Thought Bubbles from the Deep

[DeepState]

Need to answer in patches given the numerous areas for discussion

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VH: "here is a quote from their website:

The funds management industry is fundamentally flawed. EGP Capital is here to change this. EGP Capital charges no management fee. We charge a performance fee which is set against a high benchmark. And if you don’t make money then neither do we."

That particular fee set-up creates the incentive to shoot for the moon under the guise of not being a fat cat. It creates a huge conflict of interest despite the apparent alignment.


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VH: "On average, fund managers charge clients around 1.67%p.a. for the privilege of managing their money, regardless of how they perform. History shows around 80% of funds fail to beat their benchmark over a five-year period, there are a lot of investors paying a lot of money for nothing, or in some cases, less than nothing."

I was referring to illiterate super fund investors forced to invest in to the major super funds like REST as per your thoughts. These high load funds are retail direct which are totally a rip off and anyone who did any work on a fee comparison would know that there is something odd with paying $5 for an orange.

"p.s. I left out the point before that while industry super funds have relatively low fees many retail super funds are charging 1%+"

OK.

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VH: "Deepstate for somebody as knowledgeable as you not to feel some sort of outage is disappointing. I am not saying funds management should be illegal or that fees should be capped via regulation but at the very least it needs to be decried and denounced in bold fashion by investors, financial advisors (assuming they are independent and not conflicted) and the media. Its morally wrong."

Fund managers are paid to offer a service. It is impossible to create a net $1 gain on overall alpha. The fund managers are paid to try, and most make the honest effort to do so. Expecting an outcome much better than 80% not adding value against a benchmark after fees would be like expecting the finalists in the 100m Olympics to all come in the top three on average. If you want to quote Buffett, let's go to the report when he says words to the effect that (paraphrase) 'It is ridiculous that people, wanting and expecting to be above average, should expect to make money just by engaging in activity'. BTW, even index managers, if they do their job right, underperform. There should be a 100% chance of underperforming the index in their case. They also charge fees.

Am I outraged that the industry outcomes obeys what the laws of physics demands? No.

Should it be a regulated industry in terms of fees? Fund managers are not infrastructure monopolies and no-one exerts dominant pricing. No.

Denounce all you like. Or vote with your feet. It is a market. It functions as such.

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VH: " You speak as of the current system were the world is awash in debt was/is somehow good for society.

I did not say excess debt was a good thing. The ability to create debt, however, is probably a good thing if the excesses are contained or managed. I would like you to imagine a world without fractional reserve banking. We'd still be at least 100 years behind in our economic development. Or it could be a command economy instead. Uh, pass.

Credit does favour the rich. Because they have the capacity to borrow the most. And it creates the potential for hyper-capitalism. Which is why we need restraints against the excesses. However, the net standard of living we have now owes a lot to human ingenuity. One of those things is the ability to create a capital market and harness it. Nothing is perfect. Despite crisis after crisis, we keep going back to that system everywhere. There is a reason....it works better than shiny stones as currency.


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VH: "What makes you think I want to move my holdings into cash? I have enough knowledge about the stock and property markets to buy individual properties and shares successfully (at least so far) thank you very much."

Because of the tirade against low interest rates resulting in more funds and fees flowing to FMs in equity and growth type assets in general....and the outrage at the fees.

Now, of all your successful investments, how many of them were financed with debt at some stage out of our fractional reserve banks and how many of your companies that you are invested in borrow from this same system. How much have you benefited from that personally vs the alternative of the Dark Ages.

Now imagine the Austrians came in and credit creation disappeared. Broad Money becomes M1.

It wouldn't take much imagination. Society wouldn't be very complex.

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VH: "In theory there is nothing to stop somebody from becoming a fund manager but the licensing/regulation, scale requirements (at least to be decently profitable) and the fact that the industry is run like a boys club act as deterrents. Otherwise there are so many investors on Aussie stockforums that are thrashing the market returns (and the returns of the majority of overpaid fat cat professionals) yet cannot or would not open a funds management business (true that some on the forums manage capital for family and friends, etc and charge a small fee)."

It is also hard to become a neuroscientist or astronaut. Both need a bit of training and some need registration. If you think an industry is earning excess profits, the natural incentive is to fill that gap or benefit from it in some way.

