Jeff Borack: A Hedge Fund Analyst Debuts as a Genius kaChing Investor

Jeff Borack is one of the dozen investors who debut today at kaChing, a revolutionary site offering a trade mirroring service to any investors willing to take the risk.  He’s currently an intern at one of the hedge funds in New York. Well, that never stopped him from pursuing his passion outside of work and brushing up his skill as a trader.

Now it has paid off.  With an “kaChing IQ” of 144 and nearly $200K invested in his assets already, Jeff is ready to prove his worth.   He has kindly agreed to be interviewed, and now we can get to know him better.  Enjoy!

“So Jeff, can you tell us more about yourself?  Being a Genius investor on kaChing is certainly a challenging hurdle to overcome.  How did you get to where you are today?”

I’d say that I got to where I am today because of an odd mixture of good and bad luck. I’ve been unlucky that the economy and the financial job markets have been so weak, but I was lucky that I didn’t really have any financial responsibilities like student loans or a family to force me into the wrong career track.  As a result, I have been able to focus on developing my skills as an analyst by working as an intern at a hedge fund, passing the first two CFA exams, and reading as many books as I could.  My high ranking on kaChing is really just a by-product of that.

“Can you tell us a bit about your internship experiences?  What did you learn from the experience?  Do you trade any differently because of these experiences?”

If it wasn’t for my internship experience, I would be a completely different person today.  The hedge fund I worked at for two years was very small.  They had two managing partners, an analyst, and a guy who split his time between analysis and managing operations.  So I had access to some very smart investors with a great track record, and they really opened their business up to me.

The most important thing I learned was how to model a business in Excel.  By working with their models I learned about financial statement analysis, how to drive revenue expectations, and how to translate these things into future expectations and a range of possible valuations.  I don’t know where else I could have learned to do this so quickly. This was far more valuable to me than a full year of MBA coursework, and I took full advantage of it.

The best part about my internship was the tremendous amount of freedom they gave me. Sometimes they would give me projects to work on that could take anywhere from an hour to a month to complete, but each was always relevant to my development.  And other times they would set me free to identify interesting investment ideas on my own and report on them.

When I started gaining confidence in my analytical ability, I began trading my ideas on kaChing and publishing my research online at harbor.typepad.com. Unfortunately, I wasn’t able to make money for myself with these ideas.  I was living off my savings, and they were quickly running out.  But a few months ago, I got some money from grandpa and I was finally able to buy into some of my own ideas!

“Are you excited about your new endeavor at kaChing?  I would imagine that having an impact on other people’s money is a whole new set of challenges. ”

I’m extremely excited about the opportunity kaChing has given me by allowing investors to mirror my portfolio with live brokerage accounts.  I think they’ve really put together a great website and the business model has an enormous amount of potential.  They’ve found a way to quickly and efficiently identify strong investment managers with a complete disregard for race, religion, age, sex, nationality, or pedigree.  They’ve completely leveled the playing field.  They’ve also fostered a strong community focused on fundamental research and business valuation by scoring our investment ideas and analysis, making kaChing a great place for those just starting out to learn about investing.

Also, by controlling the trading platform, kaChing has created a system that forces investors from day one to manage their accounts as if they’re managing millions of dollars.  I’m optimistic about some small and micro-cap names, but building a position in kaChing could take days or weeks, if at all possible.  I think this makes it a little more likely that investment returns generated in kaChing will resemble the investment returns brokerage account clients will see when assets grow substantially.

The fact that real money is mirroring my portfolio hasn’t created a new set of challenges, but it has created a new set of responsibilities.  This is one of the many reasons why I appreciate the opportunities bloggers like you have given me.  I get to talk about who I am and what my strategy is.

I haven’t generated returns to date of over 80% without taking significant risks, and I plan on continuing to take those risks in the future.  I think it’s important for investors to be well aware of the risks if they’re considering opening an account with kaChing that mirrors my portfolio, and it’s also important for investors to understand the boundaries of our relationship.  kaChing is the registered investment advisor, so it is their responsibility to manage relationships with customers and make sure investors are aware of the risks they are taking.

My responsibility is mostly just to continue managing my portfolio to the best of my abilities.  But at least to some degree, I also have a responsibility to remind people that these investments are risky, and that they should consult an investment advisor before making any important financial decisions.  Especially after being up so much in a terrible year, it’s important to remind people that 80% returns are probably not sustainable.  The best investors in the world attract top analytical talent and still don’t put up numbers like that.  So this is a particularly important time for investors to be realistic about their expectations.

“Can you give us more on your trading strategies? What helps you deliver the consistent performance you’ve demonstrated at kaChing?”

For me, the key to consistency is patience.  I look for companies trading at a cheap enough valuation for me to be confident that the business will generate a 15% rate of return on my shares through dividends, share repurchases, and the growth that comes from incremental reinvestment.  However, when I don’t find companies that I believe are capable of generating significant returns, I wait patiently.  The portfolio I’ve been managing on kaChing has maintained a 20 to 50% cash balance.  This reduces my risk exposure to market-wide fluctuations, and it allows me to quickly take advantage of opportunities as they arise.  I’m comforted by the knowledge that even if all my stocks went to zero tomorrow, I would still be able to rebuild my portfolio from scratch.  But I don’t maintain a large cash position by choice.

