I Got the Best Stock Market Advice from a Hedge Fund Manager and It Isn’t What You Think

What to Talk About at a Wedding in 2008

The best stock market advice I ever received was at a wedding ten years ago, in 2008. The Great Recession was slashing people’s wealth in half. Everyone was talking about the stock market.

In June 2008, the S&P 500 Index, at 1,061, was falling fast. The previous October, the index was at 1,865. The index had lost 46% of its value in eight heart-stopping months.

During the wedding reception, I was talking to my best friend from high school. We had been on different paths since graduating college. After taking a year to be a ski bum, my friend was now making hundreds of thousands as a hedge fund analyst. I was in a dead end job with a destructive online poker obsession.

Looking for a way to connect with my old friend, I tried to find common ground on the failing economy. I casually asked him for investment advice. I really had no money at that time in my life – maybe $25,000 or so in a company 401(k). The question was an attempt to stumble my way through an uncomfortable social event and connect with a trusted friend.

The Best Stock Market Advice I Ever Received

The wedding is a blur to me. I don’t remember the dancing or cake or even who else I talked to. But I’ll never forget the dim lit corner of the wedding canopy where he answered my question. He looked at me seriously and said:

“What you should do is buy index funds. I meet with the management teams of these companies and pay millions of dollars for research. I have more information than the individual investor will ever have. You really stand no chance buying individual stocks. Buy index funds and hold them.”

That is the advice a true friend will give you. He knew the game and played it at the highest levels. He didn’t try to posture and tell me about some highflying stock or fancy derivative trade. He told me the reality of the situation

Information and time are the most crucial determinants of long-term investment returns. Professionals have access to information straight from the source. While the paid research, Bloomberg terminals, and finance degrees also provide information individual investors don’t have, the real value is in meeting with the source – management teams.

Missed Opportunity

I didn’t take advantage of this amazing information at nearly the low point of the S&P 500 during the financial crisis. His information was from as close to the financial markets as I could get.

On July 1, 2008, the Vanguard S&P 500 mutual fund (VFINX) was at $118.31. Yesterday, it closed at $250.99 – a return of 112% excluding dividends.

Basically, his advice would have doubled the money I had at that time. More importantly, it would have protected that money, plus the money I was to earn in the coming years, from ruinous penny stock trades.

It’s too bad I had no idea about financial independence back then. I was in credit card debt. Looking back at some emails I can confirm I was trading penny stocks in addition to playing online poker. Ouch!

Four years later, when I started reading financial blogs, I would finally take his advice and convert nearly all of my wealth to low-cost index funds.

“There’s A Lot of Money to Be Made in Information”

So that’s it? Invest in low-cost index funds is the best stock market advice I’ve ever received? Well, that was great advice, especially in 2008.

For years I thought that was all the advice he was giving me – invest in index funds. And on the surface it was.

However, I’ve realized the truly priceless advice he gave me is that information is the most valuable currency. It took reading a somewhat obscure book about very obscure people for me to understand how valuable information is.

To quote the book, Fortune’s Formula:

“Information exists only when the send is saying something that the recipient doesn’t already know and can’t predict.”

This statement is rather self-evident but many people don’t seek out or provide true information. Of course, you do because you’re reading this blog. But most people don’t.

Here is a quote in the book from one of the author’s main interests, Edward Thorp, a mathematician, blackjack player, and hedge fund manager:

“There’s a string of rumors coming down the pipeline. The further you are down the information chain, the less valuable the information is.”

We want to play in games where we are close to the front of the pipeline and stay away from games where we are toward the end. For example, I think real estate investing in my area is extremely difficult because the professional developers get word of the best opportunities first. So I stay away from real estate.

It is important to know the legalities of what information you can share and receive. Dennis Levine, who was convicted of insider trading by Rudy Giuliani, was really close to the pipeline. Too close. And he boasted about it telling friends,

“There’s a lot of money to be made in information.”

It is ironic that communicating that information is how he was caught.

Most of the book centers around a formula called The Kelly Criterion developed by a Bell Labs information theorist, John Kelly. The book says Kelly’s formula values a bit worth of information at 10,000 basis points.

To translate for normal people (you and me) information on one variable can lead to returns of 100% more for a person with that bit of information than someone without it. 100% more! No wonder there is a lot of money to be made in information!

Introvert Information Advantages

So what does this all mean for us? Should we throw our hands up and lament insider trading or that the system is rigged?

