Letters

Eclairs and Investment Management

February 2021

Éclairs and Investment Management

I have a sweet tooth. Back in Portugal, my family used to buy pastries for big events, and I binged shamelessly on éclairs. Some were better than others, but I never found an éclair I refused… Moving to the US, I missed not only the family gatherings, but the pastries too. Overtime, I discovered Boston Kreme donuts as a cheap and convenient substitute. For more than 10 years I used them to enjoy special times and remember good family reunions.

The first thing that impressed me was how consistent they were. Regardless of whether I ordered them in Massachusetts or an airport in Texas, all Boston Kreme tasted just the same. Very unlike the éclairs from
back home that had distinct flavors at different bakeries and even different times of the year at the same bakery. This taught me the business value of standardization. Clearly the Dunkin Donuts franchise was much more profitable than the bakeries back home. Not only as a chain, but on a per location basis as well. This is after all, the appeal of franchising.

My horizons opened a few years ago. While strolling with my daughters I found a place in my neighborhood that baked the best éclairs I tasted in my life. The chocolate on the top was premium unadulterated chocolate, the cream was soft and balanced and the pastry fresh and tasty. Founded in
1902 by a family of German immigrants, it had been managed by the family since then. Its recipes were passed from generation to generation. The place kept its antique decoration and ancient business practices. Payment? Only in cash. Service? None, queue up for a 15 minute wait if you want. Once the éclairs, cakes, or cookies you like were gone, they were gone. Sorry no further batches on the oven.

But behind these commercially unfriendly policies lies a family with a passion for their craft. Proud to bake the best product in the neighborhood, if not NYC. The recipe has been honed year after year for more than a century by the family. They chose to focus on quality rather than quantity. And it shows. Its customers love it and queue in the snow, rain, or summer heat for as a long as it takes for the privilege to taste its products. For these customers, there is no substitute. I remember one day getting turned away because the store was closed for the day, and finding no way to get an alternative celebratory treat…

Let us look at the different choices and results of these two bakeries:

What does all this have to do with investment management? A lot.

The choice of an investment manager for your hard-earned savings faces similar trade-offs. You can choose to hire a predictable low-cost, and consistent mass product like a passive ETF. You know what you
will get, and you will have a fair and inexpensive deal. Your supplier follows a standard approach and is focused mostly on gathering assets to increase scale and further reduce costs.

Alternatively, you can pick a smaller shop. Here your results can vary widely. You can find a highly talented and aligned manager that invests his money alongside yours. This manager makes a lifelong commitment to be the best investment manager he can be. He constantly works to hone his process. He works with maximum intensity and will look for as many opportunities as possible to improve the quality of the portfolio. He is not focused on gathering assets and is prepared to stop new subscriptions to preserve the quality of the portfolio.

You also run the risk of finding a manager that opens shop because it is an attractive business opportunity. This happens for every financial product that is gathering a lot of attention at each moment (like SPACs now). This manager is well-versed in buzzwords and usually puts limited amounts of his net worth at risk in his own product. If bad times come, he is quick to close shop and move on to the next hot opportunity.

Let us look at the characteristics of a focused aligned active manager vs a Passive ETF:

There is a time for everything and a need for everything. This type of choice should not be either / or. When I could not go to the bakery, or was out of town, I was happy to get my fix at Dunkin Donuts. Similarly, part of your portfolio should be in lower cost standard products. But the savings you are strategically investing to build wealth through the business cycle should be with high quality and aligned professional investment managers.

At Somar, we aim to be your aligned and focused investment manager. We have invested substantially all our personal savings alongside yours. We have a consistent and repeatable process. Our execution is mastered year after year and we hope to continue doing this for decades to come. Our ambition is to never stop augmenting your average risk adjusted returns. You may not see the intensity of work and opportunity screening that goes on every day at our office. But if our work pays off, the results should
reflect that over time.

My goal is that you will enjoy Somar in your portfolio for many decades as much as I enjoyed my neighborhood bakery. Just like in the bakery though, we will stop selling once we feel our product quality
will be affected by additional assets.

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Disclaimer: This website is for general information purposes only and is not intended to be, nor should it be construed as investment advice, nor a solicitation or offer to buy or sell any securities, related financial instruments, or  interests in the Somar Master Fund, LP (the “Fund”) or its feeder funds. The information contained herein is not complete, and does not contain certain material information such as disclosures and risk factors about the Fund or its feeder funds. Opinions expressed are current opinions as of the date of this material only and are subject to change without notice.Hedge funds: (1) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; (2) can be highly illiquid; (3) are not required to provide periodic pricing or valuation information to investors; (4) may involve complex tax structures and delays in distributing important tax information; (5) are not subject to the same regulatory requirements as mutual funds; and (6) often charge high fees. 

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