ETFguide.com founder Ron DeLegge’s new book, “Habits of the Investing Greats,” proposes that investing success and character are intimately related.
In this podcast, DeLegge explains how Stanley Druckenmiller epitomizes “responsibility,” and how Anne Scheiber’s extraordinary fortune derived from her “thrift,” among the 26 investing habits covered in his book.
Conversely, he discusses behaviors that cause investors to stumble, including one blooper for which “all the asset allocation in the world” cannot compensate.
Editors' Note: This is the transcript of the podcast we published Friday. We hope you enjoy this.
ETFguide.com founder Ron DeLegge’s new book, Habits of the Investing Greats, proposes that investing success and character are intimately related.
In this podcast (18:25), DeLegge makes this link explicit by suggesting how we can emulate Stanley Druckenmiller’s responsibility, Anne Scheiber’s thrift and steer clear of the disorganization that led one investor to seriously undermine his family financially. DeLegge concludes with the suggestion that advisors give their clients homework that will strengthen the traits that undergird investment success.
Gil Weinreich: Welcome to the SA for FAs Asset Allocator Podcast, a series that addresses the issues of current interest of financial advisors, including ETFs, asset allocation, and the economy. I'm your host, Gil Weinreich, at Seeking Alpha. And today, we will be discussing one of the most vital and most neglected keys to investing success, which is cultivating good habits. We will be hearing from Ron DeLegge, the author of a new book on this topic in just a moment.
But first, this word on behalf of our sponsor: Every day, Invesco brings together ideas with technology, data with inspiration and investors with solutions. Let's invest in greater possibilities together. Find out more at investco.com/together, Invesco Distributors, Inc.
Our guest was an expert in ETFs when nobody knew what an ETF was. He was podcasting before most people knew what a podcast was. Yet despite his always being found at the cutting edge, our guest has a deep reverence for and knowledge of classic investment wisdom, of the sort that investors tend to trample over in their race to make money. They would do well to slow down and learn the fundamentals, and a new book on the habits of the investing greats can help them do just that.
With no further adieu then, I like to warmly welcome my friend, Ron DeLegge, founder of ETF Guide and author of "Habits of the Investing Greats." Welcome to our show, Ron.
Ron DeLegge: Thank you so much, Gil. It's great to be here.
GW: I’m thrilled that you wrote a book on this topic. I've often argued that investing is not about trading, tactics or technical analysis; above all, it's about character. What would you say about that?
RD: Yes, I mean that's exactly correct. I mean my own study of the topic has led to that conclusion, and of course, behavioral finance, which to some extent has helped us to kind of connect the dots on why we behave in certain ways with our money, and what we’ve learned is that, behind our choices and, of course, habits is this complex web of psychological and cognitive and cultural and emotional and social factors. It's very complex, and this fascinating area has become so crucial towards understanding the investment results that we experience that, you know, Nobel Prize – prizes have been handed out to leading figures in the field. And so, what I wanted to do was study the habits that separate the good results from the bad, and then, connect them to specific investors, investing grades, as I like to call them, so that we could actually learn something, and hopefully, the idea is to improve our own habits, which will hopefully help us to improve our own results.
GW: Well, you’ve written about 26 different habits you feel are important. We don’t have time for all of them, but can you take us through at least one of your favorites?
RD: Yes. Before I do that, I just want to mention why specifically I picked 26 because some may argue, well, it should have really been 36 or maybe 46 or 56 or some other figure or number, and the way I designed this book was that I wanted to be kind of a manual that people could employ financial advisors with their clients or individual investors over a period of 26 weeks. So, each habit would be practiced once a week, and then, that's half a year, 26 weeks, and then, at the end of that 26 weeks, you could begin to practice on whatever other specific habits maybe that you feel you’re weak at or that you need to work at. But the idea was to just make it kind of a project where people could work on this on, you know, themselves. But as far as one specific habit that stands out, I mean what can I say, it's like movies or music, like who’s your favorite, you know, composer? You know, is it Mozart or is it [Bork]? You know what’s favorite food? Is it – you know is it Pizza or falafel or kebab? I mean, you know, it's hard to say.
They are all kind of important. But one thing I will say is that the thing is whoever the people are, whether they are traders or buy-and-hold types or indexers, the one defining factor that they all have in common despite the difference in investment strategies or investment philosophy is the habit, you know the habits that they cultivate. So, I would say that none is more important than the other. I don't necessarily have a favorite. It's like choosing your favorite child. You know, if you have a number of kids, it’s just hard, you know. Of course, we have our affinities, let's not just say we don't have our affinities.
