The Compound and Friends - Investing as a Hobby (Tadas with David Schawel)

Episode Date: July 5, 2019

“Where investing as a hobby might be sensible is with a small amount of your assets that you can afford to lose, and that you can handle psychologically. Being under the illusion that diving into investing in a meaningful way will result in above average performance is dangerous and likely to end poorly based on historical studies.”  David Schawel (@davidschawel) is the CIO of Family Management Corporation and is a veteran observer of the financial markets. Tadas got David on the phone to talk about a recent post of his entitled “Investing as a Hobby” where he writes about what a hobby is and why investing is likely not a worthwhile hobby for most.  You can read more at David’s blog: https://medium.com/@DavidSchawel/investing-as-a-hobby-8d048d5d98bd 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify   Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here: https://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, David, how are you? Doing well. How are you today? Hey, I'm good. I'm on the line with David Schall, who is the Chief Investment Officer at Family Management Corporation based out of New York City. David has written a number of different investment-related topics, but today I wanted to talk to him about a recent post entitled Investing as a Hobby. In this post, David lays out three reasons why investing may not necessarily line up with what we call a traditional hobby. So this post, David lays out three reasons why investing may not necessarily line up with what we call a traditional hobby. So that's a good place to start. David,

what prompted you to write this post? Well, it's interesting. You know, you talk to the average investor and sometimes you get the sense that not only do they like investing and they like talking about investing, but it seems to whether they know it or not to be a hobby of theirs. Yeah, no, I've you know, it's interesting because I wrote a post just about five years ago on the same topic. And, you know, it kind of makes me, you know, in one regard, there's more information today, which you would think would make it easier as a hobby. But in some different respects, I think that you wrote about, it's probably harder today. Right. Yeah, I absolutely agree. And then,

you know, sometimes you have to think about when you have a hobby, what are you actually trying to get out of it? So in the case of investing, typically when people are interested in investing, they're doing it for an ends to the mean. So that ends to the mean being to make more money or to have returns that are great or to beat the market or even to do as well as the market. And when you think of traditional hobbies, I like to think of it as people doing it just for the love of it, just for the enjoyment of it, not to get necessarily any means to the end, but just for the sheer enjoyment of it. Yeah, you know, it's funny, as I was preparing for this talk, I thought about the issue of

loss aversion. And, you know, that's kind of a traditional finding in behavioral finance. And anybody who has been either a trader or investor for any period of time has kind of experienced this, where we feel our gains, the positive emotion from feeling our gains is less than the negative emotions from our losses. And if you think about it from the perspective as a hobby, that's kind of a bad setup. Even if you're batting 50% net-net, you're not going to feel very good about what's going on in your portfolio. Absolutely. And I think, you know, as is the case with a lot of traditional hobbies, we like to be able to engage in our hobbies when

we want to. So if we have free time and, you know, we have some extra time, we want to go play golf or start a new novel or do whatever it is the case that we enjoy doing, we can kind of do that on our own time frame. But with the market, it's not always that, not always the case. Sometimes, sometimes with the market, we don't know when the market's going down, we don't know when it's going up. So, you know, we might not want to be engaging in the market when, you know, times are good or bad. And I think like you're saying that that can be a really bad setup. Yeah. You know, when you think about hobbies, whether it be, you know, let's say golf or, you know, some other sort of physical activity, you know, you think with some practice, you can get better. You know, that's kind of the goal. If you go out on the driving range or on the

putting green, you might be able to improve your game a little bit. But there's not necessarily anything that says that if you study more or work harder, your investment results are going to be that much better. I completely agree. And as an amateur golfer myself, and when I go to the driving range, I often feel like sometimes the more I practice, the worse I get. And I kind of wonder whether what I'm practicing is actually improving myself or not. So I think the same thing can be said towards investing for the average investor. What they're doing, you can question whether they're actually helping themselves or hurting themselves. If they're chasing the latest hot stock, or they're getting a tip from a neighbor, or they're reading an article online that they might think