Fund managers exist. They are drawn from the general population. The old school tie is utterly a bygone era. If you think it is a closed shop, you are making up excuses for yourself or others against the usual, and tiresome, unseen powers of the financial world who conspire to organise the entire economy for centuries to strip the poor. The Medici's are unlikely to have planned to make Jamie Dimon wealthy, in my view.

Many fundies come from the most modest of backgrounds. The jocks have been matched by the nerds. The fair-skinned Anglo is not a dominant majority. A number wear skirts, although the lifestyle is torrid and not so many want to hang around. It is very merit based. You make money...you get paid and promoted. No-one cares about where you went to school. Most wouldn't know. Capitalism is very pure and clean in that way.

I have already commented on the success fee element.

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VH: "And what happens to those people when the interest rate cycle reverses and heads higher?"

They pay more of their income in interest. That's what happens when you borrow on variable interest rates.

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VH: "Looking at fund manager holdings in the 90s when interest rates were high is misisng th point. You have to look at the retail investor level and see how much retail investors hold in equities, in property and in cash now compared to the 90s. Because the funds management pie has grown as a whole."

I was responding to your perspective that low interest rates forced investors into equities etc and that this benefited FMs via increased demand for those services.

The average retail punter in the early 1990s had no net assets to speak of. Those who had any assets were invested in 'Balanced' Funds which had around 60% allocations to equities and a further 10% in property of some stripe. Much as they do now.

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[kermit345]

I don't want to get in the middle of your interest rate discussion but feel I can add something with regards to the fund manager / industry super fund / SMSF part of the discussion.

VH: "On average, fund managers charge clients around 1.67%p.a. for the privilege of managing their money, regardless of how they perform. History shows around 80% of funds fail to beat their benchmark over a five-year period, there are a lot of investors paying a lot of money for nothing, or in some cases, less than nothing."

Firstly regarding fund manager fees, with the competition for fees in the financial services industry now the days are gone where 2% fees are charged by fund managers (there are still some that charge this but they are a minority, not the norm). I don't have any figures by from my work in the industry a lot of fund managers now charge less than 1% unless you're an international fund manager. In addition to this all industry super funds now have to offer a 'MySuper' or 'Core' type option which has fee limits imposed as their default option. For instance with rest their admin fee is $1.10 a week plus 0.10% of their account balance and the default option is 0.60% - hardly the 1.67% figure quoted above. Australian Super is $1.50 per week and 0.64% for the default option. Now are these default options appropriate for everyone, no, but they are hardly being ripped off either particularly for the broader public who show little to no interest in their superannuation accounts.

The mentality of the broader public towards superannuation is that its free money they might get to access one day and they couldn't really be interested in what it costs or how it performers - they just know that its there. It's really quite easy to have a decent investment approach using ETF's or index based fund managers where your total investment fee is <0.30% and your admin fee can likely be <0.5% - quite reasonable in my view and these fees continue to come down with competition (5 years ago these fees would be 1% for investment fees and 1% for admin fees).

On the note of ETF's and index funds brings me to your point that 80% of funds fail to beat the benchmark over 5 years which is spot on. There are figures for the end of 2016 that show over 5 years of 300 funds in the general aussie equity space (ASX200 benchmark) only 30.12% outperformed the index for 5 years. In the general international equity space which has around 200 funds only 6.85% outperformed the index for 5 years - staggering. The only space in which fund managers truely offer some potential for outperformance is the mid and small cap space where 52% of managers outperform the index.

So in some ways I agree with you VH that fund managers are taking money from people for doing an inadequate job, however I don't believe they are gauging huge amounts of money nor do I believe that it is their fault. People need to take responsibility for their money and simply pointing the finger at fees and performance (not referring to you, I mean the wider public) rather than taking some initiative is just the easy way out. Almost all business are required to offer super choice and banks are not the only option when it comes to receiving financial advice - people just don't want to put in a little effort for potentially big reward which is astounding when it is essentially their forced savings and own money.

EDIT:

Forgot to mention SMSF's - these are often not as good as they are cracked up to be. The members need to take an interest and some control over the funds which can often be an issue if only one member is interested in the finance side of things and the partner isn't. For instance the Male does all the share trading, looking after the ETF's and other investments etc - if he passes away the Female is left with an SMSF that they have no interest in managing.

