Reasons offered for this bizarre behaviour include:
- lack of time
- advertising from the financial sector to the effect that finances are best managed by "experts"
- the belief that it is too hard
- lack of confidence
I have no formal training in money management. My academic background touched on the fine arts, molecular biology and geography where I graduated with a Master's Degree.
I was driven to learn about investing by circumstance: the need to establish a nest egg to retrain and start my own business in the event of a job loss due to downsizing. As a manager, I laid off 40 percent of my staff ... and there was the distinct possibility that I would be next. If this happened, I resolved never to work for someone else again, much preferring to be the master of my own destiny.
I started by studying two hours each day, usually during the early morning hours when I could not be distracted. After 8 years and many mistakes, I started to earn more by investing than from my wages. It was liberating.
Ten Lost Years
My investing career followed a fairly common path:
- I read the financial pages and "flavour-of-the-month" financial books.
- I subscribed to some money management magazines.
- I subscribed to a variety of investment blogs.
- As a first step in placing my money, I retained an investment advisor who dealt almost exclusively with mutual funds. I fired him because performance was sub par. I also learned that management fees had a very corrosive impact on my portfolio and that most mutual funds fail even to surpass market indices on a sustained basis.
- I retained a stock broker. I fired him and her ... ever hear about "churning" and under performance?
- I decided to go it on my own and started by investing in junior companies with the thought that I could make quick profits. I lost money.
- I had little tolerance for dips in share prices. I lost money.
- I had no real appreciation of why stocks either rose or fell in value. I got discouraged.
Those were 10 "lost years" ... or maybe not. It prepared me for a major event - the distinct possibility that I would lose my job.
The Awakening
Until threatened with a potential job loss, I essentially "dabbled". I was now motivated by survival.
At first I hated the activity, but was driven by a duty to myself and family. I persisted and after six months, became fascinated:
- I loved the constant learning and synthesis and assessment of information from a wide variety of sources.
- I soon learned that, like golf, a large part of investing involves a knowledge of self and how to manage one's emotions.
- I also learned that the basis of successful investing, more than anything else, depends on developing a philosophy and a "world view". This is a key differentiator which is often overlooked. This is a "work in progress".
- I learned to accept losses without regret and to learn from the experience.
The Lot of Professional Money Managers
Supplicants enter the "priesthood" of money management by one or more of the following ways:
- academic credentials
- industry credentials
- association with a business in the money management game (and believe me, many practitioners regard it as a game)
- familial connections
For understandable reasons, both government and industry have to rely on credentialism BUT that is no guarantee of superior performance or that money managers will work in the interest of their customers.
In fact, an argument could be advanced that "average" is rewarded more than poor performance or superior performance.
- Running with the herd and not standing out for any reason, means that money managers can play safe. Most work primarily with the objective of maintaining their jobs. Travelling outside the herd leaves one open to question, especially if one's investments go south.
- Underperformance is common, but is often justified by the view/hope that a particular sector will outperform the rest of the market once conditions improve .... precious metals funds, come on down.
- Out performance is risky. It is very difficult to maintain outstanding performance metrics. Fickle investors have no hesitation in abandoning "hot" funds and moving on to the next great thing.
Investment professionals are often restricted by a number of other factors:
- Investment choices are restricted by the opinions of investment committees or company apparatchiks involved with "risk management".
- Brokerage firms and banks are often biased towards the stocks of companies they finance and money managers are often "encouraged" to push these stocks on unsuspecting clients.
- Money management is a very "busy" profession. Most activity is devoted to customer interaction and meeting bureaucratic protocols - NOT the search for profitable investments. The truth is that most money managers simply do not have the time or mental focus to THINK - this despite the fact that a great number of them are very intelligent.
- Career risk is always the prime motivator ... also the search for strategies and behaviours to improve one's income.
- Time frames are limited. Managers are assessed by short-term performance metrics both by their clients and their bosses. The constant search for short-term gains is inimical to sound investment strategy ... and clients suffer as a result.
The Lot of Amateur Investors
My definition of "amateur" is one who engages in an activity on a unpaid basis - no more - no less.
In comparison with her/his professional counterpart, an amateur has several advantages:
- A dedicated amateur will, inevitably, have more effective time to learn and engage in the productive management of money.
- An amateur has greater freedom to make his/her own mistakes and to learn.
- An amateur can expand into new areas of interest without career risk. Being your own boss has real advantages.
- Amateurs are not restricted by corporate policies and procedures.
- Amateurs can adopt the "long view" - free from the pressures of short-term metrics which prevail in most institutional settings.
- Amateurs have the luxury of being able to "do nothing". In contrast, it is very difficult for professional investors not to trade: pressures from their institutions and clients make this just about impossible, especially if some investments go south. The value of this advantage is inestimable as it enables amateurs to minimize trading friction and to refrain from acting on the basis of half-baked ideas. This said, most amateurs find it very difficult not to fiddle as they simply do not have the mindset to let their investments run.
There are disadvantages:
- Professionals may have access to timely information not readily available to those "outside the loop". Unless one is inclined to time the market, this advantage is not all that important as I regard investing in equities as a slow moving process, especially if one is a value investor.
- The best professionals are not inclined to panic. Instead, they look for opportunity when most others are fearful.
- The best professionals are less inclined to follow the latest investment fads. From experience, I have learned that this can be injurious to one's financial well-being.
Summary
Self-directed investing is not for everybody. However, for those with an independent mindset, it can be very rewarding from many points of view: the joy of constant learning, the satisfaction derived from taking personal responsibility for one's financial well-being ... I wouldn't have it any other way.
