Many investors define risk as being “the permanent loss of capital”. This sounds reassuring because it implies that the investor will not lose capital. I think most rational investors, myself included, would sign up to not endure any permanent loss of their capital. Of course, the problem with defining risk as the permanent loss is that it cannot be verified till after it has occurred.
Volatility is a measure used by a lot of investors to measure risk. Not by Aligned Capital Partnership. Yes, volatility can be quantified, yet as Albert Einstein said, “Not everything that counts can be counted, and not everything that can be counted counts”. I think a permanent loss of capital is very different from price fluctuations. A downward fluctuation in price, which by definition is temporary, does not present a problem to an investor able to hold on and wait for the correction back up. A permanent loss, from which there will be no rebound, can occur for one of two reasons:
- an otherwise temporary dip in the price is locked in when the investor sells during a downturn, whether because of a loss of conviction, timeframe, financial constraints or emotional pressures; or
- the investment itself is unable to recover for fundamental reasons.
It is possible to ride out volatility, but not to undo a permanent loss.
Furthermore, I believe that even after having incurred a permanent loss of capital, the only thing I know for sure is that I have lost that capital and how much I have lost. Yet those realisations tell me nothing about whether it was a risky investment to begin with, i.e. what the probability of a permanent loss of the capital was at the time I made the investment.
A common perception is that riskier investments will produce higher returns. I believe this to be nonsense and a very dangerous conclusion. If the two were positively correlated, i.e. returns increase as risk increases, then that would mean riskier investments could be counted on to deliver higher returns. If that were the case, I argue that would make them less, not more, risky.
I know that I cannot know what will happen in the future. I can form what I believe are educated views about the possible outcomes and how likely these are. I think that if I have more insight into these things than other investors, then I am likely to do well for the Aligned Capital Partnership Investment Trust. My job for the Aligned Capital Partnership Investment Trust is to, with some regularity, find asymmetric investment opportunities where I believe the potential upside exceeds the downside risk. I describe my risk management framework as common sense, vigorously applied.
The Aligned Capital Partnership Investment Trust at times may be concentrated in relatively few investments, perhaps more concentrated than many others, and as such the results may be more volatile than that of many others. I am of the opinion most fund managers own too many companies. Apart from making the performance of a portfolio owning many companies track the indices, which can be achieved much more cheaply with an index fund, I am of the opinion it also makes it difficult to invest with the conviction that stems from knowledge. Realistically, how much is it possible to know about the 30th company in one’s portfolio? When I find investments that I really like, I will sometimes invest a high proportion of the Aligned Capital Partnership Investment Trust in that investment. I think it usually makes sense to invest much more money into your best idea, than your 30th best idea.
Occasionally, the Aligned Capital Partnership Investment Trust may buy large stakes in companies, and may occasionally seek to take an active role in their management.
Unlike many other managers of investment vehicles, I am not afraid to hold a high proportion of the Aligned Capital Partnership Investment Trust in cash, if I cannot find investments that I deem attractive.
I believe that, in general, investors are too active, including investors who invest in funds run by managers who are too active. ‘Active’ is one of those bits of investment jargon which has more than one meaning and that I believe is often misunderstood as a result. the Aligned Capital Partnership Investment Trust will not run like a passive or index fund – far from it. But investment activity in the form of buying and selling shares has a frictional cost in terms of the commissions and the difference between the bid-offer spread which brokers charge. I understand that the more I can minimise these costs for the Aligned Capital Partnership Investment Trust, the better.
The Aligned Capital Partnership Investment Trust is also a very long-term investment. I do not think it is suitable for investors with time frames less than five years.
I also do not think it is suitable for investors overly conflicted with principal-agent issues. If you are at all uncomfortable then, I suspect, the Aligned Capital Partnership Investment Trust is not for you.
Over the short term our friend, ‘Mr. Market’, acts like a wildly emotional guy who can buy or sell securities at depressed or inflated prices. Over the long run it is a completely different story – Mr. Market gets it right. Yes, over the long run the often-irrational Mr. Market is actually a very rational fellow. It may take a few weeks or a few months and at times (not infrequently) a few years, but eventually Mr. Market will pay a fair price for our securities.
Your understanding of the above matters is important whilst you are a co-investor in the Aligned Capital Partnership Investment Trust. So too is the understanding that there may be investment fads which others are following but that I will not. It is important to me that you understand this since I wish to concentrate all my efforts on making the Aligned Capital Partnership Investment Trust work for its investors. I am unable to do that if I must deal with endless queries about why I am not following a particular investment fad.
My investment strategy has proven to work well over the long term, yet it may not work for several years in a row. Please understand, I focus on long-term outcomes, and I expect to be misunderstood in the short-term, frequently.
Most investors cannot stick with a strategy that has not worked for a while. For this strategy to work for you, it is important you must believe it will work and maintain a long-term investment horizon.
Anyone who are interested in investing in the Aligned Capital Partnership Investment Trust are required to complete and return the investor due diligence questionnaire which can be downloaded by clicking the button below, as well as to read the Information Memorandum and Trust Deed. If you are a likeminded investor, then please know that I would consider it an honour to have the opportunity to steward a portion of your capital alongside that of my own, and also that the emphasis I place on alignment is genuine. With this in mind, in an attempt to ensure all co-investors in the Aligned Capital Partnership Investment Trust are the best suited, capital will only be accepted from three categories of people or entities:
- family, friends, and entities known to me for long periods of time;
- close acquaintances of 1 above; and
- individuals or entities with whom I spend enough time to be able to assess that an alignment of mindset and investing philosophy exists.
In the absence of past precedent, I need to have enough reason to believe that potential co-investors possess a long-term business-owner orientation, like that of Aligned Capital Partnership. Without this clarity, I risk initiating disagreeable relationships founded on shaky foundations. To put it bluntly, I want to continue enjoying the intellectual challenge of finding interesting investment opportunities through rigorous research, while knowing I am in the company of people I trust and admire. I would rather have a handful of carefully curated relationships that persist over several years, than hundreds of relationships that revolve often. I recognise this is difficult to achieve and will therefore most likely only initiate a very few new relationships each year. In any case the structure of the Aligned Capital Partnership Investment Trust has deliberately been designed such that the maximum number of co-investors is 19.
I will never actively solicit clients. I will have no sales teams or distributors. Building a larger client count or asset base does not add to my contentment.
I understand full well that hoping for something doesn’t improve its chances of happening. I will retain gratitude for opportunities, integrity in my dealings, and humility in the event of success.
I know that the best way for me to attract quality co-investors is to be one!
Lastly, I wish to assure you that I will pay strict attention to potential conflicts of interests, avoiding them when possible and dealing fairly with them when not. I will always put my co-investors’ interests ahead of my own and treat all co-investors equally, never leaving anyone with grounds for complaint.
December 2021