When I was employed as a behavioral economist I often looked forward to meeting new people. You see, when you meet someone for the first time, there is always one question which inevitably gets asked; what do you do for a living? In most instances, this question is a passive component of the scripted social contract; a way to casually and benignly enter into conversation with someone unknown to you. However, when the answer to that question is something unorthodox or unexpected, the reaction of the questioner is priceless. Their involuntary befuddlement is displayed uncontrollably on their face, and, in that fleeting moment of disorientation, I was able to laugh at myself and the obscure nature of my professional existence.
For doctors, lawyers, chefs, and teachers the development is always predictable. You answer "doctor" and other party responds with "really? What sort of medicine do you practice?" For the lawyer the response is usually, "no kidding? What sort of law do you practice?" In the case of the chef the question is always "where do you cook", and for the teacher the most common response is "what subject do you teach?" For common occupations, there are predictable follow-up questions. However, when you answer that question by saying, "I am a behavioral economist. I consult with institutional investment clients in an effort to mitigate risk through offering market perspectives derived from sociopolitical and geocultural origins" people generally look at you like you just told them that you work as a unicorn riding wizard. It was that moment which I anticipated with childlike delight.
It wasn't that my job was all that impressive. Nor was it an egocentric title which I cast upon myself. It was simply an appreciation for misunderstanding and human dissimilarity which I too had endured in my life. I had been the questioner many times in similar situations, and I found a bazaar satisfaction in being humbled by the awkwardness of the moment. I suppose, as a finance professional with a background in social sciences, I possessed an innate appreciation for humanity personified. This is why, on some level, I always enjoyed my work. It is why, to some extent, I continue to write articles on the subject and interact with inquisitive readers. I know who I am, and I like what I do. I am fortunate in that respect.
During my years employed in the above referenced capacity I learned quite a bit about the parallels between behavior and markets, personality and portfolios, and perspective and profits. Those lessons have proven to be invaluable to me as an investor during my life's "second act." Okay fine, maybe I'm in my third act by now, but you get the idea nonetheless. I believe that some of these lessons could prove valuable to other investors, whether they are stay at home retail traders with modest capital positions, or whether they are professional fund managers responsible for considerable assets. Therefore, this article is being written with the intention of providing insight, value, and perhaps even a bit of entertainment, for readers of all backgrounds, professions, and proficiency.
The Shakespearian Investor
I have always been of the contention that William Shakespeare would have been a tremendous investor. He was self-assured, fearless in the face in of criticism, tirelessly devoted to his work, and all but impervious to the opinions of others. No market makers would have been able to rattle him from his convictions. However, it is a famous line from one of his plays which always struck me as insightful when applied to investment related matters; "to thine own self be true." That statement is a near perfect tagline for modern day investor sentiment. It reminds me of what Warren Buffett once said when he stated in an interview years ago that "When investing, know who you are, what's important to you, and why you're doing it. Then, stick to it." Personally, I see significant parallels between those two quotes.
You see, every investor has an "inner adviser." No, I am not being metaphysical or non-linear. I am simply stating a near certainty; that each of us has an instinctual and habitual mechanism which impacts all of our decisions, actions, and behaviors. In other words, we are who we are. Sure, we can diversify ourselves in different jobs, circumstances, and relationships; but in the end, our innate persona will manifest itself in whatever it is we are doing. We will, inevitably, make that experience our own. It is the most primitive of our behavioral instincts.
Our portfolios are no different. Our personalities are personified in how we invest. As a college professor of mine once said, "If you want to know what type of a person a man is, simply look at his portfolio." What he was saying, in essence, was that one's personality is one's personality, and therefore, we tend to invest how we live - for better or worse.
