Looking for Free Investment Advice

This is something I wanted to address because I am asked for stock advice often.

I was having dinner and a glass of wine at a friend’s house where most of the other participants were doctors and lawyers, nurses and civil servants. After some conversation on Donald Trump (who everyone has an opinion on), dogs and vacation plans, someone asks me what they should invest in.

Generally speaking, the conversation will always drift in that direction whether I am meeting people at a real estate event, at the swimming pool or talking to my mother.

“So you were the Vice President at Merrill Lynch? Do you think I should buy _____?”

Sometimes it is a specific, very dangerous security like a biotechnology company that I have never heard of. Last year it was bitcoin or marijuana.

Sometimes people are just looking for me to design an investment portfolio for them (not free).

Some people just want something that will give them a return of 20% per year with low risk.

The main takeaway is that people are uninformed and exhibit irrational market behavior. This market folly should be taught in high school, but we live in a society with a strong anti-intellectual current, so what can we do.

These conversations are not 30 second pitches like in an investment banking interview. These are meant to be hours of education through books and in an investment advisor’s office (that you can trust, good luck with that).

But this is not meant to speak to my reluctance to give investment advice (except when I am paid to give investment advice). This is to tell you that investment bankers can give you investment advice, but it is almost certainly meaningless.

The most expensive things are free. I would caveat that there are so many garbage investment advisors looking to swindle you of your hard earned money that some of the most expensive things are expensive.

Anecdotal Evidence for Poor Investing by Investment Bankers

Here are some stats.

In my investment banking vintage (entering class), maybe 5% of the class body actually liked finance.

And I mean really liked finance. I am not talking about kids who memorized the Vault guide and practiced with senior students for hours to get an investment banking job that they did not want. I mean kids who read books about every hedge fund manager (across every strategy – long/short, capital markets arbitrage, distressed securities, quant stuff that I do not understand), wrote their investment theses on invitation only forums and flew out to Woodstock for Capitalists – or the Berkshire Hathaway annual general meeting.

These guys did banking for two years and then immediately left for hedge funds. No private equity. You make far more money succeeding as a hedge fund junior than as a private equity associate – and you probably like your job a lot more.

These guys obviously beat the market with their security selection. They even said it was easy. They needed to beat the markets in order to get their jobs (hedge funds will ask for brokerage account records), so they probably could tell you the stocks to buy and you would not be doing poorly.

The thing is, you are never going to meet these guys and they generally do not present themselves as investment bankers. That was a stepping stone in getting the Goldman Sachs stamp of approval before moving on to Millenium Partners.

So you are left with the other investment bankers.

Matt’s Investment Banking Orientation (Analysts)

5% Good investors that perform crazy amount of due diligence in their spare time and love investment banking because they have access to equity research (which they only use to get familiar with a stock, not to listen to the recommendation), Bloomberg and Excel with a bunch of add-ins

20% Do not invest at all, purchased property with mortgage; paid off mortgage with any residual bonus
These guys did well assuming they were in New York, Toronto or San Francisco – not sure how well they will do going forward

15% Spent all their money at the club and buying nice things or eating nice dinners – generally grew up lower middle class and needed to front nouveau riche

15% Bought market ETFs or Blue Chip Stocks – Given the longest bull market ever, these guys did really well – not as well as the 5% good investor bucket that bought a bunch of Amazon, NVIDIA or Microsoft after Satya Nadella, but they have more than doubled their money and are millionaires. Some of these guys mixed this with the property, so leverage on the property and money in ETFs meant some of them beat the 5% good investors; I am also including guys who just dumped their residual cash flow into oligopolistic stalwarts such as TD Bank or Johnson & Johnson (but not General Electric)

5% Savings account – just pathetic given that they went to school and learned about risk and reward

40% Bad investors

To summarize, out of the ~60% of investment bankers that meaningfully invested their money (more like 75% including the random thousands of dollars the club rats chucked into their Questrade account), 20% made money and only 5% beat the market. Investment bankers basically are as bad as the average person in investing.

After thinking about this for long enough, my investment philosophy has changed in terms of what to recommend to other people. On one hand, you can beat the market. On the other hand, beating the market has a cost. The cost is spending time to do real investment research, and that is hard to do. The other cost is finding someone who can beat the market in terms of an investment manager. That may be even harder to do for someone who is less financially literate.

So just buy the market if you are going to invest. This means an exchange traded fund that represents the S&P 500, total US stock market or total global stock market. The most popular and liquid ones are by Vanguard or Blackrock.