This is part II of a 2-part post. I got a request from a reader to discuss some info on how I started my firm. My readers have plenty of other things going on, so I thought I’d break the post up into two parts, to make it easier to read. The first part had more of a background on me, this post will briefly discuss how I structured my investment firm.
As I said in part I, I don’t intend Base Hit Investing to be a marketing tool for my RIA, and I don’t intend to discuss my business much on this site, with the exception of course being my investment ideas and positions, which I intend to discuss frequently and openly. BHI is a site designed to share ideas and to educate readers, and in the process educate myself as well. We’re all trying to improve our game… Now, here is part II:
I started Saber Capital Management, LLC last fall as a vehicle to manage outside capital using the same method that I manage nearly all of my personal capital and most of my close family capital. As I mentioned in part I, this has been a goal of mine since 2005, around the time I began to seriously study Warren Buffett and the subject of value investing.
Structure of Saber Capital Management
Regarding the structure of my firm, I chose to set up an RIA to manage separately managed accounts (SMA’s). I decided on using SMA’s rather than setting up a hedge fund for a couple main reasons…
First, separate accounts provide much more transparency and safety (comfort) for clients. They can log into their accounts any time and see the positions I have. They can close their accounts any time, and I have no access to their funds other than to charge the agreed upon fees, which are set up front when the account is established. On the contrary, hedge funds are pooled structures where all client capital gets pooled together in one account. Plus, there is no transparency (or very little) when investing in a hedge fund. Second, it’s much cheaper intially to set up your firm this way. (Leigh Drogen wrote a great post that echoes some of my thoughts on the benefits of SMA’s vs hedge funds)
I decided that at this point in my career, SMA’s are the best way to manage client capital. It gives clients that don’t know the manager very well a level of comfort that their funds are secured. I use Interactive Brokers as my third party custodian, and they have the technology to allow me to manage many different accounts using the same strategy I use to invest my own funds. Clients can log in anytime and see the positions I have in their accounts, along with real time P&L statements. They have complete control over their funds.
Many investment managers desire to operate a hedge fund for various reasons, but for smaller managers, the pros don’t outweigh the cons. Some say that separate accounts and transparency mean that ideas will be compromised. I don’t think that a small investment manager has to worry about this. Who is going to steal my ideas? And even if they do, I’m small enough that I’ll be able to build my position before it would negatively affect me.
My personal opinion is that small investment managers think they are more important than they really are. I say this not to disparage these managers, but just to provide a reality check. We aren’t worried that Goldman Sachs is going to front run our ideas. The only exception would be if the stocks I invested in were extremely illiquid, and even a small amount of competition could be detrimental to acquiring my position. However, this doesn’t apply because most of the stocks I invest in have plenty of liquidity for the amount of money I manage. If this changes, I will adjust accordingly. At some point, the best vehicle for me and my partners may indeed be a fund, but for now, separate accounts are the best for both me and for clients.
My Firm’s Main Goal
My number one goal I had when I founded Saber Capital Management was to align my interests completely with my clients’ interests. I don’t charge a management fee in my focus Enterprising Strategy. I charge a performance fee, and I use a high water mark. In this strategy, I only make money when my clients do. I also run a strategy I refer to as the Defensive Strategy, designed more for income from dividends, and this does have a 1% management fee with no performance fee, but in both strategies, I invest alongside my clients.
Read more about my firm at Saber’s website. Please feel free to provide feedback or ask any questions. As I said at the beginning of part I, I don’t intend to discuss much on the operational aspect of my business, unless readers ask me to. I do intend to begin discussing more specifics about what stocks I’m looking at, and I’ll be tracking the performance of my investments on this blog as well.
The idea is to practice, practice, practice… invest, learn, share ideas. This process is enjoyable, educational, and rewarding. Hopefully we can all learn more collectively as we try to improve our investment skills together. In the next few days, we’ll be discussing some investment ideas I’m looking at along with some screens I’ve been filtering through.