Want to be a good investor? Don't be in finance.
Updated: Mar 14
Hey guys, MJ here.
Since I started being online, plenty have asked me if they should go into the finance industry because they're interested in investing and want to become better.
Typically, the kind of people who seek my views are: 1. Fresh graduates. 2. People in a different field wishing to go into finance.
Now, finance is a pretty big field, the area that I'll be sharing my views on today is the investing field, which usually includes analysts, fund managers, and traders.
As a disclaimer, I was a former analyst in a very un-traditional way. I wasn't one at a bank/fund but at a research house instead.
I do not have direct and 100% lived experience in traditional finance.
As such, I have sought the views of a traditional research analyst(who wants to be unnamed) to verify certain facts and of course, consult his experiences as well.
I have come to the conclusion that being in the field is a net negative if you want to be a good investor.
Let me tell you why.
To be a good investor, you have to actually invest.
The reason you become an analyst is so you can level up your technical skills + build mental models and networks. This is obvious.
A skill is just a skill if not applied. So, you have to actually use real money to invest.
The great part about this field is the pay. Compared to most other fields, it is better.
The not-so-great part is the institution you work for will likely make it EXTREMELY difficult for you to invest your own money.
See, when you work for, let's say, a bank, you'll be placed under all sorts of restrictions.
For one, you might not be allowed to invest in stocks that you've researched. No worse feeling in the world when you aren't allowed to enjoy the fruits of your labour.
Multiple approvals are also required for you to execute every single trade, which creates friction.
This alone should discourage you from entering the field if you want to grow as an investor, in my humble opinion.
Whether this is the right thing for the bank to do or not is irrelevant. They have their reasons. As far as I am concerned, I just want to know whether where I work will advance my investing skills or not. If it stops me from being a practitioner, the answer is no.
Psychology is arguably the most important aspect of investing, if you're in an environment that doesn't hone it, what's the point?
If you've been following my work long enough, you'll know I am a Warren Buffett fan and by extension, a fan of long-term investing.
It is not necessarily the highest return strategy in the stock market, but it's the one with the most data and evidence backing it. Having a long-term mindset is a massive advantage when the majority of the market is short-term.
You know what else is short-term? Working as an analyst.
Whether on the buy or sell side, clients of these institutions want returns on a quarterly basis. So, you start spending time as an analyst trying to figure out what's going to happen every 3 months or less, you indirectly push yourself to only think of analysing companies that'll grow their earnings quarterly.
Stocks are pieces of businesses, and good businesses don't grow well every quarter. All this time used to figure out short-term movements will have long-term effects on your ability as an investor.
You may be earning more now as a Grab driver, but you're losing time to learn new skills so you can leapfrog your income. The comparison is apt.
To make things worse, many sell-side analysts and investment bankers have their pay+bonuses tied to brokering deals with companies. They're heavily incentivized to write only good stuff about the company because they want to raise funds and generate trading volume, not do objective unbiased research.
Below is a verbatim comment from the anonymous source I consulted to do this writeup:
"I've seen some fund managers who get mad when analysts pitch them a stock that they think may not go up in the next few weeks but only in a few months"
Every day we stray further from Go-, sorry I mean Buffett.
One perceived advantage of an analyst at a 'reputable' institution is the access they get to management.
On paper, this makes sense. Why not get 'insider' info instead of relying on public data? Why not get ahead with informational speed?
The problems are this:
Virtually all CEOs or management are optimists. This is a very nice way of me saying that they will never share with you the full truth and only the good part of the company's activities. I don't blame them, I'd love a positive-minded CEO too.
It induces laziness. I used to have friends and 'mentors' who'll proudly say they skip the hard work of combing through annual reports, financial statements, and industry reports, but instead, go straight to management to learn about the business.
They'll say "what can you learn from desktop research and annual reports? You need to learn from the horse's mouth straight! Who's better than the CEO himself when it comes to his own industry?".
Well, here's the problem: The horse can feed your mind BS.
To be fair, not all will be like that. Of course, integrity is not totally absent among public company CEOs. But be very aware that they are incentivized to tell you what's sweet, not necessarily the truth.
The reason you do the hard work before is so you have a better chance at telling sense from nonsense when or if you meet management.
SILO YOUR SOUL
Without much research, you'll discover the field to be one where long working hours are commonplace.
This in itself isn't an issue. After all, if you like what you do, it's not 'hard work'.
But as stated above, you do not even get to make investments of your own, or it's difficult.
To make things worse, there's a good chance you'll be siloed into an industry.
As an illustration, famed investor Mohnish Pabrai once said he met a railway analyst. There are only 4 major railways in North America, and that's all that analyst looked at. How uninspiring.
To be fair, this is an extreme example. Often, perhaps after 3 years in the industry, you'll be able to handle 2 industries, if your boss permits.
Regardless, as an investor, you should go where the opportunities are. Working in a big institution limits this severely. There's no law in investing that states you MUST focus on one industry. Often your bosses and colleagues will try to convince you into thinking that's how you generate expertise, and to some extent, that's true. However, your objective is to not merely be a great researcher where you know which screw goes where in what trinket, but to be a good investor and ultimately generate satisfactory returns in the stock market. This will mean you ought to take a flexible approach and be industry-agnostic.
Also to be fair, if you're lucky to be siloed into an expansive industry like software and technology, then it might pay dividends to stick to it exclusively.
But please, no railways.
Because so many in the industry think they have a corporate title, that makes them a 'cut above the rest'.
This is farcical.
In fact, the retail individual investor who may not be the most technically gifted but invests his own money is superior.
Skin in the game.
Many fund managers and analysts talk a big game. They know all the jargon, speak in a confident manner, and can do wonders with excel.
But because they've never actually put their own money down and are paid a fixed salary, they bear very little consequences if things go wrong. The worse they experience is probably a firing or a bruised ego, whereas a retail investor actually loses money.
Ego does not pay in investing and if you join the field, there'll be plenty of such people waiting to poison your mind.
Of course, there are benefits to joining the industry. But that's for another post.
I am quite sure I've missed out on a few reasons and have not covered all bases.
Let me know in the comments if you relate or disagree.
Chat soon, MJ