X-Message-Number: 1143
Date: Fri, 14 Aug 92 11:33:08 EDT
From:  (Perry E. Metzger)
Subject: CRYONICS: Fiduciary responsibility

>From: Carlos Mondragon
>Re: Reply to Perry Metzger re. Alcor Investments & Eric Klein's Postings

>>In Re: Eric Klein's message about Alcor procrastinating on the
>>investment recommendations being made;

>>The situation (as Eric has described it; I pass no judgment yet on the
>>accuracy of his report) sounds horrible. I can understand Alcor
>>wanting to study the committee's recommendations, but waiting even
>>more than a few days to make a decision on any of them is madness. In
>>investments, timing is everything. Procrastinating a month on a
>>purchase or sale makes the committee useless. If Alcor feels it does
>>not have the expertise to study the recommendations in a timely way it
>>should get out of the business of managing its own funds and hire a
>>money manager; if it wants to manage the money itself it MUST deal
>>with recommendations as fast as possible; within a day or two at most.
>>If it isn't capable of doing that, it isn't capable of reacting fast
>>enough to manage its own funds.

>If it were Alcor's intent to maximize return by making short term 
>investments, then timing would of course be critical.  But that is not the 
>case.  Patient Trust money must be invested for the long term, and our 
>advisory committee has chosen good long term investments.  Finding good 
>investments takes time and is much better done by people who already have 
>expertise and are themselves active investors.  That's why the board 
>established the advisory committee.  But the fiduciary responsibility will 
>always rest with the board of directors.  Given the fact that suspension 
>patients are in no condition to go out and earn more money, we will always 
>proceed with a caution somewhat greater than ordinarily mandated by the 
>"prudent man rule".  I trust we will never see the day when Alcor's board 
>puts unilateral control of the Patient Care Trust Fund into the hands of a 

I have several problems with your assertions.

1) That because we are investing for the long term, timing isn't

Timing might not be critical in the same sense that it is for a day
trader or arbitrageur. However, a delay of a month is not prudence; it
is procrastination. I have a good friend who manages a large portfolio
for his clients in private placements; this portfolio is many times
the size of all of Alcor's assets; indeed, a placement in spring in a
silicon valley firm that I helped him analyze was, all by itself,
larger by a factor of five larger than all of Alcor's investments
combined. Private placements are all by their nature long term; there
is literally no way to dispose of them without registration of the
shares. I once asked my friend what the essense of his success was.
Along with his ability to spot value in investments, his ability to
time his purchases properly was a large fraction of what he cited as
the reason for his success.

In his multi-million dollar deals, he manages to make decisions about
the future of companies with only a few days to do his own analysis
and a few more weeks to allow investigators to check for fraud.

Timing of a sale is crucial. It makes a difference of several percent
in many instances. As the size of Alcor's funds increase, even small
timing errors of a day or two will end up costing Alcor thousands of
dollars; luckily we are not yet at that stage, but it has to be
recognized that excessive delay is a bad thing.

2) The contention that slowness means prudence

Slowness does not mean prudence. One can lose a fortune while debating
over a month what to do about a crashing stock. One can lose a huge
opportunity by sitting back and looking for information one doesn't

A month is an eternity. If my friend can make complete decisions on a
deal thats truly a major committment in a matter of days, if the major
houses like J.P. Morgan can set up an IPO in a matter of weeks with
the entire rest of the time spent waiting for the SEC to finish the
clearance of the registration paperwork, well, Alcor's board can
manage to make decisions on securities in less than a month. Real
investors typically do not even spend this much time on open market
transactions; they watch a security over the long run and are already
very familiar with the investment when they make the decision that the
time is right to buy or sell; the time has been amortized over a long
period and long delays are not needed.

Prudence just means that one has examined the possibilities
thoroughly; it doesn't mean that one has read the same figures over
and over again. The 10Ks, 10Qs, Annuals and other public statements
for a company rarely constitute more than a couple hundred pages of
important information; generally, an experienced investor can go over
the lot of them within a few hours, not a month. Even a dolt like me
can go over virtually all the public information on a company within a
day. Checking competitors and the market might constitute a couple
more days work, no more.

If the board does not have the time to do these things itself, it
should hire professionals to do it for them. At some point, this will
be necessary anyway; see below under 4)

3) The contention that it would be bad to place "unilateral control"
   in the hands of a professional manager.

Certainly no one would allow a single manager to handle the whole of
the funds. What one does is place one's money in multiple pools
invested according to a strategy, with a certain percentage in
equities, a certain percentage in fixed income securities, etc.; one
then may pick a set of mutual funds to invest in each of these areas,
or pick a trusted manager for each of them. With diversification, the
assurance arises that no manager could lose more than a few percent of
the total value of the funds.

The idea that it is safer to procrastinate and handle all one's own
money even if one doesn't have the experience and time is unfounded.
You can lose lots of money by procrastinating, possibly lots more,
than you can by picking a group of 5 or 10 fund pools to put your
money in and giving over control to those managers. Its one thing if
you can supervise the funds yourself on a timely basis; its another
thing if you aren't equipped to manage the money and try to do it

4) The contention that a money manager will never be needed.

