How much do we really know about our investments?

I’m a big space nerd. To the point that for my birthday two years ago my girlfriend flew us down to Houston to tour the Johnson Space Center (spoiler alert: it was awesome). Some of my favorite books the past few years have either been about the Apollo missions or how we’re going to get to Mars. So you can imagine how excited I was last year when we were out getting drinks with friends and one of the friends-of-a-friend was a woman who works at NASA. I basically bombarded her with questions the entire night.

One of the main things I was asking her about was what obstacles they still need to overcome to be able to get to Mars. She was giving me some pushback on what I thought I knew about space radiation and I remember starting the next sentence “I know [random blurb about space radiation].”As soon as I was done blabbering I thought to myself “why the hell did I just start that sentence with ‘I know’? I’m talking to a freaking NASA scientist about space travel and all I’ve done is read some books and online articles about the topic. That hardly counts as knowing.”

For some reason, that little exchange (that was mostly in my head) stuck with me and I thought about it a lot over the coming weeks and months. I’ve read a lot about the International Space Station, space travel, and how a trip to Mars might look, but I certainly don’t understand the science behind it all. I’d fail a lie detector on basically everything related to space travel. Yet, it was easy to trick myself into thinking I know that topic far better than I actually did.

A natural progression of this logic was to look at my own investments and potential investments and realizing how little I know about them. A mid-level manager at any company I own almost certainly knows more about the company and industry landscape than I ever will. That’s because I can never replicate working in the business and industry every single day.

Interactive Brokers (IBKR) is one of my holdings that I probably know an above average amount about simply because I use their products all the time (though it’s important to note that this doesn’t result in an informational advantage because of how many other investors are also on their platform). I know about their low commission rates and dominant position with small funds because I witness those things on a regular basis. On the other hand, if I’m hooked up to a lie detector and am asked about their competitive position in Asia, that’s not something I know for a fact (even though I’ve read plenty about it). Similarly, I think there are some nice tailwinds that are helping the company (broker-dealer consolidation, big banks firing small funds, IBKR’s public float increasing each year), but I don’t know if any of these are going to continue into the future. I find it humbling to read through my Interactive Brokers write-up from a couple months ago and realize how much of it is educated guesses vs knowing things for certain.

One of the biggest things that is almost impossible for an investor to know is a CEO’s inner motivation—yet it’s one of the most important. Reading The CEO Pay Machine earlier this year really drove home how bad virtually all compensation packages are. First, a CEO gets paid a high salary no matter how well the business and stock performs. On top of that, they are gifted stock options that have a ton of upside and no downside. Because of this, it’s damn near impossible for a CEO to be truly aligned with public shareholders. Knowing that, most investors spend time trying to triangulate what the CEO’s motivations are and how shareholder friendly they are, but at the end of the day it’s just a guess. Thomas Peterffy at Interactive Brokers has a long history of being shareholder friendly, focusing on the long-term, etc, but that doesn’t guarantee anything about the future. There are plenty of examples (Bernie Madoff, Tom Petters) of people who were highly respected for many years until they turned out to be frauds.

All of the above is why I’ve actively tried to stop using words like “always” and “never.” Talking in absolutes in a world that is grey is rarely correct. I’ve also tried to be more careful when I’m talking about a company’s future. Though I’m certainly guilty of it, it’s an exercise in intellectual dishonesty to say a company will accomplish something next year, as opposed to saying they should or hopefully will accomplish that same thing.

As of this writing, Wiedower Capital owns shares in IBKR. This is subject to change.

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3 thoughts on “How much do we really know about our investments?

  1. Another nice article, I just ordered the “CEO pay machine” as I also pay a lot of attention to that as well. I think many CEO’s are like the average employee more concerned about their pay then the long term prospects of a company. For a select few though their company is the culmination of their life’s work. I think looking at compensation structure is one of the ways we can begin to tell the Sam Walton’s from the mercenaries.

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    • Hope you enjoy, it’s one of the best books I’ve read this year. It really made me think about pay structures in ways I never had before. One of the big realizations I had was about benchmarking CEO pay to a peer group. The problem is that when a CEO is targeted to be in the 75-percentile, that group’s average pay is then increased. Now the next CEO who is benchmarked to that group sees his pay raised and on and on. It’s basically a rigged pay structure. I finished the book pissed off, but more informed, which I guess is a good thing 🙂

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