One of my favorite investing quotes comes from the legendary 1968 book The Money Game by George Goodman, aka Adam Smith: “If you do not know who you are, Wall Street is an expensive place to find out.”
I put this line at the beginning of my book because I’ve seen its wisdom proved again and again in my thirty-plus year career. As ironic as it sounds, the folks who start out in the investment business just to make money usually make less of it. The ones who do so because they’re inspired to learn as much as they can tend to make more. Of course, there’s nothing wrong with wanting to make money. We’re all trying to do that—the more the better. But if investing doesn’t fuel your intellectual curiosity, you’re probably not going to make as much money as you hope, and there’s a good chance you’ll go broke.
I was talking energy stocks with a longtime money manager the other day and was shocked to discover that he did not know that most energy supply firms are headquartered in Houston. He guessed Austin, then Dallas. I was dumbfounded. Pick any article written about an energy company and it will almost certainly list Houston as its home city. The only explanation for this person’s ignorance is that he simply doesn’t read very much about America’s corporate landscape. That’s a serious problem for anyone trying to earn decent returns buying and selling the stocks of American corporations.
Sadly, he is far from alone. Many folks in my business display a stunning lack of intellectual curiosity. As I recount in Dead Companies Walking, I once gave copies of a fascinating book on small cap investing to a group of analysts and brokerage salesmen in a stockpicking game I was part of during the 1980s. I was excited to discuss the book during subsequent meetings. Those discussions never happened, because exactly none of the guys in the game bothered to read it. I doubt any of them even glanced at the first page. Incuriousness isn’t just an issue on the sell-side, either. A shocking amount of money managers display absolutely no knowledge of the various federal tax rates on capital gains, ordinary income, or dividends. I’ve talked to more than a few who could not even tell me the tax rates in their home states.
In the age of the passive index fund, it’s incredible to me that these sorts of people are still in business. It shows that far too many Americans are incurious about who is managing their money, too. They have no clue that most Wall Street firms promote wealth-destroying, rather than wealth-building activity. This includes overtrading, buying funds with high fees, and encouraging investors to hire expensive financial advisors who are often far less successful and affluent than their clients. As Warren Buffett once quipped, “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who ride the subway.”
Intellectual curiosity is the key to success in many endeavors, not just money management. For all of Donald Trump’s coarseness and braggadocio, his worst quality, in my opinion, is his puddle-deep understanding of the world. Even before he pledged to keep Russia from invading a country it has already invaded, it was already obvious that he didn’t care enough about acquiring and developing the knowledge necessary to become president. While I’m not a huge baseball fan, I constantly think about the book Moneyball (which became the best sports movie ever made, in my opinion). The way Billy Beane succeeded by bucking the orthodoxy of traditional thinking didn’t just take guts, it took brains, and a willingness to engage with new ideas. In football, Bill Belichick was widely criticized a few years back after going for it on fourth down deep in his opponent’s territory. The play didn’t work but it was actually based on sound mathematical reasoning. In fact, there is strong evidence that teams should never punt on fourth down. Of course, most coaches probably haven’t even bothered to read that evidence, let alone act on it, because they aren’t intellectually curious enough to do so.
There’s a reason Bill Belichick keeps going to Super Bowls while most coaches wash out after a few years—and it’s not because his quarterback is using deflated balls. It’s the same reason only a few money managers beat the indexes over the long term while most underperform or blow up their funds. Belichick is intellectually ravenous. He’s constantly devouring information and ideas. I don’t know what kind of money manager he would make, but I can guarantee you he would never squander his investor’s money by failing to keep up with changes in the tax code—and he would certainly know where every major energy company is headquartered.
Every year, I give a talk to investing students at Northwestern business school. I tell them that if they get into someone’s car to go to lunch and that person is listening to music on the radio instead of the news, there is a good chance they will fail at money management. The kids always look at me like I’m speaking a different language when I make this point. What does humming along to a few tunes on the radio have to do with successful investing? The answer goes back to Adam Smith’s line: if you don’t know who you are, Wall Street is a very expensive place to find out. This business is brutally hard and we only have a finite number of hours each day to acquire the knowledge we need to make good decisions. If you’re not hungry to do so, you might as well index your money and go watch some reality television. I’ve never seen it, but I hear a show called The Apprentice is fairly entertaining.