When Alcor starts managing funds in the tens millions of dollars,
which must of needs happen if Alcor grows sufficently, professionals
will be needed to watch the money day to day. There will simply be no
other way to deal with the volume of decisions that will need to be
made. Assuming Alcor grows enough to become a professional
organization with hundreds of patients in suspension, the patient care
fund will grow to this size range and the board will have a fiduciary
responsibility to relinquish day to day control; it will have no other
choice, period.

>Actually, the recent suspensions might have slowed my response somewhat, 
>but not much.  I would point out again that we don't intend to "play the 
>market" with these funds, so that any delays should necessarily be 

Even if one is investing all one's money in stocks one intends to hold
for periods of a year or more, with ordinary diversification one will
find that one is making an investment decision nearly every day once
one has a few million in funds invested. Presumably, Alcor's intention
is to have that much money and a lot more at some point. Even
investing a few hundred thousand dollars as Alcor is now, one has to
make quick decisions even if the underlying investment strategy is
based on the long term value of the securities.

We are, as you have pointed out, talking about money that must be kept
safe for centuries if need be. If there is any message to this letter,
it is that procrastination does not mean prudence, and that caution
does not imply moving slowly, and that delay can be as deadly as

>It should also be pointed out that the figures in Eric's memo where
>he describes "loss of potential earnings" were based largely on
>increases in the prices of the equities which the committee
>recommended during the month of July.  According to Eric those price
>increases ranged from 0.532% to 3.59%.  He then annualized these
>gains in order to come up with a huge dollar amount of "lost
>potential".  If we took that seriously, then it would mean that
>either: a) Eric is expecting us to make quick gains by jumping in and
>out of equities, or b) Eric thinks that it is possible that a blue
>chip utility stock is going to appreciate in price by 43.09% over the
>next 12 months.

More likely, he means that many small losses of investment income
averaged over each month may mean a loss of tens of thousands of
dollars a year.  This is perfectly reasonable, given that one is
likely to have a diversified portfolio elements of which might be
changing every week even if the average holding time is many months or
even years.

>Not bloody likely in either case.

Very bloodly likely. Look, this is a very simple issue. Either the
board is willing to look at the suggestions within a reasonable time
frame, which is hardly equivalent to recklessness, or it is going to
have to find someone it trusts to manage the money day to day. The
third alternative isn't a good idea.

>You'll be interested to know that most of the committee's July
>recommendations were adopted at the August meeting when the board
>voted to implement them with a few modifications suggested by me.

A month's delay is simply not acceptable, at least not in the long
term. Either the board has to get good at examining these things
quickly, which isn't especially difficult if all it is doing is
examining suggestions for prudence rather than looking for
opportunities on its own, or it has to step out of the way by finding
someone it can trust to handle this sort of thing. Delay does not mean
prudence; procrastination is not the same as safety. 

I was expecting the board to come back with a response of the form "we
are new at this and need to take time at first." This would have been
a perfectly acceptable response, one that indicated that the board was
merely being cautious because of inexperience. However, this doesn't
seem to be the contention. It appears that the contention is that a
month or even longer is needed to prudently evaluate securities
transactions. This makes me fear greatly for the long term safety of
the funds in question. As I've said twice and must emphasize yet again
because of its importance, prudence does not mean delay. Safety is not
purchased by procrastination.

Prehaps some people don't understand this because they haven't
invested much in their time, so I'll translate to an example from
everyday cryonics experience. Waiting an hour with a cryonics patient
lying in a state of warm ischemia while deciding what to do isn't a
way to buy safety; the professional knows what to do and how to do it
and works with all deliberate speed. Not haste, merely all necessary
and deliberate speed. Some may think is analogy poor, but I mean for
it to be taken very seriously. It appears that we aren't talking about
delays being made to allow for collection of additional information.
We aren't talking about delays being made to permit the study of
material. All that can be reasonably done within days of the reciept
of a recommendation. 

We are talking about procratination here; and a procrastination that
is potentially just as deadly as that in the example because just as
surely as the patients in suspension depend on Alcor for their
preservation, Alcor depends on the money from its investments to be
able to maintain those patients.

I want to emphasize one last point here. I have no bone to pick with
any board members. I've never met Carlos Mondragon, I do not know him.
I have never personally met Eric Klien, and for all I know about him
he could have no idea about what he is doing or be the greatest
financial genius of our time; I would guess the truth to be between,
but have no basis for judgement. I have not been a participant in any
battles the board may have fought recently, or indeed ever, and claim
no particular expertise with which to judge the board or its general
competance, at least not given my current levels of knowledge of the
board and its decisions. I'm only signing up now, and am hardly an old
man in the cryonics movement. I am not trying to provide anyone with
ammunition for any sort of battle.

All I am trying to emphasize here is that procrastination is deadly in
the management of our patient care funds, and that the board should
reconsider its policy and attempt to use all deliberate speed in the
management of its money.  Not haste, not foolish overeagerness.  It
should simply not take a large multiple of the time that is needed to
evaluate the decisions to implement them.

Perry Metzger

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