Self-Education
Due to a clogged roof drain on our flat roof over by the office side of the house, during the heavy rains of March we developed a leak. We went through the normal process of sleuthing out the origin on the leak by having Handy Brad open up the outside wall between the sliding glass door and the window next to my desk. That was an area of about six feet wide, floor to ceiling. We found lots of wet insulation and wooden framing from the top plate all the way down to the floor, but it was still hard to say if the leak was coming from an exterior stucco crack, a bad roofing seal or some other issue that would need to be addressed. At Handy Brad’s urging I called Santa Fe Roofing, who is another example of a quality vendor for whom I paid top dollar. They have had to come back perhaps six times in two years to solve a leak in the dining room and now this leak in the office. Their client-friendly responsiveness makes me willing to recommend them to anyone who has a flat roof, which is their specialty. They knew exactly what they were doing when they came over and after an initial look-see, they took my hose up there and flooded the roof corner to see if the drains were flowing, and they were not. Based on their experimentation, they determined that the clogged drains were causing water to accumulate and get deep enough in the corner that the water level rose up about three inches and got to the natural flashing area along the sides of the parapet wall. That, they felt, was where the leak was coming from and why it only came forth when the rain was heavy enough to accumulate water to that depth. The solution was to unclog the drain, and while they were at it, clear all the other half dozen roof drains.
I have faith in Santa Fe Roofing, so once they declared that they were confident in the solution, I tasked Handy Brad to close up the wall and refinish the interior plaster to its original and matching texture. One of the things Kim and I like about Handy Brad is that he knows his own limitations and he always has a stable of reliable, reasonable and available sub-contractors to do the work needed. We have had good luck with his plumbers, electricians, framers and now plasterers. For our walls he recommended Eddie, who he declared is the $65/hour guy he used for his own house. Like with Robert the plumber, Handy Brad always warns me if there is someone three degrees off top dead center, but he never brings in anyone who doesn’t do good work, regardless of their quirks. Robert the plumber liked to talk to himself while he worked, but other than that and a slightly goofy demeanor, was fine in his baggy board shorts. Eddie was, once again, a little strange, but in a different way. Once he asked me enough questions (I was working in the garden near where he was working on the office wall) and determined that I had been an investment professional, Eddie started in on me. He was clearly a guy lacking in much formal education, which is not so unusual with craftsmen in areas like plastering. But it was clear that somewhere along the way, Eddie had developed an above average amount of interest in the financial world.
It does not take a genius to come to the conclusion that finance is an area with which to familiarize oneself and become more knowledgeable about how to get a slice of that pie for yourself. What it does take is some gumption and some perseverance. Eddie seemed to have both. The first thing Eddie did was ask with some gob-struck admiration about what sort of things I invested in. The admiration was most likely the result of the time Eddie spent working in my office, which is full of the normal array of career memorabilia, which undoubtedly told him that I had been an active market participant, and perhaps a successful one. I explained to Eddie that being the CEO of three significant money management businesses meant that I was largely stopped out from investing my own money because there was always the concern for potential conflict of interest. I had spent much of my years in banking recognizing that certainly publicly traded securities are problematic for anyone in investment banking. Even private market transactions required compliance approval, so I was used to leaving investing to others while I pursued business-building in the investment arena rather than investing per se.
As you might imagine, I have been asked for investment advice or opinions or even just investment anecdotes more times than I can count. It always strikes me as funny because I have always considered myself an earned income guy rather than an passive investment income kinda guy. People always assume that if I ran money management businesses, I must know a lot about managing money in a way that could be useful to them. I do know a lot about money management, and I do actually think I have some valuable wisdom about personal investing, but it is not really the kind of wisdom people expect. What people want is low-risk, high-return ideas, and I usually start by popping that bubble. They want to know what stocks to pick or at very least how to pick good stocks. That’s bubble #2 that I address. And then there is the simple, yet profound idea of market timing and how to know when to get in and when to get out. Even if people don’t understand the market, they know that picking winners and buying low and selling high is the road to success as they have tended to define it.
I always start my investor speech with a couple of surprising winners. To begin with I describe the advent of passive (index) investing and how active management has woefully underperformed indexation at every turn. This is not just a case of averaging performance, but rather an abject absence of evidence that anything but a trivial few (like Warren Buffet) can consistently beat the market (a.k.a. outperform the index). That is my top favorite for why people should not expect to be able to pick winners. I remind people that professional investors have tons of resources and data at their disposal and they cannot beat the market, so what are they odds that they can? As a footnote to that, I remind people that if they insist on individual stock investing, they had better be prepared to research and assiduously follow the investment to have any chance of not being at a severe disadvantage.
The second comment is that market timing is a mug’s game. In the days of the Count of Monte Christo, when investment information was transmitted by semaphore across Europe from one watchtower to another, perhaps there was an ability to get an edge on market timing. But today, just the fact that Michael Lewis can explain in Flash Boys that millions of dollars are needed to get a microsecond advantage with expensive fiber optics, should tell you all you need to know about how easy it is to time your entry in or exit from the market. In the Information Age, no one can time the market, end of story.
My last speech to Eddie, was that the older I get, the less interest I have in investing in private equity of venture capital deals (a distinction that appears to be lost on Eddie, who just knows them as private deals). My stated reason was that the timing doesn’t make sense for someone my age, but the truth is that to do a private deal, you really need to be committed to the idea and or the people, and I’m pretty much past all of that at this stage.
When Eddie came back later today to get paid for his plastering work, he felt the need to give me a copy of a deal he wants me to consider. It is an Alaskan Natural Gas deal involving some 900,000 acres of U.S. government land that might be available for extractive lease. I didn’t have the heart to tell Eddie that he should just stick to $65/hr. earned income plastering work just like I have stuck to earned income work of my own. This is where self-education meets self-awareness.