I offer this as an introduction. Up to this point, I have been an investor focused on institutional assets (pension funds, endowments, etc). It has been 18 years of being paid to do something that I have loved doing since I was a teen. Though I originally went to college to become an engineer (receiving a BS and MS in Mechanical Engineering) and even worked as one for a few years, it didn’t take long for me to revert back to investing. I earned an MBA in my mid 20’s and started my professional investment career. I have served four companies over that time developing skills across a broad and diverse set of investment areas; large company equity, small company equity, some private equity, Asian, European, Latin American equity, growth and value, fundamental and quantitative experiences, and as a company analyst and a portfolio manager.
Over those 18 years, I have been inflicted by and benefited from multiple crises, be it the Asian meltdown, the technology bubble, acts of terrorism and war, housing bubbles, banking crisis, great recessions, etc. All have been a learning experience. And then there were the learning experiences on the individual investment level; the company turnarounds that didn’t completely turn around, the aggressive growth investments that stopped aggressively growing, the build-it-and-they-will-come ideas that never came.
I pride myself in deep fundamental research by getting to know the managements, the competitive advantage, and the business model. Walking the floors of machine shops and titanium stamping plants, sitting with call center agents, going on the routes of trash collectors, medical waste collectors, uniform cleaning providers was enlightening. Talking to customers, suppliers, and competitors was commonplace. I would analyze the past actions of management to determine their abilities to manage the hurdles that I saw in front of them. It was a challenge to scour the hundreds of opportunities to find the few that extensive research would allow me to draw a conclusion on their chances of success. It was fun and rewarding as, at times, it was I with select others placing new capital in the hands of management teams, investing in their vision to make a company successful and to earn a return for the calculated risks being taken.
Things have changed though. And not for the better. We have seen over the last decade the markets being taken over by short duration strategies (hedge funds and high frequency traders) which has the impact of increasing volatility in the market and causing larger distortions in pricing. Some have called this a shift from investment capital to efficiency capital (another discussion for another time). It has lessened the value of deep research and hardened valuation analysis, making long term investing less comforting. Add on top of this the policies and acts of governments worldwide to ‘prop up’ markets, to drive down interest rates, control the pricing on commodities, increase trade barriers, etc. It results in long term decision-making becoming even more difficult.
And then, lastly, add the changes we are seeing in the economic drivers of our world’s economies. The rise of the internet is for all practical purposes less than 20 years old yet is having profound impacts on the method goods and services are created, delivered, and traded. Some remark that the changes in front of us are no different than the changes experienced when we moved from an agriculturally driven economy to an industrialized nation.
All of this adds to the complexity to invest one’s assets optimally and with intellectual rigor. And yet, I have not gotten to the reason for my change…
There were two isolated events that combined drove me to make a change.
The first was about 3 years ago when I was on the investment committee for a small school endowment. We had been holding only cash when the 2008 crash happened. In 2009, we decided we should start the investment process and we interviewed a number of outside advisors. Being in the industry and having participated in these types of meetings for institutional clients, I was taken aback by the way these managers would portray their performance as value-add yet were incredibly poor. And costly! I was surprised with how they categorized their performance as good by finding measuring sticks that worked in their favor rather than benchmarks that pertained to the objectives of the school. I was put off by the lack of questioning of the school’s current financial position, upcoming needs, future plans for fundraising, etc and yet they felt comfortable suggesting target portfolio allocations. How could someone advise on the long term positioning of our endowment assets when they had little desire to learn about the objectives and liabilities facing the school? From my quantitative experience, these are extremely important drivers that go into determining a proper allocation of assets.
The second event happened just a few months ago which, with hindsight, probably drove the decision to start down this new path more so than any other. Riding up the elevator with a senior member of my former firm, we had a very brief discussion on who our clients were; the individuals that invested in our funds, or the distribution channel that sold the funds. This was horrifying to me. I take my fiduciary obligations seriously, yet it was not clear that our industry did anymore.
Making this career change was not an easy decision. There is a comfort in having an employer and receiving a paycheck. But that comfort was being overwhelmed by the path my industry was on. I have been seeing too many examples of investment advisors charging a large fee for providing poor results and confusing/scaring their clients to cloud the discussion. Things need to change in the investment world, and my career seemed like the first course of action.
The above may sound somewhat sobering but it shouldn’t prevent one from investing. It is just a phase the economy and markets go through. It requires an approach that may differ from recent historical methods. It requires a diligence and respect for the environment, and an understanding of the drivers for long term investing. And it requires patience as the world works through its issues.
Within this site, you will see the way Robert and I view the investment world and the workings of the economy. We will attempt to explain, as we understand them, the drivers to economic activity and the variables we find important to experience a future where your savings produce superior purchasing power.