Category: Wealth Management

Zero Management Fees

Published on:
October 25, 2019
Reading time: 7 Minutes.
Last Update:

This article gives a reason for the zero-fee structure. I discuss the lure of the structure and some of the potential pitfalls. I conclude the essay with a practical review of how fees, both explicit and implicit costs, affect returns over the long-term. My main point is that there is no way to invest without paying fees.

Zero fee structure in a mutual fund and a fund partnership

Mutual fund

When mutual fund managers declare zero management fees, they are waiving three costs. The initial cost is an asset fee, which typically ranges from 0.50% to 2.0%. The other expenses are load fees. "A load is a type of commission," explains Wikipedia.

The third costs are distribution and service costs, also known under the technical term of 12b-1 fees. These costs compensate mutual fund managers for marketing and for providing shareholder services. Visit distribution and service fee on Wikipedia to learn more.  

Two examples: Third Avenue Management, a mutual fund I admire, charges its shareholders a 0.90% management fee, distribution fees of 0.25% and other expenses of 0.30%. The total annual fund operating expenses are 1.45%. So if you invest $10,000 with Third Avenue, you will be charged $145 per year. Download the Third Avenue Value Fund to read more.

Fidelity funds have no fees. Consider Fidelity ZERO Total Market Index Fund (FZROX) as example. It opened in August 2018, the fund today manages $3.9 billion in assets. It aims to track the performance of large-capitalization U.S. stocks using automatic trading algorithms. Household, large-capitalization companies such as Microsoft, Apple, Amazon, Facebook represent about one-fifth of the fund. Visit ZFROX to learn more.

Hedge funds

Yet when fund managers [1] speak of zero fees, they refer to something entirely else. Fund managers will require at least 1- or 3-year hold time, which means you will not withdraw funds from the partnership during that "lock-up" period.

Another change in the partnership structure as a result of the zero-fee structure is that the manager's fee, known as carried interest [2] is higher. For example, under a one percent fee, the managers' interest in the profits may be 10%. Under zero-fee structure, the manager's compensation may jumpt to 20% of the profits.

What lures about zero-fee structure

The right performance evaluation

How you evaluate performance is essential. And the manager's performance evaluation should be judged using the change in the after-tax market value of your investment.

Payment for value

Under the zero-fee structure, only if the fund performs, the fund manager is paid. That is, you pay the manager only if the fund's fund returns are above a hurdle rate.

But the practice today is that you pay fees irrespective of the fund's performance. With a management fee, a fund may have lost market value during the year, but you still pay the fund manger.  

The zero-fee structure is a value-for-value trade. You only the managers only if you got value.  

The Buffett-Pabrai effect

Zero-fee structure appeals to investors because of great investors. Warren Buffett started the Buffett Partnerships in the 1960s with a similar structure. And Mohnish Pabrai, inspired by Buffett's biography written by Roger Lowenstein, had copied the zero-fee model in the late 90s.

And since both investors performed well for their investors, logic prescribes that a zero-fee structure results in success.

Yet, as the science community knows, there is a difference between causation and association. It is more likely that both Buffett and Pabrai would have achieved high returns regardless of the fee structure.

At least, when a fund manager offers you zero fee structure, you know the manager commits to performance. And that they probably read and studied Buffett and Pabrai - a blessing in itself.


In Pen&Paper, I only write about companies I am personally invested in, and on finance topics, I find it important to share.

Buying a stock is easy. But it requires a lot of effort and discipline to keep track of the company's performance. And no matter how much a stock appreciates, you're not capturing those returns until you sell. Join the waitlist to get real-time updates.


The downside of zero-fee structure

The impracticality of the structure

But after two- to five-years of lousy performance, can we expect of managers to open their doors? Most funds have a hurdle rate. So when capital markets drop, payments to funds managers may not be for a while, six- to eight years of wait time.

Very few managers can wait that long. It remind me of the story of how Benajmin Graham dissolved his fund only after his investors recouped their capital. Or the story of Pabrai, patiently waited for a decade before pulling any money from his fund. But these are out of the ordinary stories, not the rule. I believe that for every one Pabrai, there are over a hundred managers who would walk away from the fund.

For every one Pabrai that stuck around, there are hundred managers that would walk away.