Further to this you have audit fees, accountancy fees, maintaining an investment allocation statement that the fund has to loosely adhere to. They aren't all they are cracked up to be unless you 1) want property in there, 2) take significant interest in your own investments and 3) have at least a few hundred thousand in there.

 

[Value Hunter]

That particular fee set-up creates the incentive to shoot for the moon under the guise of not being a fat cat. It creates a huge conflict of interest despite the apparent alignment.

Deepstate you have to keep in mind in this case the fund manger has a huge chunk of their net worth invested in the fund, which would reduce the likelihood of excessive risk taking. As it should be. When Buffet ran the Buffet partnerships he had to earn a 4% return before he could take a single dollar in fees and he had a huge chunk of his own money invested.

Index funds charge a fee to under-perform the market but the fee is very low and less than what it would cost for an individual investor trying to replicate the market by buying hundreds of stocks.

Most fund managers do not make an honest effort to outperform the market. They make an honest effort to keep their jobs and increase FUM. As Peter Lynch explained in one his books, there is an old wall street saying "you will never lose your job losing your clients money on IBM". Fund managers would rather slightly under-perform the market than risk sticking their necks out too far to outperform and stuffing it up. Look what happened to Leg Mason after Bill Miller stuck his neck out too far during the GFC and stuffed it up. Its safer to just hug the index (while charging active fees) and under-perform slightly, that way the marketing department can still work their magic to increase FUM despite crap performance. If fund managers were good at their jobs or even necessary, then people would not be stampeding towards index funds.

For proper alignment a fund manager needs to have:
a) a huge chunk of their own assets invested in the fund (only using other people money results in excessive risk taking)
b) Some sort of minimum return/out-performance hurdle before a single dollar in fees is paid. Fund managers should be paid for results/performance not merely for trying. If they perform well then they achieved nothing for you and don't deserve to be remunerated. The less parasites in the system the better.

Yes Kermit I agree the public needs to take more responsibility for their investments. However at the same time less parasites in the system would be a good thing.

Deepstate, we just have to agree to disagree what is a good incentive system for fund managers. As for people voting with their feet in relation to fund managers, you are already well aware of the stampede towards index funds. This is sensible and I hope it gathers further momentum.

Yes Deepstate, some of my investments are financed by debt. You have to make the most of the system we have. It does not mean the system is ideal. Its like when people complain and protest to council about a shopping centre being built near their house (more noise, traffic congestion, parking problems, etc) but then when the shopping centre is built they go and shop there. If they decided not to shop there the noise, traffic etc would still affect them so they might as well enjoy the benefits of the shopping centre. That is how I feel about fractional reserve banking. I do not like it but since it is here and I suffer the negative consequences (whether I use it or not), I might as well use it and reap the benefits/positives.

Deepstate you only need to look at the rise in wealth inequality in the past generation in the U.S.A. and other similar countries to see how an increasing share of the wealth created is going to the top 10% of society. If you look at real unemployment rates (looking at underemployment also, etc) and the real median household income, coupled with the increase in household debt, etc in the U.S.A. you will see that the bottom 80% of society there has actually gone backwards in the past 20-30 years. U.S.A. is not unique and there are other countries in a similar situation. Explain to me again how fractional reserve banking benefits society as a whole and not just the wealthy?

To say that there is either fractional reserve banking or the dark ages is a false dichotomy and is hyperbolic straw man argument.

 

[Value Hunter]

Deepstate I remember in one blog an ex-fund manager stated that when he was a fund manager, his fund only out-perfomed the market by 1% per annum, while during the same time period his personal portfolio outperformed by 14% per annum. The institutional imperative, mandate constraints, focus on FUM gathering, career risk, etc all impact performance and outperforming the market is not their number one priority, not by a long shot despite what they publicly tell people.

 

[DeepState]

Deepstate you have to keep in mind in this case the fund manger has a huge chunk of their net worth invested in the fund, which would reduce the likelihood of excessive risk taking. As it should be. When Buffet ran the Buffet partnerships he had to earn a 4% return before he could take a single dollar in fees and he had a huge chunk of his own money invested.

Index funds charge a fee to under-perform the market but the fee is very low and less than what it would cost for an individual investor trying to replicate the market by buying hundreds of stocks.

