June 15, 2018
I remember years ago watching a Wall St. analyst praise a corporate merger. The J.M. Smuckers Corporation had decided to buy the peanut butter brand Jif. This analyst was excited, expounding at length on national television as to why it made sense for the jelly company to add the peanut butter company to its portfolio. As I watched this display of certainty, I couldn't help but think "How much does this guy get paid?"
There are many people I know in the financial business with deeper insights than "the peanut butter and jelly go well together both in culinary and corporate forms." It's important to understand that when you trade a security, one of those individuals or a computer he or she programmed may be on the other side of the trade. The trade is a digital argument of sorts, and someone else is taking the other side of your argument.
This is not a comforting thought to me. As much as I gently critique the actions of the financial industry, I do not want to be on a level playing field against certain individuals. Many of them are extremely bright, they are driven, and like it or not, they are the competitor.
Did you see how I worked in "level" playing field? It's not that I don't want to be on the field, I just want the field bending, in a downward-sloping, parabolic way, toward the goal I'm shooting on. Something resembling a funnel.
So that was the first step: designing an approach that used the characteristics of the competitors against them. For example:
1. When you are a highly paid Wall St fund manager, the societal elevator to the top may have reinforced the belief that you are the sharpest knife in the drawer. Yet there is a long history of financial markets obliterating investors with egos. Adopting an investment paradigm that removes ego from the process is step one.
2. The quarterly and yearly performance reporting periods to which Wall St subjects its employees are arbitrary. Generally they are too short, and they line up with calendar quarters, because that is how performance is reported. Consumers don't work or buy in calendar quarters though, and well-run businesses often plan in years.
3. Professional investors work for firms with profit mandates that are difficult to resist. Publicly traded investment firms have a voracious appetite for increasing profit, and it gets worse if the firm is run by managers who see their tenure as limited. Structures to minimize margins and profits are difficult to establish in a publicly held business.
Addressing these items structurally gives us an advantage over time. An investment field where we are running downhill is my kind of field.