Why Investing is the World’s Most Difficult Profession

Being a professional investor is the hardest profession on the planet.

Not because the financial markets are global and 24/7.  Not because the markets are full of extremely driven and intelligent competitors.  Not because the emotional highs and lows can be soul crushing.  It is because of the constant and measurable competition against passive benchmarks.

Each day, month, quarter and year a professional investor’s performance is measured against both the benchmark and their peers.  Outside of professional sports, I’m not sure there is any other industry that generates such objective and continuous measurements. And even in sports, there is no equivalent of a “passive benchmark”.  If a player is struggling, teams do not have the option to replace that player with a benchmark that guarantees them the averaged production of every player at that position.

Benchmarks are the most ferocious of competitors.  They show up for work everyday. They never get sick.  They don’t take vacation.  They are always 100% invested so their results are continuously compounding.  Most importantly, they’re not aware of their own performance.  The S&P 500 will never enter the 4th quarter feeling it needs to really press to have good numbers for the year.  Nor will it take December off to “lock in” a good year.

Not only is the pressure unrelenting, but your failures are public on a scale that again only professional athletes can relate to.  If you do become a successful professional investor and overcome all of the above, there is always the question of skill versus luck.

No fan in their right mind believes they have a chance of beating a Kobe Bryant or LeBron James at basketball.  Yet any investor can now buy a portfolio of index funds and have a good chance to outperform not just a few, but the majority of mutual and hedge fund managers.

This inconvenient truth is like a little voice in the head of every successful investor – “Am I really good at this or have I just been lucky?”.  A voice that never goes away as it only takes a couple bad years to destroy an lifelong track record.


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I hope the iTV rumors are true

It is 11am on a Saturday and the Time Warner customer service representative is calling out numbers.

51… 51… 51?   52… 52… 52?

I’m number 59 and have been waiting patiently with about 30 other Time Warner customers. The majority of us are holding some variation of a DVR or cable box. This is my second trip to this service center in the last 90 days. Both times because my DVR has ceased to function properly. I am not surprised.

My DVR is a Scientific Atlanta Explorer 8240 HDC. A model designed and manufactured by a company that ceased to exist as an independent entity over 6 years ago. When my first one died after 5 years of use, I expected that it would be replaced by whatever the latest and greatest was. The 8240 had only been merely adequate in 2007 when I first got it and I was anticipating significant improvements over the past 5 years. Instead, I was informed that Time Warner was still using the 8240 and I would be issued a “refurbished replacement” – which looked to be in much worse shape than the unit I was returning.

To my dismay, the “new” unit did not include any software improvements either. It still changed channels at a snails pace, it still had trouble allowing you to watch something while it was recording and it still randomly deleted recorded shows. In summary, it was not as good of product as my vintage original Tivo – purchased in 2000.

Do Time Warner’s competitors have better options? I don’t know. I’ve heard mixed reviews about AT&Ts “U-Verse”, but it’s not available in my area. I know DirecTV and Dish have DVR products, but having a technician mount a satellite on my roof, run wires down the side of my house all the while still needing Time Warner for broadband internet seems like overkill for what is essentially a problem with my DVR’s software. I know Time Warner also offers the option of using a “cable card” for the newer Tivo’s, but that entails severe service limitations and eliminates all the on-demand services.

Nor is “cutting the cord” and going solely with internet based TV services an option. I enjoy live sports. I have TVs running solely off a standard coax cable connection. Anything that requires 2500+ word online “guides” describing how to setup the myriad of services and hardware required for an inferior experience is not a viable alternative. I’ve also noticed that much like trying to install Linux on a Mac, people seem to derive more pleasure in describing the myriad of steps they’ve taken to eliminate their cable TV company than in actually using the end result.

This is where Apple comes in. The media has been rife with stories that they may be building either a full blown Apple “iTV” complete with content or a cable box that can be distributed through the current cable providers. I’m open to either but would prefer the latter for the simple reason that I’m content with my HD TV and would prefer to just replace the cable box / dvr instead of the entire TV.

What most concerns me though is even if Apple was to build a cable box, what impetus would Time Warner have to offer it? The cable industry is not like the wireless industry where the vast majority of the US cell phone users were eligible to move to AT&T to get an iPhone. Cable is geography based. I can’t switch to Comcast, Cox, Charter or Cablevision even if they’re offering an Apple based cable box with three years of free programming. The only truly national providers are the satellite providers and they still have all the downsides of the physical dish and not being able to offer high speed internet.