RD: But I think it's hard to just pick one.
GW: Well, then, let me pick one. How about responsibility? I like - that one attracted me.
RD: Yes, that's a good one. Actually, responsibility is an interesting habit because we as humans – I think we’re kind of hardwired to blame and finger point, especially when things go wrong, and whatever the reason is of excuses, why we didn't reach our goals or why our investment results disappointed. Maybe it was a declining stock market, maybe it was a choppy stock market, maybe it was a neutral stock market, a rigged stock market, that's one of my favorite ones. The markets rigged that's what I'm doing bad or maybe it was because of bad timing or bad luck or whatever.
The thing is that we tend to blame others, especially when things go wrong. And so, I used as an example, the great Stanley Druckenmiller, who actually encountered this same kind of problem back in 2000. He turned $6 billion in technology stocks into $3 billion in just a matter of six weeks. Now, can you imagine losing $3 billion on paper? So, instead of hiding his mistakes, instead of blaming the external factors, Druckenmiller accepted that personal responsibility, acknowledged his mistakes, and instead of sulking about them, he quickly learned from those mistakes, moved on and didn’t repeat them. And so, for us, as investors, what should we do?
Well, document your financial moves; what went right; what went wrong; what did you learn; understand that financial – your responsibility is a choice. It carries very severe consequences, and know that being responsible one time doesn't automatically make you responsible all the time and recognize that making excuses won’t bring you closer to reaching your financial goals; correct your mistakes swiftly rather than obsessing over them; and stop scapegoating others and start accepting responsibility for your own results.
GW: Words to live by. One thing I love about your book is that the investing greats go beyond the Benjamin Grahams and Warren Buffetts that everyone's heard about. You also include Anne Scheiber a favorite great investor of mine that probably very few people of heard of. Could you tell us a bit about her, and what made her such a great investor?
RD: Oh! Anne Scheiber is an absolute giant, and actually somebody that a lot of people have – like you said, never heard of, and it wasn’t really until, I think, like the mid-90s when people began to really get wind of who she was and…
GW: That’s when I found out about her. I’ll never forget. I was a young novice investor trying to learn anything I could about it, and I used to read a column in the Washington Post - at the time I was living in Washington DC - and that's how I found out about her. James K. Glassman wrote an amazing article about her, and I never forgot about it in these – it's been like 20-plus years.
RD: Yes, I mean Anne Scheiber – I mean, to me, she's really one of the absolute greats – and in many ways, even greater than the famous investors, and I think what makes her so remarkable, she was not born into wealth; she wasn't really, you know, a privileged person. She never made more than $3,100 a year working at the IRS, but she started with $5,000, and she was just, you know, saving money and investing in individual stocks, which at her time, if we look that historical perspective, I mean that was rare for her generation because most people that were her peers were scared to invest in stocks. I mean you had the 1929 crash, the subsequent Great Depression, and yet she bravely invested the little money she had in stocks, and she grew this small portfolio over the years from just a few companies to over 140 different stocks, including companies like Bristol-Myers Squibb (NYSE:BMY), and Coca-Cola (NYSE:KO) and Chrysler and Paramount.
Keep in mind that these were all very small companies. These were probably – we might say, you know, small caps or mid-caps. You know companies that weren't established clients like they are today, and over time, she just let that portfolio grow, and by the early 90s, she was generating, you know, more than $200,000 of income just from dividends, can you imagine? And then, when she passed away in 1995, she left her $22 million fortune to Yeshiva University in New York, and really, you know, up until her death, she remained in obscurity. But even though the fact is that she's not a household name in finance circles, that doesn't diminish her greatness, and I connected her to thrifty. Thrifty was kind of the habit that I learned from her. She was frugal, but she wasn't cheap. She curtailed unnecessary trading activity, and she also, you know, stuck with it. So, I think there are some really, really wonderful lessons in Anne Scheiber, I mean one of my personal favorites absolutely.
GW: What uncultivated habit, if I may put it that way, is likeliest to cause individual investors to stumble?
RD: Well, I think one that jumps out at me would be being decisive, and some people, I think, spend a lifetime trying to figure this out because there are so many choices. I think one thing I suffer from personally, and I include myself in this group, is choice anxiety, and I think today, we have so many different choices, you know, from an investment perspective, but also from a timing perspective, and there’s also a lot of distraction. And so, it's difficult to really for us to cultivate the habit of really focusing and being decisive, and gaining knowledge, obviously, that's pertinent to own financial situations important.
