I’ve been following the financial markets since I could perceive time.
I first got paid to do it at Oppenheimer & Company when I was nineteen years old. Wally Davis and Chuck Posternak hired me as an intern at what’s now the Grand Central Private Client Group. I was paid $15 an hour to build spreadsheets that described clients’ financial situations and our associated asset management positioning.
I got to meet with fund managers, build models, and generally research stuff to my heart’s content. I also had unrestricted access to a Bloomberg terminal, which was one of the more exciting developments of my adolescence. But it wasn’t my first contact with markets. That came much earlier thanks to my parents, who were both enterprising in their careers and open with their experiences as I was growing up.
My mom liked to joke that she taught me the difference between debt and equity before I could ride a bike. Which is more or less true. She and my dad had an imperfect marriage, but their shared interest in the capital markets gave them a source of conversation on long car rides. Mom eventually left her career at Lehman Brothers to teach AP economics at Stuyvesant High School (Forbes wrote a great piece about that transition) so I guess it makes sense that I think of myself as her first student in addition to her first child. The picture above is me playing with her briefcase shortly after I learned to walk.
My dad is also one of the most insightful analysts I’ve ever met. While I was cutting my teeth at Oppenheimer in 2007, he was warning everyone who would listen about leverage in the financial system and pushing the investment community to re-evaluate companies like General Electric that had become addicted to financial engineering. I still watch his first tv appearance about it every once in a while as a reminder of how deeply the markets can misunderstand a company.
Even with these fantastic firsthand experiences, I struggled to understand why individual investors should invest their money in anything but index funds.
This chart, which shows the total return of both General Electric and the S&P 500 since dad first went on TV to talk about it, gives a good sense of why.
An investor who decided to bet against GE after dad’s interview aired would have had to incur significant cost, manage mechanical complexities, and wait close to a decade for the insight to deliver any benefit to them.
And in the meantime, a simple index fund investor would have compounded their capital faster and had more time to think about other things.
That’s what I call a win-win.
My confidence in this simple and straightforward approach only grew as I gained more information.
Joining CFA Institute in 2010 gave me an opportunity to dive deep into state of the art academic research that surrounds the practice of investment management in a context where my sole responsibility was to highlight tools, tactics, and technologies that investment professionals make better decisions on behalf of their clients.
I started out writing educational materials, but quickly got sucked into the organization’s online community-building efforts. I was put in charge of recruiting expert voices for what eventually became the Enterprising Investor (still the #1 investing blog in the world according to Feedly) and jumped in with both feet.
The task was to connect with the most thoughtful investors I could find and convince them to put their thoughts into writing on our platform. That led to some profoundly interesting work. Notable explorations of the difference between investing and speculation, what poker teaches us about risk, and the lessons from a famous bet with Warren Buffett are just the tip of the iceberg.
Eventually I got to add my own voice into the mix in addition to curating expert views. I wrote about what Enron can teach financial analysts, the role that faith plays in investment processes, and whether ESG and sustainability could enhance investor returns.
I still couldn’t see why individual investors would invest in anything but an index fund.
And then I came out.
It was 2017. I had been experiencing gender dysphoria for my whole life. And I finally felt able to do something about it besides distracting myself. I changed my name, my appearance, and my pronouns with the benefit of a supportive work environment, then prepared myself for whatever might happen when the rest of the world noticed.
The years I’ve spent connecting to other queers since coming out have taught me to take my values seriously, hold myself accountable to my best intentions, and continuously improve my ability to listen.
They have also made me comfortable with who I am. I started a podcast with my friend Ashby Monk to explore how the world’s most sophisticated investors were working to build a better future for finance, and began writing the “Inclusion in Wealth” column for Citywire RIA to explore issues around diversity, equity, and belonging in our industry.
But I still wasn’t an active manager.
Until my girlfriend and I sat down to have the conversation about how we would invest our money, I would have said it was interesting but not particularly applicable. And yes, I would have offered a full-throated defense of index funds and passive management.
But when we actually enumerated our values, it turned out that I held some pretty extreme views.
- Companies should pay their taxes,
- Avoid preventable harm to living things, and
- Care for the communities where they operate.
Though I’ve expressed them fairly concisely above, those values actually summarize a two page, single spaced policy that excludes companies with questionable products, conduct, or both from our investment strategies.
But however well-constructed our policy is, it’s unlikely to produce compelling results unless it’s part of a coherent investment process. It’s pretty easy to see why: here is a chart of what happens when you apply our criteria to the S&P 500 index.
Each column represents an economic sector. The purple part indicates the percentage of companies in that sector that can make it through our screens. When it’s just pink, it means none of the companies made it through.
You’ll notice it varies widely, and that the folks in tech and real estate seem to perform much better than the rest of them.
There’s a simple reason for that: our screening process isn’t good enough.
It can’t be.
The capital markets are literally a manifestation of the world’s current power structure. Anything that people do will find a way to concretize in them somewhere. So eventually I realized there is no checklist comprehensive enough to rely upon.
You have to pay attention.
Because companies often talk a big game, but are absent when it comes time to come through for their communities. Because our goal is not just to identify companies that are shaping the world positively but also generate financial stability for our clients. So can’t just buy the stuff that makes it through the screens and pretend I’m making the world a better place.
That’s not to say that index funds are bad. Far from it! I have Jack Bogle’s autograph is sitting above my desk, and I still think that they do an excellent job growing people’s money without requiring much in the way of oversight or critical thought.
They just have nothing to do with ethics.
And as an ethics-first investor, I owe it to everyone evaluating my strategy to be clear that there is substantial independent judgement and discretion involved in what we do.
We do not “set and forget” anything. My purpose in starting this firm is to support a restless search for better, more complete, and more reliable investment options than currently exist. And there is nothing passive about that process.
If you enjoyed this post, check out 5 Investment Lessons from the Compost Pile.