Why I don’t give investment advice
When people ask for advice on personal investing, I’ve found they are either looking for confirmation that what they do is great (it’s usually not) or some sort of secret sauce for outperforming the market (which doesn’t exist). So people are inevitably disappointed by the answer. The best advice for personal investing is simple and boring: Diversify, invest with a long time horizon, minimize churn and transaction costs, know your risk profile and liquidity needs.
When it comes to investing, people are their own biggest enemy. Lured by the siren call of get-rich-quick schemes, they waste precious time and resources (and nerves) on things like chart reading, momentum-chasing or over-exposing themselves to the latest fad. Gambling is fine, but you should recognize it as such.
Another error I see people often make is trying to copy strategies they can’t possibly compete in. Personal investing is a fundamentally different game from professional investing. Many of the approaches developed in a professional context simply don’t work or don’t make sense for your personal account. They rely on superior market access (e.g. shorts available at low cost, cheap financing, OTC supply), data that is hard to get (e.g. proprietary data sources or very expensive non-proprietary ones) and technology that is hard to build (e.g. ML models capable of dealing with non-stationary effects). You can’t hope to compete on HFT market making or bond arbitrage with the resources of an individual investor. It is highly improbable that you’ll have an analytical or informational advantage here [1].
Strategies deployed by professional investors are also developed with very different objectives in mind. As a professional investing other people’s money, your objective is to maximize management and performance fee income. You (or your employer) run a business after all. Investment management is rife with agency problems — both due to the way fees are structured and the kinds of subscription and liquidity terms investors demand. The interesting thing is that these issues can work to your advantage as an individual investor “competing” against professional investors. Since fees are structured to accrue on a quarterly or annual basis and since clients typically insist on monthly liquidity, there’s a strong short-term bias in the kinds of strategies being used. If your performance is benchmarked against annual returns, investing in a way that optimizes for a 5-10 year horizon just doesn’t make sense. The intermittent drawdowns are going to take you out of business — even without leverage, as clients will see the relative underperformance and pull out. So this is a long-winded way of saying: take advantage of your longer time horizon if you can. This is the one dimension where professionals have a competitive disadvantage vs. you as a personal investor.
Five paragraphs in, I realize I’ve contradicted the title of this post. But better to give some advice in writing once and save the conversations with friends and family for more exciting topics.
Notes
[1] I am talking from my own experience as a public markets investor, but similar considerations around market access and data apply to private markets. Angel investing is an interesting case — I believe it’s possible to have an informational advantage if you have a personal connection to the founding team, or an analytical one if you’ve spent your career in the industry that the founders are trying to disrupt. But clearly those advantages don’t scale. I’m not aware of a good dataset on personal angel investing returns, but would venture to say most non-professional angels lose money in the long run, just like most day traders do in public markets.
