Where We Are On Launching the Global Asset Management Firm
Back in September, I shared some of my thoughts on the structure of the asset management industry after some of you asked for details about the launch of the upcoming global asset management firm Aaron and I are establishing. In that post, I provided some insight into how I see the state of asset management and wealth advisory in the United States, explaining that, in my opinion, there are really five types of firms:
- Honest-to-God asset management firms (falling into one of two, or both, services)
- Private individualized asset management, often for high-net worth individuals
- Pooled asset management (sponsoring mutual funds, private equity funds, ETFs, hedge funds, etc.)
- Honest-to-God wealth management / financial planning firms
- Sales firms masquerading as either of the first two categories
- Asset gatherers serving as counselor and extracting a toll to steer people to the first two categories
- Stock brokers
There’s no point in revisiting all of the details here as that post was long enough (it was nearly 7,000 words by itself and far exceeded it once you count the extensive conversations that occurred in the comments section). If you haven’t read it, I encourage you to as it will give you a framework.
I know it’s been a long time since I’ve updated the blog. Between comments, messages, and even a few conversations on Twitter, I’m actually touched some of you reached out to see if I was okay. I am. Everything is fine. We’re so occupied with getting the firm off the ground the way we want to do it, we haven’t had a lot of time for other things. Now is probably as good a time as any to post an update so I’ll try and share some of the behind-the-scenes stuff. I’ll probably bounce around from topic to topic a bit as there is a lot to cover on the waterfront but if I try and structure this like one of my more formal posts, I’ll probably never get it published as my task list seems to replicate by itself these days.
First thing is first. Aaron and I decided that we are going to begin the firm with a laser-like focus on the activity we admired in so many of our professional heroes growing up and that we spend a lot of our time doing, anyway: Asset management. In particular, the firm will specialize in global value investing, dividend investing, and certain types of passive investing strategies for affluent and high net worth individuals, families, and institutions. At some point in future, we may consider launching either a mutual fund or an exchange traded fund for those who can’t afford our minimum account balance of $500,000 and an investment partnership for qualified investors who want to invest in special situations, takeover scenarios, and other opportunities. As I believe some of you know, we actually had both a major underwriter here in the Midwest and a law firm price out the launch of two such structures for us and I have the details stored away safely for whenever I want to proceed. (One thing I’ve been working on after hearing from some of you who were really upset about the $500,000 minimum is trying to find a way to make a few exceptions for those members of the community on the waiting list with between $100,000 and $500,000. I’m not sure I’ll be able to make it work in all cases, and I certainly wouldn’t want to advertise it to the general public, but, provided it remains the exception and not the rule, I am willing to at least try for those who want to cast in their lot with us for the coming (what I hope will be) decades.)
To that end, we needed to establish the legal entity that will eventually become the firm. Aaron and I filed the articles of organization on the 10-year anniversary, to the day, when we officially opened the virtual doors of our sporting goods business, Mount Olympus Awards. It seemed appropriate. There was a certain symmetry there that appealed to both of us.
We then began drafting the operating agreement of the limited liability company, which, once finalized, signed, and archived, name us as the managing members (to be referred to as “Managing Directors” as tends to be traditional in asset management). As the sole equity owners, the present plan is to take advantage of something that is only available in a handful of states to married couples and of which we can now avail ourselves thanks to the Supreme Court’s Obergefell v. Hodges decision called joint tenants in the entirety. In addition to providing certain asset protections to us, I believe it should offer greater stability to the firm in the event something happened to one of us. Effectively, by holding the firm as tenants in the entirety, neither Aaron nor I own it individually. Rather, our marriage owns it. Membership units held in this way are unique because, in addition to providing many of the benefits of joint tenants with right of survivorship, neither has the power to sever the tenancy unilaterally. To terminate or dispose of any part of the tenancy would require the consent of both of us. Our individual rights are further restricted for the good of the firm by some of the terms of the operating agreement, which spell out what happens in the event of a number of contingencies and certain decisions that require consensus before they can go into effect. (Update June 19th, 2016 at 1:50 p.m., CST: The tax partners at the independent accounting firm who handle our personal and business tax matters have looked into it and recommended we use a joint tenants with right of survivorship title, especially since we may at some point down the road have ownership in the hands of various family trusts and, perhaps, someday, even our future children. They explained their reasoning after looking at the relevant variables for our personal situation from a tax and planning perspective and I trust their judgment so that’s what we’re doing.)
Then there are the practical things that need and needed to be done to lay the foundation before we can get to the regulatory stuff. An accounting system had to be set up. That took at least an afternoon. The banking relationships need to be established. We have to make the initial contributed capital deposit called for in the operating agreement. High security checks need to be ordered. A company seal needs to be designed and manufactured. Stationary and business cards will need to designed and printed. Custom marketing materials will need to be produced. The front-facing website needs to be completed (which is actually happening behind the information wait list request screen at KennonGreen.com).
I’ve been spending a lot of my time writing what will become the regulatory disclosures, such as the Form ADV as well as a sort of client manual that explains who we are, what we do, and how we do it. I’m also finalizing the Credo with Aaron, which will be the guiding document that sets the tone and culture of the firm for what I hope will be the next few generations.
For now, Aaron and I have converted the study at home into a sort of war room from where we are handling most of the work. Given that there is a decent probability we may be relocating to either Chicago or Southern California at some point in the coming 12 to 36 months for reasons that a few of you already know after our trip to the West Coast when we tested out different communities – to see that trip, check out the May 2014 archives – I’m not particularly keen on running out and buying or leasing an office building. For those of you who don’t know what is going on, the short version is this: Aaron and I will have children at some point in the next couple of years and we plan on having biological kids through surrogacy a la the Neil Patrick Harris route. Two states – Illinois and California – have massive advantages over the others should we reside there when our biological kids are born. We would both be on the birth certificate, the surrogacy arrangement would protect us and our sons/daughters in different ways, and a lot of the worry of dealing with potential remote-probability events become non-issues as our estate plans would be re-worked. We’ve been quietly reordering our lives and businesses so that a relocation is a stress-free experience. Although it has reduced my mother to tears on occasion – no matter how old I get, I will always be her first born baby in her eyes so the idea of me not being a few minutes away makes her sad – even she is on board with us doing this because it will be better for our family. I half expect that wherever we move, she’ll follow before long, even if it means getting an apartment near us and going back and forth.
