As an old-time blogger I am always happy when I see smart, young bloggers enter the finance and investment space. Recently Patrick O’Shaughnessy of O’Shaughnessy Asset Management has been blogging up a storm over at Millenial Invest. His first book Millennial Money: How Young Investors Can Build a Fortune was released this week by Palgrave MacMillan.
This seems to be an opportune time due to some pent up demand for investment advice for Millennials. If You Can: How Millennials Can Get Rich Slowly by William Bernstein published earlier this year has been a frequent download by Abnormal Returns readers. Patrick was kind enough to take the time to answer some of my questions about the book. My questions are in bold and Patrick’s answers follow.
In all seriousness, why write a book targeted at Millennials? The Millennials have all read Harry Potter but are they receptive to a book about investing?
Because of this sad catch-22: the biggest investing advantage is youth itself, but young people care the least about investing. In my experience, when you lay out the basics for millennials, they start investing right away. This books is my attempt to reach as many people in my generation as I can to help them get off on the right foot early in their careers.
We seem to be in the midst of some sort of market downturn. Shouldn’t Millennials be cheering for a market dip? Wouldn’t this would allow Millennials to accumulate stocks at lower prices when they don’t really need the money.
One of my favorite Warren Buffett quotes is “smile when you read a headline that says ‘Investors lose as market falls.’ Edit it in your mind to ‘Disinvestors lose as market falls — but investors gain.’” Because millennials are going to be net-savers in the coming decades, they should root for occasional volatility and market sell offs because they create opportunity for those with a truly long-term time horizon.
In your CNBC segment you talked about whether Millennials are all that different than Baby Boomers when it comes to investing. Millennials first experiences with markets (housing and stock) have been rocky at best. Is risk-taking a learned response that can be taught?
Risk-taking is all about framing. The key is to understand that low-risk is indeed good, but that risk can only be defined with a corresponding time horizon. Short term risk (stocks) = long term opportunity. For millennials—who have the luxury of decades ahead—that means that the global stock market is likely the safest place to be. Sure, millennials will have to endure the inevitable bear markets, but the end result has always been worth the choppy ride.
In your book you talk about the potential pitfalls to relying on Social Security, etc. @awealthofcs recently tweeted: “Daniel Kahneman on why people make irrational decisions: “Because the long term is not where life is lived.”
Should we therefore focus on simple rules of thumb like “spend less than you earn” to keep investors on track?
Investing success is incredibly simple: spend less than you earn, make consistent investments in the global market, and wait. If you do these three things, you cannot help but get rich as compounding works for you over time. But simple doesn’t mean easy. That last step (“wait”) is incredibly hard to do in practice. We always want to do something with our portfolios, and usually at exactly the wrong time. As Nick Murray says, “You can’t, as we’ve seen, build and hold wealth without equities. But the converse is even more importantly true: equities can’t do it without you.” Controlling your behavior matters more than anything.
Much has been made of late about the rise of robo-advisors which seems to jibe with your idea of “getting out of the way” when you invest. Do you see Millennials as the target audience of robo-advisors? Are there any specific things they should be doing to target this demographic?
Millennials and robo-advisors are a match made in heaven because robo-advisors sit at the intersection of investing and technology. Millennials are much more amenable to efficient technology than to more traditional financial advisors. But there is an important caveat to this love affair. The most successful technology is that which enables humans to be better at their jobs, not that which totally replaces them. It will always be hard to overcome one’s emotions and stick to the plan. Good human advisors will always be very important in this regard: they can help you through the tough times, when what you do matters most. I think that the most successful companies will be those that combine the benefits of technology with the benefits of real human advisors.
I like the idea of “thinking of yourself as a business.” Where does investing in human capital, education, training, entrepreneurship, etc. play in this equation?
I think that the most important thing to do in one’s 20s is to be a human sponge. Absorb as much information as possible. Read, watch, and listen all the time. The returns on knowledge compound just like returns in the stock market, so building a base of knowledge early on is invaluable. For me that means books. I recommend 3-4 books each month, culled from the 100 or so I read each year. If you just read a lot, you’ll be ahead of most of your peers.
A big part of your book is advocating of value-based stock selection strategies. Are these distractions for investors who have a hard enough time keeping their asset allocations on track?
It depends on the individual. If I met someone on the street who asked for investment advice, I’d suggest something simple like the iShares MSCI ACWI Index Fund ($ACWI). Low-cost index funds are a great starting point. But there are options out there (Cambria’s Global Value ETF ($GVAL) for example) that are easy to buy like index funds, but offer investors access to a disciplined, global value strategy. Value investing works because the cheapest stocks are often so tough to own. But if you have the intentional fortitude to be a value investor over decades, the chances are that you will do very well.
Millennial Money: How Young Investors Can Build a Fortune by Patrick O’Shaughnessy is published by Palgrave MacMillan is now available everywhere.