Investment Advice
The old saying is that advice is worth what you pay for it. I am guessing that other than a doctor, an investment professional gets asked for free advice more than anyone else. Lawyers may fit into that spectrum somewhere as well, but I’m guessing that if you could meter advice you would find aches and pains in the lead, closely followed by how to make or not lose money, with the query about being sued or legally offside the rules at a distant third place. As an investment professional of some forty-five years who has run three large investment businesses, I get asked for investment advice very often. And yet, here is the funny part of that, I do. Not now nor have I ever managed my own money. In the bad old days of my banking career, the compliance requirements that I not be engaged in buying or selling securities in order to avoid the semblance or reality of conflicts of interest or insider trading kept me well away from active investing. The exception might be the fact that I have made one-off decisions to invest in private equity deals, but as my guru on Private Equity, Frank, always says, investing in small private companies is more about investing in people than about investing in companies or strategies. So, almost all my investment for my my own account is handled with full discretion by others.
All of that said, I have been a close observer of all manner of investment styles and investment professionals over the years and I have both theoretical and practical views on what one should do and, perhaps more importantly, what one should NOT do. The first thing I always tell people is that there are two things I know average people cannot do at all well. The first is to pick stocks that will beat the market and the second is to time the market as to optimal entry or exit. The first issue on security selection is well documented through what is known as the perfect market hypothesis. It states simply that in a world of increasingly perfect (defined as seamlessly disseminated) information, it is virtually impossible to know more about (or at least more of a meaningful nature) a security than everyone else. And since the pricing of a security is about discounting its future income opportunities, that information, be it about the income or the rate of discount (meaning the rate and/or risk environment) holds little or no value that can give you an edge in the buying and selling of that security. In other words, its almost impossible for you to legally know more than the next guy and thus to gain an investment advantage. Statistical analysis of active managers’ returns compared to passive or indexed returns. bears witness to the fact that you just cannot beat the market with any consistency.
As for market timing, there is a lot of controversy about people’s ability to know better than the market whether it is going up or going down. We do know that over time, markets do rise, but that may be the only thing we really know for sure about its directionality. In the markets there are deemed to be two types of information or data. There is fundamental analysis and technical analysis. Fundamental analysis has to do with broad economic principles and movements that can be reasoned as being better or worse for the performance (defined as profitability and timing thereof) of given companies or the economy as a whole. Technical analysis has to do with price action and volume of trading. It means that markets, which are driven quite simplistically by supply and demand principles, are influenced by how many people can and do buy or sell securities at any given time and with any given bias. Investors generally care about fundamentals and traders generally care more about technicals. Traders care about who is selling or buying what and when and in what size. Traders generally want to sell before other sell and buy before others buy. There are ways to do that, but it is getting more and more costly to gain an edge in that sort of activity.
In the old days, I remember the Count of Monte Cristo intercepting semaphore information that was being relayed tower to tower from Spain to France and thus gaining an investment edge. Now we know about Flash Boys that build expensive and intricate fiber optic cables that relay market information with nanosecond advantage that allows high-frequency traders to get split-second timing advantages for their information. I was also recently involved in a court case about an artificial intelligence system designed to plumb the depths of investor sentiment ahead of their investment actions by interpreting Twitter sentiment. This is all a tricky way to get an edge, but it also validates the concept that knowing better than the market when to buy or sell is nearly impossible. I should also say that insider trading rules make this all that much more sketchy in that technically, if you know something that the market doesn’t know, that gives you an edge and profit ability that may technically not be legal. The story I use is that if you are flying into a city and see from the airplane that a factory is on fire and you call your broker to sell that stock when you land, that could be deemed as trading on insider information. I wouldn’t want to prosecute that case, but it shows you the regulatory lack of comfort with anyone gaining an edge in investment timing.
As for broad macro trend timing, I believe I am as tuned into the macroeconomic and geopolitical environment of the world and its investment markets as anyone. I have an undergraduate degree from Cornell in Economics and Government. I have a masters degree in finance. And, I have forty-four years of banking experience on both the sell side and buy side and have followed the financial market news as closely as any professional does. Last year when COVID hit I felt that the markets had under-reacted to the likely economic impact of the Pandemic and called my investment manager to tell him that I wanted him to “lighten up” the positions, which is to say to allocate down the equity portion of my portfolio. He was hesitant and reminded me that never in twenty years had I given him such specific direction and was I sure I wanted to do that. I said yes and he reduced my equity allocation at the margin accordingly. As I sit here a year later I can say that while I don’t agree that the market has properly or adequately discounted the impact of the Pandemic, the markets have barreled through this in ways that I couldn’t have imagined. My call on the market proves to have been wrong, at least based on the market movement of the last year.
That is my way of saying that my age-old view that market timing is for mugs and that no one has an edge or should think they know better has proven right again. I told that story to my sister Marissa the other day and told her that my best investment advice to her was to invest in broad-based indices (thus not thinking they or any given active manager can beat the market), to stay away from “sold” products like annuities, and to not, under any circumstances, try to time the market. To the point she needs to put money to work or take money out, she should try to spread it out over time if possible to avoid feeling foolish or lucky by having the impact (bad or good) of a momentary market movement. Discipline and humility will serve an investor far better than impetuous and bold maneuvers. And don’t take any advice from anyone who has a vested interest in your success or failure. Amen.