Author Topic: Pabrai/Buffett partnership fee structure  (Read 60110 times)

Ham Hockers

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Re: Pabrai/Buffett partnership fee structure
« Reply #20 on: November 18, 2013, 08:17:48 AM »
To me, the incentives aren't necessarily aligned with highwater marks.  If I lose too much money, I'll just walk away and open a new fund.

Whoever wrote this quote is clearly missing your point.


oddballstocks

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Re: Pabrai/Buffett partnership fee structure
« Reply #21 on: November 18, 2013, 08:34:49 AM »
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.


I like the idea of a manager who is already financially independent.
Because if he has a track record that is worthwile, he'll be already a long way towards financial independance.
Secondly, as a partner, you don't want your manager to be pressured to take unnecessary risks because he needs the fee money to survive.
For an investor, patience is no luxury, it is a neccessity, and if your manager is being pressured by debt or by income problems, the first thing to go is the patience, and with it the rationality and prudence.

This is the current reality, the only people who can get into investment management either are young and have no expenses, or those who are older and already made enough money that day to day expenses aren't an issue.  This eliminates anyone who decides they'd like to have a family, which is probably why working all of the time is lauded for investment managers, they're either young or beyond kids.

Why would someone who's financially independent take on someone else's money to manage?  Managing money for someone else is not the same as managing your own money, it's much more stressful, with more responsibility.  If you are well off why add that to your life.  If I were financially independent I would not be managing outside money as something fun, I would probably manage my own money and spend time on things I wanted to do like skiing, biking etc.

The way for someone to manage money who has a family on their own appears to be as a RIA who builds a considerable book of business and earnings a straight fee, or for someone who's wealthy parents/relatives bankroll their living expenses while they build up AUM.  The second route is all about connections, if you come from a wealthy family I'd imagine it would be easy to collect assets which means you wouldn't need to live on your parents money for long.
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Edward

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Re: Pabrai/Buffett partnership fee structure
« Reply #22 on: November 18, 2013, 08:54:25 AM »
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.
We have a fee structure of 0.5% - 10% in our company. I absolutely agree with the sentiment voiced by oddballstocks and this is the reason we chose this structure.

If you take only a performance based fee and bear the expenses, it is a very risky proposition. You might be unlucky for a few years and if your cost structure isn't very low you're going to be under massive pressure, not to say anything about trivial stuff such as food and shelter while you're at it.



Parsad

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Re: Pabrai/Buffett partnership fee structure
« Reply #23 on: November 18, 2013, 09:11:54 AM »
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.
We have a fee structure of 0.5% - 10% in our company. I absolutely agree with the sentiment voiced by oddballstocks and this is the reason we chose this structure.

If you take only a performance based fee and bear the expenses, it is a very risky proposition. You might be unlucky for a few years and if your cost structure isn't very low you're going to be under massive pressure, not to say anything about trivial stuff such as food and shelter while you're at it.

True, but like any real entrepreneurial endeavour, risk and sacrifice play a very significant part.  We run our business very lean, because if we didn't, we would have been out of business by now.  I think those habits are learned very quickly when everything is at risk. 

A fixed expense ratio of any sort to cover the manager's office and living expenses somehow strikes me as a less efficient way to learn that experience.  And if you somehow manage to get through the first few years, especially when they came during the worst crisis in 70 years, you know you can probably get through anything going forward.  There's some definite value in that.  Cheers! 
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oddballstocks

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Re: Pabrai/Buffett partnership fee structure
« Reply #24 on: November 18, 2013, 09:15:11 AM »
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.
We have a fee structure of 0.5% - 10% in our company. I absolutely agree with the sentiment voiced by oddballstocks and this is the reason we chose this structure.

If you take only a performance based fee and bear the expenses, it is a very risky proposition. You might be unlucky for a few years and if your cost structure isn't very low you're going to be under massive pressure, not to say anything about trivial stuff such as food and shelter while you're at it.

I like your structure, also enjoyed reading the letters on your site.  Great job on Renault, I looked at that one and passed, not exactly a brilliant decision..
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skanjete

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Re: Pabrai/Buffett partnership fee structure
« Reply #25 on: November 18, 2013, 10:20:22 AM »
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.


I like the idea of a manager who is already financially independent.
Because if he has a track record that is worthwile, he'll be already a long way towards financial independance.
Secondly, as a partner, you don't want your manager to be pressured to take unnecessary risks because he needs the fee money to survive.
For an investor, patience is no luxury, it is a neccessity, and if your manager is being pressured by debt or by income problems, the first thing to go is the patience, and with it the rationality and prudence.

This is the current reality, the only people who can get into investment management either are young and have no expenses, or those who are older and already made enough money that day to day expenses aren't an issue.  This eliminates anyone who decides they'd like to have a family, which is probably why working all of the time is lauded for investment managers, they're either young or beyond kids.

Why would someone who's financially independent take on someone else's money to manage?  Managing money for someone else is not the same as managing your own money, it's much more stressful, with more responsibility.  If you are well off why add that to your life.  If I were financially independent I would not be managing outside money as something fun, I would probably manage my own money and spend time on things I wanted to do like skiing, biking etc.

The way for someone to manage money who has a family on their own appears to be as a RIA who builds a considerable book of business and earnings a straight fee, or for someone who's wealthy parents/relatives bankroll their living expenses while they build up AUM.  The second route is all about connections, if you come from a wealthy family I'd imagine it would be easy to collect assets which means you wouldn't need to live on your parents money for long.

