Early Investing

Mailbag: Don’t Take This Wall Street Investing Maxim as Gospel

Mailbag: Don’t Take This Wall Street Investing Maxim as Gospel
By Early Investing
Date September 8, 2019

Q: This sounds silly, but I just don’t know how you invest in what you know while still exploring new sectors?

A: Investing in what you know is a sound piece of advice as long as you don’t take it too seriously. I’m speaking from my own experience. For a long time, I treated it as gospel. Investing is hard and risky. Surely the more you know, the better your chance of picking a winner?

It’s a convincing argument. If you’ve lived in New York City your entire life and you like making real estate investments, are you better off investing in New York City real estate or real estate in, say, Moscow?

And yet…

I know a couple of very smart people who did just that. They ignored the opportunities in New York to buy apartment buildings in Moscow. And when you think about it, it makes a lot of sense. Because sometimes the sectors you know best are NOT home to the most exciting opportunities.

Should you just shrug your shoulders and turn your back on investing in artificial intelligence (AI), robotics, pharmaceuticals and medtech, autonomous driving, and a host of other sectors? That would be like ignoring the internet in the ’90s and early 2000s. Imagine missing out on Amazon and Google because you didn’t understand the internet.

Investing in only what you know has a big downside, doesn’t it?

TOO big, in my opinion.

So I don’t adhere to this maxim anymore.

But I also don’t invest in what I don’t know. Heck, for anybody who knows me, that’s a given.

My solution? Give yourself credit for what you do know. It’s probably more than you realize. If you take investing seriously, you’re constantly pushing the boundaries of what you know.

What I know now includes AI, robotics, autonomous driving and many other market spaces. I’m not the world’s foremost expert on any of these sectors. But I don’t have to be in order to successfully invest in them. I know more than the average nonspecialist. And I’m learning more all the time.

Learning is integral to startup investing. But so is making do with less. Less information… less of a track record… less access to hard numbers… and, frustratingly, less insight.

In the startup world, you have to fill in the blanks with your own part-science, part-art, part-instinct projections. Future profitability… market share… sales growth… What does the company say about these things? And how does that compare with what you think is possible or likely? Early investors with a little experience get pretty good at filling in the blanks.

I know I have. It’s not your traditional investing skill. It’s not science. It’s making judgments.

Invest in what you know? I know startups. I know how founders think. How they can overreach at times. And how they go about conquering big problems with a mixture of bravado and brilliant strategy.

Exploring new sectors is part of the fun and adventure. It also gives you optionality.

So don’t get hung up on a Wall Street maxim that’s a bit too simplistic for its own good. I see no contradiction in investing in what you know and exploring new terrain.

+ Early Investing Co-Founder Andy Gordon

Q: Why is the Fed making interest rates lower?

A: Because there’s way too much debt out there today. Student loans, home mortgages, credit card debt, corporate debt, and state, county and city debt.

A lot of people, governments and corporations wouldn’t be able to keep up with these loans if interest rates continued to rise or even if they stayed the same. We hit the breaking point at a fed funds rate of 2.5%, or before it.

Before the Fed lowered rates in July, the real estate market looked to be cooling quickly. Higher interest rates were going to hurt (or correct – depending on your point of view) the market. That’s a threat to the economy and the banks that make the loans, both of which the Fed believes itself responsible for.

Houses have become nearly unaffordable due to the Fed’s artificially low interest rates being in place for such a long period. The Fed created the 2008 real estate bubble and the last few before it. Now it needs housing (and other assets, like stocks) to remain expensive and unaffordable so that consumers don’t go underwater on their mortgages, lose money on stocks and stop spending.

The Fed is attempting to reinflate the asset bubble, and it thinks low interest rates and (probably) quantitative easing are the path to get there.

Lower rates and easier monetary conditions will probably “work” – at least for a while. I’ve learned to never underestimate the Fed’s determination. But considering the size of the debt pile we’ve built up, there’s going to be a rather nasty correction at some point. So the Fed will help postpone it as long as possible. It’s a heck of a pickle for everyone involved (including all of us).

+ Early Investing Co-Founder Adam Sharp

Top Posts on Early Investing