NoBull Klev

I once had a way better deal than Mike Katchen and Power...but I totally blew it

OPM 7 min read

So earlier this year, Wealthsimple founder Mike Katchen told his life story in a 60 second TV spot. As a competitive response, I will now serialize my own memoirs. I have told the stories of various meetings I have had with Important People, trying to get them to let me manage money. To date, all my stories ended in rejection. Sad! So you might wonder if I ever convinced anyone. The answer is yes.

After I met Sam Belzberg in 2007 and he turned me down, I felt I had pitched enough Canadians, so I decided to try my luck with Americans. With great difficulty, I lined up 3 meetings in New York for October 31st, 2007. One was with a private equity mogul, another was with a marketer I had read about in Market Wizards and another was with a prime brokerage cap intro guy. The private equity guy, Sash Spencer, was the only one with real money, so all my hopes were riding on him. Amazingly, he said he would back me right away before lunch. That was an incredible outcome, considering I had spent two years trying to convince Canadians.

Sash Spencer was a pioneer in private equity, having started his firm Holding Capital Group in 1975. Thomas Lee started in 1974, while KKR started in 1976. Gerry Schwartz started Onex in 1983, having been mentored by Jerome Kohlberg. Sash was part of a then-struggling ethnic minority in private equity, Anglo-Saxons. Over the years, he had also developed a lucrative side business backing fund managers. I found out about him because around that time, he was cashing in the IPO of an Asian manager he had backed, Value Partners Group. Sash was a unique individual, wise, very polite and forthright. He really thought long-term. Over 75 days, we negotiated a deal that would see Holding Capital take a minority stake in my investment firm in exchange for a seed investment in my fund. So two years of knocking on doors had finally paid off. I had not done anything different than the other meetings I have had. In particular, I was completely oblivious to the art of pitching, which I have since written about here. In fact, I would say my understanding of human behavior - most importantly my own - was just about nil.

Our partnership got formally underway in January 2008. But sadly, in June, Sash passed away at age 76. I had thought of asking Sash what would happen if he died, but didn't because I figured it would be too impolite. My working relationship with his successors was not a success. They were doing very little to advance the business. For example, they never even approved a marketing brochure for the fund. I might have called the new top guy a "bottleneck" and other people "weak" in emails. You know my fondness for precise words. Also, at the time, I had not learned to append my criticisms with a tension de-escalating "forgive me for saying so". Remember also that this was before emojis had become widely used : - (

A helicopter from a major military power crashed in a field near my childhood home. All the town people went to see it. I am sorry, I should have warned you that my stories would have weird flashback scenes and a non-linear timeline.

I was a little insensitive to this at the time, but crises are a s***show for even well-oiled machines. If currencies of major countries can fluctuate 10% in a matter of days and you can't even be sure your money in the bank is safe, that creates a lot of drama. I was later told by others that Holding Capital had its share of disasters during 2008. After all, they had investments in volatile countries like Russia, China and the United States of America. Sash was a great investor, but not an infallible one. I was happily working away in my mom's basement, oblivious to all this. At some point, Holding Capital decided to get out of my fund and started making demands. They had no contractual right to get out, but if their request was somehow judged valid, I might be on the hook for any losses subsequent to their request. I went through this in September and October 2008, as markets were plunging - action slightly less dramatic than the past few weeks

You can imagine the stress under such circumstances. Of course, my returns were affected. In 2007 I had been up 42%. But in 2008, I was only up 27%! Humblebrag! There was no stress, it was super exciting! How did I manage to be up in 2008? I was bearish for most of the year and went into September 2008 with a -30% net short exposure. My formative experience trading was the 1994 NHL lockout, when I had 200% of my net worth in hockey cards. The dotcom crash wasn't pleasant either. From that point on, I knew the only difficulty in investing was to prepare for bear markets and purple carrots. Purple carrots are what I call high-impact, unforeseen events. You probably don't know that carrots can be purple and that's because you are inexperienced and are not prepared for anything.

