Hi 👋 welcome to Recompound Blog - The Investment Mindshift. We help you better your mindset on investment and economics one article at a time. More: Our Values | Advisory | Get to know us | Picks
Super light article especially realising that our blogpost content has been quite heavy in the past few weeks. Enjoy! But if you would like to read heavier stuff in case you missed it:
Demystifying scam in the insurance industry (oldie but goodie)
I pay Budi Rp 50.000,- if I check stock prices during the day
On our landing page, people who want to get to know more about Recompound can choose to book a call with a simple button click. So I am privileged to get the chance to talk to numerous people and to be answering their questions pertaining Recompound and their investments.
I have recently started noticing patterns of their question which is something of this flavour
“If you can make money from the stock market yourself, why don’t you just invest your own money? Isn’t asking people to invest with you and pay a performance fee only making you very sus?”
- asked by multiple people
This I believe is a very legitimate question. Especially in the world where buying investment products usually entails:
very low returns
very high management fees
returns that are decent like p2p are going bust
Such offer that is presented to a prospective customer would come across as fishy and suspicious. So this article is an honest write up to tell you that what we are doing is not too good to be true. It is good for you when your investment portfolio performs, but it is also good for us as business owners, especially in the long term.
#1: The more, the merrier. This business model is not new
Few people noticed that our fee structure is based on Warren Buffett’s partnership in the 60s. The difference is that he implemented a hurdle rate of 6% (earns nothing if portfolio doesn’t grow the first 6%) and then applies 25% performance fee. Yeah, and he did not have management fee. For more detailed information, you could take a look at this post.
Why the legendary investor Warren Buffett (along with other investors btw, you could Google to find examples that only charge a performance fee) had this setup? Especially when he could make money from the equity market?
Because the more, the merrier. The more money he manages, the more returns.
It is probably akin to if I can cook a delicious meal for my 10 friends and they pay me $10 dollars each and I earn $100, why would I only want to stop at 10 friends? Why not 100 customers by creating a new shop? Or 1000 customers by franchising it?
Then the follow up question will be, why not just take a loan from the bank? Which leads to answer #2
#2: Not only we would earn more money, we would also earn more trust
Taking a personal loan from a bank necessitates paying interest.
Building a company necessitates paying operating cost (employee salaries, rent and so forth).
Both are similar in nature that contains a fixed cost component that we need to pay regardless. But let’s take a look at the reward.
The reward for taking a personal loan from a bank is more money. That is simple.
Now the reward for helping people grow their investment portfolio is twofolds:
More money (than otherwise that you could have made with your own personal capital)
More trust (from the customers whom you work with)
So from a cost and reward standpoint, it makes more sense for us to “get leveraged” by setting up a business with a performance fee structure, where we earn more than a fee. But also trust from our customers. Furthermore, I believe that trust is an intangible asset that is scarce in today’s Indonesia. We don’t have to name names but a quick glance at news media could already give us very clear signs that trust is not there:
Fraudulent startups
People expressing their distrust towards a new sovereign wealth fund
Shadow banks offering high interest yields going under
and the examples seem to never run out.
Therefore, I firmly believe that trust that is built with careful intention would compound and re-compound overtime.
#3: Know where your returns come from and investment in businesses should be a one sum game
Whenever buying an investment product, or being engaged in an expenditure that is categorised as investments. I hope I don’t sound preachy, but it is important for an investor to know where the return comes from. This is very straight forward yet often overlooked by people who want to invest.
Example one, if you want to buy a property as an investment, where does the return come from?
Some time in the future, that property might be hotly in demand because of the development over the area so people will bid higher prices for that property
Rent
Example two, if you put your money in p2p lending, where does the return come from?
From the lender who pays their loans with interest OR
From VCs that inject money to p2p companies if a lot of lender defaults
Another example, if you want to buy bitcoin as an investment, where does the return come from?
People wanting to buy your bitcoin at a higher price in the future because:
they believe there will be others who would want to buy their bitcoin at a higher price in the future, OR
they would want to use the bitcoin for some sort of use case
Now if you invest with Recompound, where do you get the returns from?
Some time in the future, the stocks you hold might be hotly in demand as there might be people who want to buy it at a higher price
Business growth leads to more dividends for you as a shareholder
Therefore, first if the businesses you buy are growing and are profitable, you as a shareholder would often be entitled to dividends. Second, you buy the business at a cheap price, people in the future might want to buy your business at a more expensive price.
Closing Remarks
A “no growth, no fee” promise might sound too good to be true — but that depends entirely on how it's structured:
Is it transparent?
Is it legal?
Does it make long-term sense?
Our goal is not to wow you with hype, but to win your trust one compounding quarter at a time.