Investing by cartoons

Recently I have started working in the investment business. Do not fear – I am not managing any money (I am nowhere near qualified and I technically I am not legally allowed to do so).  At this stage I am just learning the ropes through research and observation. Because of this, I feel I have a unique outside view to a world that, while not entirely foreign to me, is shrouded by some degree of mystery.

In many ways investing, and funds management in particular, operates like a fraternity. How so? Well, it is a male dominated club or brotherhood of people with similar interests who work for their mutual benefit. Sometimes they may come into conflict, at which point the fraternity becomes divided and factions emerge due to the existence of various alliances. Pretty gangster eh?

Investors themselves each have various styles, and they in turn form networks with like minded investors. These ‘guilds’ often span the globe. For example, an investor with a particular style who lives in Japan may have an equivalent in the US who focuses on US markets.

Some tools and methodologies:

Then of course there is no methodology at all, which is really pure speculation often precipitated by mass hysteria:

The world of financial securities is a funny place. I find it fascinating that companies can be bought, sliced up, repackaged and sold again. So can bonds, or tranches of mortgages. You can then even buy insurance on those repackaged mortgages – If you bought credit default swaps on mortgage backed securities in 2006 you would have made a motza during the GFC.

I find shares a lot less complicated than the other financial instruments. I think this is because companies with shareholders are like mini democracies. When you buy stock in a company you are taking a portion of ownership in that company. Depending on the type of share, this may entitle you to rights; The right to receive dividends, the right to vote at the annual general meeting and the right to call an extraordinary general meeting.

If a company is like a democracy, then the board is like it’s governing council. They are elected to act as a nexus between the company and its shareholders.  They must serve in the best interest of the company, which in turn naturally corresponds with the best interests of the shareholders.

Interestingly, some board members do not know this. They treat shareholders (and funds managers) as adversaries and not as allies. A very few see it as their role to be “independent”, which is quite preposterous as members of the board are able to own shares themselves. Indeed, who better to look after the best interests of a company than someone who has ‘skin in the game’ so-to-speak.

This cartoon illustrates this attitude well:

New Yorker Cartoon  by Joseph Mirachi

So if you’d read this far you are probably wondering what the point of this musing was? It may seem like I am arguing that to be a successful investor you need to be a well networked male with a sophisticated investment technique, that you act in a contrary fashion to the masses, that you focus on equities and only invest in companies who’s board members are shareholders themselves.

Not so. Anyone can be an investor. All you need is a cat.