Wall Street thinks you’re dumb – The Rise of Wise Money

Wall Street thinks you’re dumb - The Rise of Wise Money

Smart Money

When you join a large Wall Street Bank or Asset Manager and you start working in markets you quickly need to learn the jargon 

For me, given that I grew up in France, it was a triple challenge – master the jargon, professional English (since the French Education System is pretty bad at teaching languages) and my Boss’ Irish Accent

Oh… and my mentor was Scottish (not to mention we soon started working with India and got to adapt to their accents too)

Anyways, back to the topic of Financial Jargon 

You’ve got to understand who you interact with, clients, data vendors etc. and quickly you realize there are many definitions of ‘money’ on Wall Street

The broad separation is between Smart Money (Institutional Investors) and Dumb Money (Retail Investors)

Let’s start with Smart and then get into Dumb where it gets really interesting

 

Some forms of Money may not be Real ...

Smart Money further divides into multiple streams with Smartest Money usually assumed to be the Hedge Funds of which some are called Fast Money because of their short term strategies. Real Money are the long term Investors (where the sophistication varies a lot) including pension funds, fund of fund managers or sovereign wealth funds

Investment Banks are there to serve all these Investors –  help their clients raise money in the capital markets, provide various financial advisory services, and assist with mergers and acquisition activity

But while most of the Wall Street Bankers use these definitions broadly there is a lot of nuances behind it, surprisingly in Retail too…

Cycling toward Financial Independence

It took me my ‘Round the World’ Cycling trip and then researching this topic further when I stopped in Morocco due to COVID-19 (if you deal with institutional clients you have little time to look into the retail segment)  to really discover the Boglehead and F.I.R.E (“Financial Independence Retire Early”) or F.I. (“Financial Independence)  communities – and it’s been an interesting  discovery

Here is only as small part of what I’ve learned

Dumb Money

bloomberg cover part 1
Source: Bloomberg
bloomberg cover part 2

Everyone knows dumb money (retail day-traders and casual stock pickers) – Wall Street ignores them because of lack of assets and the lack of sophistication / technical knowledge and while as a whole they are a powerful market force, individually they are meaningless (compared to an Institutional Client)

From time to time dumb money gets covered on the Bloomberg Businessweek Magazine and is an easy prey for option traders and hedge funds that buy retail activity data (ever wondered why trading became commission-free?)

Thus, I’m not going to spend much time on dumb money

My main concern is that a lot of media outlets bucket all retails investors together and are largely ignorant about Wise Money that has a lot to teach Main Street and Wall Street

Take Morningstar for example, that covers Retail Investors day and night (it focuses on investment research & services)

It took years for its Personal Finance lead analyst to fully recognize the merits of the FIRE Movement Investment Philosophy (and they finally did, in June 2020!)

The Rise of Wise Money

Introducing the ‘Wise Money’ concept 

You may be smart but that doesn’t make you wise. I have observed numerous common characteristics of wise investors but the one aspect they all have in common is that – wise investors are not making Stock Market Predictions

Wise Money is Forecast-Free

Wise money knows its own limitations and as I’ve explained in my latest post about Alaskan and Hokkaido Grizzly Bears one needs to be prepared for most possible scenarios 

Your portfolio needs to be anti-fragile to shocks as much as possible

Now, not of all of the wise investors have the technical knowledge and have studied the past to make their portfolios immune

But at least they have the humility to acknowledge that they don’t know what will happen which may come from other aspects of life where wise people know how to make the difference between things that are in your control and outside of your control

Wise Money is usually Patient

Bloomberg headline on March 9 during the COVID-19 Stock Market Crash
keep calm and carry on bogleheads covid market crash

You may be working on Wall Street and be dumb

You may still be dumb with your own money despite all the technical knowledge you have

I have seen this over and over again

Despite rigorous compliance systems (it’s really not easy to buy Stocks when you work on Wall Street) people will go through all the pain to get approved and pick stocks or use other ways to ‘time the market’ (I’m talking about people in other Financial sectors that have no insights into Equity Market so that they can’t leverage their knowledge and experience)

It’s much easier to get your ETF investments approved by the compliance department because compliance knows that you have little or no edge (unless you are a macro portfolio manager or someone that has insights into future flows that could be useful for some illiquid markets)

But some bankers have the illusion of control and edge over the market

They also end up trading more frequently than needed and have no perspective on the big picture and why it pays to stay calm and have the best mix of assets (e.g. to buy Equities when they are cheap)

 

Wise Money is Young

... when it first hears about Financial Independence

To understand when FIRE Investors start out I conducted a survey on one of the European FIRE Forums 

It didn’t surprise me that out of the 300+ respondents most made wise Investment decisions relatively early in their lives. Safe money. Invest in Index Funds. Diversify.

75% of FIRE Investors have figured out their Finances before hitting their 30s

Wise Money has an Angel

Doing God's Work

Short after the Great Financial Crisis the CEO of Goldman Sachs said that banks serve a social purpose and that Banks are doing “God’s work”

The truth is, no single Investment Banker ever made any major positive difference for Retail Investors

Saint Jack

I am ashamed that despite over a decade of work on Wall Street I never heard of Jack Bogle

On the other hand, neither did any of my colleagues (it’s not a good excuse, I know) 

But Jack (he was not a Banker per se but the founder of the Asset Management Company Vanguard) made more for the average saver than anyone ever did in the Financial World

Here is how my favorite Financial Blogger Bob Carlson summarized his legacy. It’s no surprise that he’s called Saint Jack

Dumb Money's Leader is Wise

Dave Portnoy, the leader of the ‘retail traders’ army’ is probably a very wise man

He estimates his net worth at more than $100 million and said he’s put $5 million into his day-trading account so far

What does it tell you? 