But something has to give, doesn’t it? How long can Time Warner keep offering the same DVR it has since 2007? How long can they support a constant stream of users returning broken ones for “refurbished” ones in a massive game of musical DVRs? Except, if I’m any type of proxy, the answer is a long time. A combination of the reasons I laid out above and not being a demanding TV watcher means that it will take a significant amount of motivation for me to move from Time Warner. An amount that slow DVR channel changes and periodic DVR replacements won’t cover. Which is why I hope the Apple rumors are true.

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TheStreet.com – mostly Parrots

Mebane Faber and Josh Brown’s posts about how best to fix TheStreet.com ($TST), got me thinking about the different types of financial content and the relative value of each.  I currently see three major types of content generators – Reporters, Observers and Parrots.

Reporters are the easiest to define and the ones we’re most familiar with.  They are the people or organizations that actually do the work of a reporter.  They have contacts, they do research, they break stories.  AP, Reuters, The Wall Street Journal and Bloomberg fall into this category.  Their value is simple to define, they are a definitive news source (i.e. their name is often referenced in subsequent summary articles by other organizations) and they are often the first to break or release a specific story.  There is tremendous value generated by this type of content and their sites are updated constantly throughout the day and they have been successful in licensing or charging for their news feeds and content.  Its virtually unfathomable to imagine the financial news industry without the above mentioned companies.

Observers are where most bloggers and columnists fall.  They do not break the news, they instead interpret or react to it.  Paul Krugman, Barry Ritholtz, Josh Brown and the majority of the daily links at Abnormal Returns are observers.  The value of their content varies widely based on its actionability and timeframe.   At the top of the list is content that is either actionable in a very short timeframe (e.g. a specific trade idea) or that is non-actionable and not time sensitive (Barry’s Apprenticed Investor series).  The least valuable is non-actionable short term information (e.g. $AAPL is acting strange here) or actionable and not time sensitive (e.g. buy and hold $AAPL for 10 years).  The biggest advantage observers have is they do not have to publish constantly.  If there is nothing interesting happening, there is no need to push out ten new stories.  The downside is that this type of content has proven very challenging to monetize on its own.

Parrots are sites that feel to push out new stories constantly throughout the day, yet do not have the infrastructure or access to “new” stories that the reporters do.  This leads them to generate a ton of content that is either a summarization or articles from one of the big reporting sites or vague non-actionable “advice” without a real timeframe.  All content is generated with a single goal, drive page views.  As Josh mentioned this leads to articles that should have been one page becoming three, ads everywhere and Business Insider style headlines.  This model combines the worst of both Reporters and Observers as it has a relatively high cost structure (many writers pushing out tons of “content”) yet has a monetization value similar to blogs.  It also lacks the “authority” that the traditional news generators enjoy.  Would a hedge fund or quant firm building a system that requires machine readable news would license TheStreet.com or BusinessInsider over Reuters/AP/Bloomberg/WSJ?

The questions about TheStreet.com’s business model raises a much larger issue.  The vast majority of the actual financial news is generated from very few companies that generate substantial profits.  There is a tremendous amount of high quality reaction and interpretation of this news (bloggers, StockTwits, columnists, etc) that is almost all available for free and generates minimal revenue.  Is it even possible to build a sizable business around a group of “Observers” when there is so much quality free competition?


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Manipulate Machines, Not People

The technology industry used to be full of magicians. Magicians who created amazing things. The original Mac, Nintendo NES, color printers, modems, the Internet, Doom, Mosaic, iPod, Nintendo Wii, Kinect. I can clearly remember the first time I used every one of these and the excitement I felt at seeing what its creators had accomplished. In every case, they were absolute experts in the art of manipulating machines to perform this magic.

Nowadays, the magic is gone. Instead of being experts at mainpulating machines, many companies are focused on manipulating people. In most cases, their own customers. Can I get a user a to create an account? Can I get them to fill out a profile of personal information? Can I get them to email their friends a link to my site? Can I get them to login every single day? Can I get them to let me know everytime I go somewhere? Can I get them to click on the ads I show them? Can I get them to buy things after clicking on the ad?

