SunRift Capital Partners LLC

SunRift Capital Partners uses Folio Institutional for all back office services such as brokerage, custodian, account access, and account statements. Folio’s founder, Steven Wallman has been appointed to a new Securities and Exchange Commission (SEC) Advisory Committee per the press release below.  Mr. Wallman was also a former SEC commissioner.

Folio Institutional Founder Named to SEC Advisory Committee

Folio Institutional founder Steven Wallman has been appointed to the U.S. Securities and Exchange Commission’s new Investor Advisory Committee. more

The 21-member committee was mandated by the Dodd-Frank financial reform legislation. Its role is to advise the SEC on issues such as: regulatory priorities, trading strategies, fee structures, disclosure and “initiatives to protect investor interests and to promote investor confidence.”

Wallman served as a Commissioner of the SEC from 1994-97. Read more in the SEC’s announcement, or in a news article from Investment News.

Also on the Folio Institutional website:

The Foundation of Folio Institutional

The company was founded in 1999 by Steven Wallman, a former commissioner of the U.S. Securities and Exchange Commission widely recognized for advocacy on behalf of investors. We are based in the Washington, D.C. suburb of McLean, in the heart of the Northern Virginia high-technology corridor.

Mr. Wallman gained a unique perspective on Wall Street during his years as a Commissioner of the U.S. Securities and Exchange Commission. He saw first-hand how the needs of many investors were not being fully met by existing financial institutions and existing financial investment vehicles. Folio Institutional was founded, in part, to provide advisors and other professionals the tools they need to deliver better solutions to their clients:

• With Folios, investors of all sizes and investment styles can enjoy the advantages of a flexible and diversified portfolio.
• Folios help reduce the drain on your earnings from fees, trading commissions, and capital gains taxes.
• Folios, in contrast to mutual funds, provide advisors and their clients transparency and control over the securities their money is invested in.

In short, Folio Institutional was founded to provide advisors and other professionals a platform for them to deliver a better way to invest.                  www.folioinstitutional.com

This is Part 2 of my notes from the Indianapolis CFA Society Investment Forum.     Excerpts from Howard Marks’ presentation.                                                                                 Inv-Forum-Notes-Part-2  link to complete notes

Part 2 – Howard Marks- The Most Important Things in the Current market Environment

Environment:

• (3) things influence asset prices: Fundamentals, Psychology, Technicals
• Since 2009:
  • Fundamentals are ‘Iffy’
  • Psychology has rebounded
  • Technicals – centered on cash inflows vs. forced selling

Macro Questions:

• Developed world & competition
• Job creation
• Confidence and behavior of consumers
• Austerity impact
• Delevering vs. previous hyper debt
• Pace of recovery
• Inflation vs. deflation – He had a comment along the lines of “Not both… If you’re coming to me for the answer, that says something about how desperate you are.”       (my note-There’s irony in there somewhere…)
• Europe outlook – murky & scary
• Political involvement in economy – questionable leadership
• Emerging world reliance of developed world
• Hard/soft landing in China
• Nobody pays their debts, they continually refinance. Makes that point even for ‘AAA’ ratings. They rely on the capital markets.
• Sees a drawn out, weaker recovery – ‘Saucer’ vs. V shaped

Prepare for Tomorrow:

• People deal with the future by assuming that it’s like the past
• Be careful not to blindly extrapolate
• Consider that the past outcome was one of multiple possibilities (alternate histories)
• “Risk means more things can happen than will happen.” -quoted Elroy Dimson
• ‘82’-‘99’ was about as good as it gets…
• Analogy of a bucket where you continue to draw out one ball at a time.
  • The more times in a row that a white ball is pulled out, the more future expectations change and expect that trend to continue.
  • Might be prudent to consider that there are a lot of black balls left in the bucket that have yet to be pulled out. (This was a powerful point, and I’ve since added it to my mental model)
• Possible futures may be less favorable than past possibilities…
• Cyclical outlook positive, but worrisome secular trends
• Analogy of a pendulum
  • Investors can be on Offense, Defense, or in the Middle
  • Posits that one be moderate, and venture towards offense or defense in a fashion contrarian to the activity of others

Structuring Portfolios

• Should one prepare for prosperity? –Not if prosperity looks like the 90’s
• Worry more – Losing money or missed opportunity? -References pendulum analogy above and swing counter to the crowd
• What is the key?
  • Money and nerve – that’s all
  • Discernment, discipline, risk control, selectivity
  • Marks’ Current Stance – Move forward with caution
  • Price is very important – nearly anything can be good at the right price
  • Low expectations

Too Cautious?

