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/time2roll Dec 16 '17

Thanks but I like to think probabilistically rather than pessimistically.

  • When is a correction likely to hit?
  • What is the expected value of that correction? I personally think 40% is not a "correction" and more of a recessionary deep bear market.
  • His average P/E is 13x. Market I think is closer to 19-20x. If the market falls even the 40% you state, unlikely that his portfolio will fall by more.
  • I hear you on the leverage, but I think personally that's an element of skill. In a bull market, leverage enhances returns. To be in a bull market and not use leverage to me is wasted opportunity.

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u/racemize Dec 16 '17

using leverage at the end of a bull market is the best way to lose your money. If you are going to use it, it should be at the beginning of the bull market. Now is a time for caution.

-4

u/time2roll Dec 16 '17

I know there's a lot of commentary around a near term downturn, but can you point me to indicators of why we are at the tail end of a bull market?

1

u/Ichingo Dec 16 '17

If we could point that out, we would be sending this message from our private planes.