But you shouldn't be impressed by people who are up in bear markets. That generally happens because they're broken clock overly cautious people or they have a stop loss mentality, as I did, of seeing danger lurking at every turn. After the crisis, I spent many years "fighting the last war". I guarantee this will result in subpar returns in the long term. There are some great expressions to illustrate the randomness of short-term results. Even a blind squirrel finds a nut occasionally. Even turkeys fly in tornadoes. But please don’t use these sayings to insult others. I hope this also explains my earlier post about my mistake in directing money to the likes of Salida before 08. It was inconceivable to me at the time that a manager wouldn't think of bear markets and would stay attached to his or her stocks, rather than reacting to the gathering storm. To be clear, I now believe the ultimate solution to bear markets is to hold quality assets that will outlast them. Or better yet, keep most of your money in cash, while pretending to be looking for opportunities in private markets. That’s what Buffett did.

Holding Capital's redemption request was silly, even regular investors in most hedge funds can't leave without adequate notice, to say nothing of the terms that bind an anchor investor like them. I am not the only one saying that - lawyers at the CFA Institute looked into these matters and the outcome was they asked how they could invest in my fund. (I used to think that the CFA is a sham run for the enrichment of its executives and that 154,000 charterholders learning the same thing and competing against each other cannot all claim to be adding value, but all is forgotten). Whatever the merits of my position, someone said the founding rule of America is that Anyone can sue Anybody for Anything. And eventually, Holding Capital sued me to get out, despite a clause in our contract compelling arbitration. That was a real purple carrot!

I had to borrow from a line of credit to pay lawyers because all my money was in my fund. Worse yet, I had to fly to Hartford (Go Whalers!) in a state I had never visited, Connecticut to go to court. I was in a fighting mood, but my lawyers strongly advised settling and moving on. Eventually, I did. My litigation capabilities were weak. Lawyers are fine for writing memos, but what you really need in war is a general. Today, I do all my own lawyering, I strongly advise anyone I write about to not even dream of suing me! Taking on an irate American private equity firm is not even the biggest fight I have had. Later on, I took on the government of a small country in which I was living. Governments have large budgets and decisionmakers who are not spending their own dime and thus feel no pressure to act reasonably. But I learned from the bitter feeling that settling with Holding Capital left and went all the way, winning full judgments three times.

Of course, on reflection, it's clear that I made an incredibly dumb decision in not managing myself to avoid a fight with my backer. This is way, way dumber than Wealthsimple's decision to expand in the UK or the US. It is said that it's not wise to bite the hand that butters your toast. In my defense, I just prefer oats. But isn't it also true that you can't make an omelette without breaking eggs? Hmmm? It's all very confusing. It took me many years to figure this out, but humans have a need for a "stimulus diet" that is almost as necessary as a nutritional diet. I was spending way too much time indoors just trading and eating my mom's cooking. I have evolved the notion of a stimulus diet into a full-fledged Stimulus Equivalency Theory. Under this theory, even something as seemingly precious as the embrace of your child is just a stimulus. Oh no, I think I went too far! One thing is for sure: you can live a perfectly happy life without ever setting foot in Paris or Mallorca - provided you understand the nature of your need for stimulus.

Full disclosure: I am currently spending a lot of time indoors eating my mom's cooking, but that's a coronavirus thing. This might explain why I got into a tirade on Twitter the other day with someone who criticized my very beautiful post on Waratah Advisors. I totally stand by that post and now that you know what happened to me in 2008, you can appreciate how totally irrelevant I find any outperformance in a bear market to be. By the way, how exactly did the discovery that some swans could be black alter the course of history? At least purple carrots have a lot of antioxidants.

When I was struggling to find OPM, I had observed how it seemed so much easier to raise a second fund than a first - even if your first fund was a complete debacle. And that proved true in my case. I had the dubious distinction of having been sued by my first investor. Despite this, a little bit later, someone out of the blue, saw my numbers and asked to form a fund for me to manage. But that's a story for another day. People always think they are starring in the movie about their own life, but what kind of a lame movie doesn't see its hero getting in trouble? What's the biggest challenge Mike Katchen has overcome? How to invest his RESP? How to write a viral tweet? Puh-lease, his stories can't hold a candle to mine. Let me conclude with an M Night Shyamalan-like plot twist: some carrots are black. You haven't seen anything yet, kiddo.

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