Anyway, that’s a much longer post for a different day.
This doesn’t have any practical effect for most people given that our communication is exclusively over the telephone and email as is common in this day and age. However, for those of you who become clients and want to meet with us face-to-face whenever you’re in the general Kansas City area, it means for the foreseeable future, you’ll be invited into our home. You’ll be able to sit down with us, have a cup of fresh, hot coffee, and maybe even stick around for dinner as we go over your portfolio. Given that I normally have a fairly tight zone of privacy around me, it makes me a bit nervous to open what has been our sanctuary since we bought it in our mid-twenties but I’d hope we’re going to be working together for a long, long time and perhaps even become friends. It certainly is more prudent than me dealing with the hassle of locking in a long-term commercial lease if, before we know it, Aaron and I setup our lives either in The Golden State or downtown Chicago. It will also be more comfortable for you.
In any event, we ordered a new system to serve as the sole machine on which we do work related to the firm, and on which I am typing this to you right now. (I have to say the 3440×1440 resolution is sweet and works beautifully with Windows 10. We ordered a different version from the one you see in stores as this one has an Intel i7 processor, a solid state drive for the operating system plus a traditional drive for larger storage needs, and quite a bit more memory.)
Speaking of technology, that’s another thing we’re working on: Technology, compliance, and security. To understand my thoughts on how I want to handle this subject, you need to travel back in time with me to an experience that had a profound effect on how I think about these things.
Many years ago, back when I was in college, one of my internship experiences was at what I considered to be one of America’s best-run property and casualty insurance groups. I had talked my way into the arrangement by sending a message to the then-university President, who I knew from working with him as the Student Body Treasurer and Chairman of the Finance Board, asking if he could reach out to his predecessor, who was the Chairman of the Board of this insurance group. I explained that insurance was a passion of mine; that I wanted to understand it, to see how it worked behind the scenes. The former President and Chairman of that insurance group had the then-current CEO call me and we talked on the phone. I still remember having the conversation with him, standing in the bedroom of my college apartment. The CEO graciously invited me to come spend a couple of months at the firm, something for which I will be grateful for the rest of my life. I then spoke to my academic advisor who figured out a way for me to count the experience as a huge part of my hourly credit requirements, a sort of custom-made program through the liberal arts department, an arrangement we repeated a semester later when I talked my way into an internship in the contract department of Warner Music Group, one of the world’s largest record labels. It was a crazy time in my life – the year I signed the book deal for The Complete Idiot’s Guide to Investing, 3rd Edition and the year Aaron and I launched Mount Olympus Awards.
The CEO came and introduced himself to me early in the process and asked, “What do you want to do? How can we help you be successful?”. I told him that, someday, I wanted to own a holding company or some sort of investment vehicle, never have to work for anyone, and spend my day analyzing companies and acquiring them in whole or part. I wanted to get the numbers. To see how the financial statements connected with the actual operations. He didn’t miss a beat. “Then that’s what we’ll help you do.” I remember, in that moment, looking at him and realizing why he was the CEO. A statement like that didn’t even phase him. In the months that followed, he and the wonderful woman to whom he assigned me, the controller in Treasury, created a schedule that took me through practically every department in the place. I worked in accounting for awhile, then moved to the investment department. I was shocked to watch $5 to $6 billion managed from a handful of offices with less than a dozen people, realizing just how scalable asset management is. I sat in on customer phone calls in the call center and studied workers compensation claims. I spent afternoons with reinsurance experts and fraud detection specialists. Nearly everyone was extraordinary. I’d stay for hours, long after I should have left, and read A.M. Best manuals or flip through ValueLine and the Bloomberg terminal, researching companies. It was one of the best experiences of my life. Truth be told, in an alternate universe, I could have been happy and fulfilled working there for my entire career, having the same chicken salad sandwich and iced tea in the cafeteria every day. I loved that place like it was my own family business. It was a mutually-owned firm so the goal was to reward policyholders with dividends, not shareholders, which still gave me the same sense of satisfaction; of serving others and doing a good job while building something.
One afternoon, the CEO showed up and sat down with me. We began talking and I asked him if there was one thing – a single lesson – that he hoped I walked away from the experience with, and that I remembered for the rest of my life, what would it be. His response was not what I expected. “Internal audit.” It was instant. There was no hesitation; no qualifications. He explained that sometimes, even good people would do immoral things if you made it easy for them. That, often, they would convince themselves they weren’t doing anything wrong and they wouldn’t mean to steal but it would escalate over time. To protect the firm, the employees, the policyholders, and society, it was my duty as a future executive to have procedures and systems in place that made it very, very difficult to cheat and that if cheating did occur, could uncover it quickly and take appropriate measures. It was also my duty, no matter how much I liked someone, to kick them out to serve as an example if they crossed a line that should not be crossed and called into question the integrity of the firm.
Those of you who know my background, especially with my parents and their religious insistence upon character and integrity, can probably imagine how hard this was for me to accept because the idea that people needed to be policed was hard for my younger self to understand; that there were people in the world who would behave this way. I made a conscious decision that I was going to trust him; that his experience justified giving him the benefit of the doubt and that I’d never forget what he told me. The worst that happened was he was wrong and I spent a bit more on security measures. It was better than the alternative.
