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November 6, 2013

What Should I Think About The Twitter IPO?

What should I think about the Twitter IPO?

Mostly you should think about Las Vegas, Nevada, as a number of important analogies apply here.[1]

First – The Poker Table

You know the rule that if you’re sitting at the poker table, and you’re not sure who the sucker is, then it must be you?

That’s you, the retail buyer, in any IPO.

Why do I say that? How do I know that?

Buying an IPO as a retail investor - You do not have pocket Aces — Buying an IPO as a retail investor – You do not have pocket Aces

The people who have the most information about Twitter are the insiders in the business. They are the founders and the earliest private equity investors, and they know this business inside and out. They have lived and breathed this company since its existence. You have not.

The next most knowledgeable people are the bankers and financiers, who evaluate newish companies, in emerging industries, with swiftly changing technologies, and uncertain cashflows, for a living. They live and breathe stories and companies like Twitter, which you do not.

Now, at the poker table, the insiders and the bankers know their own cards, and they also know your cards, as well as the next few cards coming up on the flop, the turn, and the river. Nine out of the ten folks at the table in this transaction know more than you do. Interestingly, they are extraordinary friendly and welcoming of you at their poker table.

You should not be thinking “Huh, this Twitter IPO looks like an Ace – Seven off-suit. If I can hit another Ace as a table card, I might do pretty well at this table with these so-called pros. That would be sweet!”

No. Instead, you should be thinking: ”My what big eyes they have,” and “My, what large teeth they have.”

Remember this: The insiders – the most knowledgeable people – with the help of their bankers – the next most knowledgeable people – are all selling their ownership in this company. They are indicating, in the clearest terms possible, that they believe the company is more valuable right now than it will be in the near future.[2]

Do you doubt this? If the insiders believed – on a probabilistic basis – that the company will be worth significantly more 1 to 5 years from now, they would not be selling their ownership. They would wait for it to become more valuable. These are all rational, smart, people.

You, on the other hand, are the easy mark. Have a seat. Come play poker with me.

Second – Extraordinary Payouts

“But,” you are quick to think, “I’m pretty sure from watching TV that there’s a lot of money being made somewhere in this IPO. Isn’t that what it’s all about?”

Yes, this is true.

State lotteries display big winners in their advertisements, and at press conferences. Casinos make sure to tout all the big jackpots their customers have made in slots, or poker tournaments, or on their easy roulette wheels and craps table.

Everybody loves those goofy oversized checks

And those winners are real people, with real payouts.

But that is not your role, as a retail investor, in an IPO. You do not get that goofy oversized check.

The people with the big payouts from the Twitter IPO are the insiders, the founders, the executives, and the early private equity backers of Twitter. The IPO represents a giant payout for them.

The massive payouts to insiders give the Financial Infotainment Industrial Complex the equivalent of that goofy oversized check to breathlessly illustrate a big transaction like Twitter’s IPO.

Remember, that payout is real, but it’s not for you.

Third – The Flashing Lights, Whistles and Bells

If you have walked the floor of any casino, the flashing lights and whistles and beeping buffeted you. These sounds and lights provide an untrustworthy signal that “Wow, somebody is making money here!”

The Financial Infotainment Industrial Complex goes into high gear with an IPO like Twitter’s to provide the flashing lights and beeping and sound of coins dropping incessantly.

Their goal – as always in all of this – is to capture newsstand sales, Nielson ratings, page views, and click-throughs, with emotionally gripping, eye-catching, events.[3] The Twitter IPO provides just such an event.

A flashy score for a small group of entrepreneurs and investors is that opportunity for the clink-clank-clink-clink of Triple Cherries, just as you slip past, flushed with heightened oxygen levels, trying to navigate the purposefully crooked casino floor, on your way to the restroom.

This is not how to think about an IPO outcome for you

In sum, try to buy a piece of the casino, but do not gamble

Unless you are an insider in some way to the Twitterverse, you have no business participating in the Twitter IPO, or practically any IPO for that matter.

Don’t get me wrong: Investing in public companies – with a long time horizon – is a fabulous opportunity. I even took all of my 8 year-old daughter’s savings and invested them in the stock market to teach her about this opportunity.

