Introduction
In studying investment managers for more than fifty years, I have learned that the roles that they have played through their lives have had 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.
In studying investment managers for more than fifty years, I have learned that the roles that they have played through their lives have had 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.
Handicapping 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 in earning a CFA designation.
The first thing I learned was the
existence of "racing luck". Despite a great deal of time and energy
spent on past performance data, unaccounted 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.
One aspect of the first lesson
mentioned above is not to feel compelled to participate in every race and to
pick my opportunities. As an investor this has probably led me to favor funds
that have fewer rather than a larger number of stocks. The second part of my
track-induced money management course was to look for opportunities where the
probabilities based on my thinking were different than the odds offered. Often
I would bet on my choice for second (Place) so if my horse did come in either
first or second I could still cash a ticket. Often if the favorite did not make
it up to the wire at the end, when my horse did, the payoff for Place was
substantial.
Investment Lesson: Bargains are hard to discover at the
track and in the market but are worth the time and effort to find.
Collegiate Fencer
As a five foot nine inch 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.
Collegiate Fencer
As a five foot nine inch 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:
1. Tight discipline produces first-rate results.
2. The best defense is a good offense.
3. 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; one needs to make money to deliver against the
needs of the account. Be aware one does not have to have all the answers. Many smart
moves come from those with less theoretical, but more practical experience.
However, one needs to take command of difficult situations even when you lack
enough information.
Securities Analyst
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 to price. 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.
Securities Analyst
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 to price. 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.
Entrepreneur
I believe I have a tremendous advantage over many other CFAs and analysts. 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 on what they believe to be the objective. In analyzing a company in addition to its sheer survival, one needs to understand what management believes is the objective. All too often history has shown that professional analysts make lousy business leaders.
Entrepreneur
I believe I have a tremendous advantage over many other CFAs and analysts. 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 on what they believe to be the objective. In analyzing a company in addition to its sheer survival, one needs 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 in securities analysis, in business and in non-profit organization
management.
Business Consultant
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 fund and other financial organizations. The real world problem was that the statistical or ‘school solution’ answer to the presenting question could not be executed for a host of reasons. The challenge just as in the Marine Corps was, “When blocked, how to go around the enemy and /or improvise with new and often on the spot solutions?” The more consulting jobs I completed, the more I came to the conclusion that the real problem was people and how they acted or will act under change of circumstances. Often the biggest problems were the CEOs who hired me; even when they recognized that they were part of the problem.
Business Consultant
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 fund and other financial organizations. The real world problem was that the statistical or ‘school solution’ answer to the presenting question could not be executed for a host of reasons. The challenge just as in the Marine Corps was, “When blocked, how to go around the enemy and /or improvise with new and often on the spot solutions?” The more consulting jobs I completed, the more I came to the conclusion that the real problem was people and how they acted or will act under 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.
Investment Manager
By the time one gets the responsibility of managing large amounts of other people's money, one should know exactly how to construct the portfolios for optimum results. Even with so-called discretionary accounts there are specified constraints and unspecified constraints. The latter is what 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 Manager
By the time one gets the responsibility of managing large amounts of other people's money, one should know exactly how to construct the portfolios for optimum results. Even with so-called discretionary accounts there are specified constraints and unspecified constraints. The latter is what 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/her own risk, but if
the particular investment strategy or single investment does not work, the
manager has entered the regions of career risk.
Trustee
For those of us who have been something of a success in the investment and other businesses and want to give back to a generous society more than just cash; donating time and effort come to mind. One is often asked to become a trustee of a non-profit organization. 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.
Trustee
For those of us who have been something of a success in the investment and other businesses and want to give back to a generous society more than just cash; donating time and effort come to mind. One is often asked to become a trustee of a non-profit organization. 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.
Investment
Lesson: You
must be as careful investing your time as you are with your capital.
At
the same time I am empathetic with the managers and their staffs who are trying
to deliver expected results while staying within the specified and unspecified
guide lines.
In summation
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.
In summation
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.
_______________________
Did someone forward you this Blog? To receive Mike Lipper’s Blog each Monday, please subscribe using the email or RSS feed buttons in the left column of MikeLipper.Blogspot.com .
Copyright © 2008 - 2013 A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.
Posts
No comments:
Post a Comment