Olson’s Observations

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Andrew Lahde’s Goodbye Letter: Great Read

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Andrew Lahde, manager of Lahde Capital (a small hedge fund in California), announced he is shutting down his fund.  He broke on to the scene in a big way earlier this year after his fund, only one year old at this point, returned ~866% betting on the subprime collapse.

The returns are one thing to be amazed about but his goodbye letter is truly something that will give you a jolt.  While I do think he goes a little off the edge here and there I do think that there are some interesting ideas scattered throughout the short letter that are worth thinking about. At the very least this is a smart guy who now knows what he wants in life and has realigned his priorities and I say good for him.

Here is the letter in full (via FT Alphaville and Portfolio.com).  Lahde surely knows how to go out with a bang, that’s for sure! (via The Big Picture)

Dear Investor:

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde

Written by Eric Olson

October 18th, 2008 at 10:07 am

No Bottom Yet

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With the big hedge fund guys (even those who are down for the year meaning they aren’t trying to preserve their wins to help with their fees) moving a significant amount of their assets to cash equivalents it looks like my post from Monday won’t pan out (these guys aren’t always right but they are smart so their bold moves to cash equivalents are something to watch).  It seems like we may be in for some more losses as today’s drop in the Dow indicates (down to ~8500 or about -8% for the day). We have a tough road ahead but we’ll get through it.  As I said before, the tough market conditions will separate the wheat from the chaff and we’ll end up stronger and smarter as we emerge from this downturn.

Written by Eric Olson

October 15th, 2008 at 5:47 pm

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Discipline: One of the keys to good investing

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If there is one thing I have learned about investing it is that, to be successful in the long run, you have to be disciplined.  Discipline can come in many forms but in this post I have one form that I want to focus in on.  I want to focus on setting price targets.  Firm price targets.

Price targets help to take the emotion out of investing.  You should set a reasonable upper bound that is above your purchase price and a reasonable lower bound that is below your purchase price (key word, reasonable) when you first invest in a company and then stick to those numbers.  By “stick to those numbers” I simply mean you should sell the stock if the stock hits either one of them (yes, even if it hits the lower bound and you’ve lost money - of course, if you think the stock is still solid you could buy more and dollar cost average down but that is another post entirely).

Sticking to these targets will help you avoid large losses and avoid getting too greedy when you have already made a healthy profit.

The issue that any investor faces when they are not disciplined is the natural human reaction to “chase a loss”. An example of chasing a loss is as follows. Say you have a stock and it currently sits at $50 per share (the selling point/target in this example) and you decide to hold it even though $50 was one of your targets.  The stock then drops to $46.  Instead of selling at $46 you will say you’ll sell when it hits $50 again.  The stock then drops to $40 and you rethink your current target of $50 and suggest that you’ll sell the stock if it gets back to $46 and so on and so forth until you have chased the loss all the way down.

If you had set one of your bounds at $50 ahead of time and have stayed with it you wouldn’t have ridden the stock as low as the person did in the above example.  I am sure some people will say, “yeah, but what if the stock went back up, you would have lost that extra value.” Those people would be exactly right but the issue is that you can never truly time the market.  You never know when the upper bound or lower bound will hit and if you think you can time the market you end up chasing losses.

All of the great investors I have watched since my youth and some who I have also had the pleasure of working for are always very disciplined in their approach and while this means they don’t hit every peak or valley and thus don’t extract or lose the maximum amount of value it does mean that they consistently see solid returns.

Creating discipline through price targets is one way to keep yourself from allowing emotion into the investing process. Too much emotion in the investing process typically doesn’t lead to good returns.

Written by Eric Olson

October 15th, 2008 at 9:00 am

The Credit Crisis: What’s with the stock market?

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As a lot of you know, the stock market was my first love as far a business goes.  I have followed the market closely ever since I was 13 and I continue to do so today.  In my relatively short time following the market I have seen some interesting things.  The unprecedented growth in the 1990s.  The tech bubble inflating and eventually bursting. And now I am watching the incredible sell off set in motion by the credit crunch.

I honestly thought that we’d see some support in the markets around the Dow’s 9,000 mark but the market continued to fall.  That surprised me a little bit considering the values that are there for the taking right now.  I am sure the value guys, like my former boss at Eaton Vance, Mike Mach, are starting to snag some solid companies are ridiculously depressed prices and they will make a killing on the upside (value hounds are going to work!).

To me the drop from the 9,000 level to the 8,000 level was complete fear.  Irrationality had set in.  Over the weekend I did some thinking about this while riding my bike on the lake front and I figured that over the weekend people would start to wise up and the smart investors would start buying again due to the incredibly cheap stock sitting right in front of them.  Today it looks like things are picking up a little and perhaps the fear, while still there, is becoming more rational (if that makes sense) and greed is picking up again.

Matt McCall put out a post today about his thoughts on the credit crunch and how long it may last.  McCall gave a time frame that I also would have suggested; about 2 - 3 years of tough times followed by 2 - 3 years of modest growth and then we will see things pick up again.

McCall also wrote about the difference between equity driven crashes and credit driven crashes, which I think bears quoting.

In equity driven situations, investors need to feel that prices have gotten low enough and they will come back in (fear turns to greed). In credit driven crashes, the whole system needs to “de-lever” and the process is longer and more complicated. The core issue is that families have too much debt. So, the debt needs to go away to fix the problem. Unfortunately, because of cheap debt, poor oversight and general greed, this debt party has gone on way too long. Consumers are underwater on mortgages and credit cards and the government is approaching the trillion dollar nut. Fortunately, corporations are generally not as bad off though some will get into trouble.

It seems that investors are starting to believe that prices have reached a point where they are too low (let’s hope anyway!) but, as McCall says, credit is a whole other story and that piece will take a while to clean up.

This credit crunch is a wake up call for all of us.  Americans have alarmingly high debt compared to the rest of the world.  They also have alarmingly low savings rates.  Combine the two and you have a recipe for disaster, a disaster that we’re currently in the midst of.

However, there is a positive side to all of this.  Perhaps Americans will begin to borrow less and save more.  This would be great for the country in the long run.  Also, as far as startups go, times will be lean for the next 3 - 6 years but in year 7 the best and most lean companies will be left standing and they will reap big rewards for their responsible business building efforts.  In essence we will have separated the wheat from the chaff, which will make our economy much stronger going forward.

I am looking forward to McCall’s follow up post on how VCs and portfolio companies can survive the next 5 - 7 years. It should be a good read.  In the meantime I would suggest reading his latest post in full.  It’ll be well worth the five minutes you’ll spend on it.

Written by Eric Olson

October 13th, 2008 at 9:59 am