There is actually a third way, as suggested by Pabrai : you can combine a day time job with investing for some years until you have the needed funds.
That's the way we did it. We are not from wealthy families, haven't been supported, didn't have a financial background, we never inherited anything and we now have 4 children to support. But after some 10 years of combining a day time job with investing, we could choose to do whatever we wanted.
I agree with you however that it wouldn't be as easy to replicate this if you already have the kids. We could combine my day time job with managing the partnership and my wife's job until the 4th child came. Then I had to choose and give up my day time job.

Parsad

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Re: Pabrai/Buffett partnership fee structure
« Reply #26 on: November 18, 2013, 10:33:19 AM »
The structure is fair, but has a hole in my view.  If you can't earn an incentive fee in the first year or two, or you start in a bad market there is no reason to stick around and try to earn out of that hole.

Maybe this works if you're independently wealthy, but if I'm running a fund, and I need a fee to pay for food/mortgage/kids I can't be waiting around forever hoping to eventually earn a fee.  I guess maybe this could become an advantage, if I do end up waiting for years I might not have to pay child support or alimony after my wife divorces me because I"ll have no income.

A sizable drop and a quick rebound, like what we just experienced isn't much of a problem, the fee might be lost for a year.  What kills this structure is multiple years of declines, or a flat market.

Not everyone can be Buffett, I applaud anyone who's done well with this structure, although there's an element of survivorship bias in it.  Where are the stories of managers who tried it, didn't make any money and shutdown their fund and started a new one?

I like a structure where the manager is paid something, enough that they're not worried about getting another job or taking crazy risks, yet they are incentivized if they do well.


I like the idea of a manager who is already financially independent.
Because if he has a track record that is worthwile, he'll be already a long way towards financial independance.
Secondly, as a partner, you don't want your manager to be pressured to take unnecessary risks because he needs the fee money to survive.
For an investor, patience is no luxury, it is a neccessity, and if your manager is being pressured by debt or by income problems, the first thing to go is the patience, and with it the rationality and prudence.

This is the current reality, the only people who can get into investment management either are young and have no expenses, or those who are older and already made enough money that day to day expenses aren't an issue.  This eliminates anyone who decides they'd like to have a family, which is probably why working all of the time is lauded for investment managers, they're either young or beyond kids.

Why would someone who's financially independent take on someone else's money to manage?  Managing money for someone else is not the same as managing your own money, it's much more stressful, with more responsibility.  If you are well off why add that to your life.  If I were financially independent I would not be managing outside money as something fun, I would probably manage my own money and spend time on things I wanted to do like skiing, biking etc.

The way for someone to manage money who has a family on their own appears to be as a RIA who builds a considerable book of business and earnings a straight fee, or for someone who's wealthy parents/relatives bankroll their living expenses while they build up AUM.  The second route is all about connections, if you come from a wealthy family I'd imagine it would be easy to collect assets which means you wouldn't need to live on your parents money for long.

There is actually a third way, as suggested by Pabrai : you can combine a day time job with investing for some years until you have the needed funds.
That's the way we did it. We are not from wealthy families, haven't been supported, didn't have a financial background, we never inherited anything and we now have 4 children to support. But after some 10 years of combining a day time job with investing, we could choose to do whatever we wanted.
I agree with you however that it wouldn't be as easy to replicate this if you already have the kids. We could combine my day time job with managing the partnership and my wife's job until the 4th child came. Then I had to choose and give up my day time job.

Same thing!  No family money...no inheritance.  I used the investments I had saved up over the years as the backup support, and I did work on the side for Alnesh's accounting firm while launching and running the funds.  We launched Corner Market Capital with $25K raised from family and friends, and Alnesh and I initially only put $100 into the U.S. fund...just like Buffett did with his original partnerships. 

I also lead a very lean and frugal life for the first five years...even got rid of my beloved Mini!  Brown bagged it or ate very cheaply almost every day, public transport, office was at no or low-cost as I was doing some work for Alnesh, no fancy trips other than the usual Pabrai Funds/Fairfax Financial AGM's, no administrative assistants, and worked very hard to build a great track record.  We also had some great service providers that made our life easier!

Now we are the largest investors in the U.S. fund, and one of the largest in the Canadian fund.  We generated incentive fees pretty consistently this year in both funds.  I don't brown bag it anymore, but I still live a frugal life, including still taking public transport to the office...no stress, I can answer emails or read.  I only do occasional work for Alnesh's firm and run the funds from my terrific home office 2-3 days a week.  It's almost the perfect life for me now...just need to double our assets under management in the next couple of years and life could not be better!  Cheers!   



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Palantir

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Re: Pabrai/Buffett partnership fee structure
« Reply #27 on: November 18, 2013, 10:46:34 AM »
wow 25k?
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JBird

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Re: Pabrai/Buffett partnership fee structure
« Reply #28 on: November 18, 2013, 10:48:26 AM »
There is actually a third way, as suggested by Pabrai : you can combine a day time job with investing for some years until you have the needed funds.
That's the way we did it. We are not from wealthy families, haven't been supported, didn't have a financial background, we never inherited anything and we now have 4 children to support. But after some 10 years of combining a day time job with investing, we could choose to do whatever we wanted.
I agree with you however that it wouldn't be as easy to replicate this if you already have the kids. We could combine my day time job with managing the partnership and my wife's job until the 4th child came. Then I had to choose and give up my day time job.

That's commendable-- I have a lot of respect for that. Same for you Parsad!
« Last Edit: November 18, 2013, 10:57:54 AM by JBird »
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hyten1

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Re: Pabrai/Buffett partnership fee structure
« Reply #29 on: November 18, 2013, 10:50:58 AM »
parsad,

25k?! how can that be, the administrative/legal cost is almost hat no?

hy