Monday, September 28, 2009

Investing is Personal, Part 2

I have had the pleasure of advising a few investors of great significance financially in my life and I told them we would stand on top of our desk and yell if we thought they were making the wrong move. To be honest, I didn’t actually stand on top of my desk and yell, but I did say “I am standing on top of my desk and it’s time to sell” when the market peaked in 2000. The investors were unmoved, comfortable with the status quo in volatility and likely uncomfortable with the taxation they would bear when selling. The rest is history, advice spurned turned into money burned.

But investing is personal and what right do I have to deny them the comfort of their own persuasions? Thus, great investing and their results are a function of debate and a wrestling with facts and myths, perspective and context, history and human behavior. This is why it is important to start with philosophy and policy, our personal, unique astrological-type chart for navigating the investment ocean.

I am struck how little attention is paid to the contrarian view. It is hard to define a top or a bottom price in any asset class, but it is fairly simple to define where money is not available. This provides a starting point for research and the development of investment targets. The next step is to define sustainability of the target. Is it too early to invest? Is it too late? Does the investment provide a reasonable reward for the risk?

One area that is devoid of capital at this time is the Venture industry. The resistance by investors to consider even the most conservative opportunities is striking and will definitely result in well rewarded returns for the shrewd investor. Five years ago the toughest investment to source was exceptional venture investment funds - today you can have your pick.

The most popular investment today is liquidity, leveraged within a leading financial institution. Five years from today, I suggest the most popular investment will be private or semi-private growth companies.

Make sure you spend more time looking out your windshield instead of the rear view mirror - it’s much bigger, and it makes the drive a lot easier!

Sunday, September 20, 2009

Investing is personal; investments are scientific: 5 mistakes and how to avoid them

Investing is personal—and don’t ever forget it. However scientific your approach to evaluating risk and return, the ultimate decision is a personal one and the results of your investment will have a great deal to do with how well you know yourself. Here are five common personal mistakes to avoid in investing:

Popularity: If an investment idea is popular, it is only natural to want to be a part of it. If it is truly popular, you can be pretty sure it’s overpriced. Market tops are always defined by what is the most popular investment. Think Real Estate in 2007, think internet stocks in 1999. One of my favorite indicators for measuring the most popular industry (and thus a place not to invest) is the most popular job for newly minted MBAs. In 2006 it was Private Equity, in 1999 it was Venture Capital, and so on. It is part of human nature to align with what is popular, and so many of our investment mistakes stem from that

Horizon and Liability Mismatch: John Maynard Keynes said it best: “In the long run, we are all dead.” So many people will say they are in for the long run but they really are not. They are in for the long run as long as the values don’t go down too much, or until they have something else they would rather spend their money on. It is essential to match your horizon to the predictability of the environment you face. Fund your liabilities within that horizon. You may outlive your assets if you expect too much from them. It works both ways—it is easy to be too liquid or too illiquid, and managing the balance is a PERSONAL choice.

Momentum (Greater Fool Theory): People always expect that someone else will always be there to buy what they are holding, thus the crash of 2008 could never happen. Or worse, they expect there will always be debt capacity to carry the investment. 2008 happened, and it happened for all of the reasons mentioned in this post.

Rich means Smart: The New Yorker had a great editorial years ago: “If you’re so smart, why aren’t you rich?” Rich does not mean smart nor does smart mean rich. Some of the greatest success stories of all time die broke—and how many wealthy college professors do you know? Many people like to invest in deals where Mr. Big is leading the charge: ”If he has his money in the deal, it must be good.” Nothing could be further from the truth. Often Mr. Big does have good investments, but his risk profile and appetite may be entirely different than yours and if so, it may cost you dearly.

Strategy Stew:
Averaging Down - how to take a failed fundamental strategy and turn it into a technical “bounce” strategy.
Missing the Boat - diving into a deal without enough due diligence to justify the investment because you are afraid you will miss out on “the deal of a lifetime.” Also calls out a potential horizon/liability mismatch.
High Risk = High Reward - not really, if an investment is very well thought out, the reward comes from recognizing there is much lower risk than the popular uninformed view, which should mean ultra smart low risk = high reward.

I hope you find this helpful!

Tuesday, September 15, 2009

Seven principles on which to build your investment philosophy

These quotes come from the (out of print) book, The Merchant Bankers by Joseph Wechsberg. Fortunately for me I had just read this book when I received the most important interview question of my entire life: “Chris, what would you do with a hundred million dollars?” My response was: “...that is a phenomenal question and speaks directly to my investment philosophy. Why don’t I write that down for you and we can discuss it?” The answer was apparently acceptable because I got the job and my philosophy was soon part of the organization’s policy book. Here are the quotes - they speak for themselves - keep in mind most of these rules have been around for hundreds of years!

  1. “One can’t avoid being wrong once in a while, the important thing is not to be wrong too often.” Jocelyn Hambro (1700s).
  2. “The desire for instant gratification leads to consistent disappointment.” Robert Farrell (late 1900s).
  3. “The banker’s three cardinal qualities: First to be able to put oneself in the situation of the customer, second, courage as one approaches a task, and third, caution to know the extent of the risk.” Hermann Abs (1700s).
  4. “Between success and failure there is a margin no wider than a razor’s edge.” Mattioli (1700s).
  5. “Without complete integrity, there can never be complete confidence.” Rothchild (1700s).
  6. “You can do all the business in the world, if you do it for nothing.” Barings (1800s).
  7. “If I cannot understand something by reading my notes on the subject, I won’t buy it.” Lehman (early 1900s).

Tuesday, September 8, 2009

Good judgment comes from experience…

…and experience comes from bad judgment.

If you are so lucky to not have made some bad judgments along your path, look twice as you move forward. My best senior mentors always told me to look behind the good news—meaning there may be more luck in that success than a solid basis of good judgment and execution. I would add though that people change. They grow and get better at what they do. So many people make a negative judgment about a person or an investment opportunity or an industry and that perspective stays with them. They miss the fact that change is continuous and most people improve with age. I have to admit I passed on David Einhorn when he was 27 and forming green light capital. It wasn’t that he wasn’t smart; it just seemed he was too young and too inexperienced to invest in at the time. Oops. He now has a six billion dollar fund and likely doesn’t remember our conversation.

Thursday, September 3, 2009

First Thursday Club

Going back to the mid ‘90s when I was responsible for a significant 9-digit private fund, I gathered up many of my favorite investment managers and had them to lunch at Bones, my favorite restaurant here in Atlanta. It occurred on the first Thursday of the month and so it became the “First Thursday” group. The lunches served multiple purposes, but primarily gave me the benefit of a few hundred more years of investment experience and insight every month. It also helped the managers attending get feedback on their ideas as well as to better define key inflection points in the markets. For years we only had buy side attendees, but after a while we invited one institutional sales guy from Merrill Lynch. He is probably the best-read person I have ever known, and I have become quite dependent on his “Cliff’s Notes” over the years.

We don’t have minutes, but in the last few years I have been making notes about what we like and don’t like and it is uncanny how savvy this group has been. I guess that is why we still meet. Many of the managers have retired, but still have their own accounts and like to have a regular forum to check in and talk about the markets and hear the occasional investment pitch.

Now that I am formalizing my investment thinking in this open forum I will be mentioning each month the highlights of First Thursday meetings. I hope you will find it as helpful as I have.