IB Net Payout Yields Model

The 400% Man

SmartMoney.com has an interesting story about a college dropout in Utah that has a successful fund. Very interesting to see a guy that is successful is this business by picking strong companies for the long term instead of attempting to make a dime every minute on every bit of information.

What I really like is how the guy spends most of his time reading and very little creating spreadsheets or detailed plans. To an extent, this reminds me of myself. Constantly read articles on Seeking Alpha or numerous other media outlets where somebody has gone into an incredible effort to forecast the future numbers for XYZ company. While useful, investing still comes down to more of a science than a precise equation.

For example, John Paulson & Co. just spent months compiling detailed information in order to persuade Hartford Financial (HIG) management on how to split the company up and provide the necessary liquidity for the 2 separate units. That information was so detailed that it almost appears he has an analyst working on the inside. Still Paulson has been no more successful in his investment on Hartford than Stone Fox Capital. Guarantee it took a lot less research on our part to realize that a company trading substantially below book value and generating a ton of cash was a good investment.

The real question was more a gut feeling on whether the insurance business was going to survive and grow or not. Those thousands of hour spent on spreadsheets weren't going to answer that question. 

In a way, investing is like fighting with a hand grenade. Close is what counts not a precise hit of the target. If you buy a stock for 10x earnings and it grows at 19% instead of 20%, you'll be a very happy investor either way. It comes down to predicting trends and finding good management as much as anything.

The odd part about the fund world is that it appears to not matter how good Mr. Mecham's stock picking has done as new investors apparently prefer a slick salesman with a fancy computer model over proven results.

What I want to know is why Smartmoney didn't include my model in the 400% club? It hit gains over 400% within the first 2 years though it gave back a sizable chunk in the downturn last year. Heck, that just provides new investors a great entry point. Even Mr. Mecham had a bad year back in 2005 so guess I should be excused for having one as well.

What I really love about my chosen industry is that the slick salesman is what everybody appears to want. Everybody goes on CNBC or Bloomberg and spews why you should follow them or buy this stock yet nobody typically sees any information of fund returns. This is where Covestor has such an advantage over just about any blog, fund, or show in the industry. Whether good or bad, each model manager can pen a monthly investment report that gets disseminated along with the returns of the model. Every potential investor gets to read the opinion while immediately seeing the real results.

Sounding good is no longer equal to a good investment.

Back to Mr. Mecham, the striking part is that after 12 years in the business with huge success he has only accumulated $80M in assets. No matter how good you produce, investors still fall for the Bernie Madoff's that promise the impossible instead of taking the proven results.

Definitely read the article. The picture from the article tells the whole story. The guy would rather let his results speak for him! Maybe someday I'll make such a respected publication.

Disclosure: Long HIG. Please review the disclaimer page for more details. 


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