Most fund managers do not make an honest effort to outperform the market. They make an honest effort to keep their jobs and increase FUM. As Peter Lynch explained in one his books, there is an old wall street saying "you will never lose your job losing your clients money on IBM". Fund managers would rather slightly under-perform the market than risk sticking their necks out too far to outperform and stuffing it up. Look what happened to Leg Mason after Bill Miller stuck his neck out too far during the GFC and stuffed it up. Its safer to just hug the index (while charging active fees) and under-perform slightly, that way the marketing department can still work their magic to increase FUM despite crap performance. If fund managers were good at their jobs or even necessary, then people would not be stampeding towards index funds.

So, feel free to avoid buying active funds in favour of an index ETF or index fund or holding direct should that be more to your liking.

Meanwhile, the active funds management community will continue to, after fees, create money from nothing in aggregate. All in an effort to placate calls about their incompetence for not outperforming after fees as an industry. When they finish with that, world peace should be simple.

For proper alignment a fund manager needs to have:
a) a huge chunk of their own assets invested in the fund (only using other people money results in excessive risk taking)

Like, say, LTCM perhaps.

b) Some sort of minimum return/out-performance hurdle before a single dollar in fees is paid. Fund managers should be paid for results/performance not merely for trying. If they perform well then they achieved nothing for you and don't deserve to be remunerated. The less parasites in the system the better.

Feel free to do as ECP capital does and good luck with the $11.1 million stampede of asset raised without having an AFSL on the basis you invest OPM via a pty ltd structure. Ahem. Hello ASIC? http://asic.gov.au/for-finance-professionals/afs-licensees/do-you-need-an-afs-licence/

Yes Kermit I agree the public needs to take more responsibility for their investments. However at the same time less parasites in the system would be a good thing.

True. Additionally, the less idiotic decisions taken by people who need to find someone to blame for those decisions would also be helpful to the cause as well, I believe. In order for there to be an irritating parasite, there first needs to be a host Miss Piggy.

Deepstate, we just have to agree to disagree what is a good incentive system for fund managers. As for people voting with their feet in relation to fund managers, you are already well aware of the stampede towards index funds. This is sensible and I hope it gathers further momentum.

Index management has a strong role to play in equity markets. Yes, we can agree to disagree on the matter of fees for not providing outperformance, modelling our industry, instead, on personal injury lawyers and buskers.

Yes Deepstate, some of my investments are financed by debt. You have to make the most of the system we have. It does not mean the system is ideal. Its like when people complain and protest to council about a shopping centre being built near their house (more noise, traffic congestion, parking problems, etc) but then when the shopping centre is built they go and shop there. If they decided not to shop there the noise, traffic etc would still affect them so they might as well enjoy the benefits of the shopping centre. That is how I feel about fractional reserve banking. I do not like it but since it is here and I suffer the negative consequences (whether I use it or not), I might as well use it and reap the benefits/positives.

Can't beat 'em, join 'em. So, by extension of the above arguments, why not become a fund manager?

Deepstate you only need to look at the rise in wealth inequality in the past generation in the U.S.A. and other similar countries to see how an increasing share of the wealth created is going to the top 10% of society. If you look at real unemployment rates (looking at underemployment also, etc) and the real median household income, coupled with the increase in household debt, etc in the U.S.A. you will see that the bottom 80% of society there has actually gone backwards in the past 20-30 years. U.S.A. is not unique and there are other countries in a similar situation. Explain to me again how fractional reserve banking benefits society as a whole and not just the wealthy?

Wealth inequality gets a lot of airplay. Let's consider some base level measures of societal benefits. Proportion of births where the child survives until 2yrs old. Overall life expectancy. Malnutrition. Disease. Proportion of people working in primary industry. Literacy (even if not financial). ... We are vastly richer now than, say, 1900. If you wish to go back in time to 1900, please feel free. Not many people would be better off then. The ability to create credit had a great deal to contribute to this development. GDP growth is strongly influenced by credit. No credit, squash GDP, squash development. Most would rather be poor, alive, and with 2 tvs in the apartment, than gathering cotton. Perhaps you disagree. Fine.

To say that there is either fractional reserve banking or the dark ages is a false dichotomy and is hyperbolic straw man argument.

