7 Unusual Lessons From 20 Years Of Investment Failures

by: Greg Silberman, CFA

Summary

In this 3-part series, I detail 7 expensive lessons I paid for at the University of Wall Street.

I use my investment due diligence process as a narrative and have altered the names, dates and places to protect the innocent (and not so innocent).

So here goes:

Part I

In this 3-part series I detail 7 expensive lessons I paid for at the University of Wall Street. I use my investment due diligence process as a narrative and have altered the names, dates and places to protect the innocent (and not so innocent). So here goes:

Lesson #1: A great investment is as rare as a vein of gold!

Just how rare is gold?

Plunging into the depths of the Earth, the mine pictured above once reached a depth of 2 miles!

Now a re-created Victorian city, Gold Reef City in Johannesburg, South Africa, was built on the grounds of the former Crown Mines.

The buildings and part of the mine. Mine shaft no. 14, to be exact, is included in the park. Actually it was the 13th shaft but they skipped this number due to superstition.

Equipped with a helmet and a miner's lamp, visitors go down the shaft in a cage to the top level of the mine where they get to see the bedrock:

Sandwiched between tonnes of hard rock, only extractable through blasting, lies the thinnest of veins … golden veins.

As in mining, great investments are extremely rare. Expect to go through many layers of dross to find that fantastic investment.

In my experience, great investments don't simply pop up, they are usually dirty and covered up with lots of hair (complexity).

Peter Thiel summarizes it well in this quote which is as applicable to finding a great investment as finding the next Facebook:

"I think in some ways the really good companies often couldn't even be articulated…we didn't quite have the right words. Or maybe they were articulated but were articulated in terms of categories that were actually misleading," - Peter Thiel.

Lesson #2: When destiny arrives in the form of coincidence, take note!

Let's face it, investors can be a superstitious bunch.

I for one have had good success when an investment or a manager hits my desk at the same time from multiple sources.

Perhaps it speaks to the marketing success of the manager -- they spread themselves far and wide -- but there is no particular reason why such serendipity should result in a good investment.

Nevertheless it has worked -- numerous times.

Take for example Steven Skinner from Wendywood Partners, first brought to my attention by Mark Thomas of Marblewood Partners, a tough client if there ever was one. Mark was an investor in my Northview Alternatives fund and was brought into the fund thru the marketing efforts of longtime friend and soldier in arms Daren Block of Round the Block Funds.

What made Mark so tough was his unrelenting pursuit of investment excellence through extensive due diligence and a take no prisoner attitude, getting his clients out at the first hint of trouble and asking questions later.

Mark was an investor in Wendywood, which he mentioned casually to me during a catch-up call.

Within months of hearing about Wendywood's existence I found myself sitting next to Steve, the manager of Wendywood, at a local Alternatives conference.

BOOM!

Just how successful would Wendywood prove to be?

Read on.

Lesson #3 - Invest in what you know, invest in people who think like you because you understand them best!

Steven began his career as a broker at Huff and Tuff in 1982 where he plied his trade as a risk arbitrageur for 12 years.

He left H&T in 1994 for Optimist Capital where he ran a Merger Arb fund and honed his skills even further, then later at Alexander Miller which became Gold & Sons where he met Tyler Carson - a serendipitous event we will discuss later.

Wendywood, a Delaware limited liability company, was formed on November 21, 2001.

When we first met in 2013, Steven was 55 years old and I liked him and his set-up immediately.

Fiercely independent, Steven is the 100% owner of Wendywood which at that time was a tiny $28 million hedge fund of funds (now $84m in Jan. 2017).

Steve draws a low Buffettesque salary, instead relying on his family's $4.1m co-investment to be the engine of his personal wealth and alignment with his investors.

Everything else is either outsourced or run by his trusty COO Jon Baptista.

Steven's investment philosophy is contrarian.

I like contrarians because their thought process resonates with my own.

An avid reader, Steven reads 3 hrs/day - old school, he likes everything in hard copy format … not a Kindle guy!

He has assembled around him a group of limited partners who are partners in the truest sense ... some grizzly old guys and gals battle hardened in the field of investments.

Just the kind of folks you want to bounce ideas off and source new investments.

Lesson #4 - The best portfolios are asymmetric; if they win, they win big; if they lose they break even and protect capital

Wendywood is into Big Game hunting.

Look for one BIG trend to ride …

  • Distressed European Banks - a theme he is building through a tactical European financials recovery vehicle;
  • Subprime Mortgages - he made 750% returns on an investment with Lewis Miguel in 2007/08;
  • Power Arbitrage;
  • Israeli Tech;
  • Loan to Own Strategy - much more on this in part-2

Then build an asymmetric portfolio such that 1 or 2 managers play off the BIG theme and make up 25%+ of the portfolio.

If they are successful they will vaunt overall returns into the stratosphere (300%+), as recently happened in 2014, which scored them #1 in Stamford Banks ratings for Fund of Funds under $500m with highest 3 year annualized returns.

Then play defense defense defense:

Supplement the core managers with 7-9 arbitrage type managers/strategies that provide lower but more steady returns should the thematic binary bet/s fail to deliver … protect capital!

Watch manager cross correlations like a hawk and ensure some zig while others zag.

Keep inter-manager correlation low and hence the overall fund will have low volatility -- the Golden ticket -- and maintain as close as possible to a ZERO correlation to the market.

Pour Conclure

4 Golden Lessons!

3 more to come in part-2.

Unfortunately even though I've told you about some of my most expensive mistakes - not adhering to those 4 rules - it is unlikely you will do so either.

Why?

Because at the University of Wall Street we each need to make our own unique mistakes … tailor-made for our own psyche before we are willing to listen and obey.

But such is life.

Until next time and the 3 remaining investment lessons - happy elephant hunting!

Greg

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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