You Don’t Need to be a PhD or an Investment Professional To Learn To Invest (you could be a Texas Holdem Poker player)

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” – Warren Buffett

====

I have followed with great interest some of the material that has been floating around the news feeds and blogosphere in recent times about who should and should not (and who can and cannot) invest or have valid economic and investment viewpoints.

The first of the articles has been written by the James Montier of GMO, who has a formidable reputation as an investment practitioner who often writes expertly on the areas of value investing and investor psychology.

Mr. Montier’s article – “Barbie Does Economics” – takes issue with a paper by Kartik Athreya of the Federal Reserve entitled “Economics is Hard. Don’t let Bloggers tell you otherwise”. Athreya claims that if one doesn’t have a PhD then one (a) shouldn’t be taken seriously in any economic debate, and (b) doesn’t have the ability to make a meaningful contribution to economics or any discussion of economics. Needless to say Mr. Montier counters Athreya’s proposal quite effectively, starting of with the simple question regarding how many PhD-equipped economists predicted the recent economic crisis (please do read the rest of the article).

The second of the articles was posted by Mark Cuban on his BlogMaverick site and is entitled “The Stock Market is still for Suckers and why you should put your money in the bank”. In it Mr. Cuban claims that the “average investor” who toils away for a short period of time per week doesn’t have much chance of competing against the professional investors who watch the markets 24-7.

Since Mr. Montier hasn’t fixed his baleful stare on Mr. Cuban I will endeavour to provide an opposing viewpoint. I must preface all my comments by stating that Mr. Cuban is a very successful entrepreneur and investor. In addition, as the promoter of Texas Holdem Investing I’m a fan of Mr. Cuban since in the past he proposed setting up a hedge fund that would make money by “gambling” based in part on the similarities between the two fields. But that does not give Mr. Cuban the right to tell all the “average investors” that they are not equipped to deploy their own money in the stock market.

And now onto my own perspective, which hopefully you find valid even though I do not possess a PhD (I am a “professional” investor with some background in stocks, although some people would say this is grounds for dismissing my opinion). Firstly, it is certain the Mr. Cuban has great skill in identifying suckers since he sold his company Broadcast.com to Yahoo in 1999 for $5.9 billion (of Yahoo stock admittedly) on the basis of 1999Q2 revenues of $13.5 million (Yahoo’s market cap now is approx. $18.6 billion). But given the rest of his investing history (often in private investments) it is difficult to ascertain Mr. Cuban’s qualifications to advise on stock market investing, compared to say Warren Buffett (who Mr. Cuban’s quotes and who I quote in this article, but for different reasons). It is also tricky to analyse Mr. Cuban’s perspective as to why it is currently a bad time to invest in stocks since the main parts of the article are both anecdotal and theoretical and does not refer to any data or periods of stock markets history. When making such a proposal as Mr. Cuban does in the piece, I would prefer to see analysis along the lines of the work in Vitaliy Katsenelson’s book on Active Value Investing about long term stock market trends (you can see a PDF of the introduction here). This type of research has been quoted extensively by some major hedge fund managers recently such as Whitney Tilson of T2. And at the end of Mr. Cuban’s article, despite stating that the stock market is for suckers, he proposes that you should only forgo investing your “new money” into the market. But if the stock market is for suckers should an “average investor” have any money in the market?

====

And so now onto my own addition to this discussion, which is the concept that all people should have the ability to learn the fundamentals of investing and then be able to apply this information to manage their own money to some extent. And no person or institution has the right to tell people what limitations they have in terms of investing ability. As an aside the genesis of this blog post is one of the first sections of the free ebook – “Texas Holdem Investing – An Introduction” – which will be released soon. (*)

The investment education literature available often seems to fall into two categories in terms of its view on peoples’ investing ability and therefore the best way to provide investment training.

1. Most people do not have the required ability to invest in a way that can “beat the market”. Therefore, people should practise an “allegedly simple” form of investing which is selecting asset classes and allocating capital to so-called index funds for the relevant asset classes which will replicate market returns.
2. Most people do have the required ability to invest and achieve better returns in the market. Therefore, people should learn how to “pick stocks (or whatever other type of asset)” to beat the market.

====

It is both wrong and arrogant to state that no-one should invest (or “only the professionals”) because it is impossible to “beat the market”. Equally, it is both wrong, and dangerous to state that most people can definitely develop to a high level the required skills to achieve better returns than the market.

The commentators who make statements about what type of investing is suitable for “people” may be speaking to the benefit of their own agendas, and surprisingly so in some cases.

• John Bogle denounces stock selection and then recommends that you invest in Vanguard index funds (which involves asset allocation “selection” decisions).
• Warren Buffett preaches the gospel of fundamental value based investing and himself concentrates his investments in a small number of assets and then says that most people should invest in diversified index funds.
• William Bernstein talks about the benefits of asset allocation and then mentions that value investing as developed by Benjamin Graham does work.

====

Everyone is likely to have some sort of capability to invest their financial capital well given the correct education and training. Charlie Munger once described the requirements well in a commencement speech to the USC Business School in 1994.

To demonstrate this point, and answer the question “who can invest”, it is interesting to analyse the diverse backgrounds of some of the great investors. There is no cookie-cutter template in terms of background, education, or career that these

• Ken Griffin (Citadel) is the Michael Dell of the hedge fund world having started out trading convertible bonds in his Harvard dorm room.
• Steve Cohen (SAC Capital) studied economics at Wharton but apparently learned many of the key concepts of risk taking with money while playing poker in between lectures.
• Jim Simons (Renaissance Technologies) was a mathematics professor at Stony Brook University.
• Bill Gross (PIMCO) initially joined the Navy and then played blackjack professionally before moving into fixed income management.
• David Einhorn (Greenlight) majored in government studies in college, and then spent two miserable years in investment banking before founding his hedge fund with less than $1 million.

====

The “professionals” in the investment world certainly don’t have a monopoly on being right and providing (advice on how to achieve) better investment returns than either “the market” or “the average investor”. Numerous pieces of research have shown that the “average professional”, often represented by mutual fund managers, produces investment returns below market index return levels.

But what about “above average professionals”? Even they suffer from restrictions and issues that come with the task of managing large sums of money. Joel Greenblatt (no investing slouch himself) does an excellent job of demonstrating this point in the introduction to his book “You Can Be A Stock Market Genius” where he describes how difficult it is to invest a large sum e.g. $2.5 billion, in a focused portfolio of liquid stocks, amongst other problems.

====

Competent investing of your own funds can be an excellent way of increasing your net worth. Although investing well cannot guarantee untold riches you shouldn’t deny yourself the chance to learn effective investing because of the conventional wisdom of the fund industry and other experts which states that asset managers, Wall Street and The City (or the “professionals”) know what is best for your money. It is clear that they don’t given the excesses of the financial services industry collapse that started in mid-2007.

Most people can and should try to learn the main elements required to make good investment decisions regardless of the choice of investment vehicle.

* Please sign up to my mailing list (top right of the page) if you would like to receive details about how to obtain a copy of the ebook.