An appetite for risk

Another cause of concern is the fund manager's increased appetite for risk. Knowing the only way to get paid is by stellar performance, managers may take additional risk because of the zero-fee structure.

Marty Whitman once wrote that "an adjective must precede the word 'risk.'" Here I use the word 'risk' in two contexts. One, when fund managers lack time to research and two, when they look for stocks outside of their circle of competence.


Founded in 2004, by Charlie Tian PHD, GuruFocus provides institutional-quality financial stock research for the individual investor.

GuruFocus hosts many value screeners and research tools and regularly publishes articles about value investing strategies and ideas. One of the features I use most is the 30-year financial information on businesses. For example, see how easy it is to review AT&T balance sheet.


Lack of empirical data

Intuition aside, there is little to show that zero management fee structure is superior to any other form of fund arrangement. There are too few zero-fee funds to track. And the fund fee structure is outside of the student of finance scope of interest. Outside of common sense, the argument for zero management fees is unbacked by any data.

I am not sure there ever will be enough data to back the zero-fee structure. A fund performance depends on factors that work at the same time, and that cannot be isolated.

Research does not always support decisions. Among those: the partner we decide to marry and the business venture we choose to take and also the outcome from the principles in life we want to have. Perhaps - and not unlike in real-life -  investment decisions require a leap of faith.

Investing requires a leap of faith.

The cost of fees over the long term

Explicit costs

Page 4 of The Manual of Ideas shows a table the SEC should require fund managers to show their fee-paying customers. The table shows that a 2% management fee will cut the value of your portfolio by 22.2% after ten years; by 39.4% in 20 years; and 52.9% over 30 years. The assumption is of a 5% gross return.

Implicit costs

In a talk [3] given in 1994 to students of the University of Southern California, Charlie Munger retells the story of Federal Express's early days. Employees left packages in the warehouses. Which penalized the company's profits. So management decided to change the worker's compensation from an hourly basis to a shift basis. You got paid when the work you completed the work, not when the clock said it was five o'clock. Unsurprisingly, perhaps, the new structure dramatically changes the number of package deliveries.

In Munger's words:

"As usual in human affairs, what determines the behavior are an incentive for the decision-maker, and 'getting the incentives right' is a very, very important lesson."

Not unlike Federal Express workers, salary structure changes the fund manager's behavior. When the portfolio size determines wages, managers naturally focus on increasing the size of the portfolio. They will talk to CNBC reporters; Work with advertising agencies on brand awareness. It would be better if managers focused their attention to the portfolio needs and no to what the market thinks about the portfolio.  

The fund industry somehow managed to market their services differently. Mutual funds charge you not as a percentage of the actual revenue, but as a percentage of the assets under management. This incentive structure results in much higher management fees.

For example, with a 1% management fee, mutual fund managers will charge you $100 annual management fee for every $10,000 you invest with them. In today's capital markets environment, on average, managers will earn  6% on average on your investment. We find $600 in management fee. But we would expect that they would charge 5% to 7% of that, which is $30 to $40. Yet, since using the investment management's calculation of fees, you will be charged $100, more than three times what a real estate relationship would require.

The investment management industry charges more than three times what a property manager would charge.

Read about this phenomenon in Investment Management Fees are (Much) Higher Than You Think.


You should now be able to assess the benefits and drawbacks of the zero asset management fee. If you would like to add to the article or you still have questions about zero asset management fee, write to me. I always respond.  

For additional information, I suggest that you also read Guy Spier's white paper on zero management fees. Also The New York Times recently published an article this trend. Visit this page to read more.  

FOOTNOTES: [1] Fund managers are managers of either a hedge fund or a private equity fund. [2] Carried interest is the share of profits paid to fund managers. [3] The talk's name is a lesson on elementary, worldly wisdom as it relates to investment management business.

Print's Advantage

Published on:
October 12, 2019
Reading time: 9 Minutes
Last Update:

Value Line's history

How the Value Line report started is the story of turning setbacks to blessings. Arnold Bernard, the company's founder, was fired at the peak of the Great Recession. "You can have no idea what it meant to be out of a job in 1931," he said. "Nothing like today, when you can read and write, you can get some work - and you can get Social Security too." The Great Crash led him to work on what would eventually become the value line rating theory [1].

