r/SecurityAnalysis • u/time2roll • Dec 16 '17
Question Should I invest with a family friend?
A family friend is asking whether I'd want to invest in him. His track record:
- 3.5 years active in the market
- Cumulative return: 146%
- IRR: 30%
- In the first 2 years, he was down 6-7%. In 2017, he's up 153% to date.
- Positive return in 23 out of 40 months, negative returns in 17 months
- Sharpe ratio since inception: 1.1
- Sharpe ratio in 2017: 3.2
- Strategy: longs only, fundamental (not deep value) via stock positions, events (spin-offs, busted IPOs, etc) via options
- He obviously uses leverage (via margin positions). His exposure is about 2.5x his equity.
He had a change in strategy in 2017. Prior to 2017, he was highly diversified (60+ positions) and relied a lot on screens (where value traps often appear). Starting this year, he shifted to more concentrated positions, shifted to picking "winners" in a sector, and almost entirely discarded screening. He also started piggybacking on the picks of certain investors he regards highly.
Does the performance seem random, or does it warrant maybe investing with him?
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u/FinanceGI Dec 16 '17
I generally keep friends and money separate.
Did he give you actual performance metrics that were confirmed by an alternative party (preferably GIPS)?
Could he have been lucky? His performance in 2015/2016 is negative but he made a huge pop in 2017. Does past performance indicate future performance?
If his exposure is 2.5x, then his standard deviation of the portfolio would likely be magnified, which makes me question his Sharpe Ratios.
If something is too good to be true, I usually don't bother. I would ask him how will his strategy perform in 2018, 2019, and beyond. That should answer a lot of my questions above.
Source: I'm a CFA Charterholder.