Personal Hedge Fund: Q1 2016 Investment Performance

The Origin Story

In the fourth quarter of 2015, I started getting serious about investing again after taking a multi-year break. It was partially due to all the work that was required at my last startup and at the current gig. But I’ll get back to that in a second.

The itch for investing started when I was in middle school in the mid 90s. I had been witness to the increasing attention paid to technology as the Dot Com era was picking up steam. I remember watching CNET on TV over the summer, and picking up the newspaper every morning to track stock price movement. I even plotted my own closing price graphs for some notable stocks, including Gilette (yes, the razors), which went on a subsequent tear.

I ended up saving as much money as I could, for a middle schooler, and put $500 into a Schwab brokerage account, with the help of my parents, of course. I initially picked 3 stocks that I wanted to invest in, but my advisor recommended I put the capital into a technology mutual fund. I thought then that this guy was the expert, and so I trusted his judgement. It wasn’t until much later in life that I would learn about Warren Buffet and his famous strategy:

“Put all your eggs in one basket, but then watch that basket like a hawk.”

My performance? I sold that mutual fund a few years later at the height of the boom when I went to college for $1500. A 3x return in only a few years. Performance that any hedge fund manager would kill for. Especially because he or she would get a 20% cut of that return. And so I forgot about it, studied Actuarial Science and theoretical Mathematics.

Warren Buffet turned out to be right. Cut to the early 2000s and I had fallen into a love affair with this little struggling tech company that was attempting a rebound. It was called Apple. I asked one of my friend’s who was working towards becoming an Investment Banker in Manhattan, and now works at a major hedge fund. He said Apple was overpriced at $88/share. So I didn’t invest.

I watched the stock price go up to $120/share over the next few months. It was then I realized, finally, that I need to follow my instincts. Because I likely know more and understand more on a deeper level than someone external who’s just judging it on a quick read of the technical and fundamental details. So I invested. And continued to invest over the coming years.

What happened, obviously, everyone is aware of. They invented the iPhone and became the largest and most successful business that has ever existed in the history of mankind. I sold it a few years before its peak because I was headed to get my MBA at Chicago Booth and wanted the capital to help pay for school. Grad school is expensive. Very expensive. Even though I sold a few years before the peak, I still realized an incredible CAGR and got out before the price growth stalled due to investor expectations of continued innovation. It was another great bet with nearly optimal entry and exit timing.

I also invested in Goldman Sachs at its low during the financial crisis because I knew the federal government would never allow the gold standard of banking to fail. Then Mr. Buffet invested, albeit with preferred stock at a much higher level. I also invested in a broad market tracking stock because I knew we were at a market low and we would rebound eventually. I think it was DIA. All 3 performed incredibly well. This stuff isn’t rocket science. It just takes patience and a long term view. 2 things most people don’t have.

And I got to call all the shots. So I didn’t have to worry about LPs pinging me that “the market hasn’t recovered yet” and “why would you invest in a bank during a financial meltdown!”.

Basic principles. Buy low, sell high. Mr. Market isn’t complicated.

I thought, huh, maybe I should keep score. I was 2 for 2.

But before I got out of Apple and before I went to Booth, I started a High Frequency Algorithmic Trading firm with a few other folks. It was called BlueStone Investments and began with the most childlike of ideas.

Why can’t we just buy a stock and wait for it to go up, then sell it?

The reality proved to be much harder than the theory :)

We ran our infrastructure on AWS and were co-located at the NASDAQ. We open-sourced our idea: financial engineering students at the best universities could submit their own algorithms and we would trade using our capital. I programmed and back-tested a variety of algorithms myself using MATLAB. We didn’t want to overfit. It was essentially Artificial Intelligence neural networks that we were starting with.

Guess what year this was.

2007.

It was so far ahead of its time in so many ways.

So what was our performance over 2008, our most recent housing collapse depression? +48% to the market benchmark, if I remember correctly. Which is an incredible Alpha.

I was still keeping score. I was 3 for 3.

We shut it down once I went to business school because I thought I wanted to start my own hedge fund. I bought the books, studied them, understood what it meant to be an accredited investor etc. Here’s one I read back then, if you’re interested (can’t seem to find the other maroon hard cover with the simple title Hedge Fund, please comment if you find it):

Since then, I haven’t touched the market. It’s been maybe 8 years. Until I had enough air time to start seeing things. Angles. Timing. Alpha. Pi.

Some little voice somewhere, after building lots of software products for myself and others, beckoned me to start investing again. Picking my spots carefully. And knowing that Mr Buffet has famously shyed away from tech because he “doesn’t understand it”.

And right around Christmas 2015, I started.

So, even though I’m investing my own money, don’t have a single investor I need to report to, I thought it might be good due diligence and a great learning opportunity for others to take an interest in the market. There are tools that make it easy and free.