Value Line's early days were humble. Bernard reached out to local banks and other financial institutions and could not make a single sale; he valued the product, at the time a book, at $200. But L.L.B. Angas marketed the book for $55. Even at that low ball price, there we no buyers.

Fast forward fifty years. The New York Times wrote about Bernahrd that "His [Bernhard] approach contradicted the 'efficient market hypothesis,' which holds that information is reflected in stock prices so quickly that no attempt to beat the market can succeed in the long run." Indeed, Bernhard was one of the first investment contrarians simply because he was skeptical of the markets being efficient.  

The Value Line company

The Bernhard family still holds 89.34% of the common stock. Value Line became a publicly-traded company in 1983 and trades under the symbol VALU on Nasdaq. Subscription revenue was $28 million in fiscal yearend 2019 [2]. Revenue from print subscribers was $13 million, and revenue from digital subscribers was $15 million. In 2019, Value Line was able to attract 13% new members; renewal fees were 87% of the revenue.

Value Line does not publish the number of subscribers. I estimate the amount of subscribers today is about 70,000 to 80,000 [3]. While a significant number, the company had a much larger subscriber base in the late 80s. In the Bernhard's obituary, written over three decades ago, it was said that the subscriber base was 134,000.  

While the Value Line company is mostly associated with the Value Line Investment Survey, it has substantial investment management services business. In 2019  this business contributed $7 million - about 25 percent of  - the company's revenue. Value Line, through its various mutual funds, oversees over $3 billion has in assets.


Look for a second opinion, especially when considering big changes to your portfolio or strategy. Unbiased, professional insights can help you reexamine your assumptions and reduce emotional decisions.

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The Value Line reports

The flagship product is the Value Line Investment Survey (VLIS), which comes in both print form and digital form. The print version arrives weekly, and the digital version is updated daily. VLIS covers about 1,700 stocks, from small-capitalization stocks to large-capitalization stocks [3]. In a typical Value Line report, you will find coverage of household companies such as Amazon and Apple, but more often than not, you will discover under-the-radar companies such as Raven Industries or Stantec Inc.

The VLIS is a one-page report that covers a lot. It has 15-years' financial information;  it highlights profitability metrics such as net profit margin and returns on equity during; it allows the reader to quickly sift through the company's key growth metrics.; And it shows how much investors valued in the company over the past decade. The bottom section includes details such as recent developments in the company's business and valuation.

The VLIS report's brevity allows the reader to understand an industry and its key players quickly. Consider the human resources industry.  The Value Line report covers 12 companies in this line of business. Reviewing the one-page reports allows the reader to quickly answer questions such as what is the operating margin for the industry as a whole? Are sales increasing? Which company has been growing the most? What is the current valuation of the Human Resources Industry compared to a decade ago?

Value Line Investment Survey allows the reader to quickly understand an industry's operating fundamentals.

Value Line offers other niche products. Since June 2011, it sells readers a report focused on dividend and growth companies. This report aims to find companies expected to provide above-average earnings yield glossary.

In May 2017, Value Line began to publish a report which recommends the best exchange-traded funds (Write to me if you would like to know more about exchange-traded funds.)

The company also offers a special situation report which aims to find undervalued small- and mid-cap stocks with upside potential.

The print version of the Value Line report costs $598 a year. Adding digital access will increase the annual price to $718. The dividend income & growth, which is a separate report, costs $795. The Value Line Select ETF costs $395. The Value Line Special Situations costs $198.

Download .PDF version of the Value Line report to experience the look and feel.

How Value Line is different from Morningstar

Three features make Value Line different from Morningstar. First is the design of the product itself. Or what can also be understood as 'The medium is the message', a term the late Marshall McLuhan coined in Understanding Media: The Extensions of Man. His main point was to understand a message you need first to understand the medium. The logic applies here.

Value Line reports resembles a book. Not a trading floor.

The Value Line Report was designed for print while Morningstar was intended for the web. Print content cultivates patience. Digital content rushes us to act. And today, more than ever, "Patience is the thing in short supply," said value investor Joel Greenblatt told to the Wall Street Journal in A Value Investor Defends Value Investing.

Visit the Morningstar website, and you will see the flashing color of red and green, various calls to "act now or miss out." Value Line, on the other hand, with its dull, plain black and white format, resembles a book, not a trading floor quote.

