StoryTime – Why not? – Mr. Lambo

“Why not?” – Trust, Mr. Lambo, and Constraints

By Glen Bradford

Abstract: This is something that I wrote for myself and decided to share for the reason of, “why not?” It’s me going over the historical relationship with two investors and identifying my weaknesses. Knowing some of my weaknesses is key to my future success. I didn’t really revise this after writing it or edit it — so it might not read very well and I’m OK with that as it’s simply an exercise for me to organize my thoughts. It actually reads like a elementary schooler’s paper written in crayon.

Investor 1: Not Mr. Lambo

It all started through a referral. At first, it was his son that wanted to invest through me. I went and met this particular investor’s son. The son was interested in me mostly because he had heard good things about me. The way he had found me was by looking at my track record and he asked me about my track record for the majority of the conversation, about what I could do going forward, and defined risk as stock volatility and advised me that if a stock fluctuated down 10% or more that he would sell it. We met and briefly discussed the terms under which I would operate and I agreed to them — even though I was uncomfortable with the terms. His conditions were that I would email him stocks worth buying and that he would buy them on his own in his own account and then compensate me out of realized profits. Under these conditions the amount of capital that he was going to be trading on my stocks was 1/100^th what I was already doing.  Thus, I determined post-facto that this was going to be more hassle than it was worth. I ended up calling back his son the next day and advising him that under the conditions agreed upon I would not be comfortable saying, “I will not lose your money.”

So then, around 6 months later, I find out that his father is interested in seeing what I can do and the size he wants to invest is more substantial and the terms enable me to place the trades. I figure, “why not?” So, I meet with the father, and I ask him to define risk. He defines it at stock price volatility and I advise him that risk comes from overpaying. We talk a little more about my ideas and I tell him that if he’s not comfortable that’s perfectly fine with me. I go home.

I get a phone call a month later. He’s placed money in an account and away we go. The first thing that I did wrong in this case is that I invested his money as if it were my own. This may sound ideal in terms of maximizing future rates of return, but was not ideal in terms of me managing his account in line with his risk profile. So, I invested half of the money into American companies and half into Chinese companies. He was not very confident in the Chinese portion of his portfolio. Anyway, the American companies did terrible, and what would normally have been a smaller position for me became larger because of his request to maintain at best 50/50 (America/Chinese). So, things progress and the Chinese companies were shaking around in price and I got into some absolutely fantastic bargains in this man’s portfolio (52-week lows). About a week after that I get a phone call asking to liquidate by the end of the week (“I’m going to cash”).

So, I put a sell order on everything and let that sit for a couple days and some of the stocks sell. Also, note that at this point in time my computer is on a moving truck, I’m operating from a laptop in a hotel room in Richmond, VA, and that I’m apartment hunting 10 hours a day because the moving truck shows up tomorrow. So, I get a phone call at 3:30pm on Friday and asking, “Can you get everything into cash by 5pm?” Meanwhile, I’m thinking, that’s 30 minutes, I’m currently operating off of terrible internet connection that I’m borrowing from either Starbucks or a Train Station that I could park under, and these stocks are illiquid considering that the amount he wants to sell on some of them is greater than the average daily trading volume. I decide that it’s obviously not in my best interests to try and sell intelligently in this case because this investor doesn’t care about making money anymore. I find internet access at around 3:43pm and put market sell orders on everything and the stocks get murdered. So, what did I do wrong?

1. I treated the investor’s money like it was my own. His risk tolerance was pretty much that of his son’s. A drawdown is a bad thing in this land but a consistent 8% return is a huge win. I should have invested 10% of his money and left 90% in cash. But then again, under those parameters I might as well have said “I can’t make you money” from the beginning.
2. Investors that find me through referrals and value my track record more than the methodology behind the track record should be turned away — because these are the investors that are going to sell bottoms.
3. When people can see their money fluctuate on a daily basis — the risk of them panicking goes up significantly from when they can see their money fluctuate on a monthly or annual basis — regardless of the risk adjusted perceived future absolute returns.
4. Once an investor starts to worry, the worry is magnified even if you make their money back, for fear of losing it again. Breaking even is a reason to liquidate.
5. Although most of his losses are directly attributed to American companies and his gains were from Chinese companies, he still liquidated due to fear of losing money and due to fear of owning Chinese companies.

Investor 2: Mr. Lambo

So, you might wonder why I have him saved as Mr. Lambo in my phone. Mr. Lambo is short for Mr. Lamborghini. Actually, I should call him Dr. Lambo — but oh well. My first encounter with Mr. Lambo was while I was on the big island of Hawaii with Mr. Hawaii on his give or take 10-acre private beach, complete with his own private water that was passed to him mostly because the property used to be owned by kings and queens back in the day. I guess that gives reason for a sidestory about Mr. Hawaii.

So, I send a few emails to RedChip a year or two ago and I don’t know how it happens, but I guess RedChip mentioned to Mr. Hawaii a few of my stock picks and was like, “What do you think?” I guess Mr. Hawaii recognized that they were my picks and was like, “Yeah, those are Glen’s — I read his stuff and think he’s brilliant.” So, now RedChip is interested in meeting me. I fly down to Florida to meet with RedChip and do a video interview. Ends up that Mr. Hawaii calls in and I tell him that I’d get a kick out of it to fly out to Hawaii for 2 weeks before school starts, “Why not?” He agrees, and I fly out by myself to hang out in one of his condo’s. We meet up and after hanging out with his wife and him for a day – they collaborate that I’m not a crazy person and invite me to stay in their guest house on their private beach instead of the condo. Freaking awesome. Anyway, those two weeks were spent hanging out, doing nothing, sorting stocks, reading books, conversing, swimming in private lagoons with tropical fish, trying to surf, wandering the property, and pretty much having a BLAST. So, halfway through this trip, I get the phone call from Mr. Lambo. He wants in.

