Political skills are important risk management tools

Dear Reader,


Today the focus of discussion will not dwell on a fantastic investment idea we have developed at the office, nor a macro economic insight that we feel gives us an investment edge in determining how the world economy may develop. We will take a more mundane view on ourselves and reflect on a number of harsh lessons we learnt during the course of the last few months. They can be summarised as follows:-

1. One rarely achieves anything by getting angry with someone you need to do something for you (especially when no one else in an organisation can do it, nor is it relevant how silly or consistently silly past activities from that individual have been)
2. When one can achieve a slightly higher return with a complicated operation relative to a simple one, always choose the simple one


The first point is learnt at the potential cost of a percentage point of performance in the fund. We are deeply upset by this. There are fewer things that upset me more than losing performance for our clients, and admittedly, this could have been potentially avoided if my political skills were a little more developed. Though we remain deeply in profit in the operation involved, I repeat we are not in this business to lose points of performance over sloppy mistakes. Hence this blog is written to ensure this mistake is not repeated.

The issue is we have upset the settlement team at our custodian as we (admittedly, I) got upset with them for making four consistent large errors during the Berkshire Hathway buy out of Burlington Northern Santa Fe, the latter company being one of our largest holdings prior to the buy out offer in Q4 2009. The mistakes were 1. Our settlement team forgot to give us the option to exchange our Burlington shares for Berkshire shares. 2. When we called to confirm why they had not done this prior to the merger completion date, they said the paperwork will come. When we asked after the date, they said the shares will come in a month. When we asked after a month, they told me to go away. I came back with the detailed paperwork indicating my rights as a Burlington shareholder and providing details of all correspondence showing they never gave me (nor another client I manage in a separate account) the opportunity to make this decision. They later said we were not given the option because we were not eligible for Berkshire A shares. I informed them that is why they have Berkshire B shares, and that is why they split the latter shares so the vast majority of shareholders will be eligible for the share offer should they choose. They would later come with other stories which we would have to evidence were incorrect. To cut a long story short they eventually agreed we should have been given the option, and very kindly amended the mistake, two months after we had received the cash. 3. Instead of receiving Berkshire B shares, we received Berkshire A shares. There was great joy in my eyes and soul when low and behold there was a 25000% increase in the portfolio valuation within a single day. However, there was a little more frustration building up as it meant I could not sell the shares as the settlement team would have to change the paperwork to Berkshire B shares beforehand. On the day they were correcting this mistake Berkshire B shares fell more than 1.5%. 4. When we received the Berkshire B shares, we remain suspicious that the correct number have not been sent. This was the final straw and I blow up a hornets nest with the email that I sent to settlements with my opinion of how they handled the whole issue. We now have the settlements team working against us rather than for us. The only real solution is to leave this team and find another custodian, which is what we are doing now. Since then we have sold the Berkshire B shares, but at a cost less than the cash we originally received to get the shares. This is earth shattering for us. Though it is not even a few percentage points lost, losing money in this manner is totally not our approach to risk management. Our political skills are obviously just as important in managing risk as our valuation skills, and we better appreciate that sooner rather than later.

All of this means we have lost a small portion of the large profit we made from simply holding the cash they originally sent to us (the simple operation). We are currently pleading for a re calculation and making claims for the errors done, but cannot assume they will be processed to our advantage. This is in the domain of hope, which is not the land where consistent above average returns are generated.

We apologise sincerely for this mistake which we take responsibility for to our clients who entrust us with their wealth. We will be keeping these two points learnt vividly in our minds to ensure future mistakes will be avoided, and that we interview our custodians in a more thorough manner before agreeing to do business with them.

We thank you for your continued support in us and invite you ask any questions you may have.

Yours sincerely,

Alessandro Sajwani