Morninstar website has too much information
Too much information on Morningstar.

Another difference is that Value Line allows us to understand an industry while Morningstar's emphasis is on individual companies. For instance, if you believe the investment management industry is experiencing tailwinds [4] then Value Line allows you to sift through the key players in the investment management industry and to compare their operating fundamentals.

The fourth difference between Value Line and Morningstar is scope. Value Line focuses on U.S. based companies, specifically on the common stock of these businesses. The philosophy behind Value Line is that individual investors can understand enterprises and can decide on their own.

Readers of Morningstar, however, have a broader interest in capital markets. Morningstar covers capital markets topics from fixed income products to option trading. And Morningstar's philosophy is that investors are best to let investment professionals make the decisions.

Hence, Morningstar's emphasis on rating mutual funds and their yearly performances. Ultimately, this chase after the best performing funds leaves investors with poor results. Visit Business Insider's discussion on the topic: past performance of a mutual fund is not an indicator of future outcomes.

Valueline will fit nicely in a value-investor's desk
Valueline will fit nicely in a value-investor's desk

How to use the Value Line Investment Survey

To me, the Value Line Investment Survey is a stock screener. Every week I review about 50 one-page reports and typically find a company or two that I would like to understand more [5].

For every 50 one-page reports, I typically find three- to five companies that have great business models but are just too expensive to buy. So I add these companies to a list called inventory of ideas, an idea I copied from Michael Shearn's excellent book, The Investment Checklist.

My secondary use of the Value Line Investment Survey is just game-playing. I like to compare and argue with Value Line analysts' estimate of what the company will be worth in three- to five years. For example, Simon Shoucair of Value Line estimated that Ethan Allen (ETH on Nyse) would show $39.6 in revenue per share by 2022 to 2024, a 5-year CAGR of 6.5%. But to me, that was odd assumption since in 2014, revenue per share was $25.81, and in 2018 revenue per share was $28.9, merely a 5-year CAGR of 2.5%.

Reviewing competitors on the Value Line Investment Survey is now an integral part of my onboarding process [6]. Not unlike real life, it is easy to fall in love. If I spend a week or two researching a particular stock, it is difficult not to buy the stock since I invested so much time and effort in understanding the business and its management.

But that is a mistake. So now, I read about competitors while researching a specific business. The constant comparison allows me to find similar companies that are trading at a comparable price with, perhaps, better growth opportunities.

Finally, the Value Line Investment Survey is an educational tool. It exposes the reader to unpopular industries. Value Line not only comments on the industry as a whole but allows us to compare the industry's fundamentals via a review of the major players. I don't know of a better resource for that academic exercise.

I have other uses of the Value Line Investment Survey. Write to me if you would like the complete list.


Founded in 2004, by Charlie Tian PHD, GuruFocus provides institutional-quality financial stock research for the individual investor.

GuruFocus hosts many value screeners and research tools and regularly publishes articles about value investing strategies and ideas. One of the features I use most is the 30-year financial information on businesses. For example, see how easy it is to review AT&T balance sheet.


Who else uses the Value Investment Survey  

In the Berkshire Hathaway 1998 annual meeting, Marc Gerstein asked Warren Buffett how does he manage to review the whole spectrum of choices in equity markets. Buffett's answer was:

"I have yet to see a better way, including fooling around on the internet or anything, that gives me the information as quickly. I can absorb the information on - about a company - most of the key information you can get - and probably doesn't take more than 30 seconds in glancing through Value Line, and I don't have any other system that as good."

Charlie Munger added:

"Well, I think the Value Line charts are a human triumph. It's hard for me to imagine a job being done any better than is done in those charts. An immense amount of information is put in a very usable form. And if I were running a business school we would be teaching from Value Line charts."

I learned about Value Line while reading Mohnish Pabrai's The Dhandho Investor. There he wrote that "Value Line publishes a weekly summary of the stocks that have lost the most value in the preceding 13 weeks.

The Value Line Investment Effect

Not unlike Berkshire Hathaway, The Value Line Investment Effect is considered a market anomaly [7]. In 1982, researchers Copeland and Mayers found that between 1965 and 1978, the Value Line rankings showed statistically significant abnormal returns when compared to the market model. Researchers David Porras and Melissa Griswold then extended their work to the period between 1982 to 1995 and found that indeed, the market anomaly held. Read their findings in The Value Line Enigma Revisited.

