The Island Investing Blog

  • Where The Pirates Are Friendly

    Our friends Lance and Suzanne just moved their 105′ schooner to a new home at Schooner Wharf in Key West. We took a sunset cruise on the Halie & Matthew last Sunday. Amazing.

    Gorgeous boat, great crew. Then there was the tropical breeze, perfect music and cold beer…plus dolphins, a black powder cannon, some truly impressive shiphandling and – most important – mounds of free jelly beans for the kids. I should do a commerical.

    Their website is www.calypsosailing.com. The clip below doesn’t do it justice…I’m sort of the anti-Coppola behind a camera. But here’s another vid for the jet ski crowd, a future postcard, and a clip of her off Sunset Key the day before, too.

    Posted by: Cale Smith , Islamorada, The Good Life
  • How To Think About Building a Spoke Fund®

    Below are some thoughts for new portfolio managers to consider before building a Spoke Fund®.  I’ll elaborate more on these ideas and others every week.

    A Caveat

    When it comes to building a Spoke, I am assuming you already have the magic rocks necessary to be a good portfolio manager. It entails some hefty responsibilities, including a fiduciary duty. There is also a huge difference between being a good portfolio manager and running a business that is good at portfolio management. I’ll be focused on the latter here.

    Learn From My Mistakes

    I’m a value investor. Among other things, that means I can be pretty stingy. I’m so cheap that I once drilled a hole in a nickel so I wouldn’t have to pay six cents for a washer. My car is so old that I keep losing my wife on left turns. And when it came to starting my firm and my Spoke Funds, I instinctively took a do-it-myself approach, simply to save cash. At times, however, that approach ended up costing me more.

    In an effort to spare you that trouble, I will be recommending you outsource certain tasks on day one. If another expert can do a project better and cheaper than you can, offload it. You’ll be extremely busy the first few months. The tasks you should outsource may not be the same as the ones I recommend, however. To be able to decide what to keep on your plate and what you should hand off, you’ll need to figure out your effective hourly rate.

    The Outsourcing Number

    I guesstimated my time during start-up mode was worth $27 an hour. How? Finger in the air, really. I knew Warren Buffett’s annual salary was $100,000 a year and decided that it was bad juju to assume I should be paid more than The Oracle. I also figured there wouldn’t be any vacations that first year and that I’d be working 70 hours a week. So:

    $100,000 / 52 weeks / 70 hours a week = $27 an hour

    There’s a little more to the actual formula, but I ignored self-employment tax. And to be clear – your fees as a spoke fund manager are based on assets, not hours, so consider that number a hurdle, not a measure of value added. In the end, the rate itself will be less important than having a rule of thumb for deciding what to outsource and a hyper-awareness of opportunity costs.

    Using that rate, I could then tell the cost to the company if it took me ten hours to format our monthly newsletter – at least $270. If Gecko Graphics can do the same job in six hours for $25 per hour, I’d effectively save $120 by outsourcing it. Even more valuable, however, is that I’ve saved myself time I can then spend working on more important projects.

    Simple concept, but a powerful one. I’m hopeful that if nothing else this blog can help reduce your hours per week as you launch your spoke fund. If we can get you down to 40 hours per week, your effective hourly rate will be $48 in the above and you’d save that much more time and money by selectively outsourcing.

    Were I an investment banker, I do believe that would also mean I would then have created $21 of value per hour for you, right out of thin air. Paypal accepted.

    Last Chance to Back Out

    As I mentioned here, I choose to start a Spoke Fund® versus a mutual fund and/or hedge fund after considering each option for some time. If you want more info on how to start a mutual fund, the best guide I found was Melinda Gerber’s first book. If you want to start a hedge fund, I’d highly recommend you see Joe Ponzio’s recent summary on FWallStreet.

    Now, on to some initial thoughts.
     
    How to Think About Building a Spoke Fund®:

    1 – Destroy the dream.  Many new portfolio managers dream that putting up great numbers is all it takes to bring investors to the doorstep in droves. Banish the thought. You need to love the business more than the dream if you’re going to make it work. 
     
    2 – Think like a billionaire, work like an immigrant. Launching a spoke fund means building a firm, not just picking stocks. When it comes to the business, focus on process and systems. When selecting stocks for your fund, work like Rocky in that barn in Russia.
     
    3 – Get comfy in the long tail. Starting a Spoke Fund® means you’re a volunteer outlier. There simply aren’t many around yet. You’ll get no shortage of questions, and some folks may throw darts at your newfangled model. Ignore them. Your clients are all that matters.
     
