“Honesty is the first chapter of the book wisdom.” ― Thomas Jefferson
It’s Blogger Wisdom week here on Abnormal Returns. As we have done in previous editions we asked an esteemed group of finance bloggers a series of (hopefully) provocative questions. The answers are not edited and the author’s name, blog name and Twitter handles follow. Yesterday’s post looked at how to monetize a new return factor. We hope you enjoy these posts as much as we do putting them together.
Question: What is one thing you do with your money (spending and/or investing) that you would never recommend to a client, family or friend? (Answers in no particular order.)
I hold way more cash than any financial advisor would recommend, and I’m scraping the couch cushions to pay off my mortgage, which has an incredibly low interest rate. I understand the downsides of those decisions, at least as they appear on a spreadsheet, but investing for me is about getting as close to a good night sleep as I can, not maximizing my CAGR. I actually think that’s how most people should think about investing, but everyone’s psychology is different, so my allocation might not work for most.
Earlier in my career, I would literally skip meals in order to max out my IRA or 401k account for the year. I was so ideological about avoiding taxes and allowing my wealth to compound that I took it to those ridiculous extremes. I tell that story to clients to make a point, but I would never recommend they actually do what I did. I want my clients to actually be happy with their lives, and being as fanatical as I was isn’t healthy. Though to my credit, my account balances are a lot higher today due to the fanaticism of my youth.
About 10 years ago I bought a boat. Or, as boat owners say, BOAT – Bring Over Another Thousand. This was, by far, the worst financial decision I ever made in my life. Although it was enjoyable the cost of upkeep and maintenance was unbearable. They say that the best days of a boat owners life are the day they buy the boat and the day they sell it. I can confirm that this is wrong. The better of the two days was definitely the day I sold the boat and learned the hard lesson that materialism really isn’t all it’s cracked up to be. A famous poet once said “Mo money, mo problems”. He was wrong. He should have said, mo materials, mo problems.
The reason is simply that as an entrepreneur with a number of businesses, I’m cognizant that my income can be especially volatile. And difficult stretches in a business run the risk of not only cutting off profit/income distributions for a while, but even needing to contribute cash INTO the business. As a result, my “emergency reserves” are substantially larger than what most others would hold.
On the plus side, though, having cash available to deploy has also helped me to be able to fund a number of new businesses in recent years, which has paid substantial “dividends” – far above and beyond even what the market could have generated. They are “high-risk, high-return” investment opportunities for sure. But they’re not feasible to try if you don’t have the cash when you need it to get the business off the ground!
And so in the end, I find a lot more comfort in having substantial cash reserves for our household, even though I don’t “need” it (as we have home equity and other borrowing alternatives). Both as an especially large (but appropriate) emergency reserve given my potential income volatility, but also because having “cash on the sidelines” is an effective investing technique… both for the markets, and as an entrepreneur!
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I recommend that people never self-fund companies – which is something I’ve done countless times. I always suggest that people raise some capital from outside investors. It’s a good way to test your thesis because if you can’t find anyone to invest even small amounts it might be a bad omen. Outside investors keep you focused and give you enough distance so you don’t “money-weight” every decision against your own circumstances. You get a paycheck while you work things out, and someone with experience as a partner. I’m not saying you have to get VC backing. Investors are everywhere and building an important business can be lonely. You need people around you to support your vision.
I hold about 15% of my total net worth in one illiquid private stock. It is worth more than my house. It is an old economy company that is a strong competitor in its industry, making commercial lawn mowers. Over the years, I have made 4x my money from distributions and opportune trading, and I still hold the stock.
Anyone can buy or sell the same U.S.-listed stocks or ETFs I trade. They simply need to figure out (beforehand) what their time-frame of trading or investing is, and how they will manage their risk and size their trades/investments. As your level of experience and investing ability goes up, you can do more on the active investing or trading side, or even increase your position sizes over time.
One major caveat: if I am buying a low-priced stock or a stock with major event risk or sector risk (say, a biotech stock) I would not recommend the same course of action to a newbie trader or investor. Why? Because they tend to take a gambling approach and put way too much money into a single stock. This can lead to big losses, which can be even more devastating when the panicked investor decides to hold on or add to his losing position in an effort to “average down”.
Ben Carlson, A Wealth of Common Sense, @awealthofcs, author of Organizational Alpha: How to Add Value in Institutional Asset Management:
I really don’t do anything out of the ordinary with my money. I am really boring. I guess I do have a shoe problem – I have way too many and spend too much money on them which is probably irrational but for some reason I’m a sucker for shoes.