Coincidentally, that same year, I went out to lunch with a man who was an underwriter for a syndicate through Lloyd’s of London after a professor of mine made a call for me and convinced him to let me shadow for a day, watching how he worked. His entire business consisted of a few rooms in an old, converted house he had purchased, from where he, and a pen, generated millions of dollars in annual income. It was a fascinating experience but there is one thing that stands out to me. We went to lunch at a little shopping center near McCaffrey’s grocery store. As we were eating, he explained that many years prior, he had built a large insurance brokerage business. He had been very successful, as he was now, but that the entire business failed when he discovered one of the people at the company had been committing fraud, embezzling money and falsifying documents. It nearly ruined him. He kept lamenting that it all could have been avoided had he spent even a tiny amount on auditors and safeguards; how dumb he had been to trust other people. Even though he ended up becoming obscenely rich again, it had been so unnecessary. Sitting there, I immediately recalled the lesson from the insurance group. Internal audit.
How That Philosophy Is Influencing Our Selection of Technology Vendors and Custody Philosophy
What does all of this have to do with starting an asset management firm? Especially since Aaron and I will be the only two working there in the beginning? Simple. I’m going to build compliance into everything we do. I’m not talking about the bare minimum required by law. I want it to be part of the culture so that, if and when we grow, it will be anathema to even contemplate violating the policies and procedures in place. (And I do want to grow. If, God willing, we end up with a normal life expectancy, we should have 50+ years to expand the place into something meaningful. I’m willing to bet we can do it.)
The message of such a policy should be clear: If not even Aaron or I are exempt – and we are the Managing Directors, have our name on the door, and own 100% of the equity – why would anyone else think they are able to get away with ignoring the rules? From the day we open, I want a respect for compliance to be part of our firm DNA. We may not be perfect – and we may even make mistakes from time to time – but we will strive to be; to build a firm that, if the roles were reversed and we were the client, the safeguards in place would let us sleep better at night. I want to build a firm that, were I client, I’d be happy to have manage 100% of my net worth. That means always striving to be better.
We’ve begun choosing our technology vendors accordingly. For example, the imaging system we will be using to archive signed advisory agreements, sensitive client records, etc., is built on a platform that creates complete audit trails of all interactions between the system and the user, records additions and changes by users to WORM media (write-once-read-many so it cannot be modified), has backup ability so we can recover information in the event of an emergency, isolates user storage so only the appropriate and authorized people will have access to sensitive documents, and communicates with the firm user through 256-bit SSL encryption.
The email system we will be using retains 100% of all incoming and outgoing messages so there is a record of communications even if the user deletes them, including attachments, with the archive being stored in two different data stores for compliance, audit, and security reasons. If a regulator ever comes in and wants to examine certain email communications, it’s all there, silently being archived in the background.
These two systems will integrate with our customer relationship system, improving efficiency. That customer relationship system is advanced enough it will help us meet “know your client” requirements, allow us to build detailed, secure files on clients to better serve their needs, integrate with our chosen third-party custodian platform, and keep the information safe by having it all stored in the data center rather than on a local system. The database for this system is backed up nightly to another off-site location so we can restore information in the event of a disaster or emergency.
Where possible, we will be using two-part authentication so that simply knowing a username and password alone isn’t enough to login to a system.
Determining Which Custody Platform We Recommend to Clients Is a Major Decision We Need to Finalize This Quarter
Similarly, one of the decisions we made very early was the firm will not take physical custody of client assets. Instead, we will only agree to manage funds for clients who deposit their assets into their own custody account at a qualified third-party custodian. This means that neither Aaron nor I, nor any of the future employees of the firm, will have physical access to client funds except to debit client accounts for the fees we are owed for asset management based upon the prior written authorization of the client. Instead, the firm will be given discretionary trading authority over the account to invest the money. The custodian will directly, and independently, send the client records of the cash, securities, and other assets or positions in their custody account, along with list of transactions that have taken place in the account, which the client and his or her advisors, including attorneys, accountants, financial planners, or family members can compare to the statements prepared by our firm, including the billing calculation for fees. This will allow the client and his or her advisors to compare the statements, performing their own audit.
At the moment, we have narrowed down our choice of recommended custodian to four potential firms, which we are evaluating before making a final decision. Before I put my stamp of approval on a financial institution, I want to be absolutely certain they meet my standards and will be a major asset to both the firm and our clients. There are two that have really pulled out ahead of the pack in terms of capability and service levels but this isn’t a decision I’m going to rush.
Handling the Regulatory Licensing and Approval
Beyond that, there is still a laundry list of things to accomplish but we’re making progress every day. Later this month, I’m meeting with one of the tax partners at our accounting firm, for example. I want to make sure that everything is done right from day one since the waiting list has clients from all over the country and, in a few cases, even international inquiries.
Once we have everything checked off the list – the entire framework is in place, the documents are written, the service offerings are finalized – Aaron and I are going to go handle the personal and firm-specific regulatory approvals we need to get for both ourselves and Kennon-Green & Co. so it can begin taking clients. We want it to be like a light switch gets flipped when we open our doors, everything ready to go.
As soon as the regulatory approvals are done, we are going to systematically contact the people who were on the waiting list. The order will depend, in part, on some of the regulatory requirements of the state in which the future client resides but generally, I expect to send them all of the information either in physical form or, if we can find a client portal that I am sufficiently satisfied with in the beginning, a secure platform they can access and maybe even setup a time to speak with each on the phone to answer any questions they have. (Or, again, set up an appointment and have them swing by the house to meet face-to-face.)
Another thing we’re working on is consolidating certain family assets at a specific custodian so we can immediately bring a good chunk of change from day one to be invested in portfolios containing securities similar, and in many cases, identical, to those we select for client portfolios. I want to do this to demonstrate our commitment to walking in their shoes as much as we can by aligning incentives. With all due respect to my childhood investing heroes, I always felt like their initial contributions alongside investors were on the parsimonious side. Ultimately, I expect Kennon-Green & Co. to become the central family office through which we manage a majority, if not practically all, of our family’s liquid net worth. That will take time to achieve. From the outset, though, I’d at least like Aaron and I, along with members of our family, to kick in a collective $500,000 to $1,000,000 of our wealth to demonstrate we’re serious about this and both hope and intend to increase that amount materially in the coming years. Again, it’s something I’d want to see if the roles were reversed so I think I should hold myself to that same standard. Of course, this can’t guarantee results. Neither I, nor anyone else, can promise results. The only thing I can promise is that Aaron and I will invest client money the same way we invest our own money, factoring in individual considerations and, in some cases, moral and ethical preferences (e.g., some folks don’t want to own tobacco shares no matter how attractive they are).