    4 – Find a brain trust. If you’re lucky enough to have a mentor, latch on like a tick in the tall grass. Otherwise, consider finding a business coach or putting together an informal advisory board. You’ll need those other voices in your ear as well as the occasional kick in your pants. Emphasize sales and marketing experience when choosing your advisers above all else.
     
    5 – Plan like it was D-Day. Fund yourself. Have enough money in the bank to survive a nuclear winter before you start. Think about what you’ll sacrifice to make the business work. And though I think it probably goes without saying for this crowd – focus first on cash flow, then profitability.

    6 – Obsess about the critical path. To launch your Spoke Fund® as quickly and as smoothly as possible, you’ll have to juggle many tasks in parallel. I’ll give you my thoughts on the sequence of tasks that determines the shortest possible time to get you to launch.

    7 – Become a registered investment adviser. No cute headlines here. Being a fiduciary is unlike any other role on Wall Street. It’s also essential to the Spoke Fund® model. I’ll post more on how to accelerate this process soon (hint: we’re going to outsource it), along with some thoughts on NAPFA.
     
    8 – Master the Folio platform. Three things are essential to the mechanics of Spoke Funds from the manager’s perspective: basket trading, one click syncing and cost control. FolioFN is light years ahead of everyone else. We’ll spend a lot of time going over the Folio back-end.

    9 – Stay lean. Technology will be another huge help in keeping your costs low and productivity high. I’ll tell you more about every tool I can think of when we get to this point – from desktop software to electronic signatures to CRM tools.

    10 – Think local. As an analyst, I used to think the power of local economies of scale were among the most underrated advantages in business. As the owner of a small business, I’m now convinced they’re even more valuable.

    11 – Your weakness is better than their weakness. Sales and marketing will be by far your biggest challenge when it comes to growing any fund. That represents an opportunity for the Spoke Fund manager, though, for three reasons. First, unlike a hedge fund, you can advertise your Spoke Fund®. Second, your business will have a ridiculously low breakeven point compared to the average mutual fund company – which means you can successfully market directly to investors in places where mutual funds won’t go. Finally, while brokers and mutual fund companies are good at filling investor demand, you, my friend, can create it – assuming you’ve got those magic rocks.

    12 – Yours is a superior product. I believe the features of Spoke Funds are unequivocally superior for investors when compared to both mutual funds and hedge funds. All things being equal, it’s far easier to market a remarkable product like a Spoke Fund® then to put whipped cream on the cow chip that is yet another mutual fund. And now more than ever, people are exhausted from having being fed so many cow chips by Wall Street. So your timing and product couldn’t be better.

    My next post in this series will identify the critical path activities that I think most deserve your initial attention.

    And if you decide to start a Spoke Fund®, please let me know in the comments section, this form or via email. I’ll plug you and your firm here on CaleInTheKeys, help you as best I can on Twitter, and eventually highlight all new spoke managers on SpokeFund.com.

    For now, let’s get ready to go to work.

    Portfolio managers: go to www.SpokeFund.com for more about how to build a spoke fund.

    Posted by: Cale Smith , Spoke Fund TM
  • On Memorial Day

    The below has nothing to do with investing or the Keys. Please indulge me, anyway.

    The story came from a Newsweek piece last year. I’d sent it to a buddy in Iraq then, and I’m about to send it to another friend still over there. Thought it was important this weekend in particular.

    It’s about a Vietnamese immigrant named Anh Duong, who fled that country in 1975 as a fifteen year old, nearly drowning in the South China Sea in the process. She got picked up by the U.S. Navy and was sent to a refugee camp in Pennsylvania with the rest of her family, which eventually was taken in by a church outside Washington, D.C.

    Anh went on to the University of Maryland, got three degrees and led the team that developed the thermobaric bomb in record time for our troops to use to drop into caves in Afghanistan. Gruesome business, war. And Anh’s job was not easy. But she did it so our troops could avoid the bloodbath of searching caves the old fashioned way.

    For her efforts, Anh was to be recognized with a big civilian service medal at a black-tie dinner. Upon receiving the award, she walked up to the mike and without reading any notes, says this:

    “Thirty two years ago I came to this land as a refugee of war with a pair of empty hands and a bag full of broken dreams. This land is a paradise not because of its beauty or richness but because of its people, the compassionate, generous Americans who took my family and me in, and healed our souls, who restored my faith in humanity, and who inspire me to public service.

    There’s a special group of people that I’m especially indebted to and I would like to dedicate this medal to them. They are the 58,000 Americans whose names are on the wall of the Vietnam War Memorial and the 260,000 South Vietnamese soldiers who died in that war in order for people like me to earn a second chance at freedom.

    May God bless all of those who are willing to die for freedom – especially those who are willing to die for the freedom of others. Thank you.”

    To Memorial Day.

    Posted by: Cale Smith , Commentary