In theory then, one can draw conclusions between investor behavior and life circumstance. For example, an investor who holds onto a stagnant or losing stock for years, in woeful anticipation of eventual change, is likely the same type of person who stays in a stagnant and unfulfilling relationship in hopes of "the magic returning." In the same way that this investor is doubtful of their ability to find happiness elsewhere, they are also lacking the confidence to make back the money they lost in other equities. On the contrary, a trader who blindly jumps from catalyst trade to catalyst trade in search of that "one perfect trade" is likely a man or woman with an aversion to commitment and recklessly frivolous social habits. Of course, these assertions aren't accurate in every circumstance, but more often than not these correlations would prove truthful to the majority. Once again, we are who we are.
Therefore, there is obvious benefit to asking the question "what kind of investor am I?" It sounds simple enough, but few of us ever really contemplate this inquiry. If we honestly answer that question, assessing our strengths and weaknesses, our strong points and our short comings, then we stand a better chance of utilizing our strengths, and gravitating towards what comes natural. Let's face it, if you were born to be an artist, then you're going to be happiest and most fulfilled by being an artist. You could undoubtedly be successful in other fields, but you wouldn't be as successful. Michelangelo was an artist in every fiber of his body. Perhaps he could have been successful otherwise as a merchant, a scribe, or a farmer; but his "inner adviser" had a paintbrush, and as a result he was best served to use it.
So what kind of an investor are you? Are you a catalyst junkie? Are you a dividend sleuth? Are you risk averse? Are you a proponent of diversification? Are you the type that swings for the fences? Who are you? I ask because if you can reconcile who you are as an investor then you can reconcile who you are as a human being - and vice versa. Understanding who you are, and what you are most comfortable with intrinsically, can make you a better investor. When you know who you are, then you know what direction best serves you. When you know who you aren't, then you know what endeavors are best left to others. I believe that self-awareness is a key component in developing, executing, and benefiting from, your own personal investment strategy.
Who is Your Inner Adviser?
This section of the article will help send you in the right direction. Obviously, I believe that everyone's personal investment strategy will be uniquely their own. However, the foundation for that strategy may be discovered in the ghosts of capitalism's past, or in the preaching's of today's most renowned investors. Therefore, this section will identify five different investment icons, offer advice in their own words, and summarize their premise. Perhaps if you can identify with one of these men, or their individual philosophies, it will set you on your way to better identifying the right investments for you. We'll begin with the man whom I personally identify the most with; The Sultan of Steel.
"I believe in putting all my eggs in one basket. Then, I hire a wolf to watch the basket."
The Scottish born industrial icon known as "The Sultan of Steel" was a fearless and tenacious business man. He was born into Dickensian level poverty in the 19th century, and then grew to become arguably the most successful industrialist of modern times. At his peak, based on today's comparable value, he was worth over 300 billion dollars. He arrived in America as a teenager, and began working as a telegrapher. Possessing a unique blend of both fear of, and immunity to, extreme poverty, he started investing in railroads, bridges, and infrastructure with herculean confidence. He raised money in Europe to urbanize and industrialize America, and he built the Carnegie Steel Company from the ground up. In 1901 he sold that company to J.P. Morgan for 480 million dollars.
Carnegie was known for two things above all else; philanthropy and conviction. On more than one occasion he wagered everything he had on a single unknown and uncertain enterprise. He viewed diversification as a crutch for the tentative. He believed in his own diligence and work rate, and was utterly undeterred by others fears. He invested in companies who recognized the importance of infrastructure and mobility, as well as those which offered extreme growth potential. If he were alive today, he would likely appreciate the investment opportunities in shipping, transportation, and biotechnology. Later in his life, when he was asked about his astronomical success, he stated that he was in fact the wolf he hired to watch his basket. He said, "who better to protect his money than the man who made it."
Sir John Templeton
"The four most dangerous words in investing are………this time it's different."
John Templeton was an American born British investor who was a mutual fund pioneer. His Templeton Growth Fund, which was established in 1954, made him a household name. During the Great Depression he became famous for buying 100 shares of every company listed on the NYSE. At that time all of those companies were trading for less than one dollar per share. During World War Two, when the economy recovered rapidly, he made his money back many times over. He was a patient investor who believed in buying into fundamentally strong companies during times of market distress. He embraced fundamentals, believed in the cyclical nature of global markets, and rejected technical analysis in favor his beloved fundamental analysis.
