Dude, Where Should I Invest?
Friends have been asking me this for years. Eventually, it occurred to me that there is mass-confusion about investing. People seemed to have, at best, a vague idea about how to do it and why they should do it. But when it came to implementation, most of them were confused, intimidated and even disgusted by clueless “advisors” (read: salesman) and their questionable products.
I’m not a financial advisor. I never was. And I never will be. But I would respond to my friends’ question with some version of this:
“If you want nothing to do with your portfolio (which is most people) and you want it to be on autopilot, you’re in luck because there are some decent “Passive Investing” choices out there nowadays, which are far better than your average Mutual Fund. However, if you like investing – because 1) you’re curious by nature and you want to profit from your opinions about the world and 2) you want to take control of your financial future – then you’re sh** outta luck. Because the resources you need to do that are awful.”
And this was a very personal problem – I was decidedly in the second camp. I wanted to invest my money because I enjoyed having a reasonably formed worldview and then acting on it. But it was too much to do after a hard day’s work. It wasn’t sustainable for me to come back from a research job and then repeat my day-job during nights and weekends. And so, the resources I was left with ranged from some TV channels or newspapers to random blogs and some Wall-Street research. None of them were good options.
An Active Investor Problem: No Good Resources
If you’re like me and you want to take control of your financial future instead of outsourcing it, sadly our options are essentially these: 1) Wall-Street Research 2) Investment Bloggers and 3) Financial Advisors.
Wall-Street Research is just not the bee’s knees anymore. It hasn’t been for a while. And now they're facing a bit of an existential crisis. The reality is that investing - or the research behind it - is not their core business. Wall-Street banks are brokers. They’re in the business of “market-making”, listing securities on an exchange and arranging mergers and acquisitions. They profit when there’s a lot market activity – when people trade a lot in these securities. The Sales and Trading departments in these banks have in-house Research teams (normally called “sell-side analysts”) who put out research that the Sales and Trading desks can supply to their clients. The motivation is not altruism. It’s to urge clients to trade more so the banks make more in commissions. Normally these clients are mutual funds, hedge funds, and other “institutional” money-pots. But some of that research trickles down to regular “retail” investors like you and me, through our friendly online broker. I have nothing against "Sell-Side Analysts". Some of them are very smart. And some of them are my friends. In fact, I think there is a legitimate place for them in this world, despite the recent business hardships they've been facing. And that is 1) Access to company Management and 2) Industry-level Data. I don't usually rely on their research, partly because I think they "calculate too much and think too little", as Buffett had pointed out. And every time I come across at one of their reports, I always remember another Buffett quip: "Never ask a barber if you need a haircut". Occasionally, however, I do find some good industry or sector level data.
Bloggers – and their forums – are a bit of a crapshoot. Some blogs are genuinely good. But those are the ones about “thinking about investing or economics”. They’re mostly theoretical. Amongst the ones that actually dare to provide investment research, most of them are severely lacking in the quality department. Many of the writers have never been research analysts, professionally. You can tell within a couple of paragraphs – the moment they start throwing P/E ratios or “comps (comparables)” at you, it’s best to walk away. Then there is the issue of alignment of incentives, or lack thereof. Very few seem to put money where their mouths are; in fact, they proudly disclose that they DON’T hold a position in the company they tout. That stance, we’re expected to believe, makes them “objective”. But I always think: why would you put out your research for free about a company/stock you don’t own or don’t intend to own? The point is that I can’t take them seriously, because: 1) Usually, I don’t know anything about the authors or what their motivation is 2) Their research is shallow 3) Their research is not transparent – they are full of sweeping statements about valuation or a company’s prospects without any reasoning.
Financial Advisors, I have realized, are despised almost as much as Wall-Street banks. I’m sure there are some very capable and knowledgeable advisors out there. But in my experience, and in the experience of the thousands who’ve asked me “dude, where should I invest?”, most people know that these advisors are just not the A-players in this game. Many of them spew out canned statements that their firm provides, which is usually based on Wall-Street research. Also, often I hear them prognosticating about the overall equity or bond markets, as if that will help them in maximizing returns - this is also typical of research coming out of Wall-Street. Next time your advisor (or your favorite TV personality) gives you his or her “take” on the markets – things like the direction of the S&P 500, or the Dow, or the 10-year Treasury Rate, remember this:
“Market forecasters will fill your ear but never your wallet” – Warren Buffett
And let’s not forget that most advisors' incomes are usually commission-based. The more you trade, the more your money moves around, the more money they make. Again, there is an incentive problem here as well. Economists call this problem a “moral hazard”. Buffett calls it the 4th law of motion:
“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”
So far, I haven’t really dug into the issue of quality of research – and the intellectual and philosophical foundation upon which their research is based. That’s a whole new can of worms, and you’ll find those discussions scattered all over The Buylyst. The lack of quality research bothers me as much as (if not more than) moral hazards. For someone with a strong opinion on how research should be done, the lack of good investment resources been a source of frustration and pain for the last few years.
Something had to change.
