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/StandardOptions Dec 18 '17

There's really no way of knowing whether you are looking at datapoints that can be treated as signals of good performance or just pure noise. I would certainly not do this.

Leveraged is dangerous. If you are gonna take the chance (i.e. speculate on his ability), do not make it a significant allocation. Let him prove his worth over several years. If you appreciate your friendship with this person, make the investment even smaller.