Not unlike the performance pf Berkshire Hathaway, The Value Line Investment Effect is considered a market anomaly.

What Porras and Griswold found was that Value Line did well in picking out "winner stocks" but did excellent work in removing "loser stocks." The loser group of stocks had deteriorating financials. If there one thing you take from this article, it is that Value Line keeps the reader informed.

Staying informed is important. It is quite easy to buy a stock; it is much harder to hold it and mainly when to sell the stock. For Marty Whitman, founder of Third Avenue Management, one of the selling triggers was an impairment loss. On page 110 of Value Investing, ✨ he wrote:

"Permanent impairment means that there has been a fundamental deterioration of the business: good finances have been dissipated, new products and new competitors are beaten up, and the industry is becoming obsolete, key management members are lost, and so on."

A few concerns about the Value Line report

The Value Line report overlooks global markets. And to look at U.S.- based companies only is akin to searching for something where it is easiest to look, the streetlight effect. (Write to me if you would receive a few resources on global investing.)

Value Line proprietary ranking for Timeliness and Safety is not absolute. There is no universal definition of what an attractive stock is. What may be appropriate for a 40-year investor may not be right for a 70-year old investor. Value Line readers must come up with their own, unique ranking for what constitutes an appropriate investment.  

Readers of Value Line should have their own ranking system.

For example, when I wrote about Bon Ton stores I defined cheap stocks as "a stock that trades: (1) at an earnings multiple that is lower compared to its earnings multiple over the past decade, (2) at a substantially lower earnings multiple compared to its peer companies, and (3) at a purchase price below its net tangible asset per share."

Finally, the one-page report should serve as the starting point and not as the endpoint. Today, in our service-oriented economy, the book value of companies reveals little about their economic worth. For instance, you will not find the value of Google's engineers and company culture [8] in their reported book value. Also, investors must understand the quality of earnings and not just the reported earnings.

Reported earnings are subjective. They include too many assumptions: from loan loss projections for financial institutions to impairment loss. The only way to get closer to the economic truth is to read the notes to the financial statements found in the publicly-available annual reports and to understand the earnings quality.


Value Line did not sponsor any of the content written in this article. Pen&Paper is independently and wholly-owned by Noam Ganel, C.F.A.

Our freedom allows us to write about what we believe may be valuable to you. We don't earn affiliate marketing revenue without letting you first know about it.  And when we do, for example, if you purchase any of the books mentioned in this article, we give back 100% of the proceeds. Contact us if you have any questions.

We also don't have any positions in the common stock of Value Line. This article, like many others, is part of what constitutes the value- investor mindset: sharing with the community valuable information.

Or, as Charles Schwab said, "making investing accessible to all." 

FOOTNOTES: [1] The rating theory uses regression analysis to value stocks. [2] Value Line fiscal year ended April 30, 2019. [3] Capitalization is the number of outstanding shares multiplied by the share price. [4] If the wind is at your back, helping you to move forward, you experience tailwinds. [5] Understanding means reading the 10-K, 10-Q and 8-K financials, among other things. [6] The onboarding process is a set of checklist items I go through before buying a stock.[7] Market anomaly demonstrates inefficient markets. [8] Company culture is one of Google's competitive advantage rankings such as Timeliness and Safety.

The Obesity Code Highlights

Published on:
September 28, 2019
Last Update:

Jason Fung's book about what causes obesity has valuable lessons for students of financial markets. The first lesson is that investing requires a lattice work of mental models [1]. The second lesson is that investors should be wary of the brokerage industry's agenda. The third lesson is that we tend to reduce our knowledge to sound bites, but we should carefully examine our choices. This article is about my favorite highlights from the Obesity Code.

1. Life is multifactorial

Just as there is no single factor that causes obesity, there is no single formula for identifying value. There are multifactorial reasons which, when put together, bring the analyst closer to the economic truth. Some of the common multifactorial reasons include: industry, competitive landscape, management, brand awareness, franchise value, the company's relative and absolute valuation [1] and financial information, such as valuation and leverage ratios.

