Portfolio manager Cale Smith’s riffs on investing, spoke funds, and Islamorada in the Florida Keys.

More slides from my recent workshop. Here was Part I.

This section could be subtitled “Barely Scratching the Surface.” I tried to hit the three or four most critical issues to think about here, so there were only a handful of slides we reviewed. As it was, we spent a considerable amount of time walking through each slide and discussing the critical points in more detail. If the workshop were a week long course, a discussion about the economics of spoke funds could probably be a day by itself.

In the “Scalability” slide, “The Buffett Cap” refers to a cap on my own salary. I haven’t paid myself anything in salary to date, but I intend to before too long, obviously, and as I currently conceive of my own business, that will eventually max out at $100K a year…if for no other reason then that is what Warren Buffett takes home. I’d rather not tempt any lightning bolts by presuming I deserve more. Highly rigorous, I know.

Also, I am a cheapskate. I can be fat, dumb and happy on considerably less than $100K a year as long as I know the rest of my net worth continues to work hard for me in Tarpon. Too much more in salary would mean I’d be expected to buy a round for everyone, everywhere, every time in the Keys. So, you know, thank goodness nobody reads this blog. Plus, anything I earned beyond what I really needed would go right back into Tarpon, anyway.

In any case, cash in the business left over after hitting The Buffet Cap could go towards more virtual assistants, a full time employee and/or running the business in general. And that $20M figure in terms of assets under management is my bogey. Nothing to say it couldn’t be much higher, but that’s what I’ve been planning for since day one. As one of the guys pointed out at the workshop, my margins might be better at $30M in assets, mainly for for compliance/registration reasons, and I agreed, but I’ll get into that at another time here.

That whole not-taking-any-salary-yet thing is not nearly as ascetic as it might otherwise sound. That’s how 99% of all start-ups work, after all, a fact that often seems to be forgotten when it comes to managing money. And while I haven’t brought home a pay check to date, my business is otherwise funding itself now and my net worth is growing just fine in Tarpon – both of which mean I’m happy to eat palm fronds every day for lunch.

But to be clear, if you want to start paying yourself on day one, or bring home $500k a year in salary, go nuts. Just factor that in to the enclosed slides as you see fit.

The issue of whether or not to subsidize new accounts is a big one. And by subsidizing I mean either waiving my own fees and/or partially or fully reimbursing fees the custodian charges in order to keep my investors’ expense ratios as low as advertised. As you can see in the slides, it takes a little figuring to service small accounts in a way that keeps those investors’ fees under control – due to minimum annual fees the custodian charges each account. I chose to subsidize when I first launched Tarpon, and I recommend it for new spoke fund managers, too, unless you’re already coming to the game with a stable of active investor accounts. The reasons I subsidized were (1) I was launching a new firm and did not have an existing base of investors, (2) not all my friends and family could meet my official minimum and (3) there is a law in investment management that “assets attract assets.” Number three is probably one of the most important tips to remember in terms of growing the business that first year.

I also estimated that it cost me about $200 to acquire a new investor – a very rough early guesstimate but still a useful benchmark today. I decided that if the subsidy I paid out was less than that, and if I felt I could make the investor happy enough to refer new investors my way (without me having to beg), then subsidizing was a no-brainer. As it worked out, each account I subsidized more than made up for the cost of that subsidy through new client referrals by the end of that first year. Plus, I never had to ask. I’ll talk more about acquiring investors a bit later.

And as I pointed out in the workshop, the few slides below about a suggested budget don’t reflect the actual costs of my own business to date. Some lessons are learned the hard way, I suppose, particularly when it comes to spending money on marketing and advertising. I also spent a ton of money (at least, a ton to me) on legal fees related to compliance. Since the spoke fund concept was pretty new, I was paranoid about my own compliance efforts as well as what was I could and could not put in our ads, both in the papers and online. But assuming you can benefit from my own mistakes, and that you don’t have to pay the lawyers those extra fees, the suggested costs shown should be a pretty good benchmark – assuming you run things light, like a traditional start-up. If you feel you need the ocean-view office and mahogany conference table right out of the gate, you’ll want to adjust my numbers there, too.

Please ask any questions in the Comments section of this post. Next up: prepping for launch.

A video from future spoke fund manager Dustin, who says:

I’m always looking for things I can add to the ‘mental file cabinet’. Thought you might find this one interesting. This helps explain why Spoke Funds and aligning your interests with investors works.

“People don’t buy what you do, they buy why you do it.”

My favorite was this quote:

“The goal is not to do business with anybody who needs what you have. The goal is to do business with people who believe what you believe.”

Enjoy.

Here’s the first group of slides from the spoke fund workshop I held here in Islamorada a few weekends ago. I’ll split the original presentation up over several posts to keep things in bite-sized chunks.

I think I speak for everyone in reporting that it was an enjoyable day. Steve, Kevin, Chris, Kai and Dustin came in from all over – DC, Phoenix, Indianapolis, Chicago and Gainesville – to basically sit all day in the old dynamite warehouse that is my office and learn more about spoke funds. Everyone there was a value investor, and I don’t think I was the only one that noticed we all seemed to share a certain ethic about the right way to treat our investors. I’ve found it’s pretty rare in this wacky industry o’ mine to find yourself in a room full of peers that you intrinsically trust, but this was one of those times. I began the day feeling flattered that they would show up, and ended feeling honored that they had.

I also found it a little bit surreal to hear other portfolio managers throwing around the “spoke fund” term like it was part of the vernacular. Kinda cool. Guess our little idea is growing up.

Unfortunately, the slides below don’t capture any of the many discussions, questions, comments or off-slide conversations we had. If you have any of your own as you view these, let ‘em fly in the comments section.

Since the workshop, I’ve also been doing some more digging on some of the topics I discussed that day – like finding out more about some new technology providers – and I’ll post those notes at some point, too.

So, here’s part one. If you’re already familiar with spoke funds and my firm, some of the early slides may look familiar, but hopefully there are more nuggets for you in the later ones.

And more slides will be posted soon.