But then, it's important to initiate action and being decisive, and I think it's important that we all understand that even if we don't make a decision that is sort of a default choice in a way. And so, we definitely don't want to make decisions that are accidental or default choices that others make for us. We want to be deliberate in the choices we make with regard to our finances and investments, and I think, it's helpful to limit rather than expand the amount of choices that we’re making or decisions that we need to make because I think then it might help us have a higher probability of profitable or positive outcome. So, that would be my take.
GW: Ron, your regular radio podcast offers callers what you call portfolio report cards. Could you perhaps offer us an example of a very costly blooper stemming from a lack of having honed the important habits of great investors?
RD: Yes. The portfolio report card was an experiment that I started about 10 years ago where people would submit investment portfolios to me, and then, I would analyze and grade them based upon key factors like cost and risk and diversification and taxes and performance as well as organization, and I think one of the biggest bloopers that I've seen is organization is a big one, and specifically, naming beneficiaries correctly, accurately and keeping that current. One particular portfolio had made some mistakes regarding beneficiary choices on retirement accounts and had been married and divorced several different times, but had not changed or updated the beneficiary data to the new spouse. And so, think about what type of damage that would cause a family.
I mean all the asset allocation in the world, all the investment research in the world out the window completely with just a simple mistake, and this goes back to just being organized and staying on top of things like beneficiary designations and that's a big one. Also having a written investment policy statement as advisor sometimes refer to this as an IPS whether you're working with an advisor or not, all investors should have a written investment policy statement, which guides how your investments are to be managed, not only – it will tell you not only what your asset mix should be along with your – the vehicles that you’ll use to reach your goals, but it’ll also tell you what types of assets you won’t use or won’t invest in. So, it really is an absolute must. Good organization absolutely has to happen, and I just see so many investors, especially with the report cards, a vast majority do not have a written investment plan or statement, and as I like to say a retirement plan that’s not written or an investment plan that’s not written is not much of a plan.
GW: If you fail to plan, you plan to fail. In any event, this podcast is for financial advisors. Do you have any thoughts about what advisors could do to promote investor success?
RD: Yes. Advisors need to work more with the psychology part of helping their clients cultivate the right habits. I think this book is one way to do that. I think familiarizing clients with the behavioral finance and research of that – that's another thing. And then, trying to help clients really identify what are the weak spots from a psychology perspective, from a behavioral perspective, is it – you know is it fear? Is it, you know, excessive trading? What is it? Excessive – you know everyone has a weak spot, and so, I think financial advisors need to really build kind of this profile on each of their clients from a psychological perspective, kind of like the FBI does this, I think, with criminals.
They have this criminal database and they kind of, you know, have all the characteristics, and I don’t want to say qualities, but, you know, the things that define this type of criminal. You know they have a profile on them. And so, I think financial advisors, this is something you should be doing with your clients at building kind of profiles and really being able to frame and put together these profiles and match them with clients so that you can help them to cultivate the right habits, improve their behavior, maybe they need to save more money, maybe they need to spend less whatever it is, helping them though to recognize, hey! Here are your weak spots, and this is your homework assignment Mr. or Mrs. Client.
You know, give your clients homework assignments. I think that’s something else advisors need to do. Sometimes, advisors think they need to do it all themselves. Well, you know what, you can't do it all yourself as an advisor. There are some things that you need to give to the client in terms of delegating some responsibility back to them. In fact – and in the back of the book, I do this, in the appendix area, there’s what I call a habit layering self-exam, and it begins by choosing three habits that you believe you excel at, three habits in which you believe you’re deficient at, and then, three habits where you’d like to improve.
And then, after selecting each of those habits in these three layers, as I call them, you go back to the chapter that corresponds to your selected habits, and then, you look at the section titled what the investors should do? And so, you can do this self-exam with a friend, with a colleague, you can do it with your advisor, and basically, it's a fun exercise. You see what they think you're good at, which areas they think you struggle at, which areas or habits where they think you need to improve, and you can cross-examine them. When we turn it into kind of a fun exercise, we begin to learn more about ourselves and our weak spots and how we can improve.
GW: Interesting idea - advisors giving their clients homework. I would suggest advisors should give their clients this book and help them and yourselves at the same time, or maybe suggest this to your broker-dealer, and they could get hold of a bulk order and help a whole bunch of clients at the same time. "Habits of the Investing Greats," a new book by Ron DeLegge. Thank you so much, Ron, for joining our show.
RD: Appreciate it Gil, it’s been a pleasure.