I also think the right type of client will appreciate that it is self-made. It’s one thing to kick in money. It’s another when you and your family members had to earn it yourself.
Of course, that’s something that will have to wait until we’re closer to launch once the details are settled. Everything is subject to change and the only thing clients will be able to rely upon is what we put in our regulatory disclosures and commit to them in the advisory contracts. Those of you who have been around a long time know what you’re getting with me, and that I try to be both fair and transparent, so I trust most of you will be happy with the final decisions.
The only downside thus far is that Aaron and I have made the decision that it is going to be far easier to handle regulatory compliance by severely curtailing our online presence. This blog will change in nature somewhat, focusing on more personal and abstract, academic concepts, while things that involve specific, actionable, non-academic or entertainment capital market topics will overwhelmingly be released to clients through white papers, quarterly letters, and other publications. There is a plus, though, in that when that happens, our schedule should be a lot clearer so updates will resume, again. I may even implement a Podcast so I can more efficiently keep up with everything. Plus, for many of you, it won’t matter because you’ll be able to pick up the phone to call us or stop by and have a conversation.
Also, a bit of fair warning: At some point, as we get closer to the launch, the waiting list will be taken down so I can make sure we focus our initial efforts on those who wanted to invest with us early. There will not be advance notice. If your name isn’t on it, you’ll have to wait for us to open to the general public. If you want to add your name, follow the instructions on the site that will become the firm’s homepage.
Reader Comments (47)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
Bill Larson
May 1, 2016
Really fun / exciting to read about the development. Sounds like you're going crush as usual. Podcasting could be cool. Perhaps release some of that "specific actionable ... white papers quarterly newsletters" to plebes like me well after they would be actionable?
DLo
May 3, 2016
Replying to Bill Larson
With regard to the changes in nature to this site and its implications, that second to last paragraph is a little concerning for me. I've been reading this site for the past couple years and the main thing that keeps me coming back compared to other financial sites is your candid, specific, actionable, real-world, relative stories and examples that give a more personable touch. Not to mention non-academic or entertainment posts sometimes thrown in to mix it up. You do a phenomenal job in that regard and I've thoroughly enjoyed your writing style here, probably more so than any other financial site I frequent. This is easily my favorite financial site. I can definitely see a difference in your writing style here vs. About.com. I feel like your About.com writing focuses more around abstract, academic, teaching concepts. If the two are now going to be similar do you see merging them or stopping the personal blog? Your writing here adds personal, practical, real-world, actionable flair. I would really miss the quality of this site should you no longer write the same as in the past, I find a lot of value in it. Perhaps another medium such as podcasting could provide this? Sorry for the rambling, congrats on the Asset Management Firm, sounds like things are really coming together nicely!!
Joshua Kennon
May 7, 2016
Replying to DLo
Thank you for the kind words. As for the blog, I'm not entirely sure of the specific details at the moment. Ideally, I'd like to transform the site into something even better than it is now, with more structure and an updating schedule. Aaron and I have some ideas we'd like to implement in the coming year as that transition is made (it began by slowly rolling out a removal of the sidebar to avoid distraction and cutting the number of ad instances per page significantly, which will require going back and cleaning up all individual past posts). There will probably be a lot more about things like mental models, behavioral economics, efficiency, business strategy, case studies, etc. As it pertains to specific investments ... not so much. The main difference that I envision, I explained in a comment response I gave earlier this afternoon to @mrowenr:disqus in this same thread so you might want to read it if you're curious.
ffc
May 2, 2016
I totally agree with Bill - releasing historical white papers would be a great public service!
Jeff
May 2, 2016
Glad to hear things are coming along!
One quick note:
"The email system we will be using retains 100% of all incoming and outgoing messages"
I assume you have looked at the DOS concerns with this system?
Joshua Kennon
May 7, 2016
Replying to Jeff
I appreciate that!
As it pertains to technology and security, at the moment, I'm not going to say too much about it or the systems we are / may be using but we are trying to look at as much as we can, from every angle we can including specific-targeted attacks, physical security, and remote-contingency events such as a cyber-attack on the entire country. It's definitely on our minds.
Ang
May 2, 2016
Joshua,
Excuse the gushing that will follow - admiration and respect doesn't even begin to describe how I feel about the way you and Aaron are going about putting this business into place. Although it's sad that we won't get the full scope of discussions we have historically on this blog, I'm very happy and very excited to see where you guys take this!
P.S. I'm only about halfway towards the requirement so I haven't tried to put myself on the waitlist, but would it be possible to mail a copy of the documents? I can reimburse for shipping/material costs?
P.P.S. Off Topic - Love your desktop background - I always use the same picture and yours reminds me of it: http://www.wallpaperfinder.com/wallpaper/german-mountain-lake-house
Joshua Kennon
May 7, 2016
Replying to Ang
Thanks! We're really excited about it.
As for getting copies: Go ahead and call the waiting list number, leaving your information and mentioning you talked to me here about the documents. Once you've done that, I'll make sure you are in the CRM system for notification and figure out how to get them in your hands then when we are done with the regulatory stuff and ready to distribute them. We're looking at both paper mailings and a secure portal at the moment. The portal, if we go that route, is quite cool in that we can exchange documents with clients in a secure environment. But, definitely, getting on that list is the surest way to make sure you are notified because it is going to be the main resource we reference as we do the controlled rollout.
This computer background? Absolutely love it. We found it on a site called Interface Lift; specifically the page at this link. There are quite a few great photographs there for high resolution screens.
Andrew
May 2, 2016
Your office could come straight of Ayn Rand!
