Should you invest on your own?

On trading costs, diverse portfolio and passion.

Published on:
August 24, 2019
Last Update:

Written by

Noam Ganel is the voice behind Pen & Paper, a value-oriented stock research publication. He  serves as  Vice President in Capital Markets at Silvergate Bank and holds the Chartered Analyst Credential (CFA).

Hiller the Elder, who lived in the first century before the common era, said that we should first take care of ourselves so that we can take care of others. Not unlike his comment, I research companies for my own benefit but hope that others may benefit from the research too.

The topic of this meditation is what attracted me to stock research in the first place. I will then mention three reasons why I decided to not let others manage money and three reasons why I decided to buy stocks on my own.

Why I don't let others manage my financial destiny

The first reason is cost. Gabelli Funds, a mutual fund, charges 1.35% management fee. That means that if I was to give them $100,000 to manage, they would charge $1,350 a year.

To put in perspective what the fee of $1,350 is, excluding transaction costs, it is more than what I pay for all research and trading software. Guru focus annual fee is $450. Seeking Alpha annual fee is $200. The annual subscription fee for Barron's, WSJ, The Economist and Forbes is less than $300 in total.

And the high fee didn't meet higher return. Open to investors since 1986, the fund's average annual return is 9.98% after fees. The S&P 500 return, which you can buy for a management fee of less than 0.10% was 10.07% during this time.

The second reason is that I don't believe in neither the Noah Approach[1] to investing.  Consider the Gabelli fund again. The fund has an equity interest in over 40 sectors of the economy, from airlines and computer hardware to telecommunications and machinery. And the fund owns over 700 stocks.

To me, successful investing is not about consistently beating a performance index. And since every mutual fund’s manager knows their performance will be judged quarterly - even monthly - they focus on the flawed metrics, such as Sharp Ratio, Alpha and Beta. This is also known as the Greek approach to investing.

Why I decided to manage my money

As a business hobbyist I enjoy reading about companies; researching their profit margins, risks and business plans. My friends remind me that when I was eight or nine, I bragged to everybody that I bought a bargain: a pen on which I didn't have to pay taxes since it was bought in the city of Eilat. (In contrast to Tel Aviv where you would pay VAT. )

I am also contrarian. I ride my bike to the office and hardly drive. I much prefer to exercise alone than in a groups and you will not see me on social media. So, if the common convention is to let someone else - be it a financial advisor or a mutual fund manager - manage money, perhaps I chose the opposite just to prove a point.

There is a wealth of information that is widely available. This is a key point I believe many do not fully appreciate. It was only two decades ago that if you wanted to read the financial statements of a company, you would call the United States Securities and Exchange Commission (SEC), pay for the shipping of the statements to be delivered to your home and wait for a few weeks. Today, you can get the information in less than five clicks.

Another boon to investors was the SEC's requirement of Form 13F filing. Today the SEC requires anyone who manages above $100 million and more to publicly disclose which stocks they bought and sold. Using websites such as Guru Focus or WhaleWisdom , you can read what legendary funds and investors, such as Third Street Avenue or Mohnish Pabrai, are doing. In the last quarter of 2018, Third Avenue bought the stock of PNC Financial, Hawaiian Holding. Pabrai bought shares of Micron Technology.    

Trading costs are minimal too. If you decide to sell your home, the real estate commission and other fees can eat up about 10 percent of the sale price, according to Bankrate.com. Yet if you would like to sell your stock in, you could easily do so and it would cost you $4.95.

Your parents paid a much higher transaction fee. According to a Columbia University study, in December 1968, to trade 100 shares with a value of $400 (about $3,000 in today's currency) would cost you $3 of 1968 currency (which is about $22 today) plus 2% of the amount traded. So, it would cost a total of $82 to sell a position, about 16-fold higher than the cost of today' markets.

I believe in taking responsibility. If I lose money, I would much rather blame myself for an omission of thought than to blame another person. Jerry Seinfeld, perhaps, said it best:

"People always tell me, you should have money working for you. I've decided I'll do the work. I'm gonna let the money relax."  
FOOTNOTES
[1] The Noah approach to investing is when a fund manager has an equity interest in hundreds of companies.