Glory days in the wink of a young girl's eye
Glory days, glory days
It's that time of year again, graduation season, when we remember those "Glory Days" of our youth. Hopefully they weren't our only "Glory Days", and hopefully the young graduates we celebrate with will have many more in their future.
Thirty-four years ago, when I was 17, I remember entering Penn State Shenango Valley Campus, with the sole goal of getting some education in business, and getting out into the "real world" as soon as possible. I went the two year associate degree in business administration route, graduated and immediately went to work. First, I got my real estate brokers license. 1979, not a great time for a 19 year-old to attempt to sell real estate; what with double-digit interest rates and double-digit unemployment. So while I wasn't selling real estate I decided to start a body-builders gym. This venture into the world of entrepreneurship wasn't half bad, as long as you didn't calculate my income on an hourly basis. These foray's into the "real world" were priceless, and they helped me realize that "work" isn't all it's cracked up to be. Six years later, with an MBA and CFA under my belt, I was managing money (OPM - Other Peoples Money).
Occasionally at this time of year, I get asked about how I got into the business of investment management, and what subjects junior should study in college. Surprisingly, Money Management isn't a typical major. Sure there is "Business Administration" but it's focus is on running companies, not investing in them. There are concentrations and degrees in accounting, economics, and finance, but rarely nothing more than a class or two on investing. Many books have been written about "Great Investors", and one trait that seems to stand out is the fact that they were good at many things, they were great generalists.
If I were to design a curriculum for aspiring money managers, it would look something like this:
First and foremost, Psychology. Every great investor has to understand the psychological makeup of the market, as well as their own psychology. Understanding, and controlling fear and greed are the keys to long-term success. One question that I often ask myself is, what do you think you know that isn't already priced into the market?
One example of market psychology is "mimetic theory", which simply stated says, we humans have a strong inclination to imitate other people. We like to be liked, so we tend to imitate each other. Understanding this simple theory helps us anticipate bubbles, mass delusions where everyone imitates everyone else.
Not understanding your own psychology has been the downfall of many an investor. You have to find out how you react in periods of severe emotional distress, unfortunately this is very difficult to simulate in a campus environment.
History. History doesn't always repeat, but it often rhymes. By having a good understanding of world history, you will have a good understanding of what could happen again. Investing is all about probabilities, and having a thorough knowledge of what has happened in the past, will help you set appropriate probabilities for what might happen in the future.
Just because house prices haven't declined since the 1930's doesn't mean that they will never decline again. Just because the US dollar has been the world's reserve currency since WWII, doesn't mean it will continue in that role forever. History opens our eyes to the realm of possibilities, and various scenarios that may come to be.
Mathematics & Statistics. There's no getting around it, investing is filled with math; probabilities, percentages, valuation metrics, and return calculations. It is the language we speak. Back when I started in the business we used to talk in eighths and teenies (stocks were priced in 1/8's, 1/16's, and 1/32's), fortunately today we talk in BP's (basis points, 0.01%).
You don't need an advanced degree in mathematics, many of the more advanced mathematical formulas are dubious at best, but you do need to understand the basic concepts. With the power of todays computers you will not need to do much heavy lifting, but you still need to understand the inputs and outputs. You should be able to look at a set of numbers and know whether they make sense or not. A basic understanding of probabilities would have had a lot more people questioning the track record of Bernie Madoff.
Accounting. Again, you don't have to be an accountant, but you have to know your way around financial statements. You are buying stocks, bonds, or other bits of paper issued by companies and/or governments, and you need to be able to discern fact from fiction. There are some investors who are more like forensic accountants, they tear apart reams of financial statement filings looking to sniff out fraud. While this is great, if you are into that kind of thing, it is not necessary to make you a great investor. All you really need is an above average understanding of what makes sense. I remember selling all of our holdings in Worldcom near the top of its valuation, not because I sensed some fraud, but simply because I couldn't justify their numbers when compared to other telecom companies. Something just wasn't right.
I don't mention economics because I have yet to meet an economist who was a great investor. Sure, some economics classes would be OK, simply because what economists do at the Fed and other government organizations does move markets, but too much economics could definitely be a bad thing. Just look how well the Nobel Laureates at Long-Term Capital Management did.
I would also recommend getting the CFA (Chartered Financial Analyst) designation. It is the industry standard, that separates those who want to manage money, from those who are serious about managing money. It will greatly increase your odds of employment.
Hopefully this will be of some use in seeing that your "Glory Days" aren't all behind you.
And I hope when I get old I don't sit around thinking about it
but I probably will
but I probably will
Be careful out there, and keep the lights on,