Fair enough. I retract. The moderately dark ages. Without credit, very little development occurs. Even the supposed gold standard became fractional reserve over and over again, trying to transcend itself.

 

[DeepState]

Deepstate I remember in one blog an ex-fund manager stated that when he was a fund manager, his fund only out-perfomed the market by 1% per annum, while during the same time period his personal portfolio outperformed by 14% per annum. The institutional imperative, mandate constraints, focus on FUM gathering, career risk, etc all impact performance and outperforming the market is not their number one priority, not by a long shot despite what they publicly tell people.

So, let me guess, the number one priority would be to maximise profit for the firm? Shame!

 

[DeepState]

OK, just FYI. I am not here to be the apologist for the world's FM's or excuse the stupidity of those who have no idea what they do and yet make meaningful decisions. And really don't want to go point for point on things which have been heavily considered by the industry from a range of participants who are expert in it.

The capital markets exist to price risk. It is an important function and those within the system play this role. Without it, we would all be worse off, albeit more equally worse off - as if that were progress.

If you don't want active funds management, stop whinging, buy passive. How hard is that? If I want to buy an orange, I don't have to bag the crap out of an apple to justify it. Particularly if the basis for doing so is that a packet of 12 apples couldn't become 13 apples spontaneously. And that the particular type of apple sold was deemed more suitable for public consumption than the fugu-fish version which I personally prefer at home because I understand the risk of it better than the illiterate apple eaters. Yet, some apples are delicious.

If you don't like credit, don't borrow and don't interact with anything that does. If you benefited from it...as you do with every breath, why not show some gratitude whilst enjoying the benefits of whining about it from the perch it provided you. Investment properties bought on leverage, shares in companies whose prices are determined by real price discoverers who use leverage....and crying about inequality and concerned for the over-levered in the housing market? Poor me! Give your house to them! Inequality reduced, mortgage debt down, credit quantity down. Easy.

If you actually mean what you say and cared to do something about it, do it. The benefits are immediate and you are perfectly aligned. Set an example so that we may see the wisdom of this. If not, then bathe knowingly in the hypocrisy of the position of claiming the higher moral standard and, yet, not taking obvious moves in that direction.

You are morally obliged to take this action or declare that you are more about promise than delivery. Hmmm.

And EGP should be shut down by ASIC. Perhaps you might want to tell Tony before someone tells ASIC.

Thanks, but I'm done for this exchange.

 

[Value Hunter]

Deepstate, thanks for the brisk debate. There are in my opinion numerous straw man arguments in your last few posts but given that you have decided to opt of this particular debate I am happy to leave things as they are and not continue this debate.

On another topic are you familiar with the works of Australian economist Philip J. Anderson? Although I do not agree with everything he writes, he has a lot of fascinating insights (primarily about the real estate cycle). You should read his stuff if you get a chance.

 

[Klogg]

VH: "here is a quote from their website:

The funds management industry is fundamentally flawed. EGP Capital is here to change this. EGP Capital charges no management fee. We charge a performance fee which is set against a high benchmark. And if you don’t make money then neither do we."

That particular fee set-up creates the incentive to shoot for the moon under the guise of not being a fat cat. It creates a huge conflict of interest despite the apparent alignment.

I realise you're done for this exchange, but I'm not sure this is correct. There's a high watermark set. If the annualised rate is not above 6%, no performance fee is charged regardless. I'll also add that the fund manager of EGP has a substantial sum of money in the fund. Again, it changes the incentive...
(The LTCM example is cherry-picking. One statistical anomaly does not prove a point. Of course, the onus is on me to prove mine as well, as the one Buffett example is not sufficient either, so I'll see what I can dig up)

Thorney Opportunities (ASX:TOP) have a similar setup, except they don't have a high watermark... this is far worse.

I'll also add that EGP's structure was the same as the Buffett Partnerships.


"And EGP should be shut down by ASIC."

I don't see why. IIRC, Tony is operating as a company, coming under the limit of 20 investors/$2m per annum, as the $11.1m has come in over many years. This means no financial services license is required.

 

[DeepState]

"And EGP should be shut down by ASIC."

I don't see why. IIRC, Tony is operating as a company, coming under the limit of 20 investors/$2m per annum, as the $11.1m has come in over many years. This means no financial services license is required.

