All the books on success, not just successful investing, have one theme in common. Find someone who is doing what you want to do and then do what they do. In that spirit, the weekend reading I am proposing this time comes from a recent AAII posting of an article on learning how to invest by doing investing the same way that professionals do. So enjoy the following read. It might also behoove you to click on the supplied link as there are a number of useful reader comments that I have not pasted below but are in the original article. Have a great weekend.
4-6-21 Lessons From How Professionals Invest Their Money | AAII
Lessons From How Professionals Invest
Their Money
There’s an old quip that personal finance is more personal than finance. Though perhaps too clever, this still reveals a truth only sparingly mentioned among serious financial experts: There is no one right way to manage your money.
The orthodoxy—that “right”
way—finds its origins in the early days of modern mathematical finance. Decades
ago, the high priests of that movement—Harry Markowitz, William Sharpe, Jack
Treynor and Eugene Fama among them—not only created knowledge but also inspired
a social community with shared ideas on optimal portfolios, efficient markets,
pricing securities and other matters through which rational investors can
increase their utility. Of course, there were and remain intense debates on
these topics, but it’s also true that powerful conventional wisdoms have
emerged over the decades that are believed by many professional investors.
Outside the church walls,
there are also the pedestrian matters of personal finance—well beyond the
narrower realm of investing—such as saving smartly, borrowing wisely and
spending prudently. Here, too, there are widely accepted rules of the road. We
disregard them at our own peril.
Nevertheless, heterodoxy
reigns. We know that when elegant theories and basic rules intersect with the
real lives of individuals and families figuring out how to get by and thrive,
then managing one’s money becomes artful, to say the least.
In a recent project, wealth
manager Joshua Brown and I brought together 25 experienced financial advisers,
portfolio managers and other financial experts to reveal how they invest their
own money. Each contributor knows the orthodoxy.
However, when we pull back
the curtain from these experts’ personal lives—messy like everyone else’s—what
do they actually do? That was the subject matter of the 25 chapters in “How I Invest
My Money” (Harriman House, 2020). Here are some themes and ideas
that threaded through most or all of them and that may help as you navigate
your own personal journey.
When asked about their own
financial decisions, where does a group of CFAs, MBAs, Ph.D.s and CFPs start?
Not with spreadsheets, but stories.
Who we are as adults is
strongly shaped by our experiences from when we were young. “I grew up in a
household that didn’t enjoy a lot of excess,” explained financial adviser Ashby
Daniels. “As I imagine is true for many people, much of how I manage our
family’s financial life is probably defined by my childhood experiences. I
believe in keeping things simple and it starts with defining ‘enough.’”
Though our experiences with money aren’t
something we tend to talk about with others, or even explore in our own minds,
they have a remarkably strong impact on our attitudes toward and decisions
about money today. “What is your first memory of money?” asks financial adviser
Blair duQuesnay. The answer matters.
The most powerful examples
in the book started with childhood poverty. Not surprisingly, scarcity makes an
indelible mark. Even when we manage to transcend that struggle and achieve
prosperity, such memories impact how we choose to save, spend and take care of
others—both family and community.
Meanwhile, the stories we
tell about our family history—immigration, entrepreneurship, relationships
between grandparents and grandkids—influence how we see the world today. They
shape who we have become and who we will be in the future. The money stories we
inherit or those we learn to write ourselves weigh far more heavily on our
decision-making and attitudes than what might be revealed in a “risk tolerance
questionnaire” or the interpretation of a Monte Carlo simulation. Implicit in
every contribution to the volume is that if you don’t know someone’s narrative,
you won’t understand how they invest.
Berknell Financial Group’s
Dasarte Yarnway, whose parents fled Liberia before a deadly civil war,
discussed his father. Members of the Northern California Liberian community
called him “The Godfather” because he saved more than 45 refugees. Now, Yarnway
invests in Ganta Real Estate Company, which redevelops neighborhoods and
provides affordable housing. The company is named after a city in Liberia
located near Yarnway’s father’s birthplace.
I don’t believe this point
can be expressed strongly enough. Money is a language, and we use it to
verbalize who we are, what’s important and who we want to be.
What we value is entirely
personal. Morgan Housel, a partner at the Collaborative Fund, wrote:
“Independence has always
been my personal financial goal. Chasing the highest returns or leveraging my
assets to live the most luxurious life has little interest to me. Both look
like games people do to impress their friends, and both have hidden risks. I mostly
just want to wake up every day knowing my family and I can do whatever we want
to do on our own terms.”
Themes of independence and
security are threaded throughout the chapters. Another contributor, Perth
Tolle, built her own investment firm around the idea of individual liberty,
especially in developing nations. Many of the contributors wrote warmly about
the social causes that matter to them.
“My very first investment
was in me.” So writes financial adviser Lazetta Rainey Braxton about the journey
to grow her skills as well as her portfolio. Investing in human capital is
every bit as important as, if not more than, investing in financial capital.
The education we seek out and the skills we build pay dividends through much of
our lives. Yes, later in life we tend to lean more on our portfolios than our
job skills. But the bulk of life is about earning inside others’ companies or
building our own.
