I write a lot about investing in the stock market and analysing businesses, etc. I haven’t really talked to much here on the blog about making investments in things outside of the stock market (e.g. Angel Investments, Real Estate Investments, etc.). Regardless of where I am investing my money or time, the thesis is always the same. I am only interested in having things that are worth more than I pay for them. My kids… I pay a lot of time and money for and they are worth far more than every day I spend coaching them. My stocks are all worth more than I paid for them (or less in the case of the shorts). My real estate is the same way. Part of what got me excited about this particular deal is the same thing that has me excited about $AIG and $BAC… Lawsuits!! That’s right, Ben Graham advises that the market undervalues things that are involved in lawsuits. Granted, lawsuits make it more difficult for investors to analyze the assets they are investing in; however, logic usually wins. In my case, I am investing in a strip mall that was in receivership as a result of the last investor going bankrupt. I am using a bank loan for leverage and a group of investors to spread the equity. I know a lot of my readers have thought about this with their neighbor or co-worker and never executed on it… it really is a simple analysis.

In the past I have always invested in the single family space and am decidedly making the shift into the commercial space. Don’t get me wrong. There are a lot of reasons to think that single family is still great to get into if the numbers are right. According to this NYT article, Seattle’s housing rental rates are increasing in line with the rest of the nation; however, there is an increasing amount of competition. Housingwire reports that Seattle’s market has a bottom around $200k and Estately has a good write-up on Seattle’s multi-offer environment. Luckily the single family homes we own are only financed to around that $200k limit and the rest is equity so property values can bounce around all they want.

With all that in mind, have a look at this video interview with Wilbur Ross. A lot of people love and hate Wilbur, but I think his insights into the housing market are correct regardless of his other thoughts on the economy.

Some of the other areas I saw some opportunity were in the Detroit market. Yeah I know – laugh… but I think we missed most of the boat on the Detroit market. The SE seems to be pretty strong as well; however, for me the problem is that I like to have my real property near where I live. Granted I am not buying commercial space in Seattle, but I am buying in the area and am pretty happy with the growth potential in the area.

The alternative to real property of course would be investing in REITs and the like. This is a good strategy and in fact I sold my stake in $AGNC to free up the funds for this purchase. $AGNC has been trading above book value for a long time and they are continuing to have trouble with the spreads. For me of course those same spreads and depressed real estate market are great! In fact I will probably be selling out of my other REITs in the coming year and look to put those funds into another property.

Back to this investment, with the bankruptcy and a previously poor vacancy rate, this property was overlooked by a lot of investors. In fact one investor that I talked to about it was surprised that I would look at a deal like this. The tough part here is that you have to talk to the tenants, ask them what they want. You have to look at the comparable properties and rental rates and determine what you need to do to compete. Most investors would have passed up this 65% rented strip mall with a brand new strip mall a few blocks away… but if you look at the tenants and ask them what they need you just may find (as we did) that you can quickly move to 100% rented and invest in some basic maintenance to get the property to a good place for the tenants. Of course it helps that strip mall vacancy is falling (finally) as well.

I’ll be looking for another one… but don’t think I’ll pull the trigger unless (like this investment) I am buying below the real value of the property as Sam Zell recommends.

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In the last few months I have been asked way too many times for a referral to or advice on how to pick a stockbroker. My first thought is always that I am glad the people asking realize they just want help managing their investments. It is definitely a good thing to focus on what you are good at and be willing to spend the money for someone to do the things that you are not good at. This is the basic economics that Adam Smith explained. Usually the people asking have looked around on the web already yet have been generally shy to ask their close friends for the same advice. For some reason our culture makes it hard to talk about real money matters with friends and family. Usually that is because those conversations lead to divulging how much is really in the bank or what kind of salary people are earning. I never understood why we were so afraid to have these conversations… sure it means that we end up judging one another, but good family and friends won’t make a negative judgement based on a higher or lower than average financial position.

Usually people are asking me without having had that conversation with their family though and they are asking about stockbrokers at places like Ameriprise or Morgan Stanley. They are trying to get validation that going to one of these “financial planners” is a good idea and that they will get help with their money beating the market. They never want to do the investing themselves as they have no clue about the market and think that day traders are the only ones with online investment accounts. This leaves them going to the major advertisors (e.g. the “financial planners” at Morgan Stanley) and then asking me for validation.

Occasionally I hear the story about how they read some random walk theory and just want market returns… yet they still want to pay someone to give them market returns.

So here goes the basic advice I tell everyone. I will just start referring people to this post and update it if anything changes (doubt it will)…

If you just want to match the average stock market return – you do not need to pay anyone.