• Safety in Investing comes from margin for error
• Ensuring a margin for error is incompatible with maximization
• Girding for the bad is more essential than preparing for the good
• Worry more – Losing money or missed opportunity

Q & A

Q. Thoughts on currencies

• Current market relatively efficient.
• Information advantage not likely.
• Talked about ‘know it alls’… but for the ‘non-know it alls’… diversify

Q. Thoughts on GDP

• Historically GDP 3%-4%.
• Oaktree has no numbers and are not economists
• 3% more likely
• Does not like the idea of a historical risk premium

Q. China – ideas/impact to portfolio management

• Not really an impact
• Discussed overbuilt… bubble… avoid
• Control of that and how it is dealt with is a question

Q. Offense vs. Defense

• Recalled committee at U. of Pennsylvania
• Previous memo: ‘Dare to be Great’ Dare to Be Great – Sept 2006
• Requires ‘non-institutional behavior’ from an institution
• Avoid group-think
• Ask members to acknowledge their tendency, say on a 1-10 scale… Then try to sit that aside when considering best direction

 (In Part 3, we will round up notes from Bob Doll’s presentation)               

The Indianapolis CFA Society hosted an all star lineup at the Investment Forum last week. Here are some excerpts from Michael Mauboussin’s presentation. www.scribd.com/doc/87815587/Inv-Forum-Notes-Part-1 link to complete notes

Part 1 – Michael Mauboussin – Untangling Skill & Risk (Outcomes – past, present, future)

In general, outcomes can be attributed to skill (use/application of knowledge readily) and luck (circumstances that either work for or against)

• Easily applicable to sports, business, and investing
• Example of luck: Spanish lottery winner who insisted on a ticket with the last number ’48′ because he had two important factors with the number 7… and 7×7=48…. (help me out math people)
• Example of skill: Marion Tinsley was a checkers champion over a period of six decades…

Paradox of Skill

• Why are there no .400 hitters in baseball today? He cites  S.J. Gould study and the general level of improved play… which has led to less variance
• Sees similar phenomenon in mutual funds…

Reversion to the Mean

• The more that luck is a factor, the faster the results will revert to the mean. (‘in-play’ hits in baseball)
• The more skill is a factor, the slower the results will revert to the mean. (strikeout rate in baseball)

Arc of Skill

• He discussed an ‘arc of skill’ for various activities such as basketball, baseball, golf, and tennis. All peak at relatively young ages, with later peaks for less physically dependant performance. (typically lower 20′s with some around 30)
• (‘Peak’ investor age is 53)

A Bat & Ball…

• You have five seconds to answer: If a bat and ball together cost $1.10, and the bat costs $1.00 more than the ball, how much is the ball? (See answer in full notes…)

His final comment was almost said in passing, but for me, was the most important one of the entire presentation. He suggested finding races where not everyone is fast or the landscape is not saturated with skilled competitors. (Similar to the baseball batting average example, it’s difficult to stand out when everyone is talented and constantly battling for even the smallest advantage.)

(In Part 2, we will round up notes from Howard Marks’ presentation)    

After reading the following article on Business Insider, it seems appropriate to discuss what constitutes an ‘Investment’.

The World’s First Sports-Betting Hedge Fund Has Collapsed After Losing $2.5  Million http://www.businessinsider.com/sports-betting-hedge-fund-collapses-2012-1

Per the article, this hedge fund attempted to make money ”…purely by betting on sporting events…” While being formally launched in 2010, the idea was in the works as far back as 2004. http://www.cnbc.com/id/36218041/Sports_Betting_Hedge_Fund_Becomes_Reality

My observation has been that the word investment gets loosely applied to any situation where someone stands to profit by calling it an investment. The danger is that when everything is an investment, nothing is an investment. A good starting point for those in the Value Investing community is Ben Graham’s definition in Security Analysis:

 ”An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

And from Bershire Hathaway’s latest annual letter: http://www.berkshirehathaway.com/2011ar/2011ar.pdf

      “More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.”