To extend the casino analogy even further, long-term stock ownership is like owning a piece of the casino. You may have short-term ups and downs, but in the long run the odds will work out in your favor because you have house-odds, and you will build wealth, almost inevitably.

And also, please don’t get me wrong about Twitter. I’m agnostic about Twitter as an investment opportunity. I would describe every other highly-discussed IPO similarly.[4] I assume mutual funds that I own will end up purchasing some Twitter shares, and I’m perfectly fine with that, over the long run, and in a diversified portfolio.

I love public stock ownership, and I’m happy for the few folks for whom this Twitter IPO will be a meaningful event.

But the point here is that Twitter’s IPO is, and should be, entirely irrelevant to the rest of us and our financial lives. But the casino makes it hard for us to ignore it as we should.

[1] Really, this applies to any IPO. I don’t mean to pick on Twitter, except I’m fairly sick of hearing about it and its IPO should be totally irrelevant to all but a few dozen people on this planet.

[2] Warren Buffett on IPOs “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).”

[3] If you have not walked the floor of a casino because you prefer to stay home and knit tea cozies, that’s cool. I admire you. Let me give you another analogy for the relationship between us and the Financial Infotainment Industrial Complex. We are the kittens. They hold the ball of string.

[4] The last high profile IPO I wrote about, Facebook, I got to combine a favorite Wall Street phrase with a favorite classic rock lyric. And I was just as jaded about IPOs.

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July 12, 2013August 4, 2014

Ask an Ex-Banker: How to Invest Unexpected Cash

A friend asked me recently for investment advice. I sent her my thoughts by email but couldn’t resist making it into an “Ask an Ex-Banker” post.

Question: My daughter got caught in the housing downturn and finally has sold her condo in NY but is too poor in this economy to buy a bag of chips, let alone a house in LA. So she is trying to figure out what to do with the $90,000 left over after paying off student loans and replacing a broken car. Do you have any suggestions for earning more interest? K__ and I could use a suggestion as well, but none of us can stick it away for 3 years because as optimists, we are always hoping things will change. Thanks. Paula H., Sarasota, FL

Hi Paula,

It’s nice to hear from you. Thanks for reaching out!

Sorry to hear about your daughter D’s housing condo mess, but, from a distance, my first thought is that it could have been worse.

Despite getting caught in the housing downturn, she came out $90,000 ahead – after student loans and a broken car – a victory. It gives her a positive net worth, something most people in this country don’t have.

In my opinion, the first and only difficult thing about a pile of money like this is deciding whether you should put it in the ‘Risk’ or ‘No Risk’ investment bucket.

‘No Risk’ includes things like cash, a bank account, money markets, and annuities, while ‘Risk’ encompasses just about anything else, typically stocks, as well as real estate, and funkier investments as well. We tend to assume lots of different flavors of ‘Risk’ investments, but I’m increasingly convinced all ‘Risk’ investments are fundamentally the same. You can make money, you can lose money, but there’s no guarantee you’ll get all your money back when you need it.

If you decide on ‘No Risk’ then you should expect virtually no return, just the same amount of money available to you when you need it next. If you decide ‘Risk’ then the investment could go up or it could go down in value, but, in the short run at least, there’s no way to know where you’ll end up. The key advantage to dividing up the world this way – into these two buckets – is that it forces you to realize the illusion of having both safety and a good return in the same investment. You can’t. Anyone who offers you both absolute safety and a good return is lying. Run away from them.

In your question you’ve already hit on the key answer/problem in your question: Timing. If D might need the money within 3 years there’s no chance to earn a decent investment return, while also entirely protecting principal.

Earning a reasonable return right now, without taking risk, is impossible. If you choose the safe approach, you earn nearly nothing – $900 per year, or 1% on $90,000 – which won’t buy much. It’s hardly worth the effort of opening up the bank savings account. Interest rates are on the rise now, but from such a historically low base that they’ve got a way to rise before return on traditional savings will be “worth it.”

On the other hand, investing it ‘in the market’ or in another risky asset like real estate means that your $90,000 could be a lot smaller by the time you try to actually get it back. It very well might be larger too, but that’s just one possibility, not a guarantee. If you have to have at least $90,000 when you want it back, then ‘Risk’ isn’t the right place to put the money.

So, now, to D’s particular situation.

