SpokeFunds.com

Spoke fund manager Steve Kiel issued his July letter today for Freedom Fund investors. Check it out here. Includes some great timeless wisdom from Ben Graham and some thoughts on why Steve owns Bank of America…

A look at our investment in Bank of America

We’ve owned a significant position in Bank of America since the inception of The Freedom Fund. It’s a unique choice for us compared to the consulting firm, small Chinese media company, Israeli biotech, budding conglomerate, and water utility company, among others, that we also own. I like to own companies that most investors haven’t heard of because their stock price more easily becomes dislocated from their true value. Bank of America is different, though. The value stares you right in the face, but lingering fear is preventing it from being fully realized.

We live in unique investing times, so my first question for any stock is: If the worst case scenario hits, would the company survive? For Bank of America, the answer is yes. I think the financial regulatory changes recently passed into law institutionalizes the “Too big to fail” idea. I don’t necessarily like that as public policy, but for our investment in Bank of America it gives me confidence. Additionally, the stresses of the crisis have caused Bank of America to reduce its risk voluntarily. People should remember that before the Merrill Lynch acquisition, Bank of America was in good financial shape and didn’t need TARP money.

Let’s look at a few metrics: Bank of America is probably going to earn $3 to $4/share in a few years. It’s trading at 1.1 times tangible book. Typically, anything below 2 times tangible book would be considered cheap. Credit card defaults are slowing. Higher dividends will come back at some point in the next 18 months. Share buybacks will probably come in a few years. Its CEO has promised no more acquisitions. There’s a lot of good news. The negative is that the new financial regulations will significantly harm the bank, and that’s true. They’ll find ways to work around it, though. If the economy goes south even further, it will take longer to get to normalized earnings as well. All that taken into consideration, I think the shares are worth $30 to $40. They’re trading at $14 now.

While I don’t base my investment decisions on who else owns the stock, I feel comfortable that a number of investors that I respect a great deal have significant positions in Bank of America, including John Paulson, Bruce Berkowitz, Michael Price, Ron Muhlenkamp, Chris Davis, and Warren Buffett. When I talk about ignoring the noise and looking at the big picture, you should think of our investment in Bank of America. Three years from now we’ll look back at this investment and be very satisfied.

The rest is here, and Steve’s archived letters can be found here.

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By Cale Smith. Cross-post from my blog.

Here’s a video emailed to me from future spoke fund manager Dustin, who says:

“I’m always looking for things I can add to the ‘mental file cabinet.’ Thought you might find this one interesting. This helps explain why spoke funds and aligning your interests with investors works.”

Dustin’s favorite quote:

“People don’t buy what you do, they buy why you do it.”

My next favorite quote was this one:

“The goal is not to do business with anybody who needs what you have. The goal is to do business with people who believe what you believe.”

By Cale Smith

As per this summary, the threshold for RIAs that will be required to register with the SEC was raised in the recently passed Dodd-Frank Act from the current $30M in AUM to $100M, with a few exceptions.

What’s that mean for spoke fund firms?

Leaving aside the potential increase in additional state registration costs, it sounds like it will shift more than 4,000 (out of around 11,500) SEC registered investment advisors to state oversight. And I suppose that either means the time between potential audits is either going to increase quite a bit…or the auditors are going to show up overworked and ornery.

Probably best to prepare for the latter, eh?

By Cale Smith

Below are links to some of the original posts I wrote that seemed to generate the most interest from other portfolio managers curious about spoke funds. I suspect I’ll need to refer to these in the future on this site, so here they are:

What Is a Spoke Fund?
Why I Built A Spoke Fund.
How to Think About Running a Spoke Fund.
Building a Spoke Fund: Critical Path Items.
Spoke Funds Comprehensive Q&A.
Spoke Fund Workshop Slides Part 1.
Spoke Fund Workshop Slides Part 2.
Spoke Fund Workshop Slides Part 3.
Spoke Fund Workshop Slides Part 4.

And this is the original movie I made that seemed to get some attention, too. I created it in PowerPoint, recorded it in ScreenFlow, and published it on YouTube.