Pls refer attached and contact ASIC.

The idea of alignment of interest is very solid. To the extend that this is achieved by heavy investment of personal wealth, great. The practice and true implications beneath the surface vary a lot. I really don't want to list it all out. Buffett does it, so we must all do it I suppose or justify why we don't also drink Cherry Cola when investing.

Your 'true' incentive is to maximise wealth. That is different to maximising the value of your investment inside the fund, particularly one with mandate constraints of some type. Think about it.

It depends. 100% of Net, excluding PPOR, sounds great when you have $1m. Or, if thought to be material, it can just be a ploy or otherwise unverifiable in tinpot cases. For the most open fund in Australia, it sure is hard to get any info on the accounts for the EGP. DYOR. And don't whinge about getting your faced ripped off when the accounts are actually published by someone other than a 'volunteer auditor' and you see it was a ponzi in the end. For that outcome is also perfectly aligned to the manager.



Please ensure you disclose any financial association with EGP if you have not already done so.

 

[Klogg]

Pls refer attached and contact ASIC.

The idea of alignment of interest is very solid. To the extend that this is achieved by heavy investment of personal wealth, great. The practice and true implications beneath the surface vary a lot. I really don't want to list it all out. Buffett does it, so we must all do it I suppose or justify why we don't also drink Cherry Cola when investing.

Your 'true' incentive is to maximise wealth. That is different to maximising the value of your investment inside the fund, particularly one with mandate constraints of some type. Think about it.

It depends. 100% of Net, excluding PPOR, sounds great when you have $1m. Or, if thought to be material, it can just be a ploy or otherwise unverifiable in tinpot cases. For the most open fund in Australia, it sure is hard to get any info on the accounts. DYOR. And don't whinge about getting your faced ripped off when the accounts are actually published by someone other than a 'volunteer auditor' and you see it was a ponzi in the end. For that outcome is also perfectly aligned to the manager.

Just looping the EGP thing off as just another disaster waiting to happen. How does a fund manager expecting 5%pa outperformance, say, with $11m in teh fund, say $3m for alignment purposes, meaning $80k revenue, maintain an office on Bligh St, travel, host conferences and feed his wife and three kids? What was that, Bernie?

Please ensure you disclose any financial association with EGP if you have not already done so.

Good point on the bolded bit - I'll start with that.
I have no financial association with EGP whatsoever. But for disclosure purposes, I'll mention that I have:
- spoken to Tony (the fund manager) about various ASX listed companies, specifically when I have an interest in investing in them
- spoken to Tony about investing in the fund (I have not invested, as I am investing my own capital at the moment)


"The practice and true implications beneath the surface vary a lot. I really don't want to list it all out. Buffett does it, so we must all do it I suppose or justify why we don't also drink Cherry Cola when investing."

Fair point, you do need to ensure things check out and interests truly align, regardless of any others who may have followed a particular process.


"And don't whinge about getting your faced ripped off when the accounts are actually published by someone other than a 'volunteer auditor' and you see it was a ponzi in the end. For that outcome is also perfectly aligned to the manager."

Again, this is true. But has a financial services license stopped this in the past?


"Just looping the EGP thing off as just another disaster waiting to happen. How does a fund manager expecting 5%pa outperformance, say, with $11m in teh fund, say $3m for alignment purposes, meaning $80k revenue, maintain an office on Bligh St, travel, host conferences and feed his wife and three kids? What was that, Bernie?"

And this comes down to understanding the situation. What if this is not their only job? What if they don't need to travel and host conferences?
I'm not saying your questions are not valid, but the work must be done before one can assume there is fraud involved.



Finally, on the attached file - an unregistered fund needs a license to:
1. deal in a financial product
2. provide advice (although exemptions exist in some circumstances), and
3. provide a custodial service.

From what I know of the situation (again, I could be wrong), they're doing none of the above.

 

[DeepState]

Finally, on the attached file - an unregistered fund needs a license to:
1. deal in a financial product
2. provide advice (although exemptions exist in some circumstances), and
3. provide a custodial service.

From what I know of the situation (again, I could be wrong), they're doing none of the above.

Offering a Pty Ltd company for subscription at prices which the manager determines whose primary business consists of liquid investments traded by the manager... is not a 'financial product'?