is helping them, but in reality it might not be doing so. So I think that the actual engagement of the hobby and the research that I think investors think they're performing might not actually be helpful in the end. Well, you know, I think one of the things we should probably note is that, you know, anything that we're, the things that we're kind of talking about here don't necessarily say that you shouldn't learn about or become more proficient in investing, even if you, even if you are, use a professional advisor. I mean, I think there's something to be said for being, knowing the kind of the lay of the land and being able to understand and speak with, you know, your professional advisors kind of on a more level playing field. But that doesn't necessarily mean that it's a hobby per se. I agree. I think being informed and understanding the language is a great thing. So

when you go to meet with your investment advisor, it's great to understand things that are going on. It's good to understand the economic landscape. It's good to even understand maybe some valuations, but that doesn't mean that you take that and let's say decide you're going to go pick five stocks thinking that you're going to beat the market. And I think one of the things that I pointed out is just how difficult it is a great thing and it's great to know the language and it's great to know the lay of the land. That doesn't mean necessarily that you should attempt to outperform the market or to be buying individual stocks with the attempt to necessarily get rich or even to beat the market.

Yeah, you know, my colleague Michael Badnick has written a number of posts showing the challenges of, let's say you were able to pick Amazon in 2001 or 2002, and, you know, the great run that it's had since then, just kind of using that as an example of kind of as an exemplar sort of stock, the drawdowns that are involved in holding on to a stock like that, even one that you know that is, you know, a long-term outperformer are really quite significant, you know, 50 and 75 percent drawdowns, you know, being not out of the ordinary. And so, you know, like you said, even if you do were able to stumble onto, you know, a high flyer or a great opportunity, the chances of you holding onto it over the long run and really benefiting from that insight, you know, are relatively low. Very difficult. And that goes for even people that have informational advantages on stocks.

When you see a stock that you don't go down 30, 40 percent, and as Michael said, even 70 percent, You don't go down 30%, 40%. And as Michael said, even 70%. You know, your heart kind of goes into your stomach. And, you know, you're probably watching gains that you had seen on paper go away. So to actually buy and hold and stick through those times is extremely difficult. And one point that I'd add is I think it's even tougher when you're at an informational disadvantage. And I think that the average investor compared to market professionals are at informational disadvantages. And it's not that they can't get that information, but they're not the ones that are sitting parsing through industry data and company data and talking to company management.

And even when you're doing that, it's difficult. But if you're not doing that, I think it's even more difficult because as market prices move, your sentiment starts to change. So when you don't have an anchor necessarily, maybe being a good investment thesis or good informational knowledge of a company, the likelihood that you're going to be able to hold through tough times, I think, is extremely unlikely. Yeah, no, I think that's absolutely true. And, you know, one of the things also I was thinking about that has changed in certainly the last 10 years and certainly the last five is really just the sort of easy access that, you know, the average investor today has to,

you know, for lack of a better term, ready-made portfolios, be it either through a robo-advisor or through, you know, one of the mainline sort of investment firms, whether it be a Vanguard, a Fridelity, or Schwab, you know, essentially today the average investor can sign up for a ready-made portfolio, you know, pretty much at the drop of a hat and they don't really need to go through the hassle or the work of building a portfolio up piece by piece. And I think that's a great thing overall because even if those ready- made portfolios don't end up being the very best, I think that they end up being substantially better than probably what the average investor would do on their own. And it's going to accomplish a lot of things that errors that the average investor could get themselves into. diversification, you know, rebalancing at good times and, you know, for instance, not picking, you know, individual stocks where they're probably not going to be able to hold them

if they're right and if they're wrong, you know, potentially have crystallized permanent losses on that. You know, I think that that is a great point and I think that's a great place for us to stop the discussion. But David, I want to thank you for coming on and writing an interesting post. And we'll talk to you again soon. Okay. Thanks so much. Have a great day. Thanks.