The Best Investment Advice You’ll Never Get

We had a guest lecturer come speak to our Corporate Finance class one day. Frank Partnoy, my professor, introduced him as a hedge fund guy who knew his shit. So well, Partnoy added, that he once simply donated the 9 figure profit he made from one trade. The class was particularly attentive that morning.

After his talk I went up to speak with him. This was in 2010, when nobody really had any clue where the market was headed next, so naturally, I asked him what I should do with my money. He asked me how much I had to invest, and he listened very intently to the answer. He then looked at me and said,

“The best possible thing you can invest in today… is yourself. How many hours a day can you feasibly spend researching investments while you’re in school? 5? 6? The number one criteria that will have the biggest affect on your net wealth over the next few years is your class rank. Invest those 5 or 6 hours a day into your studies and graduate at the top of your class. That’s what will make you the most money.”

Some sobering advice from someone who knows what he’s talking about. It’s easy to spend lots of time trying to pick up an extra 1 or 2 percent around the edges. These little wins are fun to find, usually easy to implement, and they add up fast. But, that doesn’t mean it’s the best place to spend your time.

If you’re a race car driver, it might be fun to shave a quarter pound off the weight of each wheel, or change the angle of your wing to reduce drag 1/100th of a percent. But, if you, the driver, weigh 350 pounds, getting your fat ass on a diet is going to have a much bigger impact on how fast that car goes. Small wins are great, but they shouldn’t distract you from going after the big wins.

Robert K Jafek did send me off with some parting investment advice though: invest in index funds. Huh? The hedge fund guy who was still involved with other investment firms was telling me to buy index funds?

Well, it turns out he’s not alone:

From her perch at Barclays, CEO [Patricia] Dunn gave a speech at a 2000 annual industry meeting in Chicago. As reported in Business Week at the time, she started out with some tongue-in-cheek comments about fund managers’ “rare gifts and genius,” and then shocked the crowd by going on to denounce the industry’s high fees. According to the article, she even included this zinger: “[Investment managers sell] for the price of a Picasso [what] routinely turns out to be paint-by-numbers sofa art.”

Other luminaries agree:

No one running a university endowment, independent foundation, or pension fund could match his numbers during his tenure: over the last 21 years, chief investment officer David Swensen has averaged a 16 percent annual return on Yale University’s investment portfolio, which he built with everything from venture capital funds to timber. He’s been called one of the most talented investors in the world. But lately he’s becoming perhaps even more famous for his advice to individual investors, which he first offered in his 2005 book Unconventional Success. “Invest in nonprofit index funds,” he says unequivocally. “Your odds of beating the market in an actively managed fund are less than 1 in 100.”

And still more:

The most forthright comments came from Baie Netzer, a research analyst in the Orinda office of Litman/Gregory Companies, a San Francisco—based investment management firm specializing in mutual funds. Netzer told me outright, “Eighty percent of active managers underperform the market. But we do believe that some managers add value, and those are the ones we look for.”

Quotes taken from this article.

Conclusion

Small wins are important. Keep trying to pick them up, every day. But, don’t lose sight of the Big Win. Unless your business is picking stocks, or taking over companies, stick your money in an index fund and take the average returns. Focus your time on the skills you can acquire and hone in your chosen field. That’s what will produce the biggest gains. Stop looking for silver bullets.