Buffett goes on to describe three major catogories of investments:

1. Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.
2. The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.
3. My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test. Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

He also mentioned these at last year’s annual meeting. See my notes: http://sunriftcp.com/2011/07/21/2011-berkshire-hathaway-annual-meeting-my-notes/

In my mind, the analysis is simple. If I want to be fit, I hang around fit people to see what they eat and how they exercise. If I want to be smart, I hang around smart people to see what they study and read. If I want to invest money, I hang around successful investors to see how they invest their own money. I have found zero successful money mangers who got where they are by consistently betting on sporting events. But this ‘Productive Assets’ thing that Buffett mentions, well that’s a different story…

As we went about our evening routine earlier this week, our daughter recounted her day. -nothing that I’d typically feel compelled to describe on the website, until she got to science class…

For the past couple of days, the teacher has been explaining how the universe, the solar system, and the planets were made. This included explanations about swirling particles, crashing meteors, and big bangs. After awhile, I felt compelled to say something. I looked around the room at the other kids. (who might have wanted to say something) I thought about how they might make fun of me, as well as how my grade might be affected. I raised my hand, stood up, and stated that I believe God created the universe, the solar system, and the planets. Then I saw other kids shaking their heads in agreement. My teacher said “Oh, uh, well, you are entitled to your views.” I just could not sit by and do nothing. I felt like that would have betrayed my Faith.

That was her story as told in front of our church adult bible study class today. My wife had mentioned it, and the class leader thought it was extraordinary. When she told me about it earlier in the week, she was visibly upset and was wrestling with the right thing to do on the related homework assignments. I talked about it with her, and affirmed that she was right for standing up in class. I talked about how maybe we didn’t need to be upset about it and could provide the answer the textbook was looking for as well as the answer she knew to be right. I had my own ‘important’ things to work on, and part of me did not want to deal with ‘girl drama’ that evening. And that was that…

Shame on me…! This is the moment that most parents only dream about. To have a child rise up above the crowd and defend the same God that our founding fathers gave their lives for is to be truly praised. Not until I sat in that room myself and saw it with fresh eyes, did I realize just how extraordinary it was!

May an unseeing father aspire to something as worthy in his own life this week.

“… and a child shall lead them.”

Courtesy of New York Magazine:

MF Global Chairman and CEO Jon Corzine Would Like to Invite You to a Lecture About Fiscal Responsibility This Evening (scheduled for November 15th)

The following link has a photo of the invitation: http://nymag.com/daily/intel/2011/11/mf-global-cancels-fiscal-responsibility-lecture.html

Why do I feel like I should be reading this on ‘The Onion’?

Although a couple of years old now, Barry Schwartz’s TED presentation on the ‘Paradox of Choice’ is relevant to investment choices and funny. One of the first examples is in regards to the over 100 choices of salad dressing at his local grocery store. (Perhaps this is why I loathe going there and would be lost if my wife did not take care of those things!) I’m sure those of you who work with corporate retirement plans already know this… but I found it fascinating that the more choices employees have within their plan, the less likely they are to engage and make selections. (-Especially with things such as 401k matches) http://www.youtube.com/watch?v=VO6XEQIsCoM

An interesting spin on this is Malcolm Gladwell’s TED presentation on spaghetti sauce. (Which coincidentally, is the reason why we have over 100 types of salad dressing to choose from at the local grocery store.) The trick is that there is not ‘the perfect sauce’, only ‘the perfect sauces’. (All people will not converge to choose one type as their favorite, but rather will cluster around a few perfect sauces.) Obviously, there is a ‘sweet spot’ regarding number of available choices, above which paralysis (and thus no decision making) occurs.
http://www.youtube.com/watch?v=iIiAAhUeR6Y

As an aside, this is applicable to my experience in trying to understand the world of investments. Coming from another field, the literal ocean of choices available (just through mutual funds) left me thinking that I should either just throw darts or adopt it as a pet. The ‘Ah-Ha’ moment came after reading Buffett, Graham, and the general cast that seems to be associated with Columbia and Value Investing. Although there are a handful of ways its done, there is a general ‘right way’ to think about it that most importantly, made sense to me. Another powerful observation, by Joel Greeenblatt, is that you don’t have to be an expert in every area and have an opinion on every item. If you know where your circle is, and know it well, keep doing it until they cart you away……