Faculty Discusses Investment Management Advice with Forbes

Kevin Kuznia

Kevin Kuznia, professor and program chair for the BA in Finance in the Forbes School of Business & Technology, recently spoke with Forbes contributor Ken Kam on Preparing Students for Real-World Investment Management. Now, Kevin has a few additional thoughts to share on the subject.

Kevin is passionate about education and investment management, and he wanted to share some of what he didn’t get to include in his interview:

"I credit my grandfather for this piece of advice, but before I share his advice, I would like to share his story. My grandfather emigrated from Poland around the turn of the 19th century when he was eight years old. He was placed on a boat with his brother by his parents, whom he would never see again, and set sail to New York. He had no idea where he was going, and knew no English words. But he had one idea — which lead to a lifetime of success. He said to me in his broken English, ‘Invest in yourself. Someone can rob you and take away everything you own. But they can never take away your education.’

I learned this from him when I was about the age he was when he left Poland, and I have always been under the belief that the greatest investment anyone can make is in his or her education. I cannot tell you how many times that $20 book, or that $500 class, paid for itself 10 times over, or even 100 times over. I continually remind my students to not only focus on academic success, but to really think about how they will apply what they learn. That application of knowledge is really the key to success.”

Moreover, reflecting on his career, Kevin shares,

"I think in my years of both studying investment management and being an active investor myself, I can sum it in a few words – it takes work. In other words, if you want to become a skilled investor, it takes a dedicated and prolonged effort to understand markets and securities. Actually that is the secret. Most investors choose to be passive, looking for the latest stock tip being hyped by the expert of the hour on TV. In actuality, skilled investors ignore the hype and do their homework. They read annual reports (and especially the fine print), ask questions, and look for other clues as to what to invest in, and what to ignore."

Kevin’s full interview with Ken Kam on Forbes, originally published on June 20, 2017, is shared below:

Every business school teaches that the market is efficient and hard to beat. But successful investment managers must somehow beat the odds. To prepare his students for careers in the investment industry, Kevin Kuznia reached out to me with questions about real-world investing that many students may share.

Kevin Kuznia is the Finance and Economics Program Chair at the Forbes School of Business & Technology at Ashford University. If you have students who hope to work in the investment industry, send me your questions for a possible follow-up article. Here are Kevin’s questions.

Kevin Kuznia: You mention in one of your articles that great investors are both passionate, and read annual reports for the fun of it. What specifically do you focus on when you read an annual report for fun?

Ken Kam: There is a big difference between a job and a passion. A job is something you have to do to make money. A passion is something you want to do whether or not you make money.

Most people who look at an annual report spend most of their time reading the words surrounding the pretty pictures.

When a passionate investor reads an annual report, they are looking for things that the company had to disclose but chose not to highlight. These are usually found in the footnotes to the financial statements and sometimes in 10k or 8k SEC filings.

If there are material but unfavorable facts that are required to be disclosed that’s where you are going to find them.

Kuznia: You talk about having “firsthand” experience with a product or service as one indicator of a good or bad company. What types of questions do you ask of “firsthanders” to determine if a company is a good buy or not?

Kam: It is important to understand the nature of the firsthander’s experience. For example, if your experience is in marketing, I would value your marketing insights more than your views on production. The key is to find people with relevant firsthand experience, who have an insight about a significant aspect of a company that Wall Street has missed.

Kuznia: In your “Track Records Matter Even For Managers of BlackRock’s Robots” you allude to the fact that some level of investing will be replaced by quantitative models/robots to pick investments. In fact, quantitative models/robots take the emotion out of selecting securities, which seems like the right thing to do. Does emotion have any place in security selection?

Kam: The fact that many investors act emotionally is a given. Many algorithms are designed to exploit small, temporary price anomolies created by emotional investors with short time horizons who over-react to news.

For investors with longer investment horizons, having the discipline to control your emotions is necessary because good long term investments go through a predicable cycle.

At first, when the market doesn’t see the potential, the stock is cheap. The first investor to see the opportunity, has to have the confidence to swim against the tide of popular opinion. In this case, knowing whether your confidence is supported by your track record can help you to know when to pull the trigger and when you should pass.

When you buy a stock that is unpopular, it can be flat, or even go down, for years. During this time, it is difficult to tell the difference between being early and being wrong about the stock. This stage can be an emotional roller-coaster, so you don’t want to have all of your investments in this stage at the same time.

At some point, if your original insight was right, the opportunity will eventually be discovered by other investors, and the stock will rise. When a stock comes to fruition, it is an emotionally gratifying experience.

How often does the world give you a monetary reward for being right? For successful investors, it happens more often than not, and its why investing can become a passion.

