Upon Further Review, Looking at Performance Metrics and Disclosures

Upon Further Review, Looking at Performance Metrics and Disclosures

In the world of investing, performance metrics and disclosures are crucial for evaluating the success of fund managers and their strategies. However, it is important to examine these metrics and disclosures with a critical eye, as they can sometimes be misleading or manipulated to present a more favorable picture. One recent example of this is the case of Chamath Palihapitiya, who has come under scrutiny for his performance comparisons to Berkshire Hathaway and Warren Buffett.

In a series of tweets, an independent historian and media critic named Richard Landes analyzed Palihapitiya's performance metrics and disclosures, pointing out several inconsistencies and questionable practices. Landes discovered that Palihapitiya selectively chose different start dates and benchmarks for his comparisons, using gross returns instead of net returns, and even changing the method of calculation without disclosing it.

Landes began by examining Palihapitiya's 2018 letter, where he compared his returns from 2011-2018 against the S&P 500. While Palihapitiya disclosed both gross and net returns for this period, he conveniently omitted the net return in subsequent years. This raised questions about the transparency and accuracy of his performance reporting.

What was even more concerning was Palihapitiya's comparison to Berkshire Hathaway in his letters. Landes noticed that Palihapitiya used Berkshire's 7-year compound change in book value per share from 1965 to 1971 as a benchmark. This choice seemed odd, as book value per share is not necessarily the best indicator of a company's performance. Furthermore, Palihapitiya omitted certain years and selectively used different periods for his comparisons, which further raised doubts about the validity of his claims.

In his 2019 letter, Palihapitiya changed the start date and omitted any mention of the original start date of 8/14/11. This change in dates resulted in a slight adjustment to his gross returns, making them appear higher than they actually were. Landes questioned how this change could occur without any explanation or disclosure.

The most damning evidence came from Palihapitiya's 2020 letter, where he changed the method of presenting Berkshire's performance. Instead of using book value per share, he used Berkshire's stock market total return. This change was not disclosed in the letter, leading Landes to speculate that Palihapitiya was trying to hide the fact that his returns were actually lower than Berkshire's.

Landes also pointed out that Palihapitiya failed to disclose the annual returns, gross and net, for each of his five partnerships. This lack of transparency raises concerns about how the partnerships were performing and whether investors were being provided with accurate information.

In conclusion, Landes called on Palihapitiya to adopt a more transparent and accurate method of reporting performance. He suggested using the format Warren Buffett used for his partnership, disclosing both gross and net returns, and providing annual performance figures. Landes also recommended that Palihapitiya enlist the help of compliance personnel, auditors, or counsel to ensure that his disclosures are accurate and in line with regulatory requirements.

Based on Landes' analysis, here are three actionable pieces of advice for fund managers and investors:

• 1. Be transparent and accurate in reporting performance metrics. Disclose both gross and net returns, provide annual performance figures, and use appropriate benchmarks for comparisons.

• 2. Seek external verification and auditing. Enlist the help of compliance personnel, auditors, or counsel to ensure that your disclosures are accurate and in compliance with regulatory requirements.

• 3. Avoid selective disclosures and changing methods without proper explanation. Consistency and clarity are key when presenting performance metrics to investors.

By following these recommendations, fund managers can build trust with investors and provide them with the information they need to make informed decisions.