Buy the ETFs that track the indexes (S&P 500, NASDAQ, & DJIA) at any online brokerage and you will get market returns. These will be good some years and these will be not as good some years. If you want to do a little better than just the US market buy ETFs that represent all of the major indexes around the world. Some online brokers offer these for free, some offer them at little cost. A pretty common place (because it is cheap) that people who want to match the market do this is at Vanguard. Anywhere is fine though.

The good part is that you will do just as good as most money managers. This isn’t a joke, if you think it is and you would rather pay someone for market average returns, you need to ask yourself – are you losing money?

Remember that most investment professionals are paid to give you exactly the market average return. In fact, I heard the funniest comment this week from a real estate professional who was trying to get interest from people to invest with them. He stated that his investment broker had returned 1% over the market consistently every single year. He said this was amazing. What he failed to mention was that he was likely paying 1% in fees to this same broker and thus getting market returns. Needless to say he didn’t attract my investment capital for his real estate fund.

You probably think I’m kidding about the financial planner thing…. I too was paying someone 1% to manage my money (after a discount). We would talk once a year and he would tell me how the market was doing. I would argue with him and ultimately get frustrated at his view of the world. He would tell me that buying into these Morgan Stanley managed funds were way better than the indexes. In fact he would convince me to diversify and sell me other Morgan Stanley funds. Most of the time his timing would be WAY OFF. Last summer we talked when I had a 401k to rollover. I told him that I wanted every dollar of my rollover invested because I wanted to catch the coming increase in the market. I could see the business activity in the market and knew it meant improved returns were coming in the market. He said ok…. December rolled around and I called him up very irate, he hadn’t put my rollover into the market and I had already missed part of the move. He said things were about to drop so he saved me. In January I closed all my accounts with him, 1% fees for market returns and complete ignorance to macro economy indicators was ridiculous. Luckily I only had a portion of my money with this broker and had spent the last five years learning how the markets work so capturing the stock market moves we have seen lately wasn’t too tough once I fired my broker. Believe me when I tell you that paying someone 1% to get market returns SUCKS!

There are alternatives to the ETF strategy and maybe you do a little better than the ETF strategy.

I talked about Betterment, FutureAdvisor, & Wealthfront in my post about how retail investment is changing. These are online based tools that are much lower cost, but also designed to give you around or just above market performance. What I didn’t talk about in that blog post was the emergence of fee based investment professionals. This is similar to the rise in flat fee legal services where you pay an hourly rate to a professional who gives you some tips/tricks on how YOU should change your investments and afterwards steps out (http://www.flatfeeportfolios.com/). Of course in both of these scenarios you are moving away from relying on the fact that the index tracked funds will return exactly that (the same as the indexes they track) and are starting to move towards trusting the person or business you are working with. The flat fee model and the online algorithm model reduce to some extent the need for trust. They only attempt to get just above market returns and risk very little in doing so. They are also not personalized services that require you to believe in the person behind the curtain – they are straight forward and allow minimal interaction.

If you want to be better than average, you have to be willing to accept the risk.

This is hard for most people. If you aren’t doing it yourself you really have to find a way to trust someone or some firm to give you the outlandish returns they are promising. Every time I talk to someone about the returns that they want it is always double digit. When they see the kind of people and firms that can actually deliver double digit returns, they usually say that it is too risky and go with an Ameriprise broker or something. My point is that if you aren’t actually interested in investing with someone who is promising you these returns, don’t waste your time trying. Go back to getting market returns with an ETF.

If you want websites look at things like Alphaclone who promise great returns and seem to be delivering. If you want Mutual Funds, those are around as well… or if you really want a person – ask someone you trust if they know a great Registered Investment Advisor (RIA)… RIAs by law, have a fiduciary responsibility to their clients while brokers do not. I guarantee if you ask someone you know and trust that is passionate about success they know at least one great money manager (disclaimer: I know a couple that promise and deliver outlandish returns and am NOT one myself). The point is that if you really want those double digit returns after paying someone else to manage your money, you really are going to have to find someone or a firm that you can trust and usually extending that trust is pretty tough.

If you think back to the snake oil salesman of the past, these people would sell anything to cure the ails of the public. Some would put things in that were bad for you, some would put things in that weren’t good or bad, and occasionally there would be a motivated chemist who would put together a concoction that was truly helpful. The tough part is that they all sounded a little kooky. They all sounded like snake oil salesman. If you walked into a church back then and asked the room for some advice about your cough, they would tell you how they would cure your ailment, point you to the tried and true remedy, or point you to all sorts of snake oil salesmen. What I am saying is no different. If you are asking around for a referral to a stock salesman, the people you are asking can either advise you of their specific remedy, point you to market returns (warning you not to pay too much for them), or point you to their favorite snake oil salesman. Ultimately when you see the salesmen you are pointed to, you will have to make the decision that they are honest or not. There are no laws or regulations that brokers who work for investment banks have to actually return to you this year what they claimed to return last year so it is up to YOU the buyer.