These are the problems that an entire generation of companies spend their days trying to solve. These problems are very different from those faced by teams trying to fit a GUI operating system in 128k or connect computers via a phone line. These are not “technology” problems, these are “media” problems. Sure they use new terms like funnels, engagement metrics, conversions and click-throughs, but when you strip away the buzzwords we’re in the 1950’s trying to create a TV show that appeals to housewives so we can show them ads for Tide.

This is the same technology industry that continues to call for the “disruption” of other industries steeped with expertise in customer manipulation (credit cards, lending, traditional media) while many of its stars are trading on their ability to convince/cajole/hoodwink users into creating “content” that contains information marketers find valuable. All so that information can be used to convince the user to buy something most likely completely unrelated to the company’s “product”.

The downside to this model is it that the company’s and user’s interests can never be aligned because the user is not the one paying for the product. Contrast this with a company like Apple who generates billions in revenue selling directly to consumers. The iPhone doesn’t come pre-installed with ad-ware from your phone carrier and your iPod doesn’t interrupt your songs every 5 minutes with a Living Social ad. Despite the fact that these tactics could generate more revenue for Apple, they are dismissed because they would make their customer like the product less. This is the same reason Facebook won’t start collecting and storing less personal data, even though their users may enjoy it, their customers would like the product less. Instead, they will use their considerable technical prowess to determine more and more effective ways of manipulating their users to generate additional revenue.

I wonder what a company like Facebook could build if it could treat its users as customers instead of products. What would a Facebook devoid of advertising and not intent on collecting as much marketing information as possible look like? Could they streamline the site so people wouldn’t need to spend as much time each day to keep up with their friends?  Would customer satisfaction increase? Would they get even more users?  Unfortunately, we will never know.

We will continue to have the choice between working on and using products that manipulate machines and those that manipulate people. Fortunately, they’re pretty easy to distinguish. Products that manipulate machines have people lining up to buy them. Products that manipulate people have companies lining up to give them away.


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Financial Watergate

It’s taken 3 years for us to uncover the details of what should go down as one of the most disturbing periods of government action since Watergate.

In 2008, as the financial world stared at the precipice, our government acted as follows:

Hank Paulson – Secretary of the Treasury at the time, was providing hedge fund managers (many of them Goldman Sachs alumni $GS) with non-public information about how bad the crisis might become and how the Treasury would likely wipe out the common and preferred stocks of Fannie Mae and Freddie Mac.

The Federal Reserve – was secretly lending a total of $7.77 trillion to banks around the world with the vast majority going to the largest US Banks. These below market-rate loans provided the recipent banks with an estimated $13 billion in profits and again raise questions about how the Fed chose who would survive and who would fail during the crisis. The fact that the Federal Reserve and large banks fought against this disclosure for more than two years was likely a move to prevent this new information of exactly how bad off the banks were from being incorporated into the already passed Dodd-Frank reform bill.

Congress – Rep. Spencer Bachus, a ranking member of the House Financial Services Committe attended a highly secretive evening briefing with Ben Bernanke and Hank Paulson where they described how the global financial system was close to meltdown. The next morning he use options to establish a short position on the Nasdaq 100.

Any of these acts individually have to deeply shake the average citizen’s already low confidence in our government and the fairness of financial markets. Combined, they are a devastating blow that may significantly damage the value of the financial services industry for years to come.

Retail trading is especially vulnerable to a reduction in the public’s perception of the market. The charts of $SCHW, $AMTD and $ETFC look  like no one is expecting the public to return in great numbers to the market any time soon. Given what they now know, who could blame them?

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Debt – The Opiate of America

Debt is a drug. Not one of those “good” drugs they advertise on TV which promise to cure you of some horrible disease while only subjecting you to dizziness, nauseau and an upset stomach. No, debt is much more clever than that. Debt is a bonafide opiate – extremely addictive and able to manipulate our mind. It gives us the warm and fuzzy feeling that we’re saving money and ‘doing the right thing’ while we’re spending more than we could ever imagine. The withdrawl symptoms are brutal, like an opiate.

We want to avoid debt, we really do, but its peddlers are everywhere. When we go to college, we’re offered government guaranteed loans with deferred interest – our first hit. When we buy a car the first conversation is about ‘financing’. When we need a place to live we’re taught about ‘good debt’ and deducting mortage interest. By the time we look up, we’ve already spent the majority of our near term future income. We’re complete junkies.

