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Q. Do
the returns I see in your Tarpon Folio ads exactly mirror the
performance of all your investors' accounts?
A. Great question I've gotten lately
from potential investors
and other portfolio managers considering launching spoke funds of their
own.
The answer is "no." Here's why, in
several parts.
First,
for investors: rarely will your own returns match the advertised
historical returns of any fund you may see. Ours are no different.
(Thus, the disclaimers.) Many variables
explain the difference, some of which are specific to spoke
funds. More on those below if you're interested.
With regards to future performance, please
understand that we will likely never see another period where
the portfolio increases as much over a nine month period as it
has since launching Tarpon. My goal
when I launched Tarpon was for everyone to earn 15% a year.
Then, in five years, we'd double our money. That remains my goal today.
We have taken advantage of some truly exceptional circumstances lately,
but it will likely be years before we ever see so many compelling
values
spread so widely across the market again.
So,
to be clear, our returns over the next few years will not look like
those of the previous few months. That won't be for a lack of effort on
my part, mind you. I still expect to outperform as much as is safely
possible over the long term. But those are just the odds. Quality
companies are simply no
longer as dirt cheap as they had been, and the price we pay for
them determines our ultimate returns.
The next part of this answer gets a little wonky. While it's probably
geared more for
other spoke fund managers, I'll include it here, too, for any investors
who care to read more.
The question brings up a couple of
other important points regarding differences between investors' returns
and
those you see in our ads. The first, again, is that performance figures
are
historical snapshots, not future guarantees, as most investors realize
thanks to the disclaimers in the ad and/or common sense. In the case of
Tarpon,
those advertised returns are also the actual,
post-commissions-and-fees,
pre-tax returns for a $12,000 portfolio of my own
money outside of my family's other investments in Tarpon, set
up specifically to
report performance. Our performance is presented using a simple holding
period return for now, as I believe it's the most objective during this
first
year. (I'll talk more about geometric averages down
the road). Currently, at the
end of every month, I record the value of that tracking account, divide
it
by the $12,000 minimum required investment we started with in the
tracking account, subtract 1
and, walla, that's our return since inception as a percentage.
FOLIOfn
computes performance differently, however, as you may have
noticed when checking your account. FOLIOfn
relies on the
same method of calculating returns that mutual funds do -
the "modified Dietz" formula. Tarpon's returns
calculated using modified Dietz have been at times
considerably
higher than the returns I publish, but that's okay by me
because
(1) conservative numbers are a good thing and (2) I'd rather our
returns reflect the logic of my calculator than the accounting logic of
massive portfolios.
The other reason your returns may differ from
what is advertised in the local papers and our website is because of
what's called
"drift." Because investors come onboard at different times, each of you
are buying shares of Tarpon companies at different prices. The
number of shares of each individual company that you own in your
account will differ from the number of shares of each company owned in
the tracking account, too.
That's because I buy stocks in your account according to a
percentage-based portfolio weighting that I control for Tarpon through
the FOLIOfn back end. So, any differences between your
account's performance and the Tarpon tracking account
are most easily explained by (a) when you invest and (b)
the number of shares you are initially buying of each individual
company,
according to a portfolio weighting formula that I determine.
To
date, the "drift" or difference in performance between each account in
the spoke fund and
the Tarpon tracking account has not been large enough to be a concern
to me. Some
drift is to be expected given the huge swings in the market over the
last
year, which further amplify the impact of the variables above. More to
the
point, though - I've rebalanced Tarpon's portfolio weightings
twice since launching the fund nine months ago. Those rebalances
have the effect of bringing that drift close to zero for all
investors. I do not
currently have nor do I plan to create a rigid rebalancing schedule,
but I suspect once or twice a year will probably be a reasonable
average looking ahead.
Another key point about those numbers: on
the day you
invest with us, you buy shares in all companies as determined by the
most recent portfolio weightings I have loaded into FOLIOfn - not the
current
weightings of the fund itself as measured by the Tarpon tracking
account. That initial "sync" will create some future drift between your
results and the tracking account from that day forward, but it is
intentional. I do it because (1) that drift will be negated
during the next rebalance, and (2) even then that initial drift is
still still in
your best interest. Otherwise, on the day you invest, you'd effectively
be
buying shares in those companies that have already gone up the most in
price. And that's just, well, dumb. I want you buying more shares of
the most undervalued companies, all things being equal.
That last point hints at yet another reason why I
believe the spoke fund model is superior to the mutual fund
model; because I
as the portfolio manager can invest your money in accordance with
the portfolio weightings that I want you to have. Mutual fund
managers cannot make that first day tweak. The day you invest in a
mutual fund,
you are effectively buying more of the shares that have
already gone up the most. Add
that in with the other strikes against the mutual fund model,
and it
becomes even harder for your money to outperform - even at the hands
of the most talented
mutual fund managers in the world.
In summary, then - no, your returns will not
exactly match those presented in our marketing material,
particularly in volatile markets. But they should be close
enough. When investing in spoke funds, also realize that a small degree
of occasional "drift" is the
trade-off for incrementally better long-term returns.
So take all fund performance ads with a grain of
salt. They should be viewed only as a historical measure of portfolio
management skill. In fact, a statistician will tell you that track
records are effectively useless at predicting future performance until
a fund manager has at least a 25 year history. I would say that I'll be
on the beach long before then except, well, I already am.
If you have any questions, by all means
please let me know.
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Cale's
Notes: 
Out of the hammock.