The SEC warns of this – http://www.sec.gov/investor/pubs/invadvisers.htm and all the racket in the legislature the last couple weeks around the JOBS bill is centered on this very topic. The fact that anyone can con you as an investor is troublesome to a lot of people; however, there is nothing really preventing the average retail investment broker from conning you into paying them 1% for something that you can get on your own. This means that you need to trust someone or some firm in their ability to provide you with the outlandish claims that they tell you about. Of course determining the difference is the tough part and Mike Alfred seems to forget this fact in his latest Forbes article sucking up to investment advisors.

In the end, my personal recommendations are:

1. If you want market returns buy a group of ETFs or funds that track the world’s public indexes at any online brokerage – you choose, but it really doesn’t matter.
2. If you want a little better than that, use a flat fee RIA or online firm such as betterment, wealthfront, or futureadvisor.
3. If you really want to beat the market, ask a trusted friend or family member for a RIA they use because ultimately you will have to trust the outlandish story you are going to hear
4. Of course you can always learn to invest yourself, get started reading the GMO Quarterly Newsletter – Jeremy Grantham and then reading Investing Lessons from Venture Capitalist series.

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A lot of people know I am not a huge fan of market analyst ratings. Early on in my exploration of the market I thought I wanted to be an analyst as I thought that these people were paid to do great research and really dig deep on companies. I really enjoyed my time as an industry analyst over at Ferris Research and thought that stock market analysts had similar roles. I understood they were financed by the companies they were analyzing, but never thought that the lack of integrity because of that financing would be so poor. Obviously I never went that route.

Instead I dump the money I save up into the investments I research through my ESPP and more sophisticated transactions. Usually this ends up being in areas of the markets that analysts aren’t watching or don’t have good things to say.

There has been some research into the validity of those analyst recommendations and it seems that when analysts make bad recommendations, they tend to escalate those recommendations instead of admit they are wrong, at least according to a study by Beshears and Milkman titled Do Sell-Side Stock Analysts Exhibit Escalation of Commitment?. They aren’t alone though, Stanford’s McNichols finds that buy/sell strategies based on analysts recommendations would leave an investor flat (no gain or loss). Then add the transaction fees and the investor would be losing money. This is commonly the logic that is used against technical analysis of markets.

Think about it… if Goldman Sachs is doing ANYTHING to make a buck, why wouldn’t the analysts be in on it? I know separation of analysts and investors is supposed to be in place, but I think that idea is as rigid as our idea of separation of church and state. Of course it doesn’t stop at $GS, it really isn’t any different at the other firms that compete with $GS, it has to be as they have to compete with $GS (remember that logic came straight from the investment banking executives to explain the 2008 crash – including my old boss Kerry Killinger).

Todd Sullivan recently went on a rant about this regarding Salesforce.com analyst calls and how they feed into the hands of the executives running the calls. Please don’t think this is a unique analysis from Todd or a bashing of $CRM. Here is a write-up that Eric Jackson did for The Street. Eric analyzed the $RIMM analyst calls and found that the analysts with the higher stock price recommendations were primarily the ones dishing out questions on the calls. The message? If you over-estimate my stock price, you get priority. Barel Karsen points out a rather comical analyst justification regarding a hold recommendation for Berkshire Hathaway stock… “It’s the cheapest that I’ve seen it in a while. It’s hard for me to get really positive on that.”

I don’t think $BRK.A, $CRM, & $RIMM are unique cases, this research that Barry Ritholtz put together shows that most analysts are striving for the most far out estimates 2x or more…

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Well we’re back from Greece, it was amazing to see the ancient and future history at the same time.

I also see that GeekWire has announced the continuation of the Seattle 2.0 awards (I won an award at the first Seattle 2.0 ceremony). I helped in judging this round and am excited to attend the event next week. I hope that you can attend as well.

Reflecting on the categories after spending all this time in Greece, I am a bit sad that we don’t have a category to honor the lessons learned from failing to build a successful startup. Failure is something Greece has never looked at critically in their culture and increasingly it is something that we in the U.S. are failing to appreciate. Failing at things happens!

As a father I can remember watching my first son learn how to walk. He would crawl for a bit, cling on to a chair I had in our apartment, then pull himself up with an amazing amount of effort. Then take a step or two and (usually gracefully) fall. I tried to help him, I held out my hand, I gave him examples, I coached him, yet he needed to fail on his own to learn how to do this task.

