Spoke Fund ®

Cale Smith

Remember that post about making an animated Spoke Fund video?

Done.

Courtesy of Gopal Gantayat of The Free Investors…

Pretty sweet, eh?

And Gopal has figured out a way that other spokesters can get the same video as the above – only personalized for you and your fund, too. Email me for details.

And thank you, Gopal!

Cale Smith

Relaying an idea from another Spoke Fund manager that I thought could be a good one…

If you haven’t heard of the cartoonist Hugh MacLeod, you can check out some of his work at this Tumblr site or his art site here, and Hugh’s blog is also here. And here is one of his recent presentations, too, which gives some context to the paragraph below.

So the question is…how much interest among Spoke Fund managers is there in having Hugh create a 60 second animation video that explains the Spoke Fund concept? It will apparently cost from $8k to $12k to create a really slick animation video, depending on bells and whistles. Think it’s safe to say that cost is too high for any of us as individuals, but we might be able to share the cost as a group if the interest is there. The idea would be to create a cool, high quality vid that individual managers can use however they see fit, ostensibly for their own advertising efforts as well as to educate investors and prospects.

I’ve had some surprising success with the videos on my own site, and would be happy to pay a bit more than equal share to fund the cost of the video. I’ll also devote some resources to some sort of PR push to be timed with the release of the final vid, too, if we get enough interest.

So if you’d be interested, please let me know, and we will go from there. Thank you.

Cale Smith

Got a great graphic from Gopal recently that nicely sums up the advantages of Spoke Funds® compared to other kinds of funds.

While Gopal is an aspiring Spoke Fund® manager, for the time being he describes himself as an independent investor focused on achieving superior long term returns by buying stocks of great businesses at reasonable prices. He doesn’t confine himself to any particular investing style, market cap or sector, and he’s obviously a strong believer in the clear advantages of Spoke Funds over other fund structures, too.

Please visit his blog http://www.thefreeinvestor.com to find out more about his investment ideas, philosophy, analysis, and current portfolio.

And thanks Gopal!

Cale Smith

For whatever it’s worth: here’s a copy of an ad that my firm is currently putting out in one of the local papers down here in the Florida Keys.

I realize there is a fine line between blabbing on endlessly about yourself and trying to help other folks out, but in case the ad below helps spark any ideas for anyone else considering running something in a local paper, here ya go.

Hopefully the fact that for some strange reason in the little circular portrait below I look like a nuke went off in my lap makes it a little less self-promotional than it might otherwise be. The real version of the ad is pre-nuke. And, again, my firm is located in the Florida Keys, which I hope explains the “Jimmy Buffett” reference.

Advertising and marketing your firm and your fund are huge subjects to get into, and I am in many ways still dialing in on the best way to do it. I plan to put much more emphasis on online marketing for my fund in the future, and I’ll pick up on that theme again soon. When I do, someone please remind me to talk more about local economies of scale and the costs of acquiring new investors. Until then, some notes on the ad itself, for what they’re worth:

1 – I am a cheapskate, particularly when it comes to advertising. Thus, this ad will be small when it prints in the paper (2 columns by 4 inches across) and in black and white. We don’t need no stinking color. It’s going into a small circulation paper in what is by far the wealthiest area of the Keys. (Think Forbes 400.) By agreeing to run an ad twice a month for a full quarter, I get a rate of about $325 per month (I only advertise seasonally). And yes, it’s painful to spend. I try to convince myself it’s an investment, but it always feels like an expense. Newspaper ads are probably the least effective thing I do in terms of making the phone ring. However…

2 – People in town notice them. I hear about people’s impressions of these ads at the grocery store, gas station, local restaurants, etc. So, prospects don’t pick up the phone when they see the ads, but they have been good for me in terms of getting attention in the anecdotal sense. I hate that those sorts of results are unquantifiable, but it is what it is. I just try not to spend a ton on these ads.

3 – I have tried many different approaches when creating the ad itself – everything from including performance charts to giving away a free report. There is no magic formula. I’d lump this particular ad into the “brand-building” category, as opposed to, say, direct response. It’s also a very legitimate topic to debate whether I should be spending any money on “branding” at all, and instead be focused just on gripping, grinning and selling…but, well, that stuff exhausts me.

4 – That the ad looks kinda simple and cheap is okay with me. I really want to just get on the radar screen of the “millionaire next door” kind of investor…not the type of guy who is impressed with flashy full page color ads of a couple staring solemnly at a sunset or something.

5 – This is not an ad I ran through my compliance guys or lawyer ahead or time. There really was no need to. When it comes to advertising performance of a Spoke Fund®, though, different ball game. More on that later.

Any other thoughts on traditional advertising?

Cale Smith

Note: The below was a little Q&A I had with an investor that I originally published in the July 2009 letter to investors in the Tarpon Folio. It gave a little more insight into performance measurement in a Spoke Fund®. The investor was referring to an ad he’d seen in the local paper about the Tarpon Folio, though it could apply to similar online ads, too.

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.

Cale Smith

Courtesy of Arquitos Capital Management, here’s a great graphic of a Spoke Fund®, as found on the site of the new Hayek Fund. Click the below for the full size version, and check out the table that accompanies this graphic on the website here.

Along the same lines, here’s how Foothills Financial Planning depicts its Spoke Fund® the Camelback Fund to investors:

Here’s the original on the Foothills site.

My own attempt to describe a Spoke Fund® in pictures can also be found in this old PDF on the Islamorada Investment Management site.

Clearly I need to raise my game to the JPEG level…