What does an investment strategist do?

As part of my son’s Healthy Living and Careers (HACE) course at school, the Grade 7 kids have been examining a number of careers and the job skills needed for those careers.
Today is my turn on deck.
What is the job of an investment strategist?
My job is to help people grow their money through investing, but before we get to that, you should know that a lot of the global economy is involved in the business of money.
Finance is a general term. Investing is one area. Think of it as shuffling money around for profit. An INDUSTRY was built around people’s desire to grow money they have instead of working to earn more of it.
The guy who manages the biggest hedge fund (a pool of investment money) on the planet called this The Money Shuffler’s Vig:

The money that’s made from manufacturing stuff is a pittance in comparison to the amount of money made from shuffling money around; 44% of all corporate profits in the U.S. come from the financial sector compared with only 10% from the manufacturing sector (see the chart below). This has flipped.
As shown below, in the 1950’s and 1960’s the manufacturing sector’s profits accounted for about 50% of total profits while the financial sectors profits accounted for 15% of the total. Also shown, this flipping has occurred pretty steadily. We see it anecdotally – e.g. by who lives in the big houses in the expensive neighborhoods or who shops at the expensive stores.
While in decades past it used to be the captains of industry, now it’s the money shufflers – the folks who handle OPM (other people’s money) and earn their vig off of it. From low to high on the hierarchy, the money shufflers at or near the peak are a) bankers, b) investment bankers and investment managers, and then c) the 2 and 20 crowd (hedge funds, private equity firms, etc.).
Now, the notion of one’s child wanting to be a doctor sends chills of fear down parents’ spines, engineers gravitate to plying their craft on money instead of real stuff, and $600/hour lawyers are depressed (to the point of either padding their accounts or working nearly 24/7) in their failed attempts to stop falling further behind.
This growth in the money shufflers’ profits as a percent of GDP has come partially because a) financial assets and liabilities as a percent of GDP have risen steadily and partially because b) the average money shuffler’s profit per dollar shuffled has gone up (largely because those with the big bucks, particularly institutional investors, have gone from investing in the .25% to .75% fee stuff to investing more in the 2% and 20% stuff). The only thing that has been a slight drag on the otherwise rapid growth in the profitability per money shuffler has been the big increase in the number of them.
That’s one of the great things about capitalism – it allocates resources so efficiently. So rather than turning out doctors, engineers, teachers, architects, and others who are involved with the old economy, our system has met the increased demand for money shufflers (like me and you) via an increased supply. Ray Dalio, September 22, 2004

The top shufflers make a lot of money for themselves, most of it from fees they charge the clients, so much fees that the top Hedge Fund Titans’ Pay Stretches to 10 Figures.

From 1998 to 2010, hedge fund managers earned $379 billion in fees. Their fund investors reaped only $70 billion in gains.
Managers kept 84% of investment profits, while investors netted only 16%.

They also employ a lot of people to make it look like they work really hard to justify the fees. There are people in finance that write reports. There are people in finance that crunch numbers. Some write ads. Some do the deals. Most of them are in sales, attending to (“hand-holding”) clients when the market is up, down or sideways, telling them whatever needs to be said to keep their money in the fund, in order to continue collecting fees.
The shuffling is so efficient at transferring money from the investor to the investment manager that you might ask Why would any client continue to pay for such mediocre returns?

One reason is that hedge-fund managers are incredibly good salesmen. In addition, industry insiders who are all too aware of hedge funds’ shortcomings choose not to expose them, Mr Lack argues. Moreover, the common fee structure, in which hedge-fund managers keep 2% of assets as a “management” fee to cover expenses and 20% of profits generated by performance, has made many managers rich, but not their clients. Mr Lack calculates that hedge-fund managers have kept around 84% of profits generated, with investors only getting 16% since 1998. “Where are the customers’ yachts?” is the title of one chapter. What is worse, the disastrous dive of equity markets in 2008 may have wiped out all the profits that hedge funds have ever generated for investors.

By now, you know there is no such thing as magic money. But people want to believe that it exists, that they can win the lotto. And that keeps the industry going.
Describe why you like your job.
I don’t particularly like my job. Because we have to make decisions not knowing how the future turns out, we do it using math. I will never get it totally perfect and the game never ends. Unfortunately, the clients judge investment performance months afterward, after they know what happened.
It’s like saying, “I knew the Canucks would lose in 4 straight. For sure the Sharks would beat them in OT.”
But what would you have said BEFORE the series started?
What do you like most about it?
I like the academic side of it, knowing that a little math is all you need to accumulate a lot of money. The intellectual stimulation is the only thing that keeps me going:

The best problems, like the best toys, are hard to exhaust. You can approach them from a variety of different angles, each new angle making the problem fresh again, and bringing the opportunity to discover something new. Any idea, no matter how crazy seeming, might work and can be worth exploring. Indeed, the harder the problem, the more degrees of freedom one can allow in tackling it. Fischer relished hard problems because he relished that freedom, but in practice he did not try just anything. In his view, if a problem does not yield to known methods, that doesn’t mean we need more sophisticated methods, indeed probably just the opposite. Usually problems are hard not because our technique is deficient but because our understanding is deficient. Fischer Black and the Revolutionary Idea of Finance

What are the factors that made you choose your job?
When I graduated from university in 1987, the stock market was hot, and since Vancouver had a stock exchange, there were a lot of low-level jobs in money shuffling. Just like 15 percent of 2013 Harvard grads, many of us went into finance.
What do you do at your job? The most interesting thing? Least interesting?
The first part is to figure out how the market works. The good news is academics figured out long ago that that there is a financial version of gravity. The price movement of anything that you can trade actually has universal properties [PDF] — mainly because people behave in a very predictable way.
Once you know that the same thing happens over and over, you can calculate the rest with reasonable precision.
The second part is dealing with clients. This is the hard part, because people are born greedy and our gut instincts are terrible when it comes to taking risk. People seem hard wired to gamble. It is very difficult to use your brain to keep those animal instincts in check.
My job is to get people to understand something called Prospect Theory. It was awarded the Nobel prize in Economics in 2002.

