O'Leary ditches the "Get Paid While You Wait" cliche

With much frequency, I’m asked the obvious question: “how do you find time to write a blog?” Few believe me when I say “they just write themselves.” But today is one of those delightful days when what the mainstream media call an “Opinion Piece” just writes itself….

The final prospectus has been filed, and the O’Leary Global Equity Income Fund (aka The “Decade of Daddy” Fund) has declared that it will raise a “minimum” of $20 MILLION DOLLARS. The global capital markets will collectively yawn at that embarrassingly bitty figure, even if it seems like a whole peck of money to you and I. Since Mr. O’Leary has termed this the “Decade of Daddy” (if you don’t have the energy to punch through to the link, he’s the “Daddy” deserving of a Decade of self-indulgence), I suppose the decade wouldn’t be complete without his own Berkshire Hathaway-like vehicle.

The prospectus cover on the Decade of Daddy Fund refers merely to a “maximum offering of $100 million”, but I found a later reference to the $20MM minimum size offering to be more telling. In the i-banking world, a minimum offering in a structured product prospectus is often a hint as to how much money the underwriters have cobbled together from a few loyal brokers (oh, and the promoters themselves, as you can be sure that the ECM pros at lead underwriter CIBC World Markets firmly encouraged Terence Kevin O’Leary to pony up some of his own vast dough to make the deal come together).

In the preliminary prospectus filed on May 1st, the opening paragraph of the “Investment Strategies” section on page two promised:

“The Manager and the Portfolio Manager believe that global investment opportunities provide investors with an important source of investment diversification, income and appreciation. Globally, there are over 6100 issuers with a market capitalization of over $1 billion, across a wide range of industry sectors. However, in Canada there are fewer than 220 such issuers and they are concentrated in the financial and resource sectors making it difficult for investors to achieve true diversification in their portfolios. The Manager and Portfolio Manager believe in the “get paid while you wait” approach to investing globally and believe that global markets for dividend-paying equities are currently very attractive.”

In the final prospectus, filed just two days ago, that same paragraph of the “Investment Strategies” section on page two was cleaned up a tad:

“The Portfolio Manager and O’Leary believe that global investment opportunities provide investors with an important source of investment diversification, income and appreciation. Globally, there are over 6100 issuers with a market capitalization of over $1 billion, across a wide range of industry sectors. However, in Canada there are fewer than 220 such issuers and they are concentrated in the financial and resource sectors making it difficult for investors to achieve true diversification in their portfolios. The Portfolio Manager and O’Leary believe in a value investing approach to investing globally and believe that global markets for dividend-paying equities are currently very attractive.”

It also comes up on the Prospectus cover page:

“Preliminary – The Manager believes that the “get paid while you wait” approach provides investors with the opportunity for attractive total returns while diversifying risk, a theme espoused by Mr. O’Leary on regular television appearances.”

“Final – The Portfolio Manager believes that a value investing approach provides investors with the opportunity for attractive total returns while diversifying risk, a theme espoused by Mr. Kevin O’Leary on regular television appearances.”

Umm, excuse me Mr. O’Leary (“KO” to his friends). Something’s missing. Where did the “Get Paid While You Wait” line go?

Did you change your lifetime investment philosophy between the time you filed the preliminary prospectus on May 1, 2008 and the final prospectus on May 30, 2008? Or, to be blunt, did your investment banking advisors cringe when they found out just how much a clich the “Get Paid While You Wait” approach was when they read our May 8th blog titled “O’Leary Fund promises to share the wealth and wisdom“:

As investment strategies go, the IPO prospectus makes great hay about Mr. O’Leary’s personal investment approach. To quote, the “get paid while you wait” investment approach is a theme espoused by Kevin O’Leary on regular television appearances and through daily dialogue with investors through national broadcast television.

As a concept, the “Get Paid While You Wait” investment strategy isn’t a novel one. A variety of investment firms and business publications promote the exact same theme. Motley Fool has been on that bandwagon for years (2003, 2006), for example. A.G. Edwards also likes the phrase (2006). Estate Planners use it in the context of investing in a mutual fund built on dividend-paying stocks (www.grandparents.com). USA Today stock pickers referred to it back in 2001. And there was Fortune in 1993.