"The multifactorial nature of obesity is the crucial missing link. There is no one single cause of obesity. Do calories cause obesity? yes, partially. Do carbohydrates cause obesity? Yes, partially. Does fiber protect us from obesity? Yes, partially. Does insulin resistance cause obesity? Yes, partially. Does sugar cause obesity? Yes, partially." [page 216]

Investing is more art than math. Investors should read about management; decipher its character and integrity as those qualities are more important than any price to earnings or price to book value ratios. While it is fairly easy to arrive at the return on invested capital ratios or trends in net profit margin, investors should use the bulk of their understanding on whether the company's product or service will be in demand a decade from today. And numbers won't always answer this question.

The relationship among the factors is important, too [2]. Consider the following example of how various factors are related: home prices rise, lenders are loaded with capital to deploy, middleman (such as brokers) are hungry for deals and you get the 2007 real estate debacle.  

2. Everyone has an agenda

How to market services and products is now studied as an academic degree. It is little surprise that with growing research into how our minds work, marketing's influence on us is growing each year. (Almost all MBA programs now require candidates to read Robert Cialdini’s Influence: The Psychology of Persuasion as part of their required reading list).

"In 1988, the American Heart Association decided that it would be a good idea to start accepting cash to put its Heart Check symbol on foods of otherwise dubious nutritional quality."[page 110]

Brokerage firms, not unlike health companies, may not have your wellbeing in mind. Brokerage firms earn more money the more you execute trades. They also earn money by lending the capital they hold (similar to the banking business model.) So, the industry welcomes frenzy stock trading activity.

The brokerage industry will also sell practically any investment product, be it an ETF, option or cryptocurrency, as long as there are investors willing to buy it.  

The brokerage industry has an agenda. And it may not coincide with yours.

Yet the brokerage industry often gets it wrong. For instance, it took over 30 years for the industry to embrace index-fund trading. In an interview with CNBC, the late John Bogle said he was accused of being "un-American." In short, the brokerage industry has an agenda. And it may not coincide with yours.

Jason Fung's book about obesity
Jason Fung's Title

3. Reductionism

Nassim Taleb called the phenomenon of taking complex issues and simplifying them to the point they become meaningless as soundbite culture. He was describing Wall Street culture: where stock commentators are bullish on stocks because of rumors; because management is buying back the stock; or because of the industry's tailwinds. Stock commentators break apart a business into its individual parts. But to make a sensible investment, investors need to put the parts back together.  

"An avocado, for instance, is not simply 88 percent fat, 16 percent carbohydrate and 5 percent protein with 4.9 grams of fiber. This sort of nutritional reductionism is how avocados became classified for decades as "bad" food due to their high fat content, only to be reclassified today as a "super food." [page 205]  

Reductionism does not work in business analysis because business fundamentals change over time. When the price of crude oil was about $100 in 2014, investors valued gas and oil companies at 15 to 20 times the earnings multiple. As crude oil prices halved to $54 by 2018, valuations of gas and oil companies dropped to the single digits.

Stock commentators break apart a business into individual parts. But to make a sensible investment, investors need to put the parts back together.

4. Building resistance

In The Obesity Code, Fung demystifies type two diabetes. When we eat food - be it carbs, fats or protein - insulin kicks in. Insulin, in return, regulates how much sugar is in our blood. If we eat all the time, insulin is constantly working and its effect on the body eventually wears off.

"The human body is characterized by the fundamental biological principle homeostasis. If things change in one direction, the body reacts by changing in the opposite direction to return closer to its original status. For instance, if we become very cold, the body adapts by increasing body-heat generation. If we become very hot, the body sweats to try to cool itself."

While reading about insulin resistance, I thought about my ill-habit of daily checking the price of stocks in my portfolio. Colleagues of mine even get notified when a stock price jumps or declines in value every hour; it is a subtle, subconscious trigger to act [3].

Doctor fung's answer to type two diabetes is intermittent fasting. I plan to use the technique for stock investing.

Fung's answer to reduce the probability of type two diabetes is intermittent fasting [4], which focuses on the time between meals. I am taking that advice to stock investing. To reduce fatigue, I intend to delete the five stock trading apps on my iPhone and to monitor business actions (8-k filings) from now on, and not price movements.


"My number one priority in life, above my happiness, above my family, above my work, is my own health," said Naval Ravikant, AngelList founder, on a Farnam Street Podcast. "Because my physical health became my number one priority, then I could never say I don't have time...I do not start my day, and I don't care if the world is imploding and melting down, it can wait another 30 minutes until I'm done working out."  

