Successful “investing” requires some uncommon questions. (Photo: Me at Burning Man ’08)
“If the market felt fidgety, if people were scared or desperate, he [senior Salomon Brothers bond trader] herded them like sheep into a corner, then made them pay for their uncertainty.”
–Liar’s Poker, Chapter: A Brotherhood of Hoods
There were 4-6 screens per person, and chairs were lined up at a single 30-foot desk in hierarchical pecking order. Commands would come down the line and trades were made.
“Who the f*ck are you?” asked one of seniors, swiveling back to his glowing screens before I could answer.
It was my first time inside one of the largest investment banks on the planet, and I was just observing a friend in the hopes of learning something. Before I knew it, lunch had arrived and a 20-minute break was announced in a poetic slew of 4-letter words.
“Name a company.” It was a voice I didn’t recognize, but it was clearly directed at me.
“Uh… sorry. Excuse me?” I asked to the room and no one in particular.
“Name a company.”
“Any company — doesn’t matter.”
“OK. Ah… Genentech.” It was a shot in the dark with no rhyme nor reason.
“F*ck Genentech!!!” came the chorus.
“OK, we just sold 100,000 shares of Genentech. F*ck those guys. Lost a ton on them last week.”
100,000 shares of Genentech sold because a no-nothing guest had pulled the name out of thin air.
That was my introduction to how truly rigged the stock market is…
“One trader remembers that Lewie [head of Salomon Brothers’ mortgage department] would say he thought the market was going up, and buy a hundred million [dollars’ worth of] bonds. The market would start to go down. So Lewie would buy two billion more bonds, and of course, the market would then go up. After he had driven the market up, Lewie would turn to me and say, ‘See, I told you it was going to go up.'”
–Liar’s Poker, Chapter: The Fat Men and Their Marvelous Money Machine
I currently have less than 10% of my net-worth in stocks. Why? I don’t have an “information advantage”. If other words, I’ve seen the sharks in this ocean, and I want no part of it. They’ll eat my Barron’s-reading ass alive. I’d rather put my capital in angel investing and the few industries I understand, two areas where I have insider knowledge and connections that others don’t.
To quote billionaire Mark Cuban (great blog here) in his short interview with Young Money (YM) magazine:
YM: Do you have any general saving and investing advice for young people?
CUBAN: Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.
Here’s the deal — to beat the market consistently, you have to: 1) have better information than most people, 2) have superior analysis of the same information, or 3) have better luck than a Leprechaun.
Discarding luck as a strategem, and personally discarding better analysis because I don’t want to spend my life poring over annual reports or evaluating algorithms, there is a simple conclusion: don’t invest in anything that you don’t know inside and out better than most of the world.
From David Swensen, who ended 2007 up 28% as the investment manager of the Yale University endowment:
“You have to diversify against the collective ignorance… I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.”
Having come out of Princeton and the land of Burton Malkiel, I agree with efficient market theory insomuch as “information advantage” is a prerequisite to consistently getting better returns than average.
If you don’t know something the rest don’t, don’t gamble.
The Weasel Word: “Investing”
In part 1 of this series, I promise my favorite picks for investing books. Though I’ve read several dozen based on recommendations from self-made millionaires (I try not to take advice from speculators), here are the few I’ve found most useful:
The Essays of Warren Buffett: Lessons for Corporate America (Buffett)
The Smartest Investment Book You’ll Ever Read (Solin)
Liar’s Poker (Lewis)
Seeking Wisdom: From Darwin to Munger (Bevelinl; Parts 2-4)
Less is More: An Anthology of Ancient and Modern Voices Raised in Praise of Simplicity (VandenBroeck)
What?! It seems like philosophical books have been mistakenly put on this list, no? Here’s the rub: after all the research and mind-numbing number crunching, I’ve decided that the philosophical decisions take precedent over the tactical ones. For me and those whose lives I most admire, at least.
One qualified commenter on the last investing post said:
“I don’t think you’re going to figure out investing in a matter of weeks or months.”
Well, this brings up an interesting question, doesn’t it. What the hell is “investing”, exactly?
If you have the potential to make 30% per annum in a given stock, but it keeps you up with sweaty palms at night, is that a good “investment”?
Is a stock with a projected 25% annual growth rate over 10 years a good “investment”, even though it will lose value every year except for one undetermined year with a 259% increase?
I sat in on another friend’s job once. He was a day trader, and his boss made more than $50,000 per day in most cases. But, this boss also carried divorce papers in his briefcase 24/7 “just in case he’d had it with the bitch.” Do you want his life? Is he a successful “investor”? Be careful with that term.
In the 100+ comments on the aforementioned post (some of the commenters manage 9-digit funds–hundreds of millions of dollars), definitions of “investing” range from “gambling” to “asset allocation.” In other words — “investing” as a term is so overused as to have become meaningless.
I propose that we define investment as a broad concept and then separate it out. First, the broad definition:
Investing = “Allocating resources to improve quality of life.”
This applies to financial investment as much as it does time management and all other resources. How much would your behavior and results change is you just replaced the concept of “time management” with “time investment” in your head?
Using this definition of investment, I would not chase the moving target of pure ROI (after all, there is always a more speculative vehicle with potential higher gains), but choose the vehicles that offers the greatest ROI with the least insomnia. More cash with constant sweat in the palms is hereby defined as a poor “investment.”
Moving from conceptual to tactical, we can also separate “investment” into three categories of actions, which I’ve found useful:
[To be continued…]
Did you miss Part 1 of the “rethinking investing” series? Read it here.
I get really, really pissed when smart people don’t speak out. (Photo: Me at Burning Man ’08)
Posted on: November 3, 2008.
Please check out Tools of Titans, my latest book, which shares the tactics, routines, and habits of billionaires, icons, and world-class performers. It was distilled from more than 10,000 pages of notes, and everything has been vetted and tested in my own life in some fashion. The tips and tricks in Tools of Titans changed my life, and I hope the same for you. Click here for sample chapters, full details, and a Foreword from Arnold Schwarzenegger.