Kuznia: Mr. Kam, you, like most of us are a great fan of Warren Buffet. In fact, you were on the search for the next Warren Buffet. In your opinion, how much of Mr. Buffet’s success can be attributed to pure luck as opposed to skill? And does luck have any place in investing?

Kam: If you do not have data to support your investment decisions, you will never know whether your results are due to luck or skill.

In Buffett’s case, I have no doubt about his skill. Buffett only makes investments in which, over his investment horizon, the odds are with him. Furthermore, he keeps each position a small enough portion of his portfolio so that all that is required for the portfolio to succeed is that he be more often right than wrong.

Buffett is an excellent portfolio manager who focuses on the kind of investments in which his track record supports his confidence. More investors should follow this example.

Kuznia: In one of your articles you suggest that great investors make investment decisions based on their own research. What are some of the key elements in your research?

Kam: In today’s internet connected world, everyone has access to the same information. What most people lack, however, is the judgment to say which pieces of information are important, how, and why?

Let’s take an example company that makes a medical device. We can all easily get their annual reports and SEC filings. But in the end, the company’s value depends on how often doctors will use their device. Who is in the best position to make this judgment? Is it a Wall Street analyst? Is it a newly minted doctor? Is it the best doctor in the country for this procedure? Or, is it the nurses who set up the procedure trays for all the doctors who perform this procedure?

For most products, I think you can envision a set of people who are able to judge whether a product will succeed or fail better than Wall Street.

Kuznia: You segregate investors in “Quants” and “Fundamentalists”. Would you elaborate on each, and then disclose which camp you are part of?

Kam: Lord Maynard Keynes once described investing as a kind of beauty contest in which the objective is not to select the contestant you think is the most beautiful, but to select the contestant you think the judges will pick as the winner.

Quantitative investors are essentially trying to pick stocks that they think other market participants will choose to be winners in the future.

Fundamentalists are trying to pick stocks that they think are good values regardless of what anyone else thinks. In fact, at the time of their investment, they would prefer it if no one else agreed with them.

I think both Quants and Fundamentalists have a role for different parts of a portfolio.

The Quants are best for the portion of your portfolio that is shorter-term, and more risk-averse. The kinds of signals Quants can exploit with their algorithms play out over days or weeks rather than years. It is unemotional which is a real plus when events occur that cause many investors to react emotionally. I would use a Quant portfolio as part of a client’s “core” equity position.

Fundamentalists require a longer investment horizon for the simple reason that companies cannot greatly increase their value in days, weeks, or quarters. It often takes multiple years for a company to double its market cap even if it has a great product. If your investment horizon is too short, or you can’t stomach the emotional roller coaster of being invested in a stock no one likes, then you don’t want to be a fundamentalist. I would use a Fundamentalist portfolio as part of a client’s “explore” equity allocation.

Kuznia: You state that one of your roles is to “find great investors and to put them to work in teams designed to achieve our clients’ financial objectives”. Can you tell us what makes a great investor?

Kam: A great investor is one that delivers a higher return, over a market cycle, than an appropriate passive benchmark.

Kuznia: You mention in one of your articles that “The problem with investment skill is that it is hard to discern over short time periods. In many sports, after the season ends, a good coach can see who should be nurtured and who should be encouraged to move on.”  So what type of advice can you give us to build up our investment skill?

Kam: The problem with investing is it takes time to be able to tell what’s working and what’s not. There are also some predictable mistakes that nearly everyone makes.

It used to be that the only people who could afford to get down the learning curve – making lots of mistakes along the way – were people who were lucky enough to be able to invest other people’s money.

This is no longer true today. Today you can start a virtual portfolio that will tally your track record in real time, so you can make enough decisions to learn your strengths and weaknesses without having to cover the losses from your mistakes.

I’d say it takes a minimum of 3 years before the data starts to be meaningful. At 5 years, the data starts to be compelling.

But, after just 1 year, you can gain the knowledge you need to evaluate the skill of anyone who wants to manage your money.

Kuznia: You state in one of your articles that “with almost complete certainty, the future will bring more opportunities and so we should expect the returns to be different.” Why should an investor therefore pay any attention to past performance?

Kam: Past performance is the result of opportunities that have already come to fruition. It is not reasonable to expect the same opportunities to be available in the future.

Past performance is like a student’s grade point average. The student with the highest GPA is not guaranteed to be the best student next year. But, if you had to bet on a student to do better than average next year, it would be smart to bet on the one with the highest GPA.

The people who had good past performance have proven that they have some skill at identifying and taking advantage of investment opportunities. I would bet on them to do a better job over the next market cycle than the average investor, which is what an index fund would give you.

My Take:  There is a big difference between investment theory and practice. I applaud Kevin’s efforts to prepare his students for careers in the real-world.


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