"And don't whinge about getting your faced ripped off when the accounts are actually published by someone other than a 'volunteer auditor' and you see it was a ponzi in the end. For that outcome is also perfectly aligned to the manager."

Again, this is true. But has a financial services license stopped this in the past?

Hard to know. But let's run a thought experiment. If you were going to organise a ponzi scheme, would you more likely register yourself with the regulator after an exhaustive application process, or ... create a small fund whose performance cannot be verified etc..

 

[DeepState]

I'm not saying your questions are not valid, but the work must be done before one can assume there is fraud involved.

Let me be clear. i did not raise EGP, I do not know Tony and have not run forensics over this. I am not assuming he is a fraud, but am interested to find that much of what is asserted here cannot actually be verified and this seems at odds with statements about superior practices and desire for transparency together with the business model. That's it so far as anything related to fraud goes. I have no interest either way other than to prefer a legit outcome.

I do believe EGP requires an AFSL. EGP is an investment vehicle plain and simple. It should be dead obvious when you use terms like 'invest with' in relation to the l.

Caveat Emptor. That's it for EGP.

 

[Value Hunter]

EDGE: Can you point out what yours is?

1. If I were to ask what your reason is to believe that you can take money out of the market, what would it be?

2. If I then asked, are you in a position to show proof of this, could you?

3. Whatever your response to 2. above, are you able to say who you are taking these returns from? [Not the name of the person, but a general set of market participants of some kind...like other tech traders or large retail investors and the like]

I think this is an interesting discussion to see what edges people think they have.

1) My edges are:
-A long-term time frame with a long holding period. I am not beholden to quarterly or even yearly performance. 2 or 3 years of consecutive substantial under-performance does not bother me. I operate on a 5-10 year time horizon. This coupled with patience in holding onto stocks (I often hold stocks for more than 5 years) means that the performance of the businesses (stocks) has time to play out. Additionally my portfolio turnover is very low, much lower than average. My low portfolio turnover means less is paid in brokerage and taxes are deferred for longer and are more frequently paid at the long-term rate ensuring more of the gross return makes its way to the bottom line. Also many institutional funds are open ended and have to deal with fund outflows in a falling market whereas my investments are long-term money and I can sit out any downturns without selling.

-Liquidity/nimbleness. Since I am investing small sums I can easily invest in any stock including micro-caps and get in and out usually quickly and without affecting the price. This is a definite advantage over institutional investors/fund managers.

-No mandate constraints means I can invest in any and all stocks (no ethical or market cap limitations, maximum sector weightings, etc) meaning I have a larger universe of stocks to choose from. Also I can be levered and do use leverage in my portfolio (leverage secured against property so it has a low interest rate and is not subject to margin calls or expiry, etc). I do not have to be diversified and I can invest in as few or as many stocks as I want with no minimum or maximum weightings. This has led me to have a concentrated portfolio with a large amount invested in a small number of my best ideas.

2) I have substantially outperformed the market. I do not have audited results or the like so I cannot prove it easily. You can choose to believe me or not.

3) I take my return from fund managers/institutions who invest based on so called "fundamentals"/"value" who typically have a short term time horizon (despite what their marketing material says) which means they buy and sell based on short-term business or macro or portfolio weighting considerations (or even fund flows) and are overly diversified. They and broking analysts also typically are overly focused on what the business will earn over the next 1 or 2 (or sometimes 3) years. I typically look at what is the business going to look like in 5 or 10 years from now.

Also when it comes to small caps which are my preferred hunting ground I have huge advantages over small cap fund managers. Even small cap funds often have hundreds of millions of dollars to invest, and with many small cap stocks it can take them months to get in or out of a position while it only takes me hours or days to get in or out. Yes, I do not trade short-term but when a small cap stock is undervalued I can go full position size in a day, while for example a small cap fund manager could take weeks or months to get set while the share price rises on them as they are buying. Not to mention that often their buying is enough to push up the price of the thinly traded stock as they are buying it. On the opposite side of the coin I the fundamentals of a small cap deteriorate I can get out quickly while the small cap fund manager takes weeks or months to sell out often into a falling share price.

Sure small/retail investors do not have the same research firepower or technical/industry knowledge as many fund managers, or stock-broking analysts, etc but really given all the other previously mentioned advantages small/retail investors have over institutions (for long-term investing at least) it should be easy for any retail investor with half a brain to outperform the market.