In addition to brains and
wallets, we also have networks. Investing in social capital is an important
skill as well. Investment manager Ted Seides, StockTwits co-founder Howard Lindzon,
CNBC contributor Josh Brown and others have built valuable connections that
created new and sometimes lucrative opportunities. All in, we have multiple
tools to lead the lives we desire, which paints a more expansive picture of
what it means to “invest.”
That this isn’t said out
loud very often doesn’t mean it’s not true. While much pivots on what we mean
by “happiness,” the fact is that money solves problems, alleviates pain and
regret and can buy both short-lived thrills and longer-lived joy. Some of the
experts who contributed their personal stories found pleasure in art
collections, vacations or a nice home. But many wrote in personal terms about
the “peace of mind” that is possible if not guaranteed when we manage our finances
and careers wisely.
In my chapter, and
elsewhere, I’ve written about the notion of “funded contentment,” or the
ability to underwrite a meaningful life. This is my definition of true wealth.
This harkens back to Aristotle’s idea of eudaimonia, or a deeper state of
well-being or fulfillment. And what we know from scientific research as well as
personal experience, there is indeed a material intersection between money and
meaning. Away from the daily grind, those things that truly matter to us—a
sense of belonging, control over our lives, a connection to something bigger
than ourselves—can at least be partly underwritten by well-managed finances.
While there is no denying
the deep undercurrent of money in our personal lives, there is also the
practical matter of making good decisions and forming good habits. Across the
various dimensions of our money lives—investing, saving, spending, borrowing,
insuring and giving—there are better versus worse ways of doing things, albeit
through a personal lens.
For example, investment
adviser Nina O’Neal set out on a practical path for funding her kids’ education
through tax-advantaged vehicles. Morningstar’s Christine Benz has built
portfolios that work for her and her family through the lens of simplicity. On
one goal shared by all, retirement, it was fascinating to observe each expert
designing a distinct path mapped to their objectives, sense of risk, time frame
and other idiosyncrasies. (Among the older contributors, for example, some owned
bond-heavy portfolios while others remained fully in equities.)
Stories might inspire, but
the words and sentences which constitute them are governed by rules. Money,
too, has its own grammar and we are best served by learning it. One of the joys
in editing “How I Invest My Money” was seeing firsthand how the people I
respect built processes for solving problems we all confront.
I grew up in this business
evaluating money managers, a journey I detailed in “The
Investor’s Paradox” (St. Martin’s Press, 2014). And what was true
years ago remains true today: There is no one right way to pick stocks and
bonds or to build portfolios. Each individual can develop the way that is right
for them—as long as it’s embedded in a process that can be articulated,
repeated and scaled. For instance, two contributing portfolio managers, Jenny
Harrington and Mike Underhill, expressed their world views through the lenses
of dividends and commodities, respectively, based on investment processes they
developed over the course of decades.
“I grew up in a financially
volatile household and witnessed the downside of counting on possible big wins
as justification for living above the means. The current income provided by
investing in dividend stocks simply provides me a level of emotional comfort.
Knowing that income will flow into my portfolios through thick and thin (as it
has through the financial crisis of 2008/09, the U.S. debt downgrade of 2011,
the taper tantrum of 2013, the oil price plunge of 2015/16, the flash bear
market of 2018, and now the coronavirus crisis) brings me comfort, conviction
and confidence. As we all know, in times of trouble, cash is king,” says
Harrington.
More broadly, it became
clear through the volume that where one stands in the debate over “active”
versus “passive” investing is somewhat of a Rorschach test. While we all have
access to the same evidence on this perennial debate, each expert expressed
different views through the actual construction of their personal portfolios.
No single person was “pure.” Indexing advocates like Benz and myself own active
managers. Hyperactive investors who focus on venture capital or near-term
trading also own passive vehicles. The devil is very much in the details and
broad proclamations over the “right” way to invest are rarely grounded in what
we actually do.
As one of the editors of
this volume, I was struck by a number of private conversations with some of the
experts as they drafted their chapters. They are all experts in money
management, but they expressed, in some cases, anxiety and in other cases a sense
of relief (and sometimes both) in telling their personal tales.
It’s not surprising then
that coming to terms with one’s money life can be even more daunting for those
who haven’t devoted their careers to making sense of the financial world. In
that spirit, it’s clear that financial freedom—both by the numbers and by our
mindsets—is hard to achieve without financial literacy.
Personal discussions of
money can be uncomfortable among partners, parents, children and friends. Money
is a dangerous topic because it reveals an unshakable connection between our
bank accounts and our sense of self-worth. Yet, in response, our society does a
poor job of providing resources and access to those who want to make sense of
their money life, but don’t know where to start. It shouldn’t be a surprise,
therefore, that a number of the experts who shared their personal stories and
strategies are also passionate advocates for broad-based financial education.
Brian Portnoy ,
Ph.D., CFA is the founder of Shaping Wealth, an educational technology firm
which promotes financial well-being, and co-editor with Joshua Brown of the new
book “How I Invest My Money: Finance Experts Reveal How They Save, Spend, and
Invest” (Harriman House, 2020).
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