, or the way the conglomerates used to be run in Italy. Those arrangements tend to yield poor results for minority shareholders.
« Last Edit: April 14, 2018, 01:56:44 PM by Spekulatius »
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NBL0303

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Re: SYTE - Sitestar
« Reply #466 on: April 14, 2018, 01:53:18 PM »
all in the 15-60 minutes that we spend reading an annual report and whatever other research we do (even message board posting).


I've always like you Ragnar - but now I am bitter and envious.  It takes me hours to read through many annual reports, probably due to my inadequate pace of reading - so anyone that can do it in 15 minutes has my eternal envy.

On a slightly more serious note, I appreciate your post and you thinking through the nuances of reporting and evaluating businesses.  In the previous generation of investing it seemed that we could find and buy more companies based on simple low valuation metrics like P/Es and such.  But now nearly every low P/E type company has earned their low P/E.  I have found that most of the value investments that we make now are more in the camp of "this doesn't exactly look cheap based on the raw numbers, but the numbers are missing the point."  The low P/E companies have mostly been considered by all of us value investors and had their market price driven down to a low P/E because that is the accurate value for the business now.  Anyway, in this new-ish reality for value investors, I find that the questions I am asking myself about our investments and the analysis is more complicated and involves more behavioral elements.  This makes your comments Ragnar very resonant.  When any of us CoBFers and other value investors are looking at a company and are asking hard questions - like "do the current operating numbers really reflect the true long-term value of the business?"  And distinguishing between those companies in which the numbers are not currently great but deep qualitative analysis indicates that the current numbers may undervalue the longer-term prospects of the business and those companies in which the current struggling numbers accurately reflects a business having issues which impair its valuation is one of the main tasks I find I'm having to engage in - at least with the market circumstances such as they are now.

Spekulatius

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Re: SYTE - Sitestar
« Reply #467 on: April 14, 2018, 02:05:45 PM »
all in the 15-60 minutes that we spend reading an annual report and whatever other research we do (even message board posting).


I've always like you Ragnar - but now I am bitter and envious.  It takes me hours to read through many annual reports, probably due to my inadequate pace of reading - so anyone that can do it in 15 minutes has my eternal envy.

On a slightly more serious note, I appreciate your post and you thinking through the nuances of reporting and evaluating businesses.  In the previous generation of investing it seemed that we could find and buy more companies based on simple low valuation metrics like P/Es and such.  But now nearly every low P/E type company has earned their low P/E.  I have found that most of the value investments that we make now are more in the camp of "this doesn't exactly look cheap based on the raw numbers, but the numbers are missing the point."  The low P/E companies have mostly been considered by all of us value investors and had their market price driven down to a low P/E because that is the accurate value for the business now.  Anyway, in this new-ish reality for value investors, I find that the questions I am asking myself about our investments and the analysis is more complicated and involves more behavioral elements.  This makes your comments Ragnar very resonant.  When any of us CoBFers and other value investors are looking at a company and are asking hard questions - like "do the current operating numbers really reflect the true long-term value of the business?"  And distinguishing between those companies in which the numbers are not currently great but deep qualitative analysis indicates that the current numbers may undervalue the longer-term prospects of the business and those companies in which the current struggling numbers accurately reflects a business having issues which impair its valuation is one of the main tasks I find I'm having to engage in - at least with the market circumstances such as they are now.

I agree with NBL that it has become more difficult to find truly undervalued businesses and most business that are cheap based on readily available numbers are probably valued correctly. The world has become more “intangibles” in how business is conducted and those intangibles are harder to evaluate than book values, PE ratios and balance sheets. In addition, I believe that the business environment changes faster, probably driven by technology changes, so any valuation projected in the future become uncertain to a larger extend than in the past.
To be a realist, one has to believe in miracles.

ragnarisapirate

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Re: SYTE - Sitestar
« Reply #468 on: April 14, 2018, 04:46:43 PM »
all in the 15-60 minutes that we spend reading an annual report and whatever other research we do (even message board posting).


I've always like you Ragnar - but now I am bitter and envious.  It takes me hours to read through many annual reports, probably due to my inadequate pace of reading - so anyone that can do it in 15 minutes has my eternal envy.

On a slightly more serious note, I appreciate your post and you thinking through the nuances of reporting and evaluating businesses.  In the previous generation of investing it seemed that we could find and buy more companies based on simple low valuation metrics like P/Es and such.  But now nearly every low P/E type company has earned their low P/E.  I have found that most of the value investments that we make now are more in the camp of "this doesn't exactly look cheap based on the raw numbers, but the numbers are missing the point."  The low P/E companies have mostly been considered by all of us value investors and had their market price driven down to a low P/E because that is the accurate value for the business now.  Anyway, in this new-ish reality for value investors, I find that the questions I am asking myself about our investments and the analysis is more complicated and involves more behavioral elements.  This makes your comments Ragnar very resonant.  When any of us CoBFers and other value investors are looking at a company and are asking hard questions - like "do the current operating numbers really reflect the true long-term value of the business?"  And distinguishing between those companies in which the numbers are not currently great but deep qualitative analysis indicates that the current numbers may undervalue the longer-term prospects of the business and those companies in which the current struggling numbers accurately reflects a business having issues which impair its valuation is one of the main tasks I find I'm having to engage in - at least with the market circumstances such as they are now.

Some annual reports don’t even take 15 minutes. ;)

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stahleyp

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Re: SYTE - Sitestar
« Reply #469 on: April 16, 2018, 10:25:32 AM »
what percentage of Arquitos's assets are in SYTE?
Paul