 

[DeepState]

Great response VH. What do you regard as your "investment objective"?

 

[DeepState]

Ouch...on the money?

 

[Value Hunter]

I have multiple investment objectives:

1) Preserve/protect my capital from permanent loss (including loss of purchasing power from inflation) and keep risk to an acceptable/reasonable level.

So far the objective of preserving my capital has been achieved. Its very difficult to accurately quantify risk, as for my purposes, diversification levels, volatility/beta, draw down, sharpe ratios, etc do not accurately measure the risk of permanent loss of capital. It is to a large extent a qualitative judgement. I feel that the risks I have taken have been acceptable/reasonable but I am not fully sure and perhaps the risks I have taken have been too high and I am merely ignorant of the fact.

2) Over rolling 5 year periods achieve a net after tax return which is higher than:
A) The returns from cash and term deposits
B) The returns from the growth and balanced options of major super funds
C) The All Ordinaries accumulation index
D) The rate of inflation (i.e. increase my purchasing power)
E) And in the double digits

Although I have not worked out my exact internal rates of return (which would involve complex calculations due to leverage and multiple inflows and outflows into/out of the portfolios over many years) I know that all the portfolios I manage have so far exceeded all of those hurdles benchmarks since inception (and over the past 5 years also). Additionally I manage 3 portfolios: my personal share portfolio, my mum's personal share portfolio and my parents self managed super fund. They all have differing returns, but thus far all 3 portfolios have met the return objectives stated above.

Deepstate as for the paper you referred to in your post I largely agree with it. Gambling and speculation have many commonalities and are often engaged in by the same people. Investment has some similarities to both but far fewer. I rarely engage in either speculation or gambling. I would not call playing poker with your friends/family and betting $20 over the course of a night (I occasionally do that sort of thing) gambling. I have only ever gambled on two occasions in my life, got burnt and have sworn off it. As for speculation it is something I partake in on rare occasions.

 

[craft]

2) Over rolling 5 year periods achieve a net after tax return which is higher than:
A) The returns from cash and term deposits
B) The returns from the growth and balanced options of major super funds
C) The All Ordinaries accumulation index
D) The rate of inflation (i.e. increase my purchasing power)
E) And in the double digits

Although I have not worked out my exact internal rates of return (which would involve complex calculations due to leverage and multiple inflows and outflows into/out of the portfolios over many years) I know that all the portfolios I manage have so far exceeded all of those hurdles benchmarks since inception (and over the past 5 years also). Additionally I manage 3 portfolios: my personal share portfolio, my mum's personal share portfolio and my parents self managed super fund. They all have differing returns, but thus far all 3 portfolios have met the return objectives stated above.
.

Seriously, you can't (don't bother to) measure it, but you know you have achieved it.......

You forgot goal F) Be unaccountable.

 

[Value Hunter]

Craft I know each of the 3 portfolios since inception (late 2007 or early 2008) have an internal rate of return (after tax) somewhere between 10% and 20% p.a. based on rough back of the envelope calculations. However I have not sat down and made a proper spreadsheet or used a proper portfolio management software to know the exact returns. Like I said when you are using some leverage and have multiple inflows and outflows stretching over many years its complex and time consuming to do such calculations. If I am achieving my objectives what difference does it make if I find out whether my internal rate of return since inception is 13.5% p.a. or 16.2% p.a.?

 

[craft]

Craft I know each of the 3 portfolios since inception (late 2007 or early 2008) have an internal rate of return (after tax) somewhere between 10% and 20% p.a. based on rough back of the envelope calculations. However I have not sat down and made a proper spreadsheet or used a proper portfolio management software to know the exact returns. Like I said when you are using some leverage and have multiple inflows and outflows stretching over many years its complex and time consuming to do such calculations. If I am achieving my objectives what difference does it make if I find out whether my internal rate of return since inception is 13.5% p.a. or 16.2% p.a.?

It's not the precision that matters it's having the factual data so that we can guard against delusional cognitive bias'.

Are you realy achieving you goals or do you just think you are.

If you're proactively managing money and not tracking your performance against a passive accumulation benchmark, that's faith not accountability of performance.

Maybe faith is all you need.