By the time my second son came of the age that he wanted to try it, I thought that it would be different. I thought that somehow he would have learned from his brother or that I would be a better coach. This wasn’t the case though. He similarly stood, stepped, and fell (not gracefully btw). As I look back at the pictures in my head and emotions in my heart, I realize that they had no ability to learn from other’s mistakes. They could only learn from their own mistakes.

Similarly in life and business, as adults we sometimes have the ability to learn from others failures and sometimes we don’t. Sometimes we need to have our own failures and sometimes we can learn from other’s failures. In both cases, if we don’t learn to embrace failure. If we shun our own failures and the failures of others, our ability to learn from those failures makes no difference and we expose ourselves to a lack of progress.

I know that Marcelo has been very open about the lessons he learned with Sampa’s failure and Ben Bloch was pretty open Saying Goodbye to Whim, Lessons Learned.

Have you learned from startup failures?

What failure would you vote on as the most influential to your progress as a successful entrepreneur?

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If you don’t get momentum investing, aren’t good at it, or just don’t believe in it… I have a question for you. Do you use twitter, stocktwits, or any other social media tool? Do you leverage the power of the people to filter the best news ideas, comments, and links and still don’t get why momentum investing works?

I am a value investor 90% of the time. I love picking through SEC filings, CEO comments, competitive strategies, and business models to search for businesses that are selling for pennies on the dollar. Occasionally I jump on a momentum play and lose my shirt because I am just crappy at timing those things. I get the fact that momentum investing is jumping on the bandwagon for as long as the bandwagon is hot and trying to jump off when it is not, or slowly exiting while it is still hot. Recently this was really brought home for me, I had a post on my blog that spread a bit like wild fire and I realized that the quality of posts had been building as you can see in the stats below… there were some larger hitting posts and then suddenly one really popular post.

This is the exact same behavior as momentum in stock!! Look at this chart – same behavior – but it is a stock and not a blog.

You see the same jumps out of the baseline, the same doubling, nearly tripling in a short timeframe, etc. Perhaps this is why so many people who are on stocktwits love momentum investing. Perhaps I have some things to learn about momentum investing from my endeavors in social media and blogging. Granted the upper chart is volume and the lower chart is market value, but the principle that when a lot of people presume there is value the upward volume will go up in an increasing fashion is the same. If you can convince people that your twitter feed, blog, or social brand is valuable it will increase in a rapidly increasing fashion. The same is for momentum stocks in that as more people see the potential of the products the more rapidly the stock value skyrockets and thus the stock follows a relatively predictable behavior of market value growth.

Based on what I have seen in social media, I am re-writing my momentum rules…

1. Look for volume that is at least twice the average daily volume
2. Only commit if the volume continues
3. Exit slowly as the value becomes obvious

Thing about these statements in relation to TechCrunch, Pinterest, etc. They are the same truths as investing in Apple, Google, etc. If you think about the concept of how these are discovered and how people get excited about the two things they are very similar.

Small disclaimer – this was written on 4/4 and set to be published while I am on vacation exploring the new history of Greece – I hope you enjoy the post and the blog – let me know what types of posts or information you’d like to see more or less of on the blog.

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The family and I are off to see the mythological contagion of Europe tomorrow… formerly known as Greece. We are all bummed we won’t be using the Drachma while we are there, yet we are all happy there won’t be too many riots while we are there as well. I sure wish that all the subsidized ferry’s were still operational though and all the taxi drivers weren’t going on strike all the time. There will still be plenty of history from the past and present to witness and plenty of islands and ocean to visit. So why Greece? Besides the fact that none of us have been, it is gorgeous, they could use our tourist money, and history is happening there….

It is important to note that Greece is not like the US, the UK, or even Canada. Most people in the U.S. don’t think of Greece as all that different, yes a bit more socialist…. But not drastically different than the US or Canada. This is mostly due to the way we are educated here in the US, we are taught about all the philosophers that came out of Greece, all the great vacation spots in Greece, and about their great shipping industry. Not to mention how great a Gyro tastes…

What we seem to skip though is that Greece has been in turmoil ever since the era of those philosophers. We skip that they have been fighting with one another, with Turkey, and have always flip-flopped between good and bad favor with their stronger German/French/British neighbors.  The fighting and turmoil over there has been going on so long that we have begun to skip this part of the curriculum in our schools. Most people don’t know that Greece as we know it is a younger country than the United States. Not surprising to anyone who has looked into it, but the school systems and the press rarely bring up this sort of thing.