Templeton lived out his life in the Bahamas, after renouncing his American citizenship in order to avoid a hefty tax bill. He lived to be 95 years old, and was named by Money Magazine as "the greatest global stock picker of the 20th century." As an investor Templeton bet on fundamentals time and time again and regularly came out on top. He once advised his employees and disciples that if they wanted to make lots of money that the key was to "invest at the point of maximum pessimism." Templeton believed that history repeated itself, and that investments were all about basic principles, timing, and patience.
"Go for a business that any idiot can run, because sooner or later any idiot is probably going to run it."
The immortal Peter Lynch has been a cornerstone of Fidelity Investments for 40 years. After starting as an intern, and then serving in the army, he went onto manage the firms now famous Magellan Fund. Under his watch the fund absolutely slaughtered the market. The fund didn't outpace the market. It didn't outperform the market. It didn't leave the market behind. It burned the market to the ground, vacuumed up the ashes, and then danced gracefully where it once stood. From 1977 - 1990 the fund averaged 29% annual returns. That is other-worldly.
Lynch is as famous for his market domination as he is for his rhetoric. He has never been shy with his tongue, and shares his opinions openly. He believes that management is largely overrated, in comparison to business model importance, and has preached on multiple occasions the significance of investing in companies so easy to operate that "a caveman could do it." Lynch is a proponent of simple business models, with strong fundamentals, and he isn't afraid of young, growth oriented, companies. However, he isn't necessarily a risk taker either. Lynch has said that "nobody should ever invest in a company they couldn't illustrate and explain with a crayon." He keeps it simple, buys into solid ideas, and seeks out companies that are almost capable of running themselves.
"Time is your friend. Impulse is your enemy."
John "Jack" Bogle founded the Vanguard Group in 1974. Under his leadership the business became the second largest mutual fund company in the world. Bogle is famous, or perhaps infamous, depending on your perspective, for his uncompromising insistence. He regularly initiates and/or engages in contentious debates arguing for the superiority of index funds over the traditionally actively managed mutual funds. He believes the advantages are "painstakingly obvious and beyond contention."
Bolge believes in simplicity and common sense investing over all else. He believes that people should invest in low cost index funds, and avoid the additional costs of professional advice. He believes that past performance should be used to forecast consistency and evaluate risk, but not to predict future returns. He is a buy and hold traditionalist. Bolge is risk averse, patient, and opposed to paying exorbitant fees to highly-regarded managers. He believes that time provides returns, and that impatience and emotion are enemies of success.
"Diversification is protection against ignorance."
Ah yes, the Oracle of Omaha. Buffett is the very personification of value investing. Furthermore, he lives his life by the same parameters which he invests. He is a frugal man, almost comically so, given the fact that he is the second wealthiest man in America. The CEO of the world renowned Berkshire Hathaway still lives in the same home he bought in 1958 for 31,500 dollars. Granted, he does own a vacation home these days in California worth about 4 million dollars, but his aversion to unnecessary spending continues to be a theme is his life, and his business.
Buffett is all about value, diversification, safety, fundamentals, and patience. He has often been quoted as saying that "Timing is overrated, but time is underrated." He believes in buying strong companies, at a smart price, and then supporting them in their evolution. He loves dividends, and he enjoys drinking soda right out of the can. He is a Midwestern guy, with Midwestern values, and Midwestern priorities. Perhaps more so than anyone else on this list, he knows who he is, and he embraces it. He invests how he lives, and it has proven very effective.
So, there you have it; five different men, with five different philosophies, and five different approaches to investing. Admittedly, there could have been many more financial icons included; George Soros, Benjamin Graham, and Gary Shilling would all have claims to this list, as would many, many others. However, the point here has been made.
Andrew Carnegie is the risk taking, all or nothing, self-assured proponent of growth.
Sir John Templeton is the fundamentally sound, stock picking, cyclical market opportunist.