I’m not sure which is worse.

1) Hearlding an investment approach as being something so unique and valuable that Canadian retail investors should hand over their life savings, only to be outed in the blogoshpere for lacking ingenuity.

2) Pretending that you never “espoused” a “Get Paid While You Wait” approach on television, and you were always talking about “Value Investing” in both word and message.

3) Or switching your investment approach from “Get Paid While You Wait” to “Value Investing” after you discovered on your national roadshow that Canada’s stockbrokers can’t stop tripping up when they pitch their clients this vanity product. I can just hear the broker on the phone:

“You see, Joe/Jill Retail, the guy from the Dragon’s Den says you will ‘Get Paid While You Wait’ if you invest in his fund. You’ll get paid cash dividends while you wait for the stock market to go up.”

Joe/Jill Retail: “You mean he’s going to pay me, even if things don’t go well?”

Stockbroker: “Not exactly. He’s going to use your money to buy stocks that pay dividends. We get paid our trailer fees regardless, and he earns his management fee, of course. But my compliance department won’t let me promise you that you’ll get ‘Paid While You Wait’, per se.”

Joe/Jill Retail: “Then I’m not going to get paid? But it says so in the greensheet and the Prospectus. Can’t I just buy dividend stocks on my own?”

Stockbroker: “You could, but O’Leary’s strategy is worth looking at.”

Joe/Jill Retail: “So I’ll get paid to wait, then?”

Stockbroker: “Not exactly. The fund will buy stocks that pay dividends, but you may receive regular payments in the form of a Return of Capital, rather than profits from the investments.”

Joe/Jill Retail: “You mean he’s going to pay me with my own money if the market goes down and the Units drop in value?”

Stockbroker: “That doesn’t sound good when you put it like that. How about this? He’s a ‘Value Investor’, and he’s going to buy a huge chunk of the fund with his own money, and pick stocks that are ‘undervalued’.”

Joe/Jill Retail: “I like bargains. Why didn’t you say that in the first place. I’ve seen him on the CBC. He thinks he’s Simon Cowell. But he gives off the impression of being uber-rich, so why not give it a whirl?”

Stockbroker: “You’ve got that going for you as well. I don’t think his ego would allow this thing to fail.”

Joe/Jill Retail: “What’s he been doing since he departed Mattel in 2000, just before they sold his former company (The Learning Company) for zippo and wrote off the US$4.2 billion purchase price? And how much did he make on that, anyway?”

Stockbroker: “He’s tried to be front and centre since 2000, but it’s tough to tell you what he’s actually been investing in, or how he’s performed. He didn’t disclose a track record in the Prospectus, unlike Eric Sprott. On the “cash haul” front, he might’ve made $10.8 million pre-tax or $500 million; no one has any idea (see comment).”

As for this new devotion to “Value Investing”, what exactly is it? According to Investopedia, it is simply:

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company’s long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

The big problem for value investing is estimating intrinsic value. Remember, there is no “correct” intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing is that of “margin of safety”. This just means that you buy at a big enough discount to allow some room for error in your estimation of value.

Also keep in mind that the very definition of value investing is subjective. Some value investors only look at present assets/earnings and don’t place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth.

Well, that’s certainly a departure from “getting paid while you wait”. Now Mr. O’Leary is promising to try to “buy something for less than it is worth.”

Inquiring minds want to know two things. First, what happened to the promises of cheap dividend stocks that would pay investors while they waited? (There are 4.32 million Google citations for “Value Fund”, and only 116 for “Get Paid While You Wait.” The world is full of value fund managers, which must make it hard to find stocks that are trading for less than they’re worth.)

And second, how much of the fund did Mr. O’Leary subscribe for to get it over the proverbial finish line? How painful it must have been to pay 5.25% of commission to the underwriting syndicate, plus your share of the $750,000 in Offering expenses, just to put your own dough into a public vanity vehicle that’ll buy Manitoba Telecom. And why isn’t that figure disclosed in the prospectus?

Talk about paying while you wait. Only it’s Mr. O’Leary that seems to be doing the paying, assuming that he invested in the Decade of Daddy Fund himself. Now that’s something that might even get a laugh out of the real Simon Cowell.

MRM
(this post – like all blogs, is an Opinion Piece)