Steve: Great questions.

1. Hands down, performance-only fees are the most “fair” way to compensate an advisor. Unfortunately, the law doesn’t allow advisors to charge performance fees to most clients. (Clients have to be “qualified” with means $5 million in investments or some similar requirement.) The differences between us and mutual funds are numerous, but the big one in relation to your question is that we don’t have a never-ending potential client and salesforce base to throw money at us. So long as the mutual funds keep Wall Street happy, those funds will find their way into portfolios and 401ks plans.

   It’s true that we work off a performance-only fee for certain clients and an asset-based fee for non-qualified clients, but our asset-based fee is just 1% compared to the 1.61% charged by U.S. stock mutual funds in 2008 (excluding any additional fees those investors pay to brokers or advisors for putting them in those mutual funds). If we can’t work on a performance-only basis for the client with $50,000 at our firm, I don’t know of a better way to keep us accountable than asset-based fees.

2. Every business has a value (even if that value is zero). The question on this business is: How much cash could I pull out of the business during its remaining life? For example, if the company will be obsolete in five years and will, at that point, close up shop, the price you pay today will determine your results. If the cash flow all goes to the “asset” side of the balance sheet and the business winds down in two years, ultimately liquidating everything, paying off obligations and debts, and distributing the remaining cash to shareholders, then the price you pay today for that cash determines your return.

   Let’s say that the business shuts down in five years and pays out to shareholders $1 billion in net assets (say, $50 per share). The most you could pay today to earn 15% a year would be $25. Over five years, $25 to $50 is about 15% a year.

   In any investment, you have to figure out how much cash you, as an owner, could pull out during its remaining life. I don’t know if I made that abundantly clear in the book, but I think that reading the book and this website should help clarify things. Let me know if that helps.

3. Creating a short list of wonderful companies, watching them closely, and investing in them when they are cheap will only make you rich! That’s exactly what people should do. As to your point on public vs. private, companies go public for a number of reasons – expansion financing, to allow the owner to cash out some of his otherwise illiquid investment, etc. Some publicly traded companies have superior economics and are run by wonderful managers; most are lacking in one or both of those areas.

   If you keep in mind that these are businesses, and that you can shun stocks and instead invest in private businesses, real estate, art, or anything else in the world of investment opportunities, you’ll realize that there’s no need to settle for mediocre stocks. Buy the best (or cheapest based on valuations) stocks, and leave the rest for the mutual fund managers. If you can’t find opportunities in stocks, go buy an apartment building or dry cleaner. Make sense?

1) In your book you say on page 7 “Most mutual fund companies are paid based on how much money they manage rather than on how well they manage it.” However, doesn’t your investment firm Meridian Business Group do the same thing by charging a fee on how much money you manage? What is the difference?

2) Your book mostly focuses on businesses with stable growth. However, what would your opinion be of a company that has a market cap of 1B and FCF of 700M with declining FCF. The low market cap and high FCF make the company compelling however is this a cigar butt? This was a very profitable company for many years and then all of a sudden technology made it practically irrelevant. Is this another factor that we should take into account with investing, if future technology changes could possibly help or hurt the company?

3) Any thoughts on my previous post http://www.fwallstreet.co…

Thanks, MikeR, for your feedback. Clearly the editor missed these typos, though I’m certain that they found many more in my original work! As you find them, please feel free to keep listing them here!

I pre-ordered on AMZN and got my copy last week.

Joe,

Page 124 last full paragraph the g is left off the word (g)overnment. I know most of these typos are trivial and obvious, but I am assuming you want to find them for the second printing.

MikeR: Good eye! Definitely a typo. I’ll let the publisher know. Thanks!