How To Ensure Failure

September 29, 2011

“Invert, always invert.” – Carl Jacobi, German mathematician

When faced with a difficult problem, Carl Jacobi suggests turning the problem on its head. We often use this technique when considering investments; studying why companies in similar circumstances have failed.

Our challenge is to build an investment firm of which we would want to be clients. Since we have only just begun, it would be arrogant for us to offer advice about how to build a successful firm. However, we can suggest how to ensure an investment firm’s failure:

Lose your clients’ trust. If you do this, the remaining advice is unnecessary. Losing trust can be accomplished in many ways including: failing to protect client information, reporting errors, tax mistakes, refusing to discuss portfolio holdings, name-dropping, and partnering with second-rate service providers.

Accept clients indiscriminately. You should seek as many clients as possible. Especially seek impatient clients that do not know you or understand your investment approach. This will lead to rapid redemptions and additional forced selling the first time your portfolio declines in value.

Assume the world will beat a path to your door. You would not have started the investment firm unless you were “superstars”. Your talent will be readily apparent to others so you should expect that attracting new clients will be easy and not take much time. This in turn allows you toundercapitalize the business since you will become profitable quickly.

Change your investment style frequently. At the first sign of trouble make sure you change your investment style. You should also make sure you focus on short-term results, preferably daily, so that you detect trouble as early as possible.

Use lots of leverage. Leverage always amplifies returns so you should use all available leverage. If possible, leverage illiquid securities.

Do not worry about operations. Operating a business is easy and does not take much time. Do not let details like bookkeeping, compliance, tax reporting or IT distract you from investing. Do not surround yourself with experienced advisors. Nor should you be concerned with attracting and retaining talented people to help run the firm.

We firmly believe that any investment firm that heeds our advice will quickly fail.

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