In studying investment managers for more than fifty years, I have learned that the roles that they have played through their lives have an enormous influence on how they invest. What is true for the professional managers is also true for individual investors. If that is my thesis, I should apply it to myself; thus, the following will be a form of self-analysis. The purpose of this exercise is to suggest that others should examine what in their personal history influences them as investors. Our life roles and experiences go a long way in explaining our self-imposed constraints and proclivities.
Betting on Thoroughbred Racing
I have probably learned more about analytical thinking and careful money management from my experience at the New York race tracks than from all the classes I took at Columbia or from my work toward earning a CFA charter.
The first thing I learned was the existence of “racing luck.” Despite a great deal of time and energy spent on past performance data, unexpected things can and do happen. Thus, the weight of money odds always includes the betting market’s views on uncertainty or racing luck.
The second thing I observed was that the betting crowd can be wrong. The most popular bet wins less than half the time and, in many cases, more like a third of the time. Thus, I usually have an aversion to investing in the most popular stocks or funds.
The third thing I learned was that there was a better way to handle my hard-earned money than by betting on horse races.
One aspect of the first lesson mentioned above is not to feel compelled to participate in every race and instead to carefully pick my opportunities to invest. As an investor, this has probably led me to favor funds that have fewer stocks than others. Another lesson from my track-induced money management course was to look for opportunities where the probabilities based on my thinking were different than the odds offered. I would often make a “place” bet on my chosen horse — a place bet pays off if the horse comes in first or second place, allowing me to cash a ticket even if the horse didn’t win outright. Often if the favorite did not make it up to the wire at the end, when my horse did, the payoff for a place bet was substantial.
Investment Lesson: Bargains are hard to discover at the track and in the market, but they are worth the time and effort to find.
As a 5’9″ champion team member I was assigned to fencing épée. The bulk of my opponents were considerably larger than me, well into the six foot level.
Investment Lesson: I learned not to be overly concerned about being small. The bigger the foes, the harder they fall.
An Officer in the US Marine Corps
Here there are three lessons I learned from the USMC:
- Tight discipline produces first-rate results.
- The best defense is a good offense.
- Taking care of your troops and listening carefully to their reports often leads to them having the answers to difficult problems because their practical experience is far superior to field manuals of instructions.
Investment Lesson: A disciplined approach to investing is vital.
Simply avoiding large losses is not enough; you need to make money to deliver against the needs of the account. Keep in mind that you don’t need to have all the answers. Many smart moves come from those with less theoretical knowledge but more practical experience. You need to take command of difficult situations, however, even when you think you don’t have all of the information.
A single financial statement, in and of itself, is relatively useless. Early in the game of analysis we learned to compare one company against the other, usually by numerical comparisons. The next step was to compare prices. On a statistical basis, one security is cheaper than the other. This is unfortunately where a lot of analysts and investors stop. Cheaper does not always equal better. Often there are other factors, including qualitative items that the market values higher than a pure statistical measure. At times a premium price is warranted.
Investment Lesson: While numbers are very important, they are not everything.
I believe I have a tremendous advantage over many other CFA charterholders and analysts because I started a business. At times I turned around failing products. I met a payroll and paid employees and suppliers as well as corporate taxes. Too many armchair analysts tell corporations what they should do while they themselves have never done it. Today, most corporate managers do a pretty good job working toward what they believe to be the objective. When analyzing a company, in addition to its sheer survival, you need to understand what management believes is the objective. All too often, history has shown that professional analysts make lousy business leaders.
Investment Lesson: We should be respectful of the specific competence required for securities analysis, both in business and in non-profit organization management.
Because my firm produced the most complete data on mutual funds, and to some degree on brokerage firms, I was frequently asked to consult with CEOs of various funds and other financial organizations. The real world problem was that the statistical solution or ‘school solution’ to the question could not be executed for a host of reasons. The challenge, just as in the Marine Corps, was, “When blocked, how do we go around the enemy and/or improvise with new (and potentially improvised) solutions?” The more consulting jobs I completed, the more I concluded that the real problem was people and how they acted or will act under a change of circumstances. Often the biggest problems were the CEOs who hired me, even when they recognized that they were part of the problem.
Investment Lesson: As investors, we are the biggest hurdle to better performance.
Understanding and overcoming these limitations may be key to this exercise. For example, I often harbor a reluctance to sell when short-term disappointment is likely. The short-term can turn into long-term, with the possible result a long period of under-performance.
By the time you get the responsibility of managing large amounts of other people’s money, you should know exactly how to construct the portfolios for optimum results. Even with so-called discretionary accounts, there are specified constraints and unspecified constraints. These unspecified constraints manifest in a reaction that I call the wrinkled nose syndrome. When discussing an investment or a strategy with a client or a high influencer, the nose or some other non-verbal feature indicates a weariness or disappointment.
Investment Lesson: At this point an alert manager should recognize the flashing caution light. The manager can proceed at his or her own risk, but if the particular investment strategy or single investment does not work, the manager has entered the regions of career risk.
Those of us who have been something of a success in the investment business or elsewhere and want to give back something other than cash to a generous society often turn to donating time and effort. We are often asked to become trustees of non-profit organizations. Thus, from time to time I find myself in the position of wrinkling my nose due to perceived incomplete research. With no ‘spare time’ to speak of, I usually must decline. At the same time, I am empathetic with the managers and their staff who are trying to deliver expected results while staying within the specified and unspecified guide lines.
Investment Lesson: You must be as careful investing your time as you are investing your capital.
I have performed all of these roles, and they have significantly influenced my investment decisions. Through this exercise I am coming to a better understanding as to what makes me tick as an investor. Perhaps each of the readers of this blog could benefit from such an exercise. Let me know what you have revealed to yourself about the impact of the roles that you have played.
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