As I have come out of hibernation, I penned my first post– a discussion on my pivot to the types of articles I will be posting on this blog — and announced my desire to pursue a “money manager” career path.

In my last post, I laid down the foundations for my investment philosophy! These are the core tenets that I will use as guiding principles to make investments of my and my partners’ hard-earned dollars. These investments will be made through an investment partnership limited liability company, which I hope to have set up and running by end of the year 2022. The investment partnership that I envision will be structured around the framework first made famous by Warren Buffett and then cloned by Mohnish Pabrai.

In today’s post, I am going to dig into my decision for starting my investment partnership and answer some questions as to the timing of it all.

Circumstance

Until very recently, I had a reasonably comfortable corporate career working for one of the big-FAANG companies, leading a science research team. The work was in an area that I have reasonable expertise in and have a career track record, the compensation was above-average, the benefits were great and the work-life balance was manageable!

However, in the last several months, things at work started to go south for me. Macro conditions induced a pivot in corporate strategy and the composition of my immediate team also changed. Leadership did not approve of my approach to managing change and they offered me an opportunity to explore new roles within the firm. I took up this offer in a heartbeat given how unsatisfied and mentally exhausted I was in my current role. I took some time off to re-evaluate my career goals and to better understand my source of energy, or my version of tap-dancing-to-work!

I had the following options to consider:  (a) aggressively pursue alternative roles within the same firm (b)  seek outside opportunities for leadership in my area of research expertise (c) venture out on my own to carve out my entrepreneurial journey into finance, investing, and money management.

Change is never easy, especially at a stage in life when one is extremely comfortable! So was the case for me! In my minds-eye option (c) was my north star. Even so, given the magnitude of change, and my comfort zone, I put some time into considering and exploring options (a) and option (b), while all the time was working towards putting all the pieces together to make option (c) a reality.

I finally called it quits on option (a), after figuring out that it was very difficult for me to find appropriate roles for myself in my current geographic location. After consultation with my spouse and with her support, I have decided to put option (b) on the back burner and am going full-steam ahead on giving a shot to achieving my dream of becoming a full-time money manager.

Now that I have laid down the circumstance, I will offer some thoughts on the 3 ingredients that sealed the deal for me to pursue the path of my own investment management pursuit!

Confidence

My goal is to buy 50 cent dollar investing in profitable firms run by management with a sound capital allocation frame of mind with the ability re-invest and compound growth at an annual rate of 10 % [This framing of my desire to buy profitable firms on the cheap is motivated by my readings of Nick Sleep of Nomad Funds]. If I am successful, and assuming markets assign valuation to the company at par with the assumed nominal growth rate, in 5 years, the dollar investment will have grown to a dollar and 62 cents. My 50-cent investment will in turn produce an annualized return of 26%.

Twenty-Six percent compounded for 10 years, will grow $1 of investment in $10, over 20 years into $100, and over a lifetime of 30 years into $1000. Start with a million-dollar portfolio, do the math and you reach 1 billion! As you can see the sky is the limit if successful in pursuing a path of sound investment and luck!

So how realistic is the objective to compound at 26 % annually? Well, it is near impossible to do so consistently for 30 years, especially at scale! What about 20 years, what about 10? What about doing so with an investment size of $1 Million? Now we are taking…

Let us look at my track record of managing a relatively modest fund, starting with $100,000 in investments over the last 5 years! My goal with this fund was to systematically track my investment performance over a long-time period! The funds were managed in an IRA structure, to act as a forcing function to avoid any principal withdrawal. The numbers are presented in terms of cumulative returns for 5 years!

A dollar invested in my IRA would have more than doubled in 5 years! With the same dollar invested in S&P 500, the index would have grown to $1.55. MSCI World Index was not the place to be invested and a dollar invested would have resulted in a decrease to ~ninety-seven cents at the end of 5 years! Ouch!

Why do these performance numbers give me confidence that I will only do better?

• These performance numbers were achieved by doggedly sticking to a long-only, no-leverage, strategy of finding 50 cents on dollar investments in profitable businesses with a sound management strategy of capital allocation.
  • To give a couple of examples, I invested in stamps.com when the stock fell from upwards of $300 to $45, a result of a market overreaction to a long-term corporate strategy to pivot their business from one customer (USPS) to a broader market share! The management was thinking for the long haul and the markets brutally punished the stock because of its myopic focus on the impact the corporate strategy would have on the bottom line in the immediate quarter. The stock eventually rose back to upwards of $150, at which point I exited my position.
  • The second example of sound investment was my investment in BRK.B at the depth of covid-19 pandemic! It was unfathomable to me that markets were discounting such a stalwart of a business.. albeit the crisis at the time seemed world-ending! I continued to average up into BRK.B through the last couple of years with my current average standing at $224 per share.
• I was pursuing a full-time corporate career over the last 5 years. I was as such only able to invest in ideas that seemed complete no-brainer without in-depth focus on seeking out winners, of which there were several over the last 5-years!
• The opportunity set of 50-cent profitable dollar businesses has grown significantly over the last few months and the marketplace is now a ripe hunting ground!

Financial Stability

Anyone who has followed this blog over the last few years must have realized my dogged focus on FIRE (financially independent, retire early)! As a result, we as a family are standing on solid grounds for me to be able to venture out onto an entrepreneurial journey of my own, investing a significant portion of my own funds into the venture! As icing on the cake, Mrs. AVI is also enjoying her own entrepreneurial career and getting a taste of small-scale success!

Timing

My goal is to seek partnerships with like-minded folks, who are long-term focused and believers in the magic of compounding! The partners I seek are smart to realize that when things are on sale, one should go shopping.

Unless one is completely oblivious to the happenings in the world, the Ukraine-Russia War, the Covid-19-induced supply constraints, and the FED policy of flooding the markets with a massive dose of stimulus have all led to rampant inflation! In response, FED has embarked on the most aggressive rate-hike regimen the world has seen in recent times. Interest rates serve as gravity pulling markets down!

Most certainly, growth-oriented firms whose cash flow is in the distant future, suddenly become untenable as investment vehicles as the present value of these future earnings no longer looks attractive. We have seen a massive collapse– 50, 60 70, and in some cases upwards of 90 % drop in valuations from the peak reached in the recent past!

When markets are in panic mode, the baby gets thrown out with the bathwater with no regard to the soundness of the underlying business, and therein lies the opportunity to scoop up 50-cent dollars!

I, therefore, feel all stars are very well aligned for me to embark on my new journey!

So there you have it! Should the question come up again, Why? I have a blog post to point to and move on to more pertinent discussions around ideas that I salivating about to make money work for myself and my partners!