Why you need 30 million dollars to get quality investing advice

I hope you’re having a lovely day wherever you are.
 
I’m enjoying a rainy day with a cuppa tea.
 
Now just imagine for a second that you could hire the perfect person to help you full time with your investments. This person would be completely dedicated to making the right decisions for your wealth. They’re an investing expert with experience at some top notch institutions. We’d have to pay them around $150K a year, hire some office space and pay for the right data feeds and industry conferences. Chucking in some taxes this should cost you around $300K a year. I’m being conservative here.
 
If you hire a financial adviser or a wealth manager you’ll pay fees of around 1% of the amount you give them to manage. This number will be higher in many cases and in some cases lower, but let’s just assume 1% to be easy on ourselves.
 
You’re a smart person and have guessed where I’m going with this. At a 1% fee you need $30 million with a wealth manager ($300k in fees) to have a full time person dedicated to your financial wellbeing.
 
If you have one million dollars invested with a financial adviser they make $10K from you a year. That covers maybe a cubicle worth of rent or half the office Christmas party. You’re not exactly going to be the biggest priority.
 
Well, you might have 30 million dollars in your checking account. Lying around sunbathing with not much to do. Or maybe like me you’re still waiting for the bazillions to come rolling in......
 
So what are the rest of us to do?
 
Four options:

  1. Hide under a rock and pray for a miracle

  2. Do the whole investing thing yourself

  3. Completely outsource thinking about investing to someone else (and hope they don’t mess up and are genuinely working for your benefit)

  4. Learn to invest some money yourself as well as choose the right financial adviser or automated tools for you.

This post was going to be longer and come to you last Friday, but in my hurry that day I managed to scratch my eye with a contact lens and ended up in the emergency room. After 3 days of one eyed living and no iPhone or laptop allowed, I’m going to keep this bit short and send you some thoughts from a cool seminar I went to last Thursday.

Numbers are Our Financial Future
A few days ago I had the chance to attend the London Quant Finance Group Spring Seminar. That’s quant as in quantitative finance.
 
Please don’t run away now.
 
I promise there are no fat formulas coming up.
 
The group has been run for 30 years and attended by academics, researchers from the big investment managers and hedge funds. Now I am by no means a quant finance expert, but my investing world is becoming so number driven I figured I had better put some serious muscle into figuring out a small bit of this investing universe.
 
A friend told me about this conference about a year and a half ago and after minor distractions such as having a baby, I finally made it to a seminar.
 
I went in wanting to figure out 2 things:

  1. What the heck is Quantitative Finance?

  2. Can there be a magic formula to investing? By instinct I’m mistrustful of any formulas but I recently came across a fund run by a young man who had performed tests on the stock market going back to 1926 and found a formula for success. He’s raised billions of dollars and I thought - well let me figure this out, maybe I’m just not smart enough to “get it”.

Here are my take aways:

  • Quantitative finance pretty much rules or is going to rule the investing world -- its basically anywhere computing power is used to help make investing decisions. This made me feel better - that there wasn’t some big definition I was missing. In my head I’ve renamed it “investing using programming”. Less scary. For my own thinking I’m going to divide it into 2 buckets:

    • The first I’m calling the “Big Data investing”. Basically using a computer to crunch huge quantities of data to reach insights that would be impossible by just reading or running spreadsheets. One presenter had crunched 44 million bits of data to come to his conclusions! 

    • The second I’m calling “algorithm trading”. You spot a trend (say currency movements whenever the Fed makes an announcement) and you write computer code to track and buy and sell according to a set of rules. It’s faster and more consistent than any human being ever could be.                                                                                     

  • No magic formulas. Yup, a Cambridge professor basically showed that if you look hard enough you will find a pattern in history -- but that doesn’t mean it will hold true in the future. I’m just going to quote Warren Buffett as I can’t say it any better “beware of geeksbearing formulas.” So I’m happy to remain highly sceptical of any magical funds.

  • There were a couple of breaks at the seminar and I chatted to quite a few people. It seemed like you could break the group into highly enthusiastic under-40 year olds and highly sceptical of everything over 40 year olds

  • Creative self-destruction in trading.  Say Google creates a self-driving car and tests it and the car drives itself 10 feet. The Google guys get excited and make and sell a thousand cars. The car then goes a hundred feet. The project it deemed a huge success and the order goes out to make and sell a million cars. The car then reaches the half mile mark, topples over, fire shooting out the roof and disappears in a puff of smoke. There are now 1,001,000 of the same cars on the road. Similarly, someone comes up with a trading idea that seems solid - the only way to test it is to put cash to work. Money is made, so even more money is bet on this idea. This goes on “testing” the markets - and then the whole thing blows up.

I hope that wasn’t too bad and there wasn’t a formula in sight!! If you want to know more, check out their website: http://lqg.org.uk/category/seminars/
 
All the best for the week and I’ll visit your inbox again soon. Hit reply if you have any questions or comments. With just 27 subscribers, I’ll be thrilled to hear from you.

Mallika