We decide to get smart about money, cut back on the ‘foolish’ things that we feel guilty about – nice meals, vacations, massages, etc. With a little self restraint we’re now saving an extra few hundred $’s a month. Like a junkie who is using less often, we start to feel better about ourselves. We can beat this.

Then it happens, not immediately as even debt cannot penetrate our iron will when we first start something. It waits quietly in the corner, until just the right moment. When we have quietly begun to tire of our self-imposed austerity. We are tired of being ‘good’, frustrated that so much of our hard earned money goes to pay off so little of our outstanding balances. At this exact moment, when our guard is down just a little bit, it pounces.

Not in the way a lion pounces, this is much more subtle. It plants in our head the seed of an idea. The idea of a new car. We can’t stop thinking about it. How much happier would we be if we had the latest model? It looks so nice in the brochure. It’s practical too. It has more room for the family, has more airbags than our current car. It also comes with a new warranty and maintenance included. We’ll save money on repairs over the next few years.

Don’t we deserve it? We’ve been working so hard, we’ve been so good. Forgoing all those guilty pleasures for all these months. We definetly deserve a reward.

How much will it cost? That’s the best part. The dealership is running a low interest finance special and by going with a slightly longer term loan the cost is only $100 more per month than our current payment. $100 a month? For all of this? How can we say no? Afterall, we’re saving more than that by forgoing our guilty pleasures. Even after buying the car we’re still saving more than we were before we decided to ‘get smart’ about money. How very clever we are.

But we are wrong. We have been fooled again into spending tens of thousands of dollars over the next 5+ years in return for saving a few hundred dollars over a few months. And yet we think we have won.

And we are still addicted.

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Thankful for the US Dollar

With the chaos that is raging around the Euro, I’m more grateful than ever that I was fortunate enough to be born in the US.  Having lived my entire life in the US it’s easy to lose sight of how lucky we are to be in such a wealthy and stable nation.

While the 2008 credit crisis felt to us like an economic disaster, it was a mere blip compared to what happened to Iceland, Ireland and may soon occur in many of the other European nations.  I can only imagine what choices will face many Europeans if the Euro dissolves.

Will their bank go under?  If so, will the government bail it out?

If their bank account is denominated in Euros, will they be forced to convert to a local currency?

If they’re forced to convert, what will be the conversion rate?

How will their new currency compare to either what’s left of the Euro or other major trading partners (US, China, Germany, etc.)?

How much buying power will they lose?

If they work for a multinational company, what currency will they be paid in and what will their salary be going forward?

Will there be riots?  Will their government fall?

What will happen to their private or public pensions?

What about their investments?

The permutations are endless and none of these questions are likely to have good answers anytime soon.  Whiles its easy for us to look at the breakup from a distance and observe we shouldn’t lose sight of how many citizens living in “1st world countries” are looking at the very real possibility of a significant reduction in their financial well being.

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Facebook’s most important product – YOU

With the exception of their short lived “Facebook deals” experiment, Facebook has never asked me for money.  They don’t send me emails promising powerful new time saving features if I only upgrade to the “premium” version of their product.  They never tell me how I can communicate with people all over the world for less than 50 cents a day.   I don’t wake up one morning to discover that my version of Facebook has been replaced by a newer, shinier one with a car payment sized price tag.  Instead, Facebook promises its users that “It’s free and always will be”.

Instead, Facebook spends its time and energy acting very much like a traditional media company by convincing corporations to send them large sums of money in return for displaying advertisements to their 750 million users.  In essence, this part of Facebook’s business is not dissimilar from the traditional TV model of creating shows that create a large enough audience to attract sponsorships/advertisements.   Except in Facebook’s case, they don’t actually have to “create” any of the content as their users do it all for them, for free.  Not only do their users create the content for them, but the more they fill out their profile, the more valuable they make themselves to advertisers willing to pay a significant premium to target increasingly specific target audiences (i.e. high school football players in northern california).