Peter Lynch is the brazenly confident, business model based, advocate of simplicity.
John Bogle is the uncompromising, common sense campaigning, penny pinching investor.
Warren Buffett is the humble, diversification oriented, long term dividend master.
Each of these men succeeded to relatively unprecedented levels because they embraced who they were and put it to work for them. They are, as investors, personifications of themselves. Can you relate to any of these men? Can you benefit from their perspectives? Should you embrace their principals in gaining a better understanding of yourself? These questions are worth exploring.
In the opening segment of this article I stated that "I know who I am, and I like what I do." This is, of course, an accurate statement. It is also a key component of why I have (eventually) done well in the markets. I invest as I live; evaluating social and behavioral factors which I believe play a significant role in equities forecasting. Admittedly, some people believe these methods to be complete nonsense, and they certainly have every right to their opinions. However, it works for me, and therefore I employ it as a device. Once I began investing based on principals, procedures, and means which I knew best, my returns grew exponentially.
You see, when I first started investing I did not do well. Technical analysis had begun to displace fundamental analysis as the "new standard of stock picking." Everywhere you looked experts were advocating market action discounts and price trends. I jumped on board, and feverishly attempted to apply these models. Undoubtedly, both fundamental analysis and technical analysis have tremendous value. However, neither truly worked for me. My natural instinct was to go in other directions. I was interested in the geopolitical climate of the markets where the company operated. I was fascinated by the social habits and public appearances of executives. I was enamored by watching the public's reactions to market activity. These facets of the investment world intrigued me, and these were the standards of measurement which I naturally understood. It was who I was, and I wouldn't force myself to be someone else.
Eventually, I began working on my own, analyzing and evaluating investments based on how they appeared from my perspective. I started recording significantly higher levels of success. Associates and professional acquaintances started to notice. Then, one day, I found myself working for a man whose professional accomplishments in private placement, institutional investment, and banking arbitration are too exemplary to list. I woke up one morning, looked in the mirror, and I was a behavioral economist. In truth, I couldn't even tell you how it happened, other than to say that I simply did what came naturally. I knew who I was, I did what I knew how to do, and it paid off.
Such is the point of this article. If you are a technician, then be a technician. If you are a fundamentalist, then be a fundamentalist. Embrace what you know, and put it to work for you. Doing anything else is like trying to survive in a foreign country by pretending you speak the language. It simply won't work. You can learn the language, you can employ its verbiage, and you can improve. But as any bilingual person will tell you, when you dream, you always dream in your native tongue. At the end of the day, even your subconscious brings you back to who you are.
As an investor, whether you are more like Carnegie or Buffett, Templeton or Bogle, or cut from the mold of Lynch, you will be best served to invest how you live. See the market the way you see it, and make decisions based on what is logical, sensible, and worthwhile to you. You are the one that has to reconcile the outcomes of your decisions, so you are the one who has to be confident in having made those decisions. You see the world the way you see it. You define opportunity the way you define it. You assess risk based on your own thresholds. As the prominent quote from the film Citizen Kane reminds us, "those are the only terms anybody ever really knows - his own."
In closing, I would simply like to acknowledge that I am fully cognizant of the fact that not everyone will agree with my premise herein. Some people will hear me saying "embrace who you are and put it to work for you" and will wish to argue that venturing "outside of one's comfort zone" can bring about monumental rewards. In many instances, those people would be correct, and I have profound respect for proponents of that philosophy. But I believe wholeheartedly in the words of Gary Shilling, who said that "the market can remain irrational longer than you can remain solvent." So, in the ongoing battle of man versus market, one of man's most formidable weapons is the ability to stay humble in victory, and resilient in defeat. In a world of irrational markets, this requires baseline rationality. Generally speaking, the most rational version of oneself is the most natural and honest one. It is in your most authentic form where you will truly thrive. So, when picking your next investment, do so because it makes absolute sense to you, based on terms and prerequisites you define as valuable. See what happens. Perhaps you will find that the most relevant advice, as it pertains to your personal investment strategy, will come from within.