If she’s a starving artist in LA, without a steady income right now, then it’s likely she’ll need to access at least some of that $90,000 in the short run, in less than 5 years. To the extent she might need this money for living expenses anytime in the next 5 years, it needs to be in ‘No Risk.’ The return will be terrible, somewhere between 0% and 2%, but that’s just where we’re at. It probably doesn’t matter where you invest. Just stick it in a stupid bank savings account, earn the 0.9%, and be content. Don’t even bother tying it up in a 2 year CD offering 1.9%, because it just doesn’t matter. Another $900 per year won’t compensate for the fact that she can’t access all the money if she really needs it.

When would it make sense to invest in something Risky? It depends on her time horizon for accessing the money.

Less than 3 years, no way. ‘No Risk’ bucket only.

Over 5 years, start to lean towards Risky.

Over 10 years, put all of it in Risky.

If D’s music royalties or other income can reasonably cover her monthly expenses for the next 5 years, so she knows she doesn’t have to access the money, then it seems fine to pick something risky. Put it in a low-cost, all-stock mutual fund and watch it grow. Or use your real estate savvy to get involved in a rental building.

I wouldn’t bother with sexier higher-risk situations like oil royalties, film-financing, hedge funds, start-up businesses, or art unless she can blow the whole wad without missing it. It might make 10X your money. But it probably won’t.

Is there a course in between ‘Risk’ and ‘No Risk’ buckets?

Yes, for example, D may know she’ll only need a maximum of $30,000 to cover emergencies over the next 5 years. In that scenario, make two allocations – $30,000 into the stupid ‘No Risk’ bank account earning bupkis, and up to $60,000 in something that might earn a positive return over the long haul, like stocks or real estate.

The longer her $60,000 has to stay tied up in that Risky bucket, the higher the probability that the money will be larger when she needs it. The key here, though – the really essential point – is to know ahead of time which money she can’t afford to lose because she’ll need it, and which money she can afford to risk, because she won’t need it, ideally until retirement.

For you and your husband K, the equation might be different. I’m presuming you’re much more likely to have your monthly expenses covered in the next few years, so you can afford to make much riskier choices. If you lost some of your $90,000 in a risky situation that didn’t work, you’re still less likely to depend on the principal for daily living.

Your time horizon for choosing risky investments is probably better than D’s. For K and you, putting the money ‘in the market,’ or in a real estate opportunity seems perfectly reasonable to me, if you can weather the volatility. It makes sense to me that you’d invest the $90,000 differently than D should.

I know I’m not giving creative investment ideas that offer both safety and good return, but the fact is that usually – and certainly now – we can get safety or good return, not both.

I hope this helps.

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February 4, 2013February 7, 2013

Who Killed Fund Performance? We All Did!

Essay Review of “Murder on the Orient Express – The Mystery of Underperformance”

Once in a while I read something which crystalizes for me – with data and arguments better than I could hope to make – what I already suspected but hadn’t yet put into words.

Charles D. Ellis writes in Financial Analysis Journal[1] a research-based critique of the Financial Infotainment Industrial Complex’s myth of investment manager outperformance.

Using the literary conceit of Agatha Christie’s Murder on the Orient Express, Ellis plays detective Hercule Poirot to uncover everyone’s guilt – investment managers, investment consultants, fund executives, and investment committees – when it comes to paying unnecessary fees to managers who inevitably underperform ‘the market.’

If, like me, you kind of suspected all that, but wanted to see it demonstrated in black and white, I recommend the article. If you want the Cliff’s Notes version, hey, that’s why you come to Bankers Anonymous!

The Problem

As Ellis points out, everyone wants to own funds with investment returns in the top quartile; this is statistically impossible for more than 25% of investors in any year.

The further grim reality is that 60% of mutual funds underperform their benchmark every year, and that number climbs to 80% underperformance over a 20-year period.

Most troubling of all, Ellis cites research[2] which concludes that 24% of funds underperform their benchmark, 75% of funds match their expected market returns with no alpha[3], and 1% of funds actually offer risk-adjusted superior net returns, after costs.

So about 1% of actively managed funds are really “worth it.” Think you can pick that 1%?[4]

Ok, that’s the problem. Who’s to blame? Everyone in the Financial Infotainment Industrial Complex.