Before I even get to talking about him I want to point out the thing I respect the most about him is his consistency. He may occasionally make what I perceive to be a poor decision or two — but I admire the way that he does it.

So, off the bat I’m up 20% on paper in the tradable account. He’s excited. We work on a private placement. A month later, the tradable equities decline in value and he panics and liquidates. This panic also flows into the untradeable private placements and I work with a few brokerage firms to make the shares tradable as soon as is reasonable — meanwhile the price is fluctuating violently. Up and down 50% in a month give or take. Also note that net of all things, he’s never been at a point of losing money and is for the most part up 40% or more at all times — subject to violent fluctuations that sometimes have him up over 100% on paper, etc. He gets frustrated, as I do as well, due to things outside of my control. I advise him to blame me, because it’s my belief that you should always accept as much blame as you can because passing blame is no way to get ahead. I feel like this story is starting to stink — probably because I am writing this in 2 sittings and this is sitting number 2.

Anyway, so I send in unrestricted stock to a broker and it takes more than 40 days to for them to realize that it isn’t restricted, and to unrestrict it on their end to make it salable. Needless to say, I just finished closing all my accounts with said broker — oh wait, except for one. It’s the account that I have to keep because Mr. Lambo won’t let me leave them. Mr. Lambo insists on sticking with this broker because of his developing uncomfortableness of trusting me. I can see that and understand where it all comes from.

1. When the Longwei Private Placement went through, I advised him that we could sell 6 months into it. It really took about 7, and meanwhile large sales went through and drove the stock down and he was furious that we weren’t the ones selling.
2. After all, confidence comes from portfolios being green. The first problem was that the side portfolio was red.
3. He went away on vacation while I had sent the broker the shares and while the broker was figuring out “why are these restricted?” When there was no restrictive legend — long story resulting in me being on the phone with them on a daily basis for 3 weeks —meanwhile the stock dropped 40% and I didn’t sell any and he demanded to know why? Fact is that I couldn’t, but then again in a side portfolio I had a small quantity of shares that he had advised me not to sell. He asked me why I didn’t sell them. I accidently mentioned that this was also the time that I was searching for apartments 10 hours a day in Richmond — he saw this as a weak excuse — and it was.
4. He can see some of his accounts fluctuate — and he watches them on an hourly basis (I figure) and experiences a lot of visceral pain whenever these volatile stocks tick down by chance.

So, the resultant of all this mess is that now Mr. Lambo doesn’t really trust me. I don’t know why I have cash in accounts with his name on it because he has asked me not to do anything with it. In other words, I can’t trade it. He trusts the broker though (E*Trade). I’ve asked him to move to interactive brokers but he refuses. In the past, he wanted to see me buy and sell stocks like I intend to now over at Interactive Brokers — and he would have been pleased for me to do it as I intend to now — but now things are obviously heading in the wrong direction. If I was a fire fighter, I’ve gone from preventative maintenance to full blown fire fighting it would appear.

So, now I’m being micromanaged by Mr. Lambo. He tells me when to buy and when to sell. Historically he has lost millions of dollars selling low. Now, I receive phone calls asking me only to sell lows. I don’t really have a choice even though legally I am the one in charge. I could disobey him and make him a lot more money, but what’s the point in that? That would be a lot more troublesome. It’s a lot easier to just do what he tells me to do even though I know it’s backwards from what is profitable sometimes. I just lined up an opportunity for him to make over 100% fairly easily and he turned it down because he’s uncomfortable with how things have gone.

So, here’s the question, if I can’t buy anything, private or public, and I can’t sell anything unless he tells me to and he is driven to sell low — how am I supposed to make him money? Somehow, against these odds, I’m making him money right now — a lot more money than anyone else is making him — I figure. Like I said, it’s in his financial best interests for me to directly disregard what he says sometimes and do what I think is best. I am pretty sure that within 1 hour of me doing something like that though, that would be the end of it. So my options are as follows:

1. Disregard him, make good decisions, and have him close his accounts tomorrow and probably sue me.
2. Listen to him and do what he says and avoid getting sued / death. The consequence is making less money.

So there you have it, the positive feedback loops are sending things in the wrong direction. Anyone have ideas in terms of how to turn things around or a way I can present information in such a way that I could convince him that he should just let me do what I think makes the most sense to do? The idea, is I’m only here to help him help himself. I’m only interested in continuing this if I can turn things back around and start doing things that I want to do instead of things I’m forced to do. I don’t want to be a broker and I don’t really see the need to be one. I think he sees me as a broker. That might be the problem. Why not?

Anyway, I was in a conversation last night with some banker, and I’ve been in a lot of these conversations lately — where they ask me why I am not looking for new investors. I advise them that I just don’t want to deal with the hassle and that you run into a lot of additional paperwork when your AUM goes $25M+. Might as well avoid that as long as possible. Plus, I want to strategically avoid people that are prone to selling low. That’s pretty much everyone. Makes it tough. But, I have narrowed it down to a few heuristics. Just avoid anyone who finds me from my track record, asks me about my track record, and when asked about risk, defines it like they do in MBA school. Avoid anyone that doesn’t understand that I like to buy the most undervalued companies in the world —- and thinks it’s just magic. Avoid anyone that believes in luck, etc.