Brendan
May 2, 2016
Very impressive! Such a privilege it is to be able to read about the progress on the Global Asset Management Firm. Over the last 8 years I've grown alongside you in my financial education, nearly always playing a game of catch-up because I'm a science nerd first, and a finance nerd second, but the knowledge and reduction to practice have been invaluable in my day to day life.
Mr.owenr
May 2, 2016
I'm confused Joshua, does the second to last paragraph mean that us small timers are being cut off from the good information?
Joshua Kennon
May 7, 2016
Replying to Mr.owenr
It seems weird to hear it categorized as such since a vast majority of my writing is me thinking out loud or organizing my own thoughts but, to be more specific using a recent example, posts like this one on Tiffany & Company wouldn't have been made public.
Instead, I would have been buying the shares as the price declined on behalf of the private accounts under management. If and when I did decide to write about it, it probably would have been a far more in-depth, much more unrestrained letter detailing my thoughts on the intrinsic value of the business, the risks it faces, the opportunities it has, and the role it is playing in the individual portfolio; the sort of conversation I would have in private with a family member. The letter would most likely be delivered to each client for whom I purchased shares via a secure portal online that required a username and password to access, from which they could download it in Adobe PDF. Alternatively or inclusively, were I to mention it, it may be written about in the quarterly letter to clients detailing some of the developments in the equity and fixed income markets, how we think about them, and how we responded in individual portfolios.
I've begun working on the first one, as a matter of fact. If the situation still remains - and there is no guarantee it does given how volatile equity markets can be - there is a business that I am seriously considering immediately taking to a 5% weighting in most value-based client portfolios the moment an account is opened (this particular business represents a 6.91% weighting in Aaron and my personal portfolios as of today); a core holding in the long-term, highly passive accounts we run. It's something that, absent unforeseen circumstances and the need to occasionally engage in what I call horizontal risk shifting, I'm going to explain it will be among the securities we aren't likely to sell even if they become slightly overvalued because the core economic engine is so incredible, and obfuscated by current accounting and other conditions, that it's one of the few things you'd have to rip away from my hands if asking me to make a probabilistic bet on 10, 15, 25+ years from now. Even if we buy it and it crashes by 50% the following day, as long as the business remains fine, which given its particular operating structure, it should, it wouldn't phase me at all. In fact, I'd probably acquire quite a bit more. I am explaining why I want them to completely ignore the stock price for the next several years and focus on a handful of numbers in the annual report and Form 10-K, watching them like a hawk because as long as they keep getting better, at some point, I think the odds point us being highly satisfied with the outcome no matter what the volatility in the interim years. Of course, I can't guarantee that but they'll know my own money is on the line, too; that I'm not just writing an opinion but explaining why I am doing what I'm doing with their funds, and my own. In fact, in the past couple of weeks, I bought even more for Aaron and I, had both my sister and my nephew pick up some; I recently had my mother buy more, and have it shoved in my dad's, brother's, and mother-in-law's respective accounts.
In effect, by becoming a long-term client of Kennon-Green & Co., the people who will be invested with us free me to become that candid with them. I don't have to put up a lot of veils and qualifications as I do with my public writing. Right now, if I write about it on the blog or elsewhere, someone might buy shares of this particular business then be upset if a couple of years from now the stock price is down 20%. They may not have the emotional fortitude or experience to analyze the situation and, if need be, stick with it. Suddenly, in their mind, they blame me for making a mistake when the problem resides in their own inability to control their emotions or do fundamental analysis. In contrast, the people who are entrusting their net worth to the firm, who want me to invest their money using the same philosophy I do for my own family, are giving me the freedom to operate similarly to a private enterprise; to focus on value, not market quotation and not have to play the same silly games so many asset management groups have to in order to avoid losing clients. Because they've given me that freedom, I'm going to allow them to hear directly from me about my thinking on the matter. I want to explain to them why I believe this particular business, at this particular price, is something they should hold onto for decades, not letting anyone pry it out of their hands absent a handful of contingencies; why I believe it enough to use my own capital, and my family's capital, to become owners, personally, alongside them.
So, yes, there will be content that no longer appears on the site but the level of candor that I imagine both Aaron and I will bring to the missives written to clients should far exceed anything I've shared in the past as it pertains to looking at specific businesses.
DLo
May 13, 2016
Replying to Joshua Kennon
This has Hershey written all over it. 🙂
"I've begun working on the first one, as a matter of fact. If the situation still remains - and there is no guarantee it does given how volatile equity markets can be - there is a business that I am seriously considering immediately taking to a 5% weighting in most value-based client portfolios the moment an account is opened (this particular business represents a 6.91% weighting in Aaron and my personal portfolios as of today); a core holding in the long-term, highly passive accounts we run. It's something that, absent unforeseen circumstances and the need to occasionally engage in what I call horizontal risk shifting, I'm going to explain it will be among the securities we aren't likely to sell even if they become slightly overvalued because the core economic engine is so incredible, and obfuscated by current accounting and other conditions, that it's one of the few things you'd have to rip away from my hands if asking me to make a probabilistic bet on 10, 15, 25+ years from now. Even if we buy it and it crashes by 50% the following day, as long as the business remains fine, which given its particular operating structure, it should, it wouldn't phase me at all. In fact, I'd probably acquire quite a bit more. I am explaining why I want them to completely ignore the stock price for the next several years and focus on a handful of numbers in the annual report and Form 10-K, watching them like a hawk because as long as they keep getting better, at some point, I think the odds point us being highly satisfied with the outcome no matter what the volatility in the interim years. Of course, I can't guarantee that but they'll know my own money is on the line, too; that I'm not just writing an opinion but explaining why I am doing what I'm doing with their funds, and my own. In fact, in the past couple of weeks, I bought even more for Aaron and I, had both my sister and my nephew pick up some; I recently had my mother buy more, and have it shoved in my dad's, brother's, and mother-in-law's respective accounts."
Jeff
May 15, 2016
Replying to DLo
No chance it is Hershey. He has written too much about it, and it is too well known. It is a reasonable investment, but no-where near as drool-worth as Joshua hints at above given today's prices.