Investment Managers

How are they to blame for underperformance?

They choose time horizons in their marketing materials specifically to show outperformance, ignoring those years which would show either ordinary market returns or underperformance
They ignore the proliferation of thousands of highly trained experts in every aspect of investment finance who ensure that almost nobody has an edge on anybody else.
They actively market their products precisely at the moment following short-term outperformance, despite their knowledge that performance almost always reverts to the mean in the medium-to-long-run.

Investment Consultants

How are they to blame for underperformance?

Consultants get paid to retain clients, by not meaningfully underperforming the market. Consultants achieve this aim by emphasizing the importance of diversification, thereby ensuring that no single fund can noticeably impair the client’s portfolio, nor can any single fund make a meaningful contribution to alpha.[5]
Consultants inevitably recommend funds with recent outperformance – which limits the pool of funds – and ignores the mean-reversion inherent in most managers’ performance over time.

Fund Executives

How are they to blame for underperformance?

Fund executives often add a layer of extra fees by insisting on ‘separate accounts’ even when investing in long-only stock funds, when it makes little sense.
Fund executives typically are at an information and experience disadvantage when dealing with their counterparts at investment manager firms. So they fail to ask pertinent questions or push back when necessary. I’ve frequently observed the psychological barrier that prevents less experienced financial professionals in the room from asking the right question. Investment managers know this and depend on this. Traditionally we think ‘fear and greed’ drive the market and that’s still true. But the ‘fear of appearing foolish’ drives the fee structure in many parts of the investment management world.

Investment Committees

How are they to blame for underperformance?

Investment committees, like fund executives, usually act at an information and experience disadvantage when reviewing investment managers.
Most investment committees have limited time and resources to do proper due diligence. As a result, they tend to focus on recent past performance, which has little predictive power for future results, and suffers from the mean-reversion problem of markets and strategies.[6]
Investment committees mistake their role, imagining that it consists of investment decisions rather than governance decisions.
Investment committees stick with historic policies long past their “sell-by date,” because of the group-think inertia.

The result

The logical result of the “Murder on the Orient Express” discovery that “everyone is guilty” is that managers of pension funds and endowment tend to pay too much in fees for investment management.

The Financial Infotainment Industrial Complex continually reinforces the idea that outperforming managers may be discovered at any time and that the goal of investment managers is to ‘beat the market.’

But when you pay extra to ‘beat the market,’ you end up, in the long run, paradoxically underperforming the market by, at least, the amount of your fees.

[1] What? You’ve let your subscription to Financial Analysis Journal lapse? Well, thank goodness you have me to point this paper out to you then. Here’s the Scribd link to the paper.

[2] Laurent Barns, Olivier Scaillet, and Ruiss Wermers, “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas.,” Journal of Finance, vol 65, no. 1 (February 2010): 179-216.

[3] Sorry to get all Greek-lettery on you. “Alpha” means “performance above your benchmark” in investment terms. “Beta,” if you’re curious, means correlation to your benchmark. Beta is easy to achieve, and it’s what most mutual funds do despite claiming to deliver alpha. Getting alpha from an investment manager over time is hard, and rare.

[4] That sounds like a rhetorical question, but there actually is a correct answer. The answer is “no.”

[5] It’s not in Ellis paper, but this point reminds me that ‘diversification’ often prevents significant wealth creation. I’ve written this before, but truly wealthy people who made the money in their own lifetime, inevitably have extreme concentrations of risk in only one or two assets or businesses. Concentration of risks creates alpha, diversification creates beta.

[6] Ellis points out that research supports only the predictive power of recent performance for the bottom decile of managers. The worst 10% tend to maintain underperformance due to high fees and limited capability.

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January 4, 2013November 14, 2013

Book Review: Black Swan – The Impact Of The Highly Improbable

The “Black Swan,” of Nicholas Nassim Taleb’s title, describes an event that occurs completely outside expectations, has an enormous impact on future developments, and can be explained only in hindsight as predictable. Further, Taleb argues that despite the fact that we are blind to their imminent arrival ahead of time, Black Swans drive the world more than the visible, predictable patterns around which we typically organize ourselves.