This 3-minute video shows all you need to know about why people get killed in the stock market. See the full episode of How to Make Better decisions here.
I learned that most people are unable to control themselves. Managing money is a lot like deciding which game to play at the casino. There is smart money. There is hot money. And then there is money looking for a new owner.
As trader William Eckhardt observed,

If a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you’ll gravitate toward the majority and inevitably lose.

How long have you been doing this? What do you see yourself doing in 5 years?
I have been at this since 1987. I see myself doing this forever since I have to do it with my own money anyway. But dealing with clients is very tiresome.
What skills do you possess that make you good at what you do?
I have very rational mind. I don’t accept anything I read or hear as fact. Just yesterday, I discovered a huge error in a major article going around the to investors. The numbers in the article — When is $30k worth more than $90k? When you save for retirement in your 20s — are completely wrong!
Another example is when I visited an old oasis town called Palmyra in Syria. I brought the maps with me, but my friend just asked a random kid who pointed to a road. I said, “No, it’s the other road. Why are we listening to a kid who has probably never left this neighbourhood?”
Now, the town was hundreds of miles away. When we started to pass landmarks that was on the wrong road, my buddy refused to listen. Before we knew it, it was getting dark. We only had a bottle of water and a Twix bar between the two of us, with almost no gas and only military vehicles traversing the desert.
Suddenly we passed a sign that read “The Road of Bagdad 50KM“.
Not only were we nowhere near Palmyra, we were nearly in Iraq. And that was the last time I ever allowed the blind man to lead the guy with a map.
I basically work hard to make sure everything is correct. I am realistic. I am patient. I am very disciplined. I don’t believe in fairy tales.
What other people say means nothing to me. Most people just repeat stuff they heard. It’s like high school never ends.
What was the first job you had? Most interesting job?
I worked for six months at Royal Bank of Canada, going through their Loans Officer Training Program. I interviewed a lot of people and that’s where I learned people lie a lot, to others and to themselves.
What training, high school/university courses, sports, life experiences helped prepare you?
I took all the science courses in high school and was originally a biochemistry major. The scientific method has been very helpful to me in my investigation into how to make money in the market. I observe and ask questions; hypothesize; test, collect, and analyze data; and draw conclusions.
I also studied economics (and learned it was NOT a science) and was a star student in Abnormal Psychology. It turns out that psychology is probably the major reason most people have difficulty reaching their goals. You must train yourself to practice realistic thinking at all times:
Lately, I notice a lot of older people don’t seem to understand things like they used to. It seems to me that many people with heart disease, high blood pressure, high blood sugar are starting to show signs of cognitive impairment and vascular dementia. Symptoms include:

  • Confusion
  • Trouble paying attention and concentrating
  • Reduced ability to organize thoughts or actions
  • Decline in ability to analyze a situation, develop an effective plan, and communicate plan to others
  • Difficulty deciding what to do next
  • Problems with memory
  • Restlessness and agitation
  • Unsteady gait

Often, the first symptom is having difficulty managing finances, and I am the first person to see it. There are stories all over the Internet of senior citizens falling to scams or otherwise taking huge gambles. This is why you should NEVER expect to inherit money. It would be nice to get it in the end, but if they go bonkers later on, and you have no way to earn a nice living, you are done!
What hobbies help you keep balance in your life?
I like to travel and read, but have to admit that lately, the strain of dealing with my clients means I take more naps due to sheer mental exhaustion dealing with their problems. Managing money is easy. Managing clients is a terrible job, so maybe I won’t do it any more in 5 years.
Has anyone influenced you or helped guide you in your career path? Mentors?
When I first got into the business, I saw everyone at the office going about investing in the same way. It turns out they were all wrong, and I learned everything NOT to do from these people. Investing is something that you can work out with math.
If you could have been/done something else, what would it have been? Is this job in the same (or a different) field as your current one?
Knowing what I know now, I think I would have studied chemical engineering, agriculture or food science. I could make a huge difference in making the world a better place, and still worked out how to invest the money I saved from earnings.
Do you have any advice for a student about to enter high school in West Vancouver in 2012?
Learn how to apply statistics. Learn to investigate things that are presented as “facts”. That is how you will become successful in anything you do.
One of my members is a lady named Kathleen. She wants to let you know:

Having been a teacher of 7th grade in a former life, I would explain diversification as a matrix of life. Within this matrix are a lot of little boxes. Within those boxes are basic needs for living including friends, family, love, food, work, money, play, etc. If you put all of your energy into only a couple of boxes and those boxes go away, you are left with nothing, eg. if you have only one friend and that friend dies…

What is diversification, you ask? Here’s one way to I explain it:
Suppose you had tomorrow’s newspaper today; you would obviously bet it all on tomorrow’s winner. There would be no need to own anything else.
But we don’t have tomorrow’s newspaper today; therefore, PROPER diversification (own some stocks, some bonds, some gold, some of this and that, just not all of it the same category) is the only rational investment strategy because we cannot forecast the winning asset class with certainty. We can only manage risk.