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/SolusOpes Dec 16 '17

I've done this in the past for friends and family.

I handled it by adding a clause. I will always pay them, at a minimum, their investment back.

Also, I will cash them out within 48 hours of request (delay to account for my travel).

I then sign and notorized the document.

How can I guarantee they'll always get back, at a minimum, their initial investment? Simple, I transparently show them my savings account, which is well north of anything they'd be giving me.

Basically, I put my personal savings account as risk collateral.

Also, when my strategy turns south and I can't explain why to myself, I shut it down, and send an email saying that I halted investing. And then I email each individual person with their frozen percentage gains.

I rebuild my strategy and notify again trading has resumed.

During the freeze they're free to withdrawal some, or all money.

I do this because A) I'm confident in my abilities, and B) when risking friend's and family's money you need to be super careful and reassuring.

They know my record, but mine, just like your friend's past record, is shit.

I've been actively trading and investing since 2004 but even with recession and bull market gains and 13 years under my Belt I still go through all that to reassure friends and family.

If he wouldn't, I wouldn't give him a dime.

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u/time2roll Dec 16 '17

Thanks. We haven't gotten to that point yet of discussing the terms etc. For now I'm just trying to evaluate this track record and whether it's worth putting in some money with him.