So how can Greece be so different? We hear “Europe” and think Industrial Revolution, we think of the area of the world where the society we live in was born, and we think of the mythological and religious heritage that all of Europe brings us. We forget or were never taught that Greece wasn’t a big part of that society until the late 20th century. We usually aren’t taught that the government that is essentially operating in Greece today was founded in 1974 and that before that time there were so many versions of government and definitions of territory that we wouldn’t recognize what Greece was. We also forget that this spotted history has continually been bailed out and saved by all of the world powers (both good and bad) and has always found a way to come out on top despite these problems. Considering the history, Greece being in trouble in less than fifty years from their last bit of turmoil is not surprising. I know we focus on what is happening now and we think that during a time where technology and financial algorithms advance faster than we get kids through college that this historical pattern shouldn’t matter. In the larger macro view, I think that it does and despite “good politics” or “good central banking” or “good monetary policy”, Greece’s history will repeat itself here and rely on the powerful nations of the world to help it through another spot of trouble.

Greece and the Greek people have been in turmoil for hundreds of years. They did have their prime during the 8th century and that is the ancient Greece that we all recognize. The Greece of Odysseus and Achilles, the Greece that brought us the Olympics, Athens, Spartans, etc. After that time, it was an open door policy on rulers. Alexander the Great, the Romans, The Byzantines, and The Turks. By the early 1800s, the Greek culture was so disrupted and the Greek people were so mixed with these other invaders that what “Greece” should look like was not well understood by the people who lived there. The result was a period of internal turmoil and confusion.

These revolutions, internal mayhem, and changes in the sort of government that was in power didn’t make anything any easier. Each of the different groups that ruled the land made conflicting changes, sold out to different groups, and ultimately engendered a culture of chaos and dependency on other nations.

Without going through the history of the Ottoman era, we only need to look back as far as 1833 when Greece finally became independent again with ‘a democracy under a king’, this democracy carried no constitution, no votes, but plenty of leaders and taxes as had been in place under the mix of Ottoman/French/Greek orthodox/Russian/Turkish rules. Not having run a government, the reliance on German, French, & British systems was the norm and Greece struggled to strive on its own.

In the last quarter of the 19th century this struggle turned worse and Greece found that its economy was not large enough to support itself (no industry to speak of, peasants had at most 25 acres of farmland – and they weren’t farming tobacco yet). This meant there was no tax basis to support the government and by 1893, debt-service amounted to one-third of the national budget. Interest rates on mortgages and loans reached prohibitive heights. Unemployment or disguised under-employment presented an intractable problem, which only began to be alleviated after the turn of the century by large scale emigration, chiefly to the USA.

A mere 120 years ago Greece was dealing with something awfully familiar to what we are seeing today.

Of course, by 1908 there was another revolution (the Turks again), that wasn’t resolved until 1923 (The treaty of Lausanne). During this time Venizelos claimed himself leader and finally put together a Greek government system. This was great I guess for Greece, but by the end of the first quarter of the century, Greece already had a communist party (Communist party of Greece) that was associating itself with the efficient (but not Hitler run Germans), and had had found that Corfu was occupied by Mussolini and was rapidly expanding their reach. The British Military Mission took over sections of Greece so they could fight Mussolini. A wide array of grassroots liberal groups that comprised Greeks, Turks, etc. wanted to rebel against everyone.

Sounds like more of a melting pot than we had here in the U.S. – why isn’t what they did ever taught in the name of learning from other people’s mistakes? Wait, I know why…there is more to the story…

As soon as the Brits beat Mussolini a guy named George Papandreou organized the Lebanon Charter to have Greece run their own country again. Of course an organized and heavily communist country attracted some new friends, the soviets. With friends like that Truman Doctrine in 1947 had to include Greece and Turkey (that is a pretty key military region in the world btw). Think about it, between 1900 and 1952 Greece had the Turks try to take over, their own government, an assortment of disarray during the Mussolini invasion with no real ruling government, a communist government, and finally a U.S. backed semi-functional state.

Wait, 60 years ago and everyone is intervening to save Greece?

With the U.S. influencing and funding a guy named Papagos took charge to rebuild the economy and did the usual Greek version of rebuilding an economy (devalue currency, reduce government employees – retiring roughly 5k employees early – sounds familiar) and found that none of the usual tricks worked. The economy was still in shambles all the way through 1969 when it was finally kicked out of the Council of Europe on investigations of being ‘undemocratic, illiberal, authoritarian, and oppressive’. Despite the untold story of the Greek dictatorship, the U.S. wanted more Naval access in the area and setup port in 1972.

As with every other time a nation took a strong interest in Greece, turmoil ensued. Greece pulled out of NATO, tried to kick out the U.S., then ditched the dictatorship and adopted a new constitution and democratically elected government. The new constitution and democracy meant the U.S. was ok again and the country that we know today – the country that is a part of the European Union was born.

