1% is bit high, but sure, why not, I’m ok with allocating small proportion of my portfolio in @Julianek’s hands. 
As I said in my journal, currently markets are quite expensive and it is getting more difficult to find cheap assets. That is why i have 40% of my portfolio sitting in cash waiting for occasions. On the other hand, most of the companies listed previously here are still in my portfolio, except Velcan(sold at 11,15 EUR) and Sanshin Electronics (sold at 2049 JPY). This does not mean that I still consider them cheap nowadays.
Wow I wasn’t expecting this kind of compliment, that is nice to hear 
Although let’s be realistic : If i ever was to manage someone else money, I would like the fees structure to reflect what investors are expecting from me: beating the market! (else, indexing is the way to go).
Therefore, I think that a structure like the Buffett parterships in the 50s is the fairest to everyone:
- No fixed yearly management fee (so the manager is not paid to do nothing)
- A performance fee that would look like the following :
- Since the market return historically on the long term around 6% per year, the manager would not be paid if he does not return at least 6% every year. This hurdle is of course compounded every year.
- However, as soon as the hurdle is reached, the manager would take 25% of the over-performance. This looks like a lot for mustachians, but it aligns the incentives of everybody :
- The investor does beat the market. A guy like Buffett did 19% during 50 years. Sure, after his cut there is only 15,75% left for the final investor, but that his still way better than what an index fund can historically provide.
- The manager is fairly compensated for a skill that very few can provide; if he fails to beat the market he is not paid at all.
Buffett, Mohnish Pabrai and Guy Spier are good example of fund managers having this structure and providing excellent results.
But this was a digression. I am currently nowhere near the place where I would have the legal infrastructure to manage other people’s money. Of course if enough people were interested i would start looking into it, but so far it is only a very very remote hypothesis.
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I’d be comfortable with investing in your fund few percent of my portfolio.
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sure, a fee like this is fair, because then the goals of the investor and the fund manager are aligned.
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So, just a follow up
I have been researching what would be the legal business structure to adapt if I was to manage other people’s money, and it is not very encouraging…
- As mentioned somewhere else on the forum, the lightest structure is the “investment club” (up to 20 members), but investors have to make investment decisions together (i.e, there is no manager managing other people’s money)
- then there is the equivalent of the Limited Partnership (i.e Kommanditgesellschaften für kollektive Kapitalanlagen), but it is very quickly regulated by FINMA. Moreover, it has big fixed costs (i.e compliance, regulatory and accounting) that are very unlikely to be covered by my fees if I only manage money on a small scale.
- or if I want to be shielded from personal liability I could as well create an AG or a GmBH, but fixed costs increase a lot as well.
I found as well this document from Guy Spier (Aquamarine Fund) making a study on which funds do not charge management fees, and the underlying reality even with the best intentions, a fund still has a lot of operational overhead costs to cover.
So in conclusion, if you want to manage money for others :
- You need to manage a lot of assets
- If you charge management fees, you should be able to survive; but if you do not, pray to have a very good first year and no bear market, or your costs are likely to make you close the shop.
TLDR : Managing a small amount of money for friends and acquaintances does not look like a good idea from a legal point of view…
That might be interesting… who else would be interested?
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<-
Think about it. I think there might be some people here interested in allocating part of their portfolio in high-quality small/micro-cap value stocks. We could structure the club to make you CIO of the club formally (if the law allows for that) or informally (by for example naming it “Julianek’s value investing club”).
isn’t enough to create a category of the forum which is invite only?
I thought a lot about it and I have created another thread on the forum where I expose what I have in mind. @1000000CHF, @nugget, @bojack, @ma0, if you are still interested by the concept feel free to apply!
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Just to add something: there is a quite easy way to manage other people’s money. Don’t commit me to this but as farbas I remember there is a possibility on IB for a “friends and family” account. Each investor has their own account and you are authorized to manage it. All accounts are combined thus as a small fund. Then you can instruct IB with your fee structure et voila, you are managing money. I checked this by myself some years ago so probably still valid. And the best thing, you are not required to provide any reportings.
On the other side it has became much easier to set up a fund/investment structure in recent years. In my office we have several funds (only own money) which are even x-traded.
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Hi @Julianek
Thank you so much for this post - you explain everything very clearly.I found it really very interesting.
I would very much like to do Net Net investing eventually, however at the moment I lack the confidence because I am a novice (the five step process which you provide, while it very clear and well set out, it is very intimidating for a guy like me who has no IT background, no investing background, and has no experience in investing). So I have been searching for an alternative - and I came across Value ETFs such as, for example, VTV (TER 0.05%) from vanguard. For someone like me, who is just a beginner, and who lacks the confidence and experience to be able to their own Net Net investing well, would such Value ETFs be a good alternative?
Do you see any disadvantages for Swiss investors with such Value ETFs? (besides not having control over when to sell and buy shares in a particular company)
Hi @Runner, thanks for your interest.
My only problem with Value ETFs is that nowadays “Value” can mean a lot of different things.
For some people “Value” means buying something cheap on an absolute basis (i.e figuring how much a business is worth and then paying a lot less for it), for instance:
- Buying cheap assets (example : Net-Nets, Hidden Real Estate…)
- Debt Capacity bargains
- Sum-of-the-parts bargains
- Buying a wonderful predictible business at a fair price and let it compound
For others, “Value” means buying buying cheap stuff on a relative basis (i.e compared to the market)
- Buying stocks with lowest earnings multiple
- Buying low Price to Book, low EV/EBIT, …
For others, “Value” is just a marketing sticker that the fund and ETF industry will put on a ETF to help sell it. Looking at the main holdings of the ETF/fund, you can see that there are stocks that should not be there (ex: not long ego Exxon Mobile was in almost in a lot of ETFs, it could be considered a value stock, a growth stock, a high yield stock, a quality stock, or what else; the label was in the eye of the beholder). Another alarm would be if the ETF hold so many holdings that there is no way it could have a performance sensibly different from the market (in that case, make yourself a favor and fallback to VT).