Examples of Black Swans would include the European ‘discovery’ of the American continents, Eduardo Severin’s $20,000 Facebook investment becoming $2 Billion, the rise of modern weaponry for war, the 9/11 attacks, and the Great Credit Crunch of 2008[1]

But instead of looking for Black Swans, we seem to be hardwired to search for predictable patterns to understand our world. The typical forward-looking models we create to make sense of the world tend to assume inertia and normal distributions. We expect the future to remain within an expected range of previously observable or predictable outcomes. Black Swans, however, all too often overwhelm our expectation for continuity, acting like a tsunami that wipes out all our careful planning.

If you find the Black Swan view of the world compelling, how would you then organize your life and organize your investments?

Taleb’s suggested approach to both is dominated by what he calls empirical skepticism, which may be otherwise understood as doubting everything, and trying your darndest to deal with the fact that what you should be worrying most about is the thing you haven’t yet conceived of.

What you should not do, however, is trust too deeply in established patterns, impressive-seeming back-ward looking models, or anything that depends on normally-distributed bell curves.

I founded my investment fund[2] in 2004 with a compelling investment thesis, based on observable phenomenon and solid experience. From my mortgage bond sales seat at Goldman Sachs I could see clearly that we, and thousands of our colleagues and competitors, were engaged in a headlong rush to underwrite and securitize as much consumer debt as we could possibly create on a daily, weekly, and monthly basis. A good portion of this debt inevitably would go bad, creating huge opportunities for distressed investors who knew how to find and profit from the distress of financial institutions.

I knew something about the default and recovery rates on this type of debt, and I knew about the profitability of purchasing debt when it became distressed. In sum, I knew that we were headed for a debt reckoning, and I knew I had to set up my fund and achieve scale in time to take advantage of that reckoning. So far, so good. My fund grew until 2008.

The Black Swan of 2008 made it clear that instead of focusing on what I knew, I should have profitably focused on what I didn’t know. Fund of Fund Managers can have their capital wiped out in July 2008 and demand a 100% redemption, for reasons entirely unrelated to my fund.

Let’s just say the Black Swan of 2008 swatted aside all the things I thought I knew about distressed debt investing. It was all the things I didn’t know that killed the fund. Taleb would argue that I focused on all the wrong risks, and I have to say, in hindsight, he was right.

Market participants could contemplate a single large broker dealer like Bear Stearns going under in March 2008. That’s not a Black Swan. What was harder to contemplate and therefore qualifies for Black Swan status was the simultaneous insolvency in one week in September 2008 of Lehman, AIG, Fannie Mae, and Freddie Mac, followed within weeks by the likely insolvency of money market funds and every other major financial firm.

I know I’ve already written before that I don’t like ‘How To Invest’ books, preferring instead the ‘How Not To Invest,’ book as more profitable in the long run. Most of Black Swan may be profitably read as a ‘How Not To Invest,’ as Taleb implicitly blows up the status quo investment approaches embraced by the mainstream Financial Infotainment Industrial Complex.

However, I would be remiss if I failed to mention Taleb’s interesting investing career, which practice closely reflects his Black Swan philosophy. He co-founded and continues to consult with a fund called Universa. Universa purchases ‘volatility’ and ‘tail risk,’ via a long options strategy. In plainer English his fund traditionally purchases deep out-of-the-money calls and puts, resulting in a portfolio that loses a little bit of money in most years but makes a killing when the rest of the investment world blows up due to some unforeseen, volatile, Black Swan event.

A word of caution if you’ve never read Taleb: His personality determines his writing style more than most authors. In his first, well-known book, Fooled By Randomness, Taleb nearly undermines his key financial and philosophical points with his abrasive style. He slashes through ideas and people he considers lazy or wrong, never lowering the decibel level on his critique. He improved the tone in Black Swan to the level of merely an irascible professor, making him more readable than his debut effort.

Please also see my review of Nassim Taleb’s Fooled by Randomness.

Please see related post: All Bankers Anonymous Book Reviews in one place.

[1] Which of course occurred after the publication of Black Swan and did more than anything to cement the value of Taleb’s skeptical empiricism approach. Black Swan is more readable but probably less profound than his earlier book Fooled by Randomness, which I’ve reviewed here. His latest book Antifragile, Things That Gain From Disorder is on hold at my local library.