You can see why there is so much mis-understanding about what Greece is as a country and what their history is like. Looking at it in this perspective what has happened in their economy and what will likely happen during their recovery is much more clear. It has happened over and over again through history and there is no reason it won’t repeat itself.

As you can imagine, I have been doing a bit of research ahead of our trip. Too many websites to quote, but a lot of great facts from Modern Greece: A Short History. I am looking forward to the relaxation, the insights into the current history that is taking place there, and thoughts from readers. It will likely take a bit to get my thoughts into a post… if I choose to put it in long from here on the blog at all, if not follow me on twitter for the short form.

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Howard spews investing advice every Monday (usually), he talks about the individual companies he invests in all the time on StockTwits and isn’t shy to discuss his reasoning behind each of those picks. As you may have picked up on, the Investing Lessons series that has looked at Fred Wilson and Chris Sacca focuses on lessons that we can take back and incorporate into our own investment strategies. While it may be great to follow Howard into some of his picks (like Pabrai, I’m a fan of cloning great ideas), I think it is more valuable to learn from his examples and discussions about how he invests. Howard recently popped up in a foundville interview and provided some insights into himself and his thought process.

Thinking through the lessons we can learn from Howard with my more value oriented view of the world makes for some interesting insights…

Lesson #1 – Invest With The Sharks

Howard walked through a mental model he has about the ecosystem around the great white shark. He talks about how being the pilot fish in that ecosystem provides an opportunity to have the shark’s protection and how that protection affords an investor the opportunity to take some risks that aren’t as dangerous as they otherwise would be. I think those sharks come in many forms.

For me the biggest place that shark came into my investing was my investment in AIG, this was a failed company – bailed out by the U.S. taxpayer. If you look at the surface of the investment it is pretty risky and one that would require a lot of protection to take. Looking under the surface though there are a couple of sharks providing some protection. Benmoshe (our modern day insurance oracle) was brought out of retirement to turn the company around, the U.S. government took a stake (despite an enormous amount of outcry by the public), and looking at the books in the last year these protections have proved to work out. The U.S. government is turning a HUGE profit, AIG is trading for well below valuation, and this risky investment that came with a lot of protection continues to look better every day.

Lesson #2 – Play Games

Yes, I said play games!! Risk, Poker, Chess… Howard referenced all three when talking about strategy, investment, and building companies. He infers that there is a lot of value that investors can get from playing games. Assuming of course those investors are able to turn the lessons they learn playing Risk into analyzing companies they are investing in. Of course I’d recommend Settlers of Catan which is all the rage for startups in Seattle.

One of the major references Howard made was that in Risk, a player needs to build a solid position in one area before expanding. Looking at countless case studies, this is nearly always what companies that would be good investments do. Buffett often refers to this as building a franchise first and expanding from there. Wal-Mart is a prime example. They built a great position (literally in one part of the country as they would in risk) and expanded from there.

Lesson #3 – Can Management Change With The Industry?

Howard talked a lot about himself and the difficulty he presented to investors. The difficulty that his track record was to build great things and sell them quickly. His ability to find the next great idea and his lack of ability to be a great operations guy. This inferred a little bit that the team is important (as other VCs have mentioned). He outlined why he believes his current startup is a little different. He has a larger number of people and has found that the vertical he is playing in is not on the radar of others (meaning he has a lot of room to expand his business).

Investors need to understand management’s anticipated longevity. Are they looking to flip the company, IPO, run it forever, etc? Are they looking to go on a never-ending growth trajectory or will they start paying dividends as soon as they start becoming profitable. If the managers find themselves in a position to continue to innovate and grow, do the managers have what it takes to do so? I keep thinking about iGo, they have some great products, they have some great innovation, but the space is crowded and management hasn’t proven that they know how to differentiate themselves in a business where competition is tough.

Lesson #4 – The CEO Doesn’t Do Everything

When pressed about his overwhelming duties as CEO… Howard quickly and succinctly outlined his only duties as CEO. This seemed to be a theme for Howard. He either on-purpose or by accident partnered or hired the right people to work with, this way he could do what he loved and they could do what they loved. The reverse was true as his worst mistake he ever was to have a bad business partner who was stealing from the business. Howard also publicly described his feelings for Timothy Sykes.

It is important to think through this in your own investing. I know the CEO gets most of the press, but what about the other people? I have talked about how excited I am that Ron Johnson (the guy that invented the genius bar) is turning department stores on their head over at JC Penney (of course JCP is attracting a lot of attention because of this) - but it isn’t just Ron. Ron is hiring specific people that he can rely on to make the right decisions in the right places (such as hiring Laurie Beja Miller specifically to build “The Square”). It takes a team and as Howard points out, the CEO does have a job description just like everyone else!

