Who does not want to make money?
That shouldn't be the question. The question to ask is how much more does one want to make.
Most of us are always on the look-out for a little bit of an edge, a small opportunity to make a bit more….at least.
From a homeless person to Warren Buffet, everyone wants to make a bit more money. It’s in our nature. Why it’s in our nature is a topic for a different conversation. This conversation is acceptance, and an exploration on how we go about doing it.
In the investment business the term Alpha refers to the amount greater than the broad market or index that is made or can be made. Broad market is defined as a combination of all publicly traded companies without discrimination. So in other words, if $1000 was invested in the S&P500 or the Dow Jones Industrial average 10 years ago (May 2006), its value today would be about $1,600. If another $1,000 was invested the same time with a money manager who used their own proprietary creative strategy and analysis to invest, and its value today is $2,000 then the difference of $400 is Alpha. Essentially, Alpha represents an intention to make more then the board market or everyone else. Or….”How can I make more”.
Research is clear that over the long run 10-30 years plus, very few money managers, if any, are able to produce Alpha. In fact, the broad market has returned roughly 8-10 percent annually for the last 20-30 years while the average investor a returned 2-3 percent.
So as we try to make more we end up making less.
Which brings us back to how can we get what we want. How can we make more?
We are all investors even though the financial services industry has complicated to the point of scary most of us away from the term “Investor”
So let’s start from the beginning and then explore the hierarchy of how we might maximize our Alpha.
As Warren Buffet says, “You need to divorce your mind from the crowd. To be a successful investor you must divorce yourself from the fears and greed of the people around you”. Said differently successful investment requires mindfulness and consciousness.
Each moment is an investment and to become mindful will lead us to alpha. This is much easier then it might sound. All we need is patience, or mindful impatience.
We tend to want short term gain. It feels a bit better and safer to get a chunk of money quickly. But that mentality gets in the way of us realizing a sustainable income. Our behaviour is what helps us find sustainable long term alpha. If we think short term, we will always feel like we are struggling. Think long term.
And think about what we believe in.
In order to Invest we need capital.
We are born with the most valuable capital. Time.
How we spend our time is our primary investment and will be integral to the quality of subsequent investments.
To produce Alpha requires behavior that stokes our energy, and our hope. If we tirelessly chase money the opposite will happen. Enantiodromia, a principle introduced by Carl Jung is that the superabundance of any force inevitably produces its opposite. In our quest for Alpha we need to turn our focus to those activities that make us creative, and feel good. Only then will we be in a position to make more money.
Breaking down how we spend our time can is not a matter of circumstance but shared experience. So how much time each day do we spend with work people, family, friends and self is out first asset allocation. What is the allocation that gives one the most energy. In order to effectively figure this out we must “divorce ourselves from the fears and greed of the people around us”. We need to bow out of the race for alpha, take our own path. Take two steps backward so we can take three steps forward. Subtle changes like leave work earlier or arrive later, or make “appointments with myself”, appointments that cannot be broken. Meeting friends for coffee. Hanging out with family without firing off emails.
Time is our most precious capital. As we start to produce more of this capital, one way or another we will start to get a paycheck.
The second level of investment is how we spend this paycheck. We should to look to Maslow’s Pyramid for some guidelines on this asset allocation.
1- Physiological - food, home , car
2 - Safety - Health insurance, Gym, Bike
3 - Love/Belonging - Social Life, Travel
4 - Esteem - Yoga class, hobbies
5 - Self-actualization - Ongoing Education, work we beleive in.
Now what’s left?
Somewhere in between 1 and 4 we can start to think about how we might turn our money into more money. The further up Maslow’s pyramid we go the better the investment. The more potential for Alpha we find.
“Money is a reward for self-actualization” - Tal Ben-Shahar
Self actualization can seem bit far fetched at times, so to stay grounded we can get back to some of basics.
So how can we make more with the money we earn.
The best opportunity is to invest in our-self. The most obvious way to do this for the sake for making more money is start a business. The best investments are the ones we play an active role in.
A more subtle way to invest in ourselves is by going back to school. Not necessarily in the traditional way, but anyway that makes us better. Could be a degree or a certificate. It could be volunteer work. Anything that is interesting and challenging that makes us smarter.
This will lead directly or indirectly to Alpha. Directly if it gives greater skills in our business or work, indirectly if it makes us more productive.
“Everyone desires progressively to raise the threshold of their intelligence and to reap the benefits” - Iyengar.
Not all of us are in the position to start a business or work for ourselves, so our business reinvestment can be to make us more productive at our jobs so that we may earn more money or bigger bonuses.
The next level of investment is investing our money in a private transaction. In a company we know well and believe strongly in its mission. Perhaps we are an active partner and play a role in the day to day management and operations or serve as a board member. We could also be a passive investor but then we are less in touch with the company’s operation and the mission could diverge from our values and beliefs and the potential of our investment is diluted.
From here we can turn our attention to the capital markets. Stocks, bonds, mutual Funds, ETFs and other similar investment vehicles. As described earlier, in the capital markets if one is investing for the long run - 10+ years - then it’s almost impossible to beat a broad market index. It’s almost impossible to find Alpha. Money managers may produce alpha, for a year or two or three, but as the time frame gets longer so chances of Alpha gets smaller. Money managers retire, or change companies, their analysis and creativity is no panacea. Like they say in Vegas, the house always wins. In this case the house is the broad market.
There is another investment option that can refine the broad market. Investing in companies that have missions and operations that are in line with our values and ethics. Social and environmental responsible investing has become a popular way to do this. There are many funds and money managers who use various research analytics to discover socially and environmentally responsible companies.
We can take this a step further. Being “Responsible” implies obligation. How about finding companies that don’t act out of obligation but whose primary mission is to improve the wellbeing of people and the environment. A more refined social and environmental investment if you please.
What does this have to do with Alpha?
Do you notice that the people and organizations around you that are the most altruistic end up being the most successful. If not there is plenty of research, from both the ivory tower and from Wall Street showing that humble companies that are built to improve lives and preserve the environment and to last 100 years enjoy more sustainable profits.
And if that’s not enough, won’t we sleep better at night knowing we are invested in companies we understand. If you love animals, wouldn't you rather have an animal lover making decisions about how your investment uses resources, or is possibility of more money more comforting.
Finding Alpha comes from maximizing one’s productivity, pursuing passion and sharing experiences. If we look around us, we see all those successful people who make more over time are those who do just that. If you hear someone talking about how much money they made in the stock market, consider the whole story. How much did they lose, how much have they made since they made their first investment.
Research and experience has taught us that that the silver bullet for making Alpha is the holistic approach of self-investment.