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Tobias Carlisle, The Acquirer’s Multiple, @greenbackd, co-author of Concentrated Investing: Strategies of the World’s Greatest Concentrated Investors:
Aggressive, concentrated option buying and selling. There are simply too many things that can go wrong.
I intentionally invest my personal portfolio less aggressively than my risk tolerance and financial plan would indicate as both my income and value of my business are dependent on performance in capital markets. Therefore, I take less risk in my personal investments to account for this risk.
My asset allocation is extremely conservative, I have very little in equities. We live well below our means and so are lucky enough to have a high savings rate. More importantly, while I don’t think I am prone to succumbing to emotions caused by large declines (or rallies), a small allocation to equities ensures I don’t react emotionally with clients’ money.
While I don’t do it often, I make some more aggressive trades that are beyond the scope or risk thresholds of my firm’s clients. Besides that, I’m fairly conservative with my own money, nothing too exciting.
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I knowingly buy way more books than I will ever be capable of reading. The intent is always to read each one, but those damn work/life things seem to always get in the way!
Honestly can’t think of anything. Hit me up for recommendations.
I would happily recommend every fund I own, but not in the percentages I own them. I wouldn’t advise others to tilt toward value, small, international and especially emerging markets to the degree that I do, because I wouldn’t trust them to be as tenacious (translation: pigheaded) in the short-term as I am.
I slavishly buy season tickets for my favorite sports teams — Aston Villa FC and Warwickshire County Cricket Club — naïvely hoping that this will be the year we finally turn things round. Rather like active management, it never is!
I am entrepreneurial and love having skin in the game. The risk and stress of that approach are not suitable for most.
I bought an Illinois Muni-Bond.
Own an old house. They’re beautiful and you can’t get that kind of character in newer homes, but they are expensive to maintain and improve. Unless the house is in a hot neighborhood, you’re unlikely to get returns on investment that would exceed those of the broad stock market. A rational decision would be to save the repair and improvement expenses and invest them. Though it may be irrational, I still love my old house.
We save an unusually high portion of our income, carry no debt ever, and have invested in significant whole life and long term care insurance to ensure that our estate will remain intact in a tail scenario of our early deaths or disabilities. That is more conservative than I would necessarily recommend for others.
Buy obscure Magic the Gathering collectible cards. I don’t read most of the books I buy, so I’d probably encourage most to not mimic that behavior either.
I can’t come up with anything. I invest the way I tell everyone to invest (low management fee passively managed and index funds). We live within our means. I have adequate insurance and a comprehensive estate plan in place. My wife has participated in the planning and execution of our estate plan and will be able to implement it seamlessly when necessary.
Owning an asset management firm, I have a lot of implicit market exposure (e.g. if the market goes up, our AUM goes up, so our firm revenue goes up). With this in mind, a lot of my investible assets are not invested in equities, because most of my illiquid assets are already exposed to market returns. Furthermore, I don’t use debt efficiently as I would advise others to – particularly for real estate. This is again driven by the fact that I own my firm, so I barbell the added career risk and volatility with less leverage in other parts of my life.
I have material investments of my own in esoteric/illiquid strategies, while I would never put my parents in much outside of relatively plain vanilla low cost beta.
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Wesley R. Gray, Ph.D., Alpha Architect, @alphaarchitect, co-author of Quantitative Momentum: A Practitioner’s Guide to Building a Momentum-Based Stock Selection System:
Invest all your net worth in Alpha Architect products.
I practice what I preach but I realize that swing trading is not for everyone. It takes time and dedication – something that not everyone has or is willing to give. Everything has an opportunity cost.
My portfolio is invested in 100% equities because I want the higher expected returns, my risk tolerance is very high, and I’m comfortable with market losses. Although I don’t have a bond allocation to use for rebalancing, my human capital serves a similar purpose by funding automatic contributions to my various investment accounts every two weeks.
For someone else, however, the additional return of having an all-stock portfolio versus allocating 10% or 20% towards bonds isn’t enough to compensate for the risk that someone suddenly decides they can’t handle the volatility of an all-stock portfolio. Most younger investors have the ability to tolerate the risk of a 100% stock portfolio, but their willingness to tolerate risk (whether they acknowledge it or not) makes them more likely to stick with an 80% stock portfolio. Additionally, the ability to rebalance from bonds to stocks has the behavioral benefit by giving people something productive to do in response to market losses.
Spend it on me.
Thanks to everyone for their time and effort. Stay tuned for a new Blogger Wisdom question tomorrow.