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April 27, 2010


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Nick Gogerty

Sticky capital is about 2 things.

1. trust in process (faith that a process is being executed consistently.)

2. isolated investment process (the thesis that the returns generating process is isolated from news/noise or spikes that cause fear and capital flight).

Buffet had to structure his business to overcome flight even though his process is isolated. Many of his firms sell products and services that are bought and perform literally as long as the sun comes up in the morning and yield some effective margin due to moats and competitive dynamics coupled with repeat consumption behaviors.

Buffet actually positions himself and uses capital unstickiness to his advantage by paying the premium of having large capital sitting around. The pool of unused capital thus gets sticky when everyone one else is unsticky.

Trust in process and isolated process are difficult to establish. Most investors including FoFs and hedge funds have limited understanding of black boxes or the dynamics generating their returns, maybe 10-15 yrs history. If they only have history instead of understanding the returns generator, they flinch in the face of events, even though those events may be isolated relative to the process generating their returns.

Nick Gogerty

oh I forgot to mention Buffet in his original investment life only allowed redemptions and reported once a year.

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