This page is written for new stockpicking funds who will be starting small. Many of the most successful investment firms bootstrapped themselves starting with <$20 million of AUM and a lean budget, before they scaled over time. See Illuminating the Garden Path for examples.
I will continue to add to this over time, and suggestions are welcome - you can submit by clicking the grey button below. Anything that resonates with me, I will include.
This is not advice, because 1) I have never started a fund myself and am not qualified to give advice and 2) investing is too complicated for one-size-fits-all advice that would apply to every strategy and every person everywhere.
This is simply designed to be food for thought for newly formed stockpicking firms who want to achieve amazing returns over a long period of time. The closest thing I have to advice is the simple observation that amazing results come from aiming high, being patient in building your firm, ignoring conventional wisdom, and being content being quirky. The world around you, from service providers to LPs, will try to move you back towards the mainstream - your job is to resist the pressure!
Your best bet for advice on how to build a great investment firm is to talk to someone who has done just that. In that spirit, we got permission to share the below piece written for aspiring independent stockpickers. It was penned by a very thoughtful manager we know and respect named Rob Vinall and describes how he built his business patiently over many years through compounding, refusing to take shortcuts, and letting the right investors self-select in.
I thought this interview with Phil Ordway, Elliot Turner, and John MIhaljevic was a great resource on the topic of what it is like to be an emerging manager, and sharing lessons learned. https://twiii.podbean.com/e/on-being-an-emerging-manager-experiences-lessons-learned-success-factors/
Some points that resonated based on my experience talking to 100s of "EMs," often starting from zero:
1) Elliot on advantages of being an outsider and being able to be different: "As time has gone by I've viewed my outsider approach to the industry, the fact that I wasn't brought up in the industry and brought my own unique perspective, as huge distinct advantages."
2) Phil on the value of LP quality: "a bad LP is going to outpunch a good LP in a fight. Avoiding bad LPs is really important."
3) Elliot on writing: "Helps you clarify your thoughts, and once you get it out there you never know what life it takes on its own. If you write regularly, it gives a permanent resource people can look back on when they first meet you, and becomes the way they get to know you."
4) Elliot on LP quality: "I actually have this belief that with HNW clients the longer it takes them to come in, the better clients they are. The first people to make the decision, I think they could have been the first to leave. The slower someone gets to a decision the better."
5) John: "there are a lot of managers who are doing the same thing and there isn't enough differentiation. I think you have to think about, how are you going to be truly different. I think it is worth spending time talking to lots of our managers to realize, you're not that special, unless you really think about that and make that a focus."
This was a very thoughtful piece written and shared on twitter by Frederik (handle @neckarvalue). Frederik candidly addresses the challenges of being an emerging manager. In addition, he says, " I would like to offer some advice on two issues: understanding the allocator’s perspective and gaining clarity about what it is you are trying to build: a business or a practice. "
On matching with the right LPs https://twitter.com/joelmcohen/status/1353002354036121600
A very impressive emerging manager shared this concept with me when he was narrating how he broke his way into the industry right out of college despite not having a traditional background.
I have seen this approach work both for people looking to get into the industry and for those managing small unconventional funds. Keep costs low so timing doesn’t matter and simply be so good they can’t ignore you.https://www.calnewport.com/blog/2008/02/01/the-steve-martin-method-a-master-comedians-advice-for-becoming-famous/
*Be so good they can’t ignore you!*
I saw that you are helping new managers learn from others. For whatever its worth, I thought I would pitch in few takeaways from my own experience:
This is ostensibly a marketing book, but we found deep insights for anyone looking to create a successful and differentiated value proposition. Some favorite quotes and insights:
“True differentiation…is rarely a function of well-roundedness; it is typically a function of lopsidedness. The same can be said for excellence.”
Part of the moat of being a “lopsided” brand is in the discipline in refusing to be pushed towards the center, to correct one’s weaknesses. Likewise with “lopsided” (I mean that in the best possible way!) investment firms.
“these idea brands don’t try to compete. That is key. They are more interested in separation than comparison…against a sea of homogeneity, true differences can be charismatic. For difference to be charismatic, it’s got to deviate AND it’s got to resonate.”
1/ A key message from us is that investment firms shouldn’t be afraid to be different and quirky. In order to generate amazing returns you almost *have to* make yourself un-investable to many people. Might as well embrace it!
2/ some things about our managers that many people find odd:
3/ some have literally no office and no employees
4/ some turn away investors who aren't a perfect fit, even when AUM is sub-scale
5/ some have extremely low portfolio turnover
6/ some openly trumpet the fact they can be down 25% in a month as a badge of honor
7/ some just have a handful of LPs
8/ some have no "marketing materials" at all and just send potential investors their letters
9/ some move their locations away from major financial centers to maximize focus and independent thinking
10/ some have concentrated positions in controversial stocks that turn off potential LPs
11/ some own just 5-6 stocks
12/ some have unique fee structures that focus on incentivizing the right long-term behavior from LPs and GPs
13/ What they tend to have in common is a total lack of interest in changing what they do, or how they do it, to make people more likely to invest
14/ if any of this sounds crazy to you...well that is exactly the point! It optimizes for compounding, not conventionality or style or broad appeal.
RV Capital Emerging Manager Meeting
RV Capital has an annual emerging manager forum, videos from which can be found below. I have been an attendee and found the quality of the content and attendees to be very high
The Zurich Project by MOI Global
Longtime friend of both me and MITIMCo, John Mihaljevic of MOI Global, puts on an annual conference that seems to help both current and aspiring emerging managers
Good Investing Talks
Host Tilman Versch has interesting interviews with under the radar investment managers, such as Rob Vinall. Many of these are (or were, but successfully grew) small, sometimes single-person shops.
Invest Like the Best Podcast / Colossus
Probably familiar to most of you, but a wonderful source of business and investing insight
Why there are so few 15–30 year amazing track records
Food for thought: Twitter thread on pacing and the learning process
Food for thought: on the value of writing great letters to your investors
Thoughts for people who reach out to MITIMCo as a potential partner
The following are some favorite quotes relevant to those aiming to build something great and enduring in the investment business
“Only by starting with a blank canvas can you paint a masterpiece” — Jim Collins
“Learn as if you’ll live forever, live as if you’ll die tomorrow” — John Wooden
“make it a practice to keep on the lookout for novel and interesting ideas that others have used successfully. Your idea has to be original only in its adaptation to the problem you are working on” — Albert Einstein
“We shape our dwellings and then our dwellings shape us” — Winston Churchill
“Great leaders are competing, not with others, but with the idea of perfection itself. It does not matter how many sales records they have broken, how many competitors they have extinguished, or how many breathtaking products they have introduced — a greater, more perfect version of their success always beckons.” -Mike Moritz
“Play iterated games. All the returns in life, whether in wealth, relationships, or knowledge, come from compound interest” -Naval Ravikant
“Become the best in the world at what you do. Keep re-defining what you do until this is true” — Naval Ravikant
“For the simplicity that lies this side of complexity, I would not give a fig, but for the simplicity that lies on the other side of complexity, I would give my life.” Oliver Wendell Holmes
"You have to pay a price for your distinctiveness, and it’s worth it. The fairy tale version of “be yourself” is that all the pain stops as soon as you allow your distinctiveness to shine. That version is misleading. Being yourself is worth it, but don’t expect it to be easy or free. You’ll have to put energy into it continuously. " - Jeff Bezos, 2020 Amazon Shareholder Letter
If you have started a fund, whether recently or long ago, please consider sharing a mistake or regret from your early days that others can learn from. (Forgive the cheesy photo, we couldn't resist)