Lesson #5 – The Playing Field is Level

Howard reminds us that it is a level playing field out there. This lesson is short… but very important!

You as an investor have the capability to have just as much of an edge as the next guy. There is no reason why you can’t pick great stocks, buy great ETFs, or invest in a truly great piece of Real Estate. I have been investing in the single family home space since I was 19. I grew up playing monopoly and watching my Dad try to build a real estate empire. For some reason I got it stuck in my head that single family investments that I funded was all I had the capacity to do. I read books on multi-family and commercial real estate investing, researched deals, and couldn’t find a way to take it forward. Recently I met a fellow real estate investor who laughed at me and said there was no reason I couldn’t move into commercial real estate. He offered to partner with me on a deal and…. My first commercial deal is on its way to closing. Granted I am not running the deal entirely but given the suprising amount of existing knowledge and capability that I have in the space I plan to be doing my own later this year.

Howard’s advice that it is a level playing field out there is important. There is no reason to pay someone 2% of your earnings just so you can get market average returns – that is called LOSING MONEY. You need to realize that you can step up and put together your first big commercial real estate deal, drop the investment advisor, or pick some great things to invest in – it is a level playing field out there – you just need to get off the couch and get onto the field.

Stay tuned for the next Investing Lessons From Venture Capitalists post!!

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You pay on average 1-2% in fees to someone else just so that they can manage your money. This means that even if they are great at managing your money, you are going to lose between a third to a half of your potential earnings over a 30 year timeframe. Of course the research shows that you are likely paying a crappy manager to manage your money in the first place considering the larger money managers significantly underperform independants. Which means that you are likely able to match or beat their performance with minimal effort.

Why do I say that you are going to lose 30-50% of your money? It is pretty simple compounding interest math. As your investment grows, the schmuck you are paying to manage your money earns more money. The tough part is that they are not trying to earn you more money because of this – they are trying to match the market returns. This means that if you match the market returns through something like an ETF you can obtain the same returns without paying all of those fees to your “money manager“. I know – I don’t usually talk about ETFs, I recommend in my ESPP posts that individuals can do better than just investing in ETFs, I will use ETFs for this example as they take much less thought to implement and are commonly used in these comparisons. Of course if you want to beat the market, I recommend you start by reading the series on Investing Lessons from Venture Capitalists.

As an example, let us assume that the market returns 6% annually. So for every $10,000 you have invested, you will earn $600 every year (this is a fairly normal assumption on the return of the S&P – bonds of course are another story). If you are paying someone else to manage your money (@2% for example) you would pay them $212 for that 6% return on $10k. That seems pretty silly to pay someone 1/3 of your earnings for matching the market return.

Let’s walk through this really quickly… Compound returns are equated as FV=PV(1+r)^n… all that is saying is that the future value of your money is equal to the present value multiplied by the rate of return over a time period. The financial genius that money managers use is a much more complicated equation an equation so we’ll use a table to explain it…

That is a lot of money you’ll lose – over $16k… Roughly 30% of your potential earnings. Would you like to have an additional 30% in your account? I know I would!! Most of the research out there talks about the affect of compounding fees inside of mutual funds, etc. The same applies to paying a manager who is charging you an assets under management fee. About that famous compound interest quote – Einstein did not actually pen any quote about compound interest. Which is good, you need to think for yourself sometimes and realize that compound interest is great and compound fees are a cancer.

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Following up from my last post in the series 5 Investing Lessons From Chris Sacca, I came across this article that Jeff Bussgang wrote on lessons for startup entrepreneurs. Reading the article, there were a few key points that Jeff points out as important for startup entrepreneurs. These are great for the MBAs Fred was speaking to and entrepreneurs, but it is interesting the insight that Fred is providing into his thoughts on investing and how relevant they are to investors in public companies.

Let’s look at each of the key points and how they are relevant to retail investment decisions.

Lesson #1 – Embrace Failure

Fred observed that failure is typically a valuable and powerful experience—forcing introspection, humility, and an extra drive to prove something to others. He observed that the entrepreneurs he has been most successful with typically had a major and personally defining failure in their career.

This is less of a lesson in what to invest in and more of a lesson on being a good investor. Every good investor that I know has suffered from a loss or failure. I have my stories of failure and loss in the markets as I’m sure any other great investor you talk to does. This holds true for traders and investors alike, the world can not be perfectly calculated easily, despite what economists attempt to tell you. Making investments with failure and loss in mind does make you more hungry, it does make you define success more clearly, and it does teach you to manage risk in a more manageable way. Entrepreneur, investor, whatever – the process of trying really hard at something and getting it wrong teaches more lessons than most universities will be able to.