My Ideal Research Ecosystem
I’ve spent many years in Investing Management – both on the Quantitative side of investing as a Risk Analyst and on the Fundamental side of investing, as a Research Analyst. During all those formative years, I was constantly trying to learn the craft of investing (I still am). But during the early years I went through an uncomfortable phase of cognitive dissonance. What I was told to do in my job and what the “industry” norms were (still are), didn’t quite match up with what I learnt from the giants of investing – people like Warren Buffett, Charlie Munger, Howard Marks, George Soros and others. There was a big disconnect, and it drove me nuts. I did a sort of “mapping” exercise early on in my career, where I would work in the trenches during weekdays and learn from the giants of investing during nights and weekends, to (hopefully) find common ground. It was a self-imposed form of “experiential learning”. It sounds quite sad and boring, now that I write put in on paper, but without this nerdy hobby I would have neither the ability nor the perseverance to create The Buylyst.
I am a huge fan of Warren Buffett, Charlie Munger, Benjamin Graham, and the brand of investing they popularized – Intelligent Investing – because it jives with my core values. It’s grounded in common sense, it puts Risk Management front-and-center, and it rejects the notion of investing (or economics) as a science. Many people call this type of investing “value-investing”. That’s a redundant term, as Buffett will have you know – if there is no value to be gained, why would you invest? You should buy something only when it’s much cheaper than what you think it’s worth – it’s an obvious statement when you see it on paper. But that’s an example of a seemingly trivial fact that many investors ignore. They tend to gloss over the “how much is it worth?” part. Most of them can hardly distinguish between investing and speculating. Graham, who coined the term and wrote the book (literally) on Intelligent Investing said that’s it more about character than it is about brains. Wall-Street, Academics and investors in general tend to think the opposite: that it’s more about brains than it is about character. Their research reflects that. And there is a severe disconnect between that and the way the giants of investing operate. Buffett and Munger have said this about the Wall-Street machine:
“People calculate too much and think too little.”
Investing is not divorced from reality. The research behind it shouldn’t be either. The moment it involves too many calculations, ratios, and accounting shenanigans, it tends to disconnect from reality and becomes too complicated and pretentious. And it gets awfully difficult and boring to read. That may work for academia, but it doesn’t work in practice. The worst part, of course, is that their research doesn’t do what it’s supposed to – pick good investments. And that’s because it hinges on spreadsheets and pseudo-scientific financial-theory rather than sound philosophy and common-sense.
Investing should be logical. And easy to understand. And it should mirror how we observe the world and think about it. The numbers, models, spreadsheets, and accounting know-how are simply (sometimes defective) tools. The meat of investing lies in connecting the dots, in reading, observing, thinking. Buffett famously spends about 80% of his time reading and thinking. It’s truly amazing that he, and the other giants of investing, have been so generous and transparent about their insights on investing and how they go about it. We’re lucky to live in a time when this treasure trove of information exists. It’s just a question of applying it. Most “professionals” don’t.
The Buylyst is built upon this rich, deep philosophical and intellectual bedrock, and my challenge has been to put it in practice and make it easy-to-use and accessible to most investors. In a way, I am evangelizing Intelligent Investing as I’m building my ideal research system.
Creative Satisfaction, Mental Clarity and Money – those are the three other motives. The need for money came last – after I decided to pursue my creative instincts in creating The Buylyst. I had a very comfortable job as a Research Analyst. But I realized very early into the process that if I were to create my ideal research ecosystem, I would have to commit to it full-time. And if I did that, I would eventually need a source of income to keep it (and me) afloat.
I wasn’t creatively satisfied in my Wall-Street career. During high school, before I stumbled upon Investment Management as a career option, I wanted to be an architect. To me, it was about this exciting tension between art and science, creativity and precision. Clearly, I didn’t end up pursuing Architecture as a career. But now when I look back, I’ve enjoyed that same tension between art and science in Investing as well. I enjoy that tension even now, as I work on The Buylyst. It has been designed to make research more intuitive. That involves striking that elusive balance between art and science, creativity and precision, and logic and statistics. And that’s been immensely creatively satisfying. In the world of Architecture and Design, there is an old Bauhaus saying: “Form follows Function”. That’s very true of The Buylyst. In fact, I’d go one step further and say that at The Buylyst, “Form is Part of Function”.
Distilling a rich philosophy and complex sets of data to make investing intuitive – in theory, in practice, in written word and in design – requires a fair amount of mental clarity. Maintaining The Buylyst as a business, which means I am accountable for the quality of my Research, serves as a self-imposed check. Constantly thinking about clarity in written word, clarifies my thinking about my investments. Helping you is actually helping me. It’s a virtuous cycle that I hope you find gainful.
And, of course, I need to pay rent and buy groceries to survive. Yes, most of my savings are invested. But I can’t live off those returns, unless they’re criminally obscene. Unfortunately, I don’t have a critical mass of, say, 5 million dollars invested in the markets, whereby I could live a decent lifestyle even with paltry returns. Sadly, my day job wasn’t that lucrative. So, I need an alternative source of income while I build up an ideal research ecosystem. While I keep writing, creating, designing and, hopefully, making your life a little bit easier, I hope to make enough money, so I don’t have to worry about the basics. Then I can focus on what I love: Investing, and building The Buylyst.
As a user, you should feel that the value you get from The Buylyst far outweighs the price you pay for it. That’s my daily goal. And that’s perfectly correlated with my selfish long-term goal: Financial Freedom.