[2] Misleadingly labeled a ‘hedge fund’

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July 31, 2012February 27, 2019

Book Review: The Intelligent Investor

I never intend Bankers Anonymous as a “How to invest” site,1 but B$A readers may safely approach The Intelligent Investor as a “How Not to Invest” site, a more profitable set of rules in the long run, in my opinion. I prefer The Intelligent Investor to any modern investment book I’ve ever read, and I recommend it as inoculation against the investment advice crap that fills up bookstores, television, and the interwebs.

Since I started working in finance 15 years ago, acquaintances frequently learn about my background and start in with a “So what do you think of the market here?” or “What do you think of X stock?” The conversation typically gets awkward from there, as I mumble that fixed income markets are different from ‘the market’ they are asking me about and that I typically have no opinion whatsoever about particular stocks.

My professed ignorance is real, but The Intelligent Investor reminds me of why it’s best that I have no opinion. Benjamin Graham’s quick answer would be that security selection 2 is investing – rather than speculating – only if you have an idea about the value of the company you invest in. The company’s true value, in turn, would depend on knowing something about the cash flows which may be reasonably expected 3 to accrue to the business you’re buying. Approximately 0.01% of the people 4 asking my opinion about a particular stock have sought to value a company’s cash flows 5 before making their purchase, or before asking my opinion. So what my acquaintance really is asking me is whether I prefer red or black at the Roulette wheel, or whether I hit or stay on 16 when the blackjack dealer is showing a 5. Frankly, I have no opinion, but it’s usually considered impolite to add that I’m pretty sure the house is going to win against you in the long run. So I try to stay quiet and mumbly.

Please allow me to justify my somewhat extreme response, as it’s contrary to everything most other financial professionals want you to believe, from the Motley Fool to the CNBC fool 6 whose primary parlor trick consists of reciting nonsensical facts he memorized about stocks just before the cameras started rolling. I don’t want to come off like a pretentious finance guy looking down my nose at amateur day traders. My real target here is not my day trading acquaintances, but rather the entire financial-infotainment-industrial complex, from CNBC to TD Ameritrade, from Goldman Sachs to Charles Schwab, which wants you to believe any or all of the following myths:

1. You can beat the market.

2. Your mutual fund manager can beat the market.

3. Jim Cramer 7 can beat the market.

4. Your investment advisor can beat the market.

5. Your hedge fund guru can beat the market.

Although first published in 1949, very little of The Intelligent Investor feels dated. I estimate 95% of the opinions and techniques described by Graham still apply.8

Here’s a few rules of Graham’s approach that we all mostly honor in the breach, when investing:

Investing in volatile markets requires not a timing approach, but rather a pricing approach. The entire financial-infotainment-industrial complex will guide you to the former, but investing according to value, when the stock dips into an attractive price range, requires knowing something about how to value a company, and something about the value of your particular target company. Trust me when I say neither Jim Cramer nor TD Ameritrade will help you in this process.
You should receive investment advice with deep skepticism, whether it comes from your investment advisor, brokerage houses, investment firms, friends, or relatives. The best investment advisor is one who does two things: She prevents you from imprudent investment behavior, and she claims not brilliance but rather careful and conservative competence.
New issues favor the seller, not the buyer, as the seller has the best access to information and almost by definition picks a favorable time to sell securities.9 Individuals should almost never seek to buy new issues.
When deciding to purchase a stock, think like an owner, as that’s what you’ve become. Expect and hope to be treated by management like an owner. Realize, however – and this was as true in 1949 as it is today – that shareholder rights barely exist in practice.
Be business-like in your investment practice. If you would not make professional decisions at work on a whim, based on emotion, or following a rumor you picked up from your gym-buddy, try to resist doing any of those things when making investments. If you approach investing as an amateur, do not expect profits like a professional, just as you would not in your day job. Businesslike investing for businesslike profits requires work, an idea which the financial-infotainment-industrial complex would like you to forget.

Benjamin Graham exposes the awful truth that very few of us can competently handle the work required to invest, rather than to speculate. Even worse, most investment advisors encourage the latter rather than the former.