My guess it is a smaller company with a decent moat that provides critical services at prices which don't eat too much into their customer's margins. Thinking something *like* EXPD or BR. Maybe something with an accounting quirk like Autozone that hides it's true value.
We will just have to wait for the 13F, unless Joshua figures out a way around that. If they are all customer owned accounts, instead of a fund, that may remove the need for the 13F. I don't like that idea at all! 😛
Mr.owenr
May 18, 2016
Replying to Jeff
I imagine clients will discuss Joshua's picks on the future "forums." It might be easier to raise 500,000 though.
Joshua Kennon
May 18, 2016
Replying to Mr.owenr
I cannot fathom why they would because it'd be against their own self-interest. If you're looking at a business that has, say, $300 million to $500 million in float and we've been silently accumulating it for a few quarters, why on Earth would they want to bring it to other people's attention so they created competitors that could bid up the price of the very thing we are trying to accumulate for them?
It wouldn't matter for the type of future clients who came to us and said, "Hey, I have $5 million, would you build me a directly-held private index fund of the largest 200 companies in the United States by market capitalization, with the original positions equally-weighted, then reinvest the dividends into each component that paid it, and handle spin-offs and split offs as follows [insert instructions here] for a flat fee of [x%] per year so I can sit back and not have to do anything at all?" because they'd be dealing with enormous firms that had deep pools of trading liquidity which a lot of other people own. For global value and worldwide high dividend, though, it would not be intelligent to go telling everyone what they owned. If they were not judicious about it, it could have some significant opportunity costs. The lack of discretion is not something upon which I'd look favorably. The equity markets are effectively auctions and the last thing any of us would need is other bidders given that I'm more inclined to want to hold something for 5+ years.
Mr.owenr
May 21, 2016
Replying to Joshua Kennon
I respect what you are saying, that people should look out for their own best self interest and that you would look unfavorably on them. Perhaps this is true of you $500,000+ types, the super power of incentive would definitely suggest this to be the case. Yet in my experience people never look out for their own best self interests (like "The Millionaire Dentist Who Stole a Navy Veteran’s Debit Card to Buy Pizzas"). So don't leave it up to them. Smack that line in your future forums Terms of service where people are not allowed to discuss nonpublic information, such as your unique and secret Deity tier stocks.
Joshua Kennon
May 30, 2016
Replying to Mr.owenr
The investment advisory agreements will contain a confidentiality provision forbidding the discussion, both during the relationship and following its termination, of advice provided and transactions effected within an account to any third-party without written agreement or as otherwise required by federal or state law, regulatory authorities, or as may be necessary to effect a transaction within the account. Talking about what we are buying has the potential to harm not only the client but other clients as it creates competitors or other complexities for our positions that should not exist. It won't be tolerated. This won't come as a surprise to people who are used to this sort of private client arrangement where discretion is essential.
Mr.owenr
May 18, 2016
Replying to DLo
You can't bake a pie. Never forget that. Definitely not a chocolate pie once Hershey's runs out of it.
Full disclosure: I own HSY.
Jeff
May 15, 2016
Replying to Joshua Kennon
For comparisons on "level of candor" you may want to take a look at Ensemble Capital's blog http://intrinsicinvesting.com/. They have a similar style to you and are very generous with the reasons for their holdings.
David Elwood
May 2, 2016
Best of luck with the new venture! Been a reader of the blog a long time. Your statement on moving to Cali caught my eye. How will you mitigate the tax consequences of this (i.e. the upto 13.3% state income tax there, the high franchise taxes on LLCs/S-Corps with nexus there, etc)? I have been considering a similar move but the tax situation scares me.
Joshua Kennon
May 7, 2016
Replying to David Elwood
It will definitely be something we, and our accounting firm, will have to spend a lot of time figuring out. In our case, we'll do what we can but whatever the net additional cost may be compared to other alternatives, our trade-off costs will have to be factored into the decision. What is the value of perfect weather? What is the value of being in a place where, if we're out walking around, shopping after dinner, I can grab Aaron's hand without thinking about it because nobody is going to care? What is the value of being around a large potential client base that likely won't go to some other firm when they find out we own it (it is wishful thinking to believe that I wouldn't be at a significant market disadvantage were I to move to, say, North Carolina)? When we have kids, what is the value of being season ticket holders to Disneyland or having access to some of the best cultural and educational institutions in the country? In other words, is it worth it to have fewer dollars but a superior product the same way a person who buys a Lexus gives up more greenbacks but has a much more enjoyable driving experience than someone who opts for a Nisson Versa? Money exists as a tool to serve us; to make our life better so we enjoy the time we've been given.
There's no doubt, though, that the state income tax will have an effect. (The inheritance taxes and such, not so much if the estate plan is well-constructed. For example, if a person has lived in California for most of his or her life, has a substantial net worth, and is ready to begin transferring assets to future generations, there are all sorts of ways to get around that, such as an incomplete non-grantor trust [PDF].)
Illinois does have a major advantage over California here. Since the tax rates went into effect back in 2014, the new rule calls for the state tax liability being 3.75% of whatever the Federal tax bill is, which allows a lot of flexibility and planning. Partnerships have to pay 1.5% of income as a replacement tax but that is because local governments and school districts are banned from collecting personal property taxes on business assets.
I definitely understand your concern, though. It's something we talk about a lot, if not daily; trying to put a monetary value on those trade-offs. If and how we'd mitigate specific tax situations, at this point I couldn't say.
Eric Vaughn
May 8, 2016
Replying to Joshua Kennon
Like Munger said at the Berkshire annual meeting, it should be illegal to cite costs without also citing benefits
AC
May 10, 2016
Replying to Joshua Kennon
Joshua,
I left the midwest for California nearly 20 years ago. It's one of the best decisions I ever made. Yeah it's more expensive, but I earn 2-3x as much vs. people who stayed there. Plus I build equity in a 7-figure home. Even with a very substantial household income (well into the six figures), my combined state and federal tax rate is around 19% due do efficient tax strategy. When I decide to retire I'll have the freedom to move just about anywhere on the planet. That's not something I can say for my friends who, for whatever reason, decided to stay put in a much less wealthy part of the country.
