While attending investor conferences in my early career at Hambrecht & Quist, I was tasked with taking notes about specific companies for a VC client. The VC several times asked me to describe the crowdedness of a room, a question I appreciated later. The many enthusiasts for Canadian data communications player Gandalf Technologies overflowed the breakout area, but Gandalf dismissed its sales force out of supreme confidence in its product and saw its market cap fall from $1 billion to zero over the following five months. By contrast, the VC was excited to learn that Sunrise Senior Living had drawn only a depressing half dozen people including me and the presenters. Assisted living was an emerging concept with no public companies yet in existence, but Sunrise now boasts 270 facilities across North America.
These experiences occurred as the Internet began to launch. I joined Hambrecht the week they brought Netscape public, and tamping down investor enthusiasm for all things dot com became increasingly a challenge when I left for Citi Smith Barney a year later with technology markets rising ever higher. I tried cautioning a prospective investor that he could own ‘the Com.com’s of the world,’ only to be interrupted and asked to explain what Com.com did and how we could buy it. I had to explain that no, it was a fictitious company I had just made up as a for instance, and no, purchasing shares was not possible.
In this frenetic climate, one investor fired me for earning only 40% annualized over a two-year period. Under pressure from clients and colleagues who wanted me to “innovate” with the money entrusted to my care, I finally created a dot com portfolio using ‘smart money’ indicators. As insiders never purchased Internet stocks, I pulled together ideas from select analysts and from conversations with industry insiders, eventually assembling an investment mix. I established a rule: no one could put more than 1% of their net worth into this portfolio, 2% if adamant. If the portfolio performed even better than the rest of the Internet, like I hoped, then 1% exposure should suffice, and if not, our downside would be limited. My investors ultimately lost 70% to 80% of what they ventured here. In a surreal experience that will (hopefully) not recur in my career, every client without exception thanked me for having guided against greater harm.
Although not operating on the scale or intensity of dot com, rising successors such as cannabis and crypto have taken up the fast money mantle. The non-correlation to other investments is a positive, but that is the extent of my enthusiasm. Put simply, these areas appear purely crowd driven, impressions strengthened by numerous VC pitch meetings and focused events I have attended. Cannabis is an industry replete with former drug dealers and an unsettling mix of relaxed and skittish participants where companies do not enjoy even basic federal tax deductions. ‘Coolness’ reigns, and investors are pitched on luckily getting to deal with ‘the adults in the room.’ Crypto may meanwhile have merit but has never struck a chord with me. Blockchain might help to improve documentation efficiencies in a housing sale, as an example, but ominous warnings against fiat currencies are something I have never emotionally or intellectually understood. And I have tried – I am not embarrassed to admit it.
Further on the topic of current trends, I sympathize with the goals of an ESG (Environmental, Social, Governance) portfolio. I remain skeptical, however, regarding existing avenues for getting there. As someone who considers and builds financial data tools for a living, I have always been drawn to ESG as a potential business opportunity. Each time I have come back to examine the latest in available datasets and technologies, however, I have invariably concluded that genuine ESG is far from a simple goal. What most investors moreover fail to appreciate is that current ESG ratings tend to measure not whether a company helps or hurts the world but instead whether a company’s bad behavior translates into financial risk. I think the SEC is right to look at ‘greenwashing.’
I also appreciate the urge to ask an investment manager to avoid particular industries or companies, and I field these questions occasionally from all political directions. Investment managers gain or lose clients on performance, however, and shrinking their options or forcing deviations from an index can harm other clients while impacting the manager’s ability to make a living. I have always believed that someone asking a paid professional to avoid particular investments should consider whether they themselves would willingly maintain shorts in the same positions.
I survived in the industry by realizing early that we all tend to believe whatever market conditions we experience are unique and without parallel. A more bankable reality is that forty years from now, someone reading this could swap in new industries and anecdotes for the above, and my same underlying message would apply.