Both physical exercise and nutrition are important for us. The two constitute a large part of our wellbeing. Visit Doctor Fung's website for details.

[1] Visit Farnam street for a discussion on mental models. Or read Bevlin's book about the subject.  
[2] Charlie Munger refers to this relationship as the lollapalooza effect.
[3] If the price of the stock dropped, it triggers a sell sign.
[4] has warning cautions about intermittent diet.

Should you invest on your own?

Published on:
August 24, 2019
Last Update:

Hiller the Elder, who lived in the first century before the common era, said that we should first take care of ourselves so that we can take care of others. Not unlike his comment, I research companies for my own benefit but hope that others may benefit from the research too.

The topic of this meditation is what attracted me to stock research in the first place. I will then mention three reasons why I decided to not let others manage money and three reasons why I decided to buy stocks on my own.

Why I don't let others manage my financial destiny

The first reason is cost. Gabelli Funds, a mutual fund, charges 1.35% management fee. That means that if I was to give them $100,000 to manage, they would charge $1,350 a year.

To put in perspective what the fee of $1,350 is, excluding transaction costs, it is more than what I pay for all research and trading software. Guru focus annual fee is $450. Seeking Alpha annual fee is $200. The annual subscription fee for Barron's, WSJ, The Economist and Forbes is less than $300 in total.

And the high fee didn't meet higher return. Open to investors since 1986, the fund's average annual return is 9.98% after fees. The S&P 500 return, which you can buy for a management fee of less than 0.10% was 10.07% during this time.

The second reason is that I don't believe in neither the Noah Approach[1] to investing.  Consider the Gabelli fund again. The fund has an equity interest in over 40 sectors of the economy, from airlines and computer hardware to telecommunications and machinery. And the fund owns over 700 stocks.

To me, successful investing is not about consistently beating a performance index. And since every mutual fund’s manager knows their performance will be judged quarterly - even monthly - they focus on the flawed metrics, such as Sharp Ratio, Alpha and Beta. This is also known as the Greek approach to investing.

Why I decided to manage my money

As a business hobbyist I enjoy reading about companies; researching their profit margins, risks and business plans. My friends remind me that when I was eight or nine, I bragged to everybody that I bought a bargain: a pen on which I didn't have to pay taxes since it was bought in the city of Eilat. (In contrast to Tel Aviv where you would pay VAT. )

I am also contrarian. I ride my bike to the office and hardly drive. I much prefer to exercise alone than in a groups and you will not see me on social media. So, if the common convention is to let someone else - be it a financial advisor or a mutual fund manager - manage money, perhaps I chose the opposite just to prove a point.

There is a wealth of information that is widely available. This is a key point I believe many do not fully appreciate. It was only two decades ago that if you wanted to read the financial statements of a company, you would call the United States Securities and Exchange Commission (SEC), pay for the shipping of the statements to be delivered to your home and wait for a few weeks. Today, you can get the information in less than five clicks.

Another boon to investors was the SEC's requirement of Form 13F filing. Today the SEC requires anyone who manages above $100 million and more to publicly disclose which stocks they bought and sold. Using websites such as Guru Focus or WhaleWisdom , you can read what legendary funds and investors, such as Third Street Avenue or Mohnish Pabrai, are doing. In the last quarter of 2018, Third Avenue bought the stock of PNC Financial, Hawaiian Holding. Pabrai bought shares of Micron Technology.    

Trading costs are minimal too. If you decide to sell your home, the real estate commission and other fees can eat up about 10 percent of the sale price, according to Yet if you would like to sell your stock in, you could easily do so and it would cost you $4.95.

Your parents paid a much higher transaction fee. According to a Columbia University study, in December 1968, to trade 100 shares with a value of $400 (about $3,000 in today's currency) would cost you $3 of 1968 currency (which is about $22 today) plus 2% of the amount traded. So, it would cost a total of $82 to sell a position, about 16-fold higher than the cost of today' markets.

I believe in taking responsibility. If I lose money, I would much rather blame myself for an omission of thought than to blame another person. Jerry Seinfeld, perhaps, said it best:

"People always tell me, you should have money working for you. I've decided I'll do the work. I'm gonna let the money relax."  
[1] The Noah approach to investing is when a fund manager has an equity interest in hundreds of companies.

