Put my money where my mouth is

Not a lipstick advertising piece.

Due to extreme weather and recent injury, I am trapped at home most of the time. There isn’t much to do besides sleeping and cooking. So I speed up one more hobby -> investing.

I really enjoy investing. Despite not super great at it. I can tell that is something I am interested in and can do quite well. I like applying what I learn in school in real life. When we discuss company strategies or new industries, I tend to look into those industries/companies, think about what drive the industries’ profit, what make companies successful. I love analyzing industries, companies. From a macro perspective, I enjoy learning what’s going on around the world and which countries are racing ahead of all others. All of this knowledge and curiosity make investing a perfect habit for me. It links me to the real world from New Haven. (4 more months then I am out of here!)

From my recent readings and classes, I summarized a few important points for myself for future investment reference.

1) GDP Growth does not equal to stock market growth. When picking country indices, people tend to think that there is a strong positive correlation between a country’s GDP growth and its stock market growth. In fact, the correlation is slightly negative. Ben Inker, a managing director at GMO asset management, told us in class that countries with high GDP growth usually have high investment in capital, which in term, drive down the return on capital. The best way to pick country indices is to pick countries with low price/5 year average earning ratio. In this area, value dominates growth. And the cheaper folks can bring in more return than the expensive ones. [I recently put a couple of thousand dollars in MSCI country indices for my mom. It would have been better had I had this class before making the investment. Poor mom, hopefully it works out.]

2) Quality of the company does not equal to the quality of the investment

People often say, “this is a good company”. And they ended up losing money on the investment. Why? You could pay many times more for a good company. And it ended up good, but not great. In the short run, margins and multiples drive valuation. In the long run, growth and dividends do. What’s ironic is most of us cannot wait for that long run to come. We die in the glories war of getting there. Even the best asset managers experience huge withdrawal of funds due to underperformance, not because they had done things wrong, but because investors today all have very short-term view. If you have a long-term view, you might not succeed even if your investment makes good returns in bad years, because those who put money in your funds would have already withdrawn when you underperform the market or benchmark. They cannot stay till you turn around and make the big bugs. This is very similar to the story lines of TV dramas, but not the ending. The general public wrongly trusted the devil and killed the hero. However, there is no come back like the TV dramas do.

3) Since there is career risk and integrity risk in managing assets, how could one do his/her best given what’s feasible? This is a question we all need to constantly ask ourselves. We technically only have two choices -> expand what’s feasible or re-evaluate what’s the best. There is no need for me to spend hours thinking about shorting stocks or buying gold. Shorting stock is not feasible for me and buying gold is not the best given my risk tolerance. This technique applies to life as well as investing.

4) A quote from Jim Collins makes perfect sense as well. It’s the Art of Adding by Taking Away. “It is the discipline to discard what does not fit – to cut out what might have already cost days or even years of effort, that distinguishes the truly exceptional artist and marks the ideal pieces of work, be it a symphony, a novel, a painting, a company or most important of all, a life.” We spend too much time trying to complicate our lives, taking on more tasks, responsibilities, hours at work. We need to start doing replacement rather than addition. Simplify investment ideas, processes. Extract the essence. Let those investments support and help us achieve our life goals.

I am often surprised by how few classmates actually actively invest. My estimate is about 25% of our class passively invest and about 10% actively invest. Among the ones who actively invest, almost all are men. Maybe because Yale really doesn’t promote investment management as a career, which is a pity, because it is probably the best career I could think of for women in professional services. (Education, innovation consulting and marketing aside, investment management has overwhelmingly better hour and earning//hour than consulting, IB and PWM.)

I wish I could shout out to my female classmates in school and tell them to invest. If you could talk miles long in class, you could certainly put your money where your mouth is.

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