As pressure begins to mount on Facebook to continue growing its business at a rate that will justify recent valuations and the eventual IPO, there are multiple paths it can take to increase advertising revenue.  The first is to increase the amount of time you (and other Facebook users) spend on the site as total amount of time spent on Facebook is the amount of inventory Facebook has to sell.  The second is to increase the value of their inventory by collecting more and more granular information about each user so they can be targeted more effectively.  The third is to increase the total number of Facebook users – but this will become increasingly difficult as Facebook reaches saturation in its more mature markets.

The problem with this scenario is that its sets up an inherent conflict of interest between Facebook and you.  New features that make your time spent on Facebook more efficient and reduce the total amount of time spent on Facebook may be a positive for you, but are a negative for Facebook the company as it reduces the amount of inventory they have to sell.  Any feature that provides Facebook more information about what you like or what you are doing provides tremendous value to Facebook’s advertisers regardless of if you find it useful.  New features such as timeline, sharing music/movies/books will provide tremendous opportunities for advertisers to target audiences who listen to certain bands, watch certain movies or have children of a certain age/sex/medical condition.

There is nothing wrong with this model, as by signing up for a free service that is paid for by advertising you as a user know that your information will be used for advertising purposes.  But as the depth and breadth of what Facebook tracks continues to grow it is reasonable to looks at these new features and ask who they most benefit?  You – their user?  Or an advertiser, their customer?

Remember – you do not provide the majority of Facebook’s revenue.  Facebook is not selling to you, Facebook is selling you.

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Parlor Games – Taxes and spending matter less than we think

“In any dispute the intensity of feeling is inversely proportional to the value of the issues at stake.” – Wallace Stanley Sayre

Does increasing or lowering taxes impact the economy?  What about government spending?  If so, by how much?  Listening to either party one would think there was clear evidence that supports their argument, but there isn’t.  The only thing that is clear is historically the US economy has both prospered and floundered under every conceivable tax rate and government spending combination.  We’ve seen great growth and deep recessions under tax cutting as well as tax raising regimes.  Not something that most members of Congress will ever admit to.

As much as Presidents and Congresses like to believe they are able to significantly impact our economy, the bulk of the evidence points to the idea that they too are mostly just along for the roller coaster ride that is the economic cycle.  For if governments were able to “stimulate growth” or “avoid recession” shouldn’t there be at least one example of a western country successfully taming the economic cycle in the past 200 years of modern nation states and economies? We’ve seen western governments controlled by capitalists, socialists, communists, dictators and everything in between.  We’ve seen governments formed from coalitions that span a wide political spectrum and those directed by a single person.  They’ve increased and reduced corporate taxes, individual taxes, tariffs, benefits and investments.  None of them, not a single one, has shown any concrete proof of being able to consistently increase a countries immunity from the economic cycle.

Contrary to popular opinion, our political leaders on both sides are not idiots.  Most of them are quite intelligent and are likely trying to do what they honestly feel is best for the country.  The same inherent desire to come together in the face of dire enemies (9/11, Pearl Harbor, etc), leaves them free to argue so vehemently about domestic fiscal policy.  If there was even a shred of concrete evidence that the outcome of the latest taxes vs spending debate would significantly impact job creation or growth, there would be no debate as the way forward would be clear.

Domestic fiscal debate is little more than a modern day parlor game in which the merits of inherently opinion driven policies are incessantly debated with increasing vigor precisely because of how little is at stake.

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Investing IS Speculating

Watching this clip of Howard Lindzon from StockTwits and Joshua Brown of The Reformed Broker discussing momentum investing with Herb Greenberg brought an interesting exchange about what the differences are between investing, trading and speculation.

CNBC and the mainstream media continues to preach the folly that “investing” is good while “speculating” is bad.  This is especially prevalent with Gold or other commodities which can never be consider a true “investment” since they don’t generate any earnings/yield, so owning them must be “speculation”.

The reality is there is NO difference between investing and speculating.  In both cases the only objective is to make money over time.  It doesn’t matter what you buy or for how long, if you are not right about your asset increasing in value you will not make money.

This is as true for High Frequency Traders scalping a fraction of a cent on a 500 shares of Citigroup in 300 milliseconds as a pension fund investing billions in the S&P 500 index over two decades.  The real blindspot in CNBC and most investors view is that they believe buying something for the “right” reasons and for the “right” timeframe guarantees profits.  To those people, I strongly suggest they review this chart prior to making any long term decisions.


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