Lesson #2 – Investigate Your Hunches

He repeated a comment that we drew out from last year’s conversation, which I particularly like: “Start-ups should be hunch-driven early on and data-driven as they scale.” What was interesting was discussing the profile of the entrepreneur that has good hunches—often they come from outside the domain, yet are obsessed with the opportunity to disrupt the new field with a fresh perspective.

As I read this advice, I thought back on the many investment opportunities I missed because I didn’t execute on my hunches. I wrote a bit about one of them in The Difficulty of Pursuing Your Ideas. In that article I didn’t talk much about the hunches I had on investing in RIMM when the stock was trading at $4… in 2002. At the time the benefit of the product was so amazingly obvious to me (I was rolling out Blackberry Server at Washington Mutual Bank). One weekend the service was up, two weeks later everyone had a blackberry – there was no way this was not going to be a hit. At the time, I thought I would capitalize on being really smart at knowing how to configure the server… the real money would have been made investing in the stock (even selling today I would be up 230%). Your watchlist or the list of 10-K’s on your desk should be your list of hunches, not some list of stocks on MSN.

Lesson #3 – Look Out For Gate Keepers

We discussed the role of gate-keepers in start-ups. Fred is skeptical of businesses that involve gate-keepers. In fact, he encouraged the students to look for industries that have gate-keepers, and compete directly with them (e.g., education).

This is a good piece of advice, where gate-keepers exist, there is money to be made. Most importantly for investors are the gate-keepers around the investment vehicles. If you invest in a stock that is under $5 that is going to soon go over $5 as a result of growth you are going to take advantage of the gate-keeper that institutional investors have. Remember, they aren’t looking at those stocks that are priced under $5. When they do look at those companies when they become valued in a range that is acceptable – and if the like what they see – the results for you can be amazing. Similarly, most retail investors are not investing in options (even covered calls in an ESPP) or warrants. Understanding how these work and how to invest in them is a great skill to take advantage of the fact that most retail investors aren’t in these markets.

Lesson #4 – The Team Matters

When evaluating whether you want to join a company, think like an investor. Conduct extensive due diligence on the team, the product and the market opportunity. Ask yourself whether you would invest your money in the company before deciding to invest your career.

As we learned from Chris Sacca, the team matters! I don’t care who you are, an investor, an entrepreneur, an employee – the team that is making the magic happen needs to be a great team. I talked about Ron Johnson in my last post, he is brilliant! The same is true for all of my investments. Just listen to Benmoshe over at AIG talk about the insurance industry – the guys is an insurance industry oracle. He is turning around that company, paying back the investors, and going back home to deal with his cancer – I’m in!

Lesson #5 – Experience What You Are Investing In

Entrepreneur and start-ups have many varied models for success. Don’t try to follow someone else’s model. Stick with your personal passion and your authentic leadership model. If you don’t have your own start-up idea, go join a 50 person company and leave when there are 500 employees. And if you have an idea and no one can talk you out of it, go be an entrepreneur. (Interstingly, Fred confessed that if he could have done it over again, he wishes he had joined a start-up for the first 10 years of his career.)

If you haven’t been at a startup – you should try it. This advice was to a bunch of MBA students, but as investors there is no better way to learn how businesses are run than to join a startup and see how businesses grow. When you are in a 50 person startup you hear and see everything. You get to learn the difficulties of office space, leasing vs. buying, debt vs. equity, etc. You gain an insight into running a business that extends into any industry and market that you want to invest in. I have been at a couple in my time – as well as large companies. Fred doesn’t talk about this much, but it is equally important for investors to understand just how screwed up the internals of large companies are and what drives management. I can tell you from experience, what drives management at startups is not the same as what drives management at large companies. This matters when you are making an investment decision as the insight into what is driving decisions in that business are critical to understanding what the management is going to do with your money.

Keep your eye on the Investing Lessons From Venture Capitalists tag for more lessons!

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I saw this clip of Alan Patricof and started wondering how the increase in entrepreneurship will influence the job market and hiring in the future. Historically… well a century ago… building a business was the norm for most people to earn a living. Granted the businesses were different, but earning a living was a family affair or that of a small group of people building a small company (a blacksmith for example). That isn’t to say that higher education didn’t exist, it just wasn’t the norm for most people. It wasn’t really required as anyone could build a great business and those that built great businesses were known as good people to work with.

I wondered as Alan talked about all of the incubators and the startup fever that has taken over the nation (for the second time in 20 years) if entrepreneurship was more valuable than a degree. As a father and someone who believes that higher education is beneficial, I struggle with this thought. I know I would be proud of my boys if they built successful or failed startups, but would they do this instead of obtaining a degree?

What do you think?

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