As for being a beginner, I had no background in investing three years ago, i mainly got all of this from reading
and being interested. If that’s your case, i advice you to start with accounting. I wrote a five-part guide of accounting for beginners here.. Then, you can find another longer article I wrote on Net-Nets. And finally, you can find there good recommendations of books on value investing.
Feel free to contact me if you have other questions.
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Thanks so much @Julianek 
I’m interested and I’m very hungry to learn - I will take a look at the accounting for beginners, and the other articles on Net Nets which you wrote; that should keep me busy for a while 
I think I understand; Net Net stock is only one type of “value stock”. I found this list on Investopedia defining what a “value stock” could be:
- A share price that’s no more than two-thirds of intrinsic value. For example, if the intrinsic value is $30, the share price should be no more than $20.
- A low price-earnings (P/E) ratio. The P/E ratio measures a company’s current share price relative to its per-share earnings. It’s calculated by dividing the market value per share by earnings per share. A good rule of thumb for value investors is to look for stocks with a P/E less than 40% of the stock’s highest P/E over the previous five years.
- A low price-to-book (P/B) ratio. This metric compares a stock’s market value to its book value and is calculated by dividing the current closing price by the latest quarter’s book value per share. Typically, value investors seek companies with P/B ratios that fall below industry averages.
- A low price/earnings to growth (PEG) ratio. This ratio is used to determine a stock’s value while considering the company’s earnings growth. It’s calculated by dividing a stock’s P/E ratio by the growth of its earnings for a specified time period. Value investors typically look for PEG ratios below one.
- A low debt/equity (D/E) ratio. D/E measures a company’s financial leverage and is calculated by dividing its total liabilities by its stockholders’ equity. Like many metrics, D/E should only be used to compare companies within the same industry since a relatively high D/E might be normal in one industry, while a relatively low D/E might be common in another.
- A dividend yield that’s at least two-thirds of the long-term AAA bond yield. For example, if the AAA bond yield is 3.61%, the company’s dividend yield should be at least 2.38%.
- Earnings growth of at least 7%. Also there should be no more than two years of declining earnings of 5% or more, during the past 10 years.
In an ETF they will consider a stock to be a “value stock” provided that it meets any one of the criteria in the list above. Whereas, in your strategy you invest in only those stocks which are net net stock. Did I understand correctly?
So an ETF such as VTV would not contain 100% Net Net stocks; but it would likely contain some Net Net stocks + other stocks which were considered to be “value stock” for meeting one of the criteria in the list above.
You are almost there… almost because there is a BIG difference: In current markets no ETF will ever own a Net-Net stock. Why? Their market capitalization is tiny (think less than $50 million). These stocks are too illiquid for ETF managers. If they ever wanted to take a meaningful position in these companies, they’d make the price jump instantly… As an example, SHOS is currently worth $53 million, EGD is worth CAD 10 million… No institutional can invest in them, these stocks are too small!
So that’s also the advantage of the small guy, non-institutional investor… We get to go where the big guys cannot go, and uncover some big inefficiencies!
The second reason why you will very rarely find a Net-Net in an ETF is that they are quite rare in current market conditions… We are at the top of a 10 years heavy bull market, i’d say there are currently less than 10 relevant Net net stocks in North America…
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Got it thanks
So ETFs will not include Net Net stock because the companies market capitalization is too small and they are rare. Well this motivates me even more to learn about Net Net stock investing and to include Net Net stocks in my portfolio because it would enable to intelligently invest in parts of the market which the ETFs are missing.
Thank you very much for your willingness to help - I very much appreciate it.
(I’m currently making my way through the accounting for beginners guide which you wrote - its awesome - I highly recommend it to any novices who might be reading this forum (even if you are not interested in Net Net investing!))
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I have a hard time grasping, why commters seem to be ok with the idea that you can beat the market.
And not only that, but you can beat it with some back-of-the-envelope calculation.
Just to take on one example mentioned here:
Berkshire Hathaway beat the market for 20 years. But they have been very inconsistent since around 1998.
As far as I understood:
They were pretty successfull back in the day because they identified undervalued small stocks.
Back then most stocks were only valued with high rigour by the big investement companies. These companies were mainly focused on valuing stocks of large companies. In turn stocks of small companies could often be undervalued for a significant period of time.
Nowadays there are many more financial institutions with a lot more knowledge and technology at their hand. This makes it much much harder to find an undervalued stock.
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Oh, it’s alright. To take your example into account, Berkshire has “only” made 3.5 times the returns of the S&P500 since 1999. I’ll take this “inconsistance” any time.
And regarding my back of the envelope calculation, I prefer to be roughly right, than precisely wrong (ex: CAPM model, alpha/beta and other modern finance theories).
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Fair enough, they are still beating the market overall/over a long time horizon. It`s just much less impressive now, then back in the day.
So, help me understand:
Why do you think, you can beat the thousands of small- to medium-scaled investement firms who would just absolutely love to get the kind of returns you have been getting?
I think they have similar time horizons as you have.
They have the means to correct false valuation of small stocks in a short time and they could make a killing doing it.
They have surely heard of Net Nets. They have thousands of employees at their hand, who could be running simulations on wether this strategy would have been a good tactic overall.
Why aren`t they doing it? Are they just irrational?
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