No! Let’s use this to our advantage. We are not going to play in games where we have a massive disadvantage. Professional investors and insiders have many bits of information we can’t access. Sure, we could have hunches and win a few stock picks but over the long run it is like playing in any casino game. We’ll be giving our money away.

As introverts, we have an advantage because we keep our mouths shut and ears open. We can soak up information that others may not pick up on.

Secondly, because we are economical with our words, people will listen when we are communicating valuable information. That is, as long as we don’t keep it locked in our heads. We must present information as complete ideas as best we can. The information should be rewarded by our employers or customers (or readers…hint, hint…share this post with your networks.)

How to Collect and Benefit from Information

Diversified Low-Cost Index Funds.

When you buy an index fund, you are taking a piece of several hundred companies, each in different economies and sectors. I have funds that cover indices in the US, Europe, Australasia, developing economies, small companies, large companies, governments, and real estate developers. With each index fund share I purchase, I have ownership in the creative and ambitious ideas of millions of people. As long as human ingenuity is encouraged and information is brought to the masses as usable solutions, the indices will reflect economic growth and my investments will multiply.

When information is opaque or falsified, we get market failures. For example, the housing crisis featured credit default swaps that buyers didn’t understand. And Bernie Madoff’s clients were wiped out because of his deception.

Overall, economic prosperity and innovation continue around most of the world and we can be a part of it through index investing.

Investing in Ourselves

We can make ourselves invaluable by gathering information. How can you gather information? Well, I have good news. You are already doing it by reading this blog. Gather information through formal and informal education, experience, and through the experience of others. One way to gather information through the experience of others is to read books, listen to podcasts, and read blogs.

Investing in Our Networks

The other way to gather information through the experience of others is to invest in our networks. You might cringe at this as an introvert. But remember, we are talking about investing in people who are interested in the same things we are and that have experiences (information) that they can share with us.

I am not talking about going out to random networking events to make meaningless contacts. This is about finding people who you can share information with and they with you – because you trust each other and want each other to succeed.

This takes social investment and cannot be merely transactional. Check in with your networks. Have coffee or lunch regularly.  Share information (valuable books, articles, or something you’ve learned) that you come across that you think they’d be interested in.

Investing in my network is my greatest source of wealth over the last two years.

Monetizing Information

Investing in yourself and your network will give you information (knowledge and experience) to share with your employer or benefit your own business. The information should result in compensation. The more valuable information you can produce, the greater the compensation should be. (Remember, one bit of information is worth 10,000 basis points to your employer.)

When I think about it, my consulting contract is purely based on the fact I learned a niche job, made relationships in that community, and am now trading my experience and contacts (information). You are doing that too every day at your job. Putting it in these terms may help to underscore why communication skills are so important.

This could also answer the question I get a lot about why extroverts seem to get more opportunities and compensation – they may be better at sharing information. Even though your work product has more value, it really has no value if no one knows about it. Purvey information clearly.

Intrinsic Value of Information

My friend gave me much more than the best stock market advice I’ve ever received. He let me in on the tremendous value of information.

Of course, its utility isn’t just economic. We put incredible value on the life-advice of a sibling or mentor. Who knows how many life basis points making an unexpected call to a friend might be worth to their well-being or yours? We can be generous with the information we provide (maybe saying I love you to your spouse when they don’t expect it) and be a sponge with the information we receive (ears open, mouth closed – assume you can learn something from the person talking).

What Information Can You Share?

That conversation with my friend was ten years ago. But the information communicated within it has influenced my life every year since.

It took me the better part of ten years to understand my introversion and harness and manage it. This blog is meant to share information with you about professional and financial achievement as an introvert.

I hope you got at least one bit (or 10,000 basis points) of information out of this post.

(As a quick aside, you may be wondering why so many fund managers don’t beat the index if they have such an advantage with information. The index is the average. For there to be an average, some fund managers have to do worse and some better. Everyone can’t beat the average.)

Questions for My Readers

Are introverts inherently at an information advantage or disadvantage?

Do extroverts feel frustrated that information is locked up in introverts’ heads or do you appreciate that when an introvert speaks up you know something valuable is coming?

4 Comments

  1. mrprairiefire said:

    Great post and wise advice. Information is key, but when it’s lacking play it safe and preserve capital.

    I’m a natural introvert, but also have an empathic tendency. Basically people spill the beans/provide info because I’m a good listener. I don’t say a word and they fill the silence with intimate details about their life. Simply ask people a few questions about themselves and they will reveal some interesting tidbits. I’ve used it to my advantage in several areas of my life.

    All the best,

    Mr. PFC

    August 4, 2018
    Reply

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