That quite likely, 95% of his net worth is in some form of long term Investments (his followers should know that)  

The 5% trading is a good amount of play money and his Twitter activity creates a powerful marketing machine that more than offsets the trading risks 

Wise Money has beginner's luck

The main Bogleheads Forum was created in May 2008 and Mr Money Moustache Blog was only launched in 2011

Various FIRE communities popped around the globe during the last decade 

Below is my count as of September 2020

For comparison, the biggest Dumb Money forum (aka WallStreetBets) counts 1.5 million members as of today

Of course, there is a bias in these numbers since wise investors know that communities can bring valuable information and are more concentrated here while Dumb Money is usually distracted by media and all possible financial traps imaginable (and there is lots of them)

As you can see, there is further differentiation in the FIRE community between members that can afford the type of retirement they wish (Lean Fire is minimalist while Fat FIRE is luxurious)

FIRE and Bogleheads Forum member count and creation dates
wise money reddit members - count l

Luck favors the prepared mind

It did help that most of these investors started investing during the last decade

Over the last ten years the NASDAQ returned on average 17.8% annually, the S&P 500 13.4% and even Bonds were still performing well 

Wall Street will say that it may be tricky to replicate this going forward and Wise Money must also set proper expectations in a World with low returns

 

But, remember Wise Money thinks in decades not years

And given their International Diversification, aggressive Equity allocation based on their age Wise Money will inevitably end up riding the next wave

Assets ranked by performance (2010-2019)
choosing best long term index funds - fire financial independence retire early asset class matrix 2009 2019 gold nasdaq reits S&P dividend aristocrats corporates bonds treasuries TIPS

Wise Money will be Millionaire

Ultimately, Wise Money will end up Millionaire – the math checks out

  • With initial injection of 1,000
  • Monthly injections of 750
  • Assuming long term returns of 8%

You will end up Millionaire in 30 years

Optimistic assumptions also given that you need to de-risk before retirement, but injecting more cash is also not unreasonable

30 Year Investment Portfolio Value Projection
compounding of interest - 750 monthly contribution

Key Takeaways

  • For Yourself & Your Children: If you want your children to succeed, invest early on and leverage the power of interest compounding. Deposit the money when they are born and log on once a year to re-balance (and top-up if possible). Let them become financially independent and focus on things they love instead of chasing money
  • For Our Leaders: Some FIRE Investors were lucky enough because they heard about the powerful passive income making machine that the Stock Market can be, as long as you follow the right principles. Financial Education should be taught very early on so that we obtain a better level playing field for everyone – especially in an era of rising inequality
  • For Wall Street: Investing is more (or at least as much) about wisdom as it is about technical aspects. We, as an industry, should recognize the merits of wisdom and long term thinking. I have listened to a number of audiobooks this year while cycling the world (mainly autobiographies). Wealthy people tend to move into charity work as time goes by – if you strive to be one of the rare people in Finance to make a mark on the World be like Jack
  • For Bogleheads & FIRE Movement: Keep Calm and carry on leading by example in the next major crisis
 

Good luck! (invest Early and if it’s too late for you give that benefit to your children)

What's your opinion on this topic?

Let me know in comments section below 👇

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DISCLAIMER

The information provided in Bankeronwheels.com is general in nature only and does not constitute personal financial advice.The information has been prepared without taking into account a reader’s personal objectives, financial situation or needs.

Before acting on any information contained in Bankeronwheels.com you should consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate.

I only talk about products, services and companies I use / would use myself.


DROP A KIND WORD

This website is non-revenue generating. In addition to time I dedicate to this, I pay for hosting and software to provide you with the analysis.

If you enjoyed my work and found it useful please do leave a comment below or share it with someone that may benefit from itI am grateful for any single feedback

Stay safe & healthy, 

Raph

 

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Al
Al
26 days ago

Another top article! I really enjoy reading your work/thoughts, keep it up!

Ferdi
Ferdi
26 days ago

After all, It seems being wise in investment and FIRE target is not that difficult with the possibility of ending up millionaire if you follow some simple rules. As Warren Buffett once said “nobody wants to get rich slow”, but I believe this the only reliable and proven way for most of us.
I wish I had read valuable articles like this in my early 20s. Nevertheless, you know what they say “later is better than never” 🙂

Matt @ OMB
22 days ago

Another great article Raph. I have to say that I am more and more bafled as time goes on how so many people overlook the long term view. From companies to individual investors it seems that the most important thing has become the next quarter.

Build over time, rebalance as necessary. Let the investment grow.

David
18 days ago

Great article Raph, I also discovered Bogle “too late”. I think that their philoshy is not well known and spread because is, like he said, boring. At the same time is simple and in our minds something simple can’t be that efective, a winning formula should be complex, otherwise any idiot could be doing that and become millionaire… yet, his philosopy is simple and efective. Like Bogle said: “I look at indexing as being simple and, sad to say, boring. Be bored by the process but elated by the outcome. In Vegas, it’s the opposite. You’re elated by the process,… Read more »