Once you’ve absorbed this awful truth, what’s an ex-banker to do, you ask?10 I’ll paraphrase Graham and add my own editorial suggestions in the light of The Intelligent Investor:

Hire an investment advisor, but pay them to keep you prudent and to deliver market results. As a logical consequence of this expectation, don’t overpay for investment advice.
Expect market results. Do not expect to ‘beat the market.’11
Markets can be volatile, and that’s not entirely a bad thing.12
If you enjoy investing as a hobby, allocate some small part of your investible capital to your hobby, and expect to pay appropriately for that entertainment. Allocate the greatest portion of your investible capital to a low-cost investment vehicle, not managed by you, that fits your appetite for risk.
Know your appetite for risk. For example, can you handle losing money? How much would you be able to lose without losing your head? Have you considered FDIC-guaranteed bank deposits as a result of thinking about this?
Most people seek to highly diversity their investments, and rightly so. On the other hand, most people who become very wealthy in their own lifetime typically have extremely concentrated equity exposure.13 Are you someone who knows enough about owning your business(es) to be extremely concentrated in your equity investments?

Unlike The Motley Fool, I write Bankers Anonymous to “amuse and inform,” but not to give investment advice, or to “enrich.” Financial advice hasn’t improved much in the last 60 years, which is why The Intelligent Investor is where to begin if you’re looking for investment advice, and it might just be where to end as well.

Please see related post: All Bankers Anonymous Book Reviews in one place.

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It’s funny how many people, upon hearing my intentions with B$A, have said “So that’s just like The Motley Fool, right?” I’m not here to “Educate, Amuse & Enrich.” Just the first two, sorry. ↩
I don’t mean to be jargon-y saying ‘security selection’ instead of ‘stock picking.’ I’m using ‘securities’ to mean stocks or bonds, and Graham refers to them both. ↩
Allowing for Graham’s signature investing rule to always allow for a “margin of safety” ↩
I rounded up that figure, fyi. ↩
I’m saying cash flows here to mean either the income from a bond you own or the expected profits from the company that you own shares in. ↩
Jim Cramer ↩
Yeah, that guy with the clown squeaks, horns and whistles. Needless to say this brings to mind the great Jon Stewart take-down of Jim Cramer. ↩
Oddly enough, interest rates have done a round trip since 1949, from 2.5% on the 10year to 16% and then back, such that his discussion on expected bond returns feels fresher than it probably would have 30 years ago. Kinda weird. ↩
For a little more detail on my views of IPOs, can I interest you in this posting ? ↩
Last week I came across the best four pages of bullet-pointed investment advice and investment advisory advice I’ve ever seen assembled in one place. You’ll want to scroll down to Appendix 3, pages 9-12, of this attached PDF . If any of this blog post/book review speaks to you, you will love printing out those four pages and hanging them on your wall for future reference. I have zero connection to that author, and I had never heard of him before last week. You’re welcome. ↩
Now is as good a time as any to acknowledge the weird and ironic truth that Graham’s best-known protégé, Warren Buffett, is the most famous market-beating investment manager of all time. When I read The Intelligent Investor, I get the strong sense that very few people will ‘beat the market,’ so I should not try it. But Buffett must have gotten the strong sense of the opposite: that through his efforts he would be one of the rare people who could beat the market. That’s just one of the small ways in which my life trajectory has differed from Buffett’s. ↩
Graham means it in the sense that stocks sometimes get cheap, so volatility can be your friend. I mean it in another sense as well. In the post-Madoff era, we’ve learned that a consistent return with no down months does not mean your investment advisor is a genius, it means he’s a fraud. Remind me to tell you some time about my client who berated me for 20 minutes over the phone when he experienced the first down month in my fund. After a period of steady returns investing with me he had come to expect no down months, and suddenly I was “terrible at my job,” and he wanted his money back immediately. In a related news item, he found out by January 2009 that he had not just Madoff in his portfolio but 3 other Ponzi schemers as well. He was a lot sweeter to me after that. ↩
The wealthiest man I’ve ever known, someone on the Forbes 400 list, told me when we first met that he’d never invested in the stock market. Most of his family’s net worth, however, derives from their ownership of a single successful retail business. That kind of concentrated equity exposure is typically a pre-condition of people who experience massive increases in wealth in their lifetime. Think Rockefeller, Gates, Jobs, and Zuckerberg.
These folks did not get wealthy through diversification, but rather the opposite. ↩