My ideal situation is to be fully invested with maybe ten or so uncorrelated investments that I could hold as 10% positions each.  Since many of my investment ideas have already appreciated in value so much, I’m forced to sell them and continue the hunt. Right now I’m at about 35% cash, and I’m slowly building a position in BBW.  When I decided to buy it was still at $5, but in the last two weeks it has risen to about $6.50.  At most I would buy another 5%, but we’ll have to see how much more it moves away from me.

That being said, I think it’s a little early to describe my performance on kaChing as “consistent”.  Consistency can only be measured in years.  If I’m still putting up strong numbers in 2020, I’ll be able to tell you for sure what’s helped me deliver consistent performance.  Even that might be too early.

If I am able to consistently outperform, I’m guessing it will be because I read annual and quarterly reports, proxy statements, conference call transcripts, and sell-side reports until my eyeballs bleed every day.  I was only able to sacrifice two years as an unpaid intern because I find the market to be endlessly fascinating.  For the first year, I felt like every question I found the answers to raised three more questions.  I’m at the point now where every two questions answered only raise one new question.

I still have a lot to learn.  With financial markets facing so much uncertainty, I think we’re in for a very exciting decade.  I have a lot of work to do!

“That’s certainly a great point. I couldn’t agree more.  So speaking of learning, what are some of the resources you find valuable and utilize for your learning?  Websites? Companies? People?”

Starting out, I would say the first two levels of CFA materials were extremely valuable to me.  That’s probably the quickest way to get on your feet in terms of understanding common valuation techniques, and I still use the textbooks all the time as a reference.  I actually signed up for level III as soon as I could last year because I was eager to read the books.  However, I ended up throwing them out before January and not sitting for the test.  It was all about market efficiency, beta, and other junk I have no practical use for. If I had shown my coworkers what I was learning, they would have (justifiably) laughed at me.  So until I see some tangible evidence that having a CFA will help me, I really just can’t stomach the level III material.  I’ll reconsider when I stop being labeled as overqualified on job interviews.

Websites?

sumzero.com – A great place for analysts to post research, rate each other’s work, and talk about ideas.  It’s educational, good for networking, and I get a lot of great investment ideas there.

gettextbooks.com – They aggregate price data from all the major online booksellers, and email users when the price of a book I want falls below a threshold.  So I’ve been maintaining a wish list there for about two years, and it funnels me a steady supply of great books at great prices.

I avoid websites like fool.com with the terribly superficial garbage they produce that’s clearly designed for search engine optimization.  We have a natural bias to seek information that confirms what we already believe.  Sites like fool.com play to that weakness by randomly saying good and bad things about every company without any depth to the analysis, and I’m guessing that causes people to be overconfident and to make terrible short-term trades.  I designed my blog to be the exact opposite of fool.com.

“Can you share some of your good and bad trades? Given the new age of transparency, I would love to know more about your past trades.”

I watch CNBC for about 20 minutes in the morning while I eat breakfast.  I see that commercial for Jim Cramer in which he says something like “Oversized dividends can be a big RED FLAG! It’s a reason to worry and not to feel safe, and that means it’s time to SELL SELL SELL.”

Well, earlier in the year, I saw that International Paper (IP) had an unsustainable trailing dividend yield of over 15%, and I couldn’t resist buying it.  Good thing I did because it tripled in just a few months.  If a company is consistently paying dividends for years and all of a sudden can’t, it’s probably not a long-term problem with the business but a short-term problem with the environment. So I focused my research on International Paper’s default risk, decided it wasn’t terribly significant, and bought shares.  Time was on my side.  However in this case, alternative fuel tax credits came to the rescue and boosted share prices industrywide.

I haven’t really had any disastrously terrible trades yet, but I know they’re right around the corner.  I subscribe to the Ralph Vince optimal-f theory of portfolio management, which I expect will lead to a higher long-term rate of return but greater drawdown.  A big position for me right now is FNM, and I’m fully aware of the possibility that shares will end up worthless.  I’ve more than doubled my money on it.  I’ve pulled out my initial investment, and I’m still embarrassed to talk about holding it.

I’m guessing that my natural fear/disgust is part of the reason why FNM is so cheap right now.  What it boils down to is that if it goes to zero, it would have been obvious.  If it goes to $10, it will be for some reason no one today could have foreseen.  So there’s a huge social liability to holding shares.  I don’t want to look like a fool.  However, the underlying business has been tremendously profitable over the past 20 years (no one remembers that Jim Collins wrote about it in Good to Great).  FNM is an important piece of our economy, and its fate rests entirely in the hands of our government.

Our government wants its money back.  It doesn’t want to control FNM/FRE.  Furthermore, the government has made it extremely difficult for these companies to actually go bankrupt, and it has received massive campaign contributions from these companies in the past.  Lastly, the government is partly to blame for the mess by mandating FNM/FRE to make home loans available to those who otherwise might not be able to afford them.  Therefore, there are enough positive scenarios to believe that the upside far outweighs the risk.  15% of my kaChing portfolio is in FNM right now, and an even greater percentage of my real money is in it.  People probably think I can’t sleep at night with so much FNM, but the truth is I couldn’t sleep at night until I bought shares.

“Thanks for your time Jeff.  Looking forward to seeing your progress.”

Hey, thanks for taking an interest in my work.  I appreciate the introduction, and hopefully there will be good reason to probe me further next year!