Explore

Firefly Capital Update - 2024 Q2

2024 Q2 results

April 1st

June 30th

$ change

% change

Firefly Capital

$594,780.39

$615,612.74 *

$20,832.35

3.44%

S&P500

$5,254.35

$5,460.48

$216.71

4.13%

Difference

-0.7%

Year-over-year results

July 1st, 2023

June 30th, 2024

$ change

% change

Firefly Capital (Normalized)

$151.48

$182.34

$30.86

20.38%

S&P500

$4,450.38

$5,460.48

$1010.10

22.70%

Difference

-2.32%

There are no rows in this table

⁠

* We are currently at $59,558.74 in cash.

That wraps up another quarter! Doing well overall, but we are lagging the S&P 500 a little bit. In some ways, I expect this might continue depending on the economy, but more on that later. You might've noticed our cash reserves slimming down—that's because we've dipped our toes into something new.

Real estate: a new asset class

The new position we entered is real estate. After thorough research by myself and some of my investing buddies, we entered into a deal to renovate, rent out, and eventually sell an inn in Vermont near Mount Snow. This is the first real estate deal the fund has entered into. I expect it to start cashflowing about a year in, which will be around June 2025. The property is expected to be sold by 2029 but potentially has some earlier exit opportunities.

In case it catches your attention, no, your money is not locked up, as there’s enough of my own personal capital in the fund to cover the purchase.

The unburstable bubble

I have been reading a lot of financial books. Five just in this last quarter. They all use 8% for “average stock market annual returns”. That number is a bit odd and a bit old. If you look at the

S&P 500 data from 1957 (inception) to 2024⁠

you will see its inflation-adjusted returns about 6.5%. If you take the last 10 years, it’s around 10%.

So what is the last year’s return? 22%.

That number is huge, and way above normal. It’s so far above normal, that it absolutely cannot keep up. This brings us to an incredibly important principle: regression to the mean.

Regression to the mean is a fancy way of saying that statistical outliers can be expected to back to their average.

Robert Schiller explored this concept thoroughly in his book,

Irrational Exuberance⁠

, and won a Nobel prize for his research. He showed stock market prices operate within this regression to the mean and over long periods return to their long-term averages.

Right now, no matter what metric you look at or take for your long-term average, the stock market is over double its long-term average. So when I say it cannot continue, this is part of what I’m talking about. It’s one of the most convincing arguments I’ve seen.

What are the other arguments? I saw this list show up on an investing Reddit thread and thought I’d share as I agree with all the points (there’s a lot of investing jargon):

⁠

That said, I’ve been saying this is a bubble for a long time. It continues to be so, and it’s for this reason that I am doubting whether I can beat the market for the next few quarters. I have many positions that I’m entering in cash for and some that act as cash and I would expect to fall much less if a recession happens, but it is getting increasingly hard to keep up.

To fund, or not to fund: that is the question

An investing friend and I have taken another extremely strong stab at starting a fund and going through the full legal process. We’ve spent close to $40,000 in the last year learning, talking with lawyers (handfuls of them), rubbing shoulders with other fund managers, and the like. Spending hundreds of hours. In the end, we learned what we wanted to learn. We know exactly how to start a fund and exactly what the legal limitations are, including all necessary factors.

Before explaining what I learned and the decision in front of us, I want to highlight a couple of my key principles:

It is important to have aligned incentives

This needs to be a win-win for everyone involved

With that said, here are facts I now know:

I cannot charge a performance fee (aligned incentive) while I live in California unless the investor has 2.1 million dollars.

I can only charge an assets-under-management fee (unaligned incentive), or nothing at all (not a win-win).

The cost of running a fund is immense — in tens of thousands of dollars per year (at a minimum!). This either comes out of your earnings or comes out of our profits.

It has been shown statistically that 95% of fund managers can’t match the S&P 500, about 4% match it, and about 0.5-1% beat it over the long run. It’s also been shown that has a strong correlation with the fees being charged (more fees, less likelihood of beating the S&P 500). This makes sense when you think about it.

If tomorrow I magically had a fund of $25 million and had a fantastic year (like last year’s), the profit I get is still less than I make at my day job (in part because of all the expenses of running the fund).

For those reasons, we have decided to take a pause on launching the new fund as we think more about how to go about doing this.

I still love investing, love researching, and still plan to do this for the rest of my life.

This has brought me to consider what to do with this fund that you and I are in. It’s exactly what I enjoy and want, but it has its own problem: I am taxed for all of our gains, despite only earning a part of the profit. In addition, I am taxed at a very high tax bracket. It’s not fair to you for me to pass on the tax at my bracket, and it’s not fair to me to have to pay taxes on your earnings.

I have exhausted all other routes of trying to set this up legally in a way to separate these taxes.

I haven’t made any decisions, but I am looking at the idea of closing this fund. There are other options for ways I could “manage” money. Here are a few ways I’ve seen other people do this:

Separately Managed Accounts (SMA) - this means you would have the money in a brokerage account, and I would control your brokerage account. This is a lot more work for me as I have to proportion and repeat all trades on each account, but it solves the tax issue.

A subscription-based weekly or monthly newsletter or text messages with specific knowledge and trade information. It would be up to you to act or not act on this information.

Use an “automated trading” platform that automatically copies my trades. I’m not entirely sure what platform would work for this, but it is a possibility.

With all that said, nothing is changing yet! Everything will go on as normal, I just wanted to give you a heads-up sooner than later.

Until next time

It’s been great investing this last quarter, and as always, please send me any questions or comments you may have.

Cheers, Kerry

Want to print your doc?
This is not the way.

Try clicking the ⋯ next to your doc name or using a keyboard shortcut (

CtrlP

) instead.