Author Topic: SYTE - Enterprise Diversified  (Read 211911 times)

LC

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Re: SYTE - Sitestar
« Reply #450 on: April 12, 2018, 06:57:05 PM »
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?
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Parsad

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Re: SYTE - Sitestar
« Reply #451 on: April 12, 2018, 07:46:15 PM »
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!

   
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Jurgis

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Re: SYTE - Sitestar
« Reply #452 on: April 13, 2018, 07:32:57 AM »

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?


Parsad - that is exceptional of you and I believe exactly the way Charlie Munger would want us to behave.  Good on you.

This is more of an aside, but there is a terrible provision in most US state securities laws, and for federally registered investment advisors, that as it has been explained to a friend of mine by a former SEC lawyer, that in the US it is mostly impossible for investment advisors to do this legally.  It comprises a "guarantee of performance" whichever for whatever reason is not allowed by investment advisors according to securities lawyers.  I know this because I have a very good friend who tried to do something similar as you Parsad - who was convinced by leading hedge fund lawyers that it was against the law - because it would have constituted a "guarantee of performance" which is not allowed. 

Anyway, the technicality of US securities laws aside - I admire you for behaving that way and I hope that I would do the same if I were that situation.

I am not a lawyer, but what Parsad did is likely legal in US. He did not provide a guarantee beforehand, he just made some partners whole. And what he said in post about 100% guarantee is a figure of speech rather than written guarantee that would have legal implications.
I am pretty sure someone in US did this too... Pabrai? Can't remember.

But, yeah, check with lawyers and all that.

To put my $.02 into the topic about managers earning multiple income streams. Somehow people don't rebel when big-name manager X runs a bunch of mutual (hedge) funds, a bunch of separate accounts, goes on lecture circuit, writes books, runs an investment company and gets money for all of these. Or is it OK when you manage billions, but not OK when you manage just couple millions and post on forum?  8)
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racemize

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Re: SYTE - Sitestar
« Reply #453 on: April 13, 2018, 07:39:49 AM »
From my recollection of the Series 65, there are a couple of things not to do:

1) any type of indication of a guarantee before-hand, as Jurgis mentioned; and
2) for non-qualified (but accredited), having a fee but an arrangement for forgiving the fee based on performance, as this equates to a performance-based fee.

However, that is not to say that you cannot waive fees or elect to take action for individuals/partners yourself.

Jurgis

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Re: SYTE - Sitestar
« Reply #454 on: April 13, 2018, 07:58:56 AM »

I am not a lawyer, but what Parsad did is likely legal in US. He did not provide a guarantee beforehand, he just made some partners whole. And what he said in post about 100% guarantee is a figure of speech rather than written guarantee that would have legal implications.
I am pretty sure someone in US did this too... Pabrai? Can't remember.

But, yeah, check with lawyers and all that.


I was curious so I just talked to one of the leading lawyers in the country about this and he said that there have been a couple notable cases in the US where people refunded negative performance and the SEC or whatever regulator found that to be impermissible because even though it wasn't in the documents - it looked like a tacit guarantee of performance.  Like the General Partner had told its investors "if you don't make money we'll refund it" which runs contrary to the risk disclosure basis for private investment funds in the US  (you know all the language about "All investments are risky; you could lose money.")  I guess their concern is people running around raising money saying in their documents "You could lose money" but meanwhile telling their investors "If things don't go well, we'll refund your losses."  Anyway its kind of an interesting legal question, but really a side note to this story.

From what I've been told from this attorney, the issues that people had in the past were that since you can't make a guarantee before-hand - rebating losses after the fact looks to some regulators indistinguishable to guaranteeing it beforehand - so they don't allow it.  Though in a couple of instances - regulators apparently did allow it - but they likely had a slightly different structure.

I should note - there is a way to set-up a fund so you can do this legally in the US and in every state - but the "loss rebate" requires that the fund be structured a little bit differently.  I'm not an expert on this - but you said it up more like a PE fund so the first portion of what is left belongs to the limited partners and then over certain benchmarks the general partner starts to get more ownership of it.  You can set the benchmarks such so that it effectively means the general partner gives up any ownership below the loss threshold. 

In reality, this is not an issue hardly ever, because very few funds and people would do this when they shut down a fund with losses.  We need more terrific people like Parsad.

OK, thanks for elaboration. I guess whoever else did it in US might have flown under the radar... Also with what racemize said, not sure how Chou's fee forgiveness works... (edit: Chou fee forgiveness might work under mutual fund rules... I'm really out of depth there). But yeah, we should not discourage people like that.  8)
« Last Edit: April 13, 2018, 08:22:05 AM by Jurgis »
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drzola

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Re: SYTE - Sitestar
« Reply #455 on: April 13, 2018, 08:18:19 AM »
I just want to thank Sanjeev and Alnesh on behalf of two of the four.

Sincerely;

SR and SWL

valueseek

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Re: SYTE - Sitestar
« Reply #456 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 #457 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 #458 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 #459 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)
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