The Stellar Wealth Partners Owner’s Manual

Inspired by the Berkshire Hathaway Owner’s Manual, we share herewith what we believe will serve as an effective “Stellar Wealth Partners Owner’s Manual” for our limited partners.

  • We work to align investor and manager incentives and eliminate conflicts of interest. Many investment managers today have misaligned incentives between manager and investor. We have taken several steps to ensure they are aligned. Although not required by law, the General Partner’s principal, Gautam Baid, CFA, intends to invest a significant portion of his own liquid net worth in the Fund. This does not guarantee investment success, of course, but investors can rest assured that the General Partner’s investment strategies are being applied not only to their assets, but also to those of Mr. Baid himself. We have further aligned the General Partner’s and investors’ interests by structuring our compensation from the Fund differently from most investment managers. Instead of the typical 2% management fee, we charge the Fund zero management fee. Instead of the typical 20% performance allocation on the entire profits, we provide the first 6% of an investor’s annual return free of a performance fee, and we subject ourselves to the high water mark provision before a performance allocation is ever applied. Even on profits that satisfy both the high water mark and hurdle criteria, 80% is allocated to the Limited Partner, with the remaining 20% allocated to the General Partner. This structure creates much better alignment between investors and managers and is modeled after the original Warren Buffet partnership.
  • We look to partner only with investors whose value systems, mindsets toward wealth, and philosophy toward long-term investing align well with our own. While most investment management firms focus on aggressively growing their assets under management (AUM), we have no such motivations. If we were to dilute the quality of our investor base in pursuit of rapid AUM growth, we will have eroded our own peace of mind and diluted our focus on our research process. A patient investor base gives us the latitude to focus on what really matters over the long haul – a sound investment process, transparency & integrity in our dealings, and healthy long-term returns.
  • We focus on three key metrics in how we measure ourselves –
    1) our long-term returns to families and institutions that entrust us with their capital;
    2) our underwriting quality (individual stock selection and portfolio management);
    3) the quality of our investor base.
  • We have a clear mandate in terms of our investment operations – to compound capital over decades. Although periodic reports are made available online to our clients – we do not manage our investments to maximize quarterly returns. We have no control over what returns may look like on a monthly/quarterly basis and we don’t want to confuse the ability to measure these statistics with the intention to manage them. Our long-term investment approach works only over multi-year horizons. By consequence, our long-term returns are strongly tethered to the underlying fundamental performance of our portfolio companies over the coming years.
  • The bulk of our work involves “qualitative research” – appreciating characteristics which are difficult to quantify and are hence by definition less widely appreciated. Often the most valuable characteristics are immeasurable. These “hard-to-quantify, but critical to long-term success” aspects include the existence of attributes like management teams having immense clarity of thought and consistency of execution, and company cultures that encourage measured, intelligent risk-taking to build optionality. It is these very attributes that tend to play a decisive role in long-term outcomes for patient investors who truly think and act like business owners.
  • We invest in emerging and fundamentally strong businesses based on variant perception and long-term structural trends. The former category of investment requires an “analytical edge” – having a differentiated view on the short to medium-term trajectory of a business, while the latter category requires a “behavioral edge” — the patient mindset, discipline, and willingness to take a long-term view about the intrinsic value of a business.
  • Deep research requires an enabling ecosystem – an environment which fosters long-term thinking, analytical rigor, and creativity. Such an ecosystem is not built naturally, it is to be created. At Stellar Wealth Partners, we’ve been successful in doing just that thanks to our focus on eliminating distractions and nourishing the right principles and priorities. Our personal time and bandwidth are primarily dedicated to reading, learning, and thinking quietly – all of which are exceptionally value-accretive activities for our investors, rather than marketing/promotional activities that invariably divert finite energy and resources away from our core purpose.
  • We assess decisions of a company’s management team based on their impact on the long-term earnings power of the business – not on whether said actions affect the next quarter’s earnings negatively or not. Short-term accounting appearances are sometimes different from long-term economic realities. In pursuit of above-average long-term returns we will have unconventional ideas and we will see periods of short-term volatility. At such times we will remain unfazed and given the opportunity, we will build on our highest conviction ideas. Some fund managers seem to have an obsessive preoccupation with how their performance looks vis-à-vis others. In our view, this can wreak havoc on how one allocates capital. If you’re trying to maximize an outcome over a decade you need to give yourself liberty to deviate from others over short, arbitrary time periods. If underperforming broader markets and peers for certain interim intervals is the price of admission to exemplary long-term performance, we won’t mind paying it. Outperforming over decades necessitates equanimity towards periodic underperformance. Taking a long-term view also gives us the advantage of an uncrowded spot as institutional imperatives often force professionals to check their relative performance scorecard every quarter, half-year or year. Our approach, if deployed well, is designed to help us deliver superior outcomes over the long-term. We can only invest successfully when our investors understand these foundational principles of our investing approach.
  • Our long-term success will be a function of the maturity and emotional fortitude of our investor base – their ability to conscientiously guard against the harmful impulsiveness which usually manifests itself in times of panic. We can only have superior long-term returns if our investors are willing to endure volatility and mute the noise that comes with it in the short run. The periodic, sharp corrections will likely be no more than a blip in the outsized long-term returns that patient and disciplined investors eventually reap.
  • Numerous research studies have identified a common trait among successful professionals in fields of probabilistic activity: they all emphasize process over outcome. Over the long run, a sound process can be counted on to deliver desirable results in a sustained manner and produce more reliable outcomes. Our focus will be on adherence to a robust, replicable, and scalable process rather than short-term outcomes. Our portfolio would be a blend of ‘Value + Growth’ opportunities and ‘Megatrends’. The endeavor will be to maximize return and minimize risk. We follow a market cap agnostic and sector agnostic approach. While there will not be any formal hard cap on the allocation within the portfolio to any single stock or sector, prudence will be maintained at all times – with an emphasis on risk management, longevity, and durability.
  • Disciplined selling would be a key area of focus for us. We look to protect investor capital by exiting a portfolio stock under 2 situations: A) Company or industry fundamentals have started to deteriorate sharply B) Valuations become so expensive that they are no longer justified by the growth prospects. In these cases, we may exit the position, and may hold the corresponding percentage of the portfolio in cash or fixed income securities. Once an opportunity arises, we will deploy the capital in stocks which meet our criteria. At any given time, we are likely to be agnostic to whether broader markets are overvalued or undervalued. Buying, selling, and holding decisions would be driven solely by bottom-up, stock-specific considerations.