Joshua Kennon
May 10, 2016
Replying to AC
Not that I need too much convincing but you make me want to go straight to the airport and get back on a plane for the West Coast...
Alexander Davis
May 15, 2016
Replying to Joshua Kennon
I agree, I moved to LA and now work for a major video game company in their Finance department near Santa Monica. It's really been a dream job and the backdrop of the City and Beach can't be beat. California really has everything as long as you can afford it.
Cheers,
Derek
May 10, 2016
Replying to Joshua Kennon
"What is the value of being in a place where, if we're out walking around, shopping after dinner, I can grab Aaron's hand without thinking about it because nobody is going to care?"
I've been replaying this sentence over and over in my mind for the last couple days. It struck a chord and has been bothering me ever since reading it two days ago. It is so profoundly unfair and wrong that something as simple as holding your spouse's hand has to be considered when choosing a place to live. Hopefully the progress being made continues and soon no one has to worry how others react to a small act of affection.
Thank you for this wonderful blog, and best wishes to you and Aaron as you embark on this exciting new venture. Perhaps I'll look up your investment management firm in a few years when my wife and I meet the investor minimums.
Heath
May 2, 2016
Thanks for the update Joshua! BTW, did you happen to get your hands on the BRK lounge pants, they were sold out by Saturday morning!
Joshua Kennon
May 7, 2016
Replying to Heath
We left those for others to enjoy (the bookstore was our target). I could tell people were excited by them because when we walked by the Fruit of the Loom section mid-day Friday, the line was out of the booth. I'm actually surprised with the car dealerships under the corporate umbrella that Berkshire doesn't have a massive car lot with huge shareholder discounts available.
Allen Jarboe
May 2, 2016
Glad to see you back posting here! Good luck on the effort to create your own firm; it sounds like you are making good progress and it is very exciting!
Allen Jarboe
May 10, 2016
Replying to Allen Jarboe
And ps I really like the new look!
Joshua Kennon
May 10, 2016
Replying to Allen Jarboe
Thanks! Personally, it's probably my favorite theme the site has ever had. The goal, eventually, is to get the sidebars completely removed, cut down the number of ads and sponsored links drastically, expand the body of each page across the width so the reader can focus on the content, and change over some of the remaining ads to Kennon-Green & Co. banners (I'm already providing advertising inventory for Vanguard, Fidelity, Charles Schwab, T. Rowe Price, and a host of other asset management companies so I may as well insert my own in the mix since I built the platform.)
There's still a lot to do but it makes me want to write new content for the blog. I absolutely have to figure out how to get some sort of hosted forum integrated, though, preferably with an identical design aesthetic. That way, if I'm unavailable for periods of time, again, the community can still meet everyday to talk about mental models, investing, etc.
Ang
May 11, 2016
Replying to Joshua Kennon
Are you sticking with the grey/black background? It's a little hard on the eyes, especially with white text - did you not like the baby blue or forest green experiment?
Joshua Kennon
May 11, 2016
Replying to Ang
The current background? It's a darkened and desaturated blue/cyan (see attached image for what it looks like lightened). Almost all of the present design will be staying except the only problem I have is the white Disqus text, which Disqus refuses to allow website owners to modify from what I can find online and no CSS seems to be working. I'd like to change it from #fff to #989ea1 (the text would be the same grey as the article body and reads easier to our eyes due to the lower level of contrast). It's almost enough to make me want to get rid of Disqus because I'm not going to arrange my entire site around their lack of functionality. Frankly, it's nothing new for them. They unilaterally decide what they want to do - e.g., removing showing downvotes in comments - and force it on communities. It makes it a far less useful service than it would otherwise be. But my patience is running out with them, anyway. The quality of their sponsored posts had declined sufficiently, I recently shut off all of their ancillary services as I consider the loss of revenue to be worth the better appeal. I may need to look at alternatives when I get around to getting the forum setup, which is quickly becoming a high priority (like to get it done before the end of the year) task.
If you prefer black and white text and background, mobile view and/or desktop reader view are still available if your browser supports it. It strips out all formatting and presents each post as plain text (see attachment from Safari for example of this post viewed as such on a desktop).
Right now, the big task is going to be switching over years and years of posts to the full width format, adding header images (which don't show up quite correctly on most mobile or tablet versions, ruining the effect, but they are fantastic on desktops and notebooks); e.g., see how this article has changed. We might go back and systematically change out images that were on white backgrounds, too. It's going to be a long haul but, in the end, it should be worth it.
But I'm with you on the white text. it won't let me change it. No matter what I do, the Disqus plugin over-rides me. The only thing I can make it inherit is the link color. I believe the CSS stylesheet its referencing is something like body.dark (I'd have to check as I don't recall, exactly, off the top of my head) but we're having trouble even locating it. It's just ... a thing. An unpleasant thing. It's irritating me immensely but we'll figure something out in the end.
Ang
May 11, 2016
Replying to Joshua Kennon
No the blue is great, I'm used to the blue and am fond of it. But instead of the blue, what I'm seeing is this:
Could be my computer but both work and home computers as well as mobile (droid phone) are showing that color
(If it's a personal issue and you/Aaron are not seeing it on your devices, I apologize, the change occurred maybe yesterday? Very recently, prior to that it was a very peaceful green)
Joshua Kennon
May 11, 2016
Replying to Ang
Sorry, I wasn't clear. Entirely my fault. The color you are seeing is the right color (the one you are calling gray). It's that blue (the attachment) that had then been darkened and desaturated so it was more muted. There's nothing wrong with your device, I hadn't had my first cup of coffee, yet.