On Short-Termism

Published on:
August 10, 2019
Last Update:

My favorite tables shows the power of compounding. Taken from the Aquamarine 2017 annual report, the table has just three columns and four rows. The table shows what happens to an investment after 20, 40 and 60 years of operations assuming 7%, 12% and 18% rates of return.

How can we not marvel that a 12% rate of return will multiply the original investment by 10 times in 20 years?

Taken from Aquamarine 2017 annual report

Glancing at the table every once in a while, I am reminded that (1) stock investing is a long term game, (2) not losing money is more important than maximizing return and (3) a reasonable rate of return, say 7% to 10%, will result in a wonderful investment outcome over a long period of time.

Yet it is unbelievably difficult to focus on year 2039 and beyond. The anticipation of whether a company will report higher sales numbers or net earnings is just too exciting to pass on and it results in both wide mood swings and in swinging market prices.

It is a self-fulling prophecy: if investors expect stock prices to move as a result of quarterly projections then -whether the business fundamental changed what so ever - the stock price indeed moves.

According to Warren Buffett and Jamie Dimon, the quarterly projection of earnings per share is bad both to shareholders and to the economy as a whole. In an Op-Ed to the Wall Street Journal, they write:

Companies frequently hold back on technology spending, hiring and research and development to meet quarterly earnings forecasts that may be affected by factors outside of the company's control.

A few examples from my own portfolio: When Weight Watchers', which I bought in March, management reported to investors in April 2019 of expected softening in sales, the stock dropped to $17 from $27 in less than 24 hours. Yet when the same management reported last week of an expected uptick in sales, the stock immediately jumped to $30. Another example is Hyster-Yale which I bought a few months ago. Here too when management reported on an uptick in sales, the stock climbed to $63 from $55. In short, when management projects earnings, capital markets do what they do best - they react.

Yet between stimulus and response there is space[1]. And I argue that the price movement after a quarterly announcement is the wrong response. Can we reasonably expect a company such as Mednax for example, which I wrote about last week, with over 16,000 employees and a fresh senior executive leadership[2], to make meaning changes in 90 days?

Today's reporting standards

Wall Street certainly expects more reporting today. In The Art of Speculation, written in 1930 ,the legendary investor Phillip Carrett, writes that "many companies publish annual statements that confine themselves to balance sheets and even those publishing income statements omit many details."

More remarkable than the little amount of information companies reported back then is that investors were drawn to the stock market just as much as they are today.

But today's companies report much more. Consider Hawaiian Airline’s management, which provides guidance on expected gallons of jet fuel consumed (expected to be 1.0 to 2.0% less); that available seat miles will be up between 1.5% and 2.5%. It further breaks down the quarterly earnings report by available operating revenue per ASM of 13.81 cents, compared to 14.25 cents a year ago.

This level of reporting takes much energy. I can only imagine how much time senior management spends in preparing for analysts’ questions and how both legal counsel and public relations people advise them. Legal counsel may ask them to use words such as "we believe" or "it is likely that" while public relations people will tell them to emphasize words such as "we exceeded" and "we are positive" and "we see growth."


Research[3] shows that daily meditation or religious practice assists in developing more tolerant, kind behavior. People who have such daily practices are less prone to get upset while driving and are more kind to random strangers.

And just as spiritual meditation on why we are here, how did we get here and how we should live our lives is helpful, I believe that a quarterly- let alone daily - outlook on stock movements is harmful.

To that I suggest three remedies: First, to develop meta-rules, such as "will not sell a stock for at least two years." This will reinforce the attitude that a quarter is just one piece of the puzzle.

Second, to garden. There is no better reminder that change takes time than nature. That There are simply no shortcuts.

My friend's Tomer vegetable garden

Third, cut, paste, print and regularly view and meditate on the Aquamarine table.

[1] Viktor Frankl writes that space is our power to choose our response. In our response lie our growth and our freedom. This is taken from his seminal book, Man's Search for Meaning.
[2] The 25-year president of the company recently retired
[3] Read American Grace: How Religion Divides and Unites Us by Robert Putnam for more on this topic. The book is about two of the most comprehensive surveys ever conducted on religion in public life in America.