The Ledger
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The fiftieth portfolio stock exists purely to gather asset-based management fees
“The evidence is that after eight stocks, you're 80% diversified, right? So the 50th name in your portfolio is doing nothing to get you more of the free lunch, right? I mean, it's just a exercise in gathering assets to get more asset based fees for a manager.”
Top institutional allocators underwrite people and processes over five-year track records
“The best allocators, especially in, I grew up in the institutional community, like the best allocators They underwrite people philosophy process. They're not looking for the best five year track record. If they were doing that, they'd be performance chasers an…”
Multi-manager portfolios with hundreds of stocks yield passive returns for active fees
“I mean, 10 equity managers, each holding a hundred stocks, charging one percent, you're charging active fees and getting passive results. It's ridiculous. And so everybody should be concentrated.”
Bares Capital pre-qualifies investment candidates without looking at historical stock prices
“So everything that we pre-qualify for purchase is done without any knowledge of what the stock price is or has been.”
Investors should hold exceptional compounding businesses even at 120 percent of value
“Whether it's something, 60 cents on the dollar, 80 cents, or even 120 cents on the dollar, if it's the right business run by the right people with great growth prospects, the default setting here is just to hang on to it.”
Assuming qualitative equivalence among cheap stocks is the biggest asset management mistake
“This idea of qualitative equivalence among your opportunity set is the biggest mistake that most managers make. ABC at 80 cents on the dollar is not the same as XYZ at 80 cents on the dollar. They're different qualitative businesses. They're different competit…”
No fund manager successfully boosts returns by trading around long-term compounding stocks
“I don't know any manager that has successfully traded around a long-term compounder and really juice the returns by buying it 12 times earnings and selling it 25 times earnings.”
Multi-strategy fund structures eliminate the existential operational risks of single-strategy firms
“I think a lot of endowments take the approach that we only invest with single strategy firms. And I get that, but I would argue vehemently against that. I think there's been huge benefits to us having the various strategies and the benefits are to both us and …”
Concentrated institutional LP bases create a dangerous game-theoretic fund redemption risk
“Most people don't know this, but like large institutional allocators tend to act in concert, but they're also in this game theory problem where if there's, you know, five investors in somebody's fund, everyone's sort of pointing at each other, wondering what t…”
Goldman Sachs avoids micro-cap because fees trail middle-manager compensation
“The reason is that Goldman is not going to produce a concentrated microcap strategy because the total fee revenue potential is just a fraction of what a middle manager there makes in a year.”
Bares Capital Management operated without legal counsel for its first nine years
“Little known fact about my firm is for the first nine years, I didn't have an attorney. I was just so frugal that I didn't want to pay for one, which was, I do not recommend to people. I think it was completely reckless. Course of action. And now we have great…”
Bares Capital spent eight years manually analyzing micro-cap stocks without computer screens
“We actually do, despite the quantitative aspects of my old firm and my math background, we do no computer screening or filtering. Like we started from A and went to Z and microcap. It took us eight years, but we did it.”
Software and precision instruments consistently out-earn their cost of capital
“Precision instruments, information services, software, these are industries where most participants out earn their cost of capital over extended periods, because there is something about the business, the industry itself that just allows for exceptional return…”
Eighty percent of corporate acquisitions fail to achieve their intended synergy targets
“80% of acquisitions fail to meet their intended synergy targets.”
Unplanned large-scale acquisitions by portfolio companies usually signal investment trouble
“Unless that's an overt part of the plan, and we have underwritten as part of that plan the ability of the people to do M&A successfully, it's typically a red flag for us that this is not going to end well.”
Bares Capital forces junior analysts to leave after a three-year tenure
“So we have a rotating stable of junior analysts. So we hire people and put them to work and then tell them in three years, I got to go find different employment. Part of that is because we have a capacity limited set of strategies and that capacity limitation …”
Bares Capital abandoned quantitative scoring overlays after repeated system backfires
“We have made certain attempts at trying to score these various things quantitatively, and every time I try to layer a quantitative element onto this qualitative process, it sort of backfires for us, and so we've stopped doing that.”
Bares Capital automatically trims any stock position exceeding 30 percent portfolio weight
“We say 30% is our hard cap. And so nothing gets over 30% of the portfolio by weight will automatically start scaling it back.”
Institutional allocators underwrite a fund manager's communication skills alongside portfolio performance
“What people don't tell you about being an investment manager is not only are people underwriting your ability to execute on an investment portfolio and to run a business, but every now and then you have allocators that are underwriting your ability to go to th…”
Bares Capital Management launched with $21,195 in total paid-in capital
“All the capital that was ever put into my firm is 21,000, but 195 dollars and 14 cents is all the paid in capital.”
Bares Capital Management operated without institutional salespeople for twenty years
“Over 20 years, we've never had a formal sales and marketing effort. We don't have any, you know, institutional sales people on staff or anything, and we closed one out of every three conversations we had with institutional allocators back in 2000”
Bares Capital limits its concentrated ten-stock portfolio to three annual trades
“If you look at the numbers, we're actually roughly about 30% turnover. So it's thinking in a 10 stock portfolio about three new positions per year.”
Bares Capital Management has maintained a 65 percent historical investment win rate
“Our batting average is like 65%. That's been a historical sort of win rate”
Brian Bares regrets letting downside risk management prevent him from enjoying success
“And it is impacted my business life because I've had some business success and I haven't enjoyed it because I'm constantly thinking about the downside, the risk management or the future planning or the future optimization. So I know it's kind of an unusual ans…”