We went with it for a few reasons. 1.) It looks really, really good on the screens we use to work, which means I'm more likely to want to work on the site for long periods of time, 2.) I'm really serious about removing elements of things I don't like, including the sidebar, etc. The large amount of white space made me hate looking at the screen for long periods of time, 3.) As we slowly strip out advertisements, take out unnecessary plug-ins, remove ancillary things like the globe on the right of the side bar (enough browsers now require you to "press play" on it that it has lost its utility), it gives me the sort of blank canvas I want to create a branded experience. Going forward, the new content should be stylized to fit seamlessly within it and I want to figure out how to use things like the video galleries, photo galleries, etc. which have all been largely untouched.
I realize it's not everyone's cup of tea, especially since all of the upgrades that we plan on going along with it won't roll out for a few quarters or even a couple of years (I'd love to build something like a huge book recommendation library, downloadable spreadsheets, etc., but all of that takes time). The reader view should solve it for you, though, if you find it too dark. (Having this conversation about "dark" reminds me of Dark sided! Dark sided stuff!.)
Sorry, it's still early for me. I was up working late and slept in a bit so I'm sitting at my desk waiting to full wake up.)
Ang
May 11, 2016
Replying to Joshua Kennon
Ahhh I see. Good to know im not as colorblind as I thought I was for about fifteen minutes there! Sorry for the miscommunication.
Joshua Kennon
May 12, 2016
Replying to Ang
It was one of the greatest episodes of a television show called "Wife Swap" that ever aired. It became a bit of a meme for awhile. This woman switched places with a hippy lady, if I remember correctly (after seeing the clips, I had to track down and watch the whole episode years ago to see what could have predicated such a meltdown). My favorite part after all of that: She took the money. (Of course she did. Is anyone surprised?)
It really did make my morning yesterday. I kept cracking up at my desk imagining you clicking on different subject pages and tags screaming in that voice, "Everything is tainted! Dark sided! So dark!"
Whenever I watch the clip, I can't help but think: These people are real. There are millions and millions of them. They vote. Trying to come up with intelligent policies is a difficult thing when you're dealing with this level of irrationality. On the upshot, though, the kids seems somewhat normal? Maybe they'll grow up and be regular functioning members of society?
Jeff
May 15, 2016
Replying to Joshua Kennon
Just as feedback, I find your body text rather hard to read on my monitor, and prefer the Disqus white. It's not a deal breaker as I can adjust my monitor, or over-ride the CSS if I really want to.
Thanks!
-Jeff
A
May 2, 2016
Good to hear you guys are still alive, I was beginning to suffer from JK withdrawal 😉
joe pierson
May 3, 2016
>Back in September
Geez, it's been eight months?
DLo
May 3, 2016
With regard to the changes in nature to this site and its implications, that second to last paragraph is a little concerning for me. I've been reading this site for the past couple years and the main thing that keeps me coming back compared to other financial sites is your candid, specific, actionable, real-world, relative stories and examples that give a more personable touch. Not to mention non-academic or entertainment posts sometimes thrown in to mix it up. You do a phenomenal job in that regard and I've thoroughly enjoyed your writing style here, probably more so than any other financial site I frequent. This is easily my favorite financial site. I can definitely see a difference in your writing style here vs. About.com. I feel like your About.com writing focuses more around abstract, academic, teaching concepts. If the two are now going to be similar do you see merging them or stopping the personal blog? Your writing here adds personal, practical, real-world, actionable flair. I would really miss the quality of this site should you no longer write the same as in the past, I find a lot of value in it. Perhaps another medium such as podcasting could provide this? Sorry for the rambling, congrats on the Asset Management Firm, sounds like things are really coming together nicely!!
Eric Vaughn
May 8, 2016
I'd give anything to be in a position to move to California. You and Aaron are truly blessed.
The Struggling Millennial
May 11, 2016
Well Joshua, I'm sure this comes as extremely disheartening news:
http://taxfoundation.org/article/illinois-considers-1125-percent-tax-small-businesses
"Under the proposal, Illinois would impose the second-highest state rate
in the country on pass-through businesses, after only California.
Illinois would be third after the state of California and New York City
when local income taxes are also taken into account."
Both California and Illinois are two of the most broken states economically. Truly regressive. But at least in California, you get nice weather. I'm sure you're aware of this, but I figured I'd kick in anyway.
nlf
May 12, 2016
Josh, two things. 1. I'm curious to know if you intend to have a cap on either the number of clients or the total invested amount in the beginning. And 2. who do you expect your first clients to be? $500,000 or even just $100,000 in investable assets can be hard to come by for a young professional. A majority of my net worth is currently tied up in either retirement savings or brokerage accounts, so I reckon it would take me several years of continued salary growth, saving, and contributing before I get to the $100,000 (or $500,000 even).
PS Might I suggest a meet-and-greet the next time you are in Southern California?
Don Hilario
May 15, 2016
Hi Josh!
I have a small private practice in So Cal as a CFP(R) professional; services include stand-alone financial planning where client assets are held with multiple custodians.
Can Kennon-Green & Co. offer third-party management?
Say for example, we, on behalf of our client(s), want to hire your asset management firm for a sleeve of our dividend growth strategies, assuming your minimums are met (i.e. ~500k per client), is that something you can offer?
I've used separate account managers (i.e. Davis, Marsico, Pimco, etc.) in the past, especially during my heyday at UBS, but annual fees were as high as 2.85%. As my practice grew, so did my fiduciary conscience of "client's interest comes first," and not since 2009 have I deferred to a third-party asset manager.
Having said that, I've been a genuine fan of your work, personally and professionally. In short, I believe you stand by your convictions.
And though the initial idea may sound crazy, yet to meet you face to face, here I am inquiring about professional money management.
My contact info is among your waiting list - no genuine rush here, but welcoming the opportunity to explore Kennon-Green & Co. going forward!
all the best Josh!
Don
Eugene
May 16, 2016
This is very exciting. Congratulations! What would you advise for the small-timers who can't put up the necessary funds to invest with you? Honestly, it seems like a once in a lifetime opportunity to invest. Should I just wait for you to open to the general public or pool money together with family? What would you advise? Thanks!