It always bothers me when I hear a news broadcast that begins, "In business today..." and proceeds to report on developments in the investment world. In fact, business and investing are by no means the same. Business, to me, involves bringing various resources together to create value. Investing is about using money to make more money by attempting to predict the future value of whatever you happen to invest in. The two endeavors call for very different skills. So it's little wonder that good investors often make bad businesspeople, and good businesspeople are often bad investors.
I have to admit that I knew almost nothing about personal investing until I was well past my 50th birthday. Of course, that was partly because I didn't really have any money to invest. Whatever I took out of the business I had to be prepared to put right back in if the company needed it. In addition, I had personal guarantees on my bank loans, which meant I could lose everything if the business went under (see "Free At Last"). My entire net worth was effectively tied up in a single investment, the riskiest type of all, namely, a young growing company. When I did take money out, I would keep it in CDs and bank accounts, so as to be sure I could get it whenever I wanted to. In retrospect, that was silly. You should always have a balanced portfolio. But I didn't know any better at the time.
It was my wife, Elaine, who convinced me we should start paying more attention to our personal finances. Her friends all had investment advisers and accounts with stockbrokers and were heavily into financial planning. "Shouldn't we be doing something?" she asked. "Our money is just sitting in the bank."
"I don't know," I said. "That money isn't really ours."
I explained that if the business was unable to repay its loans for any reason, the banks could come after our personal assets. She was not pleased. "That's all the more reason to get help," she said. "We need to protect ourselves, and we don't know what we're doing." I agreed. And so began our education in what turned out to be the most difficult part of developing a personal investment strategy: finding advisers and money managers who will listen to what you want, do what they say, and put your interests ahead of theirs.
In the beginning, we didn't know exactly what we wanted--a broker, an investment adviser, or a financial planner. We interviewed 12 people over the course of a year, settling on a married couple in New York City who had appeared as experts on CNN and repeatedly made the best-adviser and best-money-manager lists of Money, Worth, and other such publications. We visited them in their Park Avenue offices. After interviewing us for an hour or so, they said they wanted to develop a plan for us and asked for $2,500, which would go toward their fees if we hired them. That seemed reasonable. We gave them a check, and they said they'd have our plan in a week.
Two months went by without a word. When I finally called to find out what was going on, they said the plan was complicated, but they'd have it in a week. After hearing nothing for two weeks, I called again. It was almost finished, they said. We'd have it on Monday. But Monday and Tuesday came and went. By Wednesday, I'd had enough. I called again. "This is ridiculous," I said. "I don't know what your problem is, but you obviously can't keep a commitment. I'd like my money back." They insisted the plan was almost ready. They'd call back that afternoon. They didn't. The next morning, they agreed to return my money but said I'd have to wait until the end of the quarter, when they were paid their fees. "Pay someone else back at the end of the quarter," I said. "I want my check tomorrow or I'm going to report you to the attorney general." They became indignant and reminded me of their prominent position in the investing community.
"You ain't that prominent," I said. "I'll see you tomorrow."
The check was waiting for me the next day. As I walked away with it, I couldn't help feeling stupid. We'd spent a whole year doing research and ended up where we'd started. So we tried another gambit: getting recommendations from friends. One of them swore by two brokers from Prudential and insisted they'd be perfect for us. We met with them. "Let me tell you what I'm looking for," I said. "Most of my money is in my business, which is a big risk. The money I'm giving you is not risk money."
"What do you expect?" one of the brokers asked.
"I'd like to average between 9 and 10 percent annually over 10 years," I said. We were in the middle of the great bull market of the 1990s. "I'm not looking for 15 or 20 percent returns like everybody else these days. I want you to invest very conservatively." They seemed to get the idea. I opened an account with Prudential and put in about half the money I had outside the business. They would invest the money as they felt necessary to achieve my goals, earning a commission on the trades.
Within days, we began receiving a flood of slips recording purchases and sales of securities. I'm talking about stacks and stacks of slips--50 shares of this, 200 shares of that, 150 shares of something else, and on and on. I called the lead broker, who said, "Don't worry. We're establishing our positions."
"Okay," I said and waited for the flood to let up. It didn't. I couldn't imagine how these guys could square their aggressive trading with my desire to invest conservatively. When we sat down to review the account after six months, I asked what was going on.
"We're doing well," the lead man said. "We're tracking 18 percent [after commissions] for the year."
"No, no, I mean what's with all this trading you're doing?"
"We're momentum players," he said.
"Momentum players? You didn't tell me that when I interviewed you," I said. I had no idea what he was talking about, but it didn't sound like anything I wanted to be involved with.
"Look at the returns we're getting," he said.
"The market is going crazy," I said. "A blind monkey could get these returns. I'm concerned about what happens when the market goes down. You're putting my money at greater risk than I'm comfortable with. This is not what I asked for." I closed the account--and found myself back at square one.
Well, almost at square one. I had learned a few lessons. For one, I'd decided that I never wanted to place all my money with one firm. Ideally, I'd have a main manager and a backup, someone who could step in if the lead guy didn't work out, or retired, or whatever. With that in mind, I'd recently invested some money through a friend, Harvey Wolf, then a financial adviser at Morgan Stanley and now at UBS. I'd laid out the same objectives I'd given to the Prudential guys. Then I waited and watched.
It soon became apparent that Harvey had listened. He invested the money exactly as I wanted, placing it with professional money managers on whom he had done research and who had no affiliation with his firm, thus precluding a conflict of interest. Each was a specialist in a different type of investment. Harvey monitored their performance and made sure that my investments were properly diversified based on risk, liquidity, tax considerations, and so on. I paid a quarterly fee--between 1 and 2 percent of the assets under management--out of which the various parties were compensated. For the first time, I felt confident about the way my money was being handled. So I made Harvey my lead manager and began to search for a backup.
I'm still searching. I thought I'd found the right person, a broker at Merrill Lynch. He listened to my speech, said he understood what I wanted--and then proceeded to put almost 40 percent of the money I gave him into two Merrill Lynch funds of hedge funds. Although I wasn't happy about that, I figured I had to let him use the tools he felt he needed to achieve my objectives. My concern increased, however, when I saw the hefty fees that the funds were charging and watched their value rise 6 percent while the S&P 500 was going up 12 percent. I became really unhappy when I decided to cash out of the hedge funds and found that it would take six months to get my money. I was eventually paid in full with a modest return, but I no longer trusted the broker. I closed that account and gave the money to Harvey to invest.
And yet, through all these bad experiences, I think I became a fairly savvy investor. I realized that I needed to make my own decisions--at least the big ones--about what to do with my money. I've always put about 10 percent of my money aside for angel investing. I figured out what percentage of my assets to invest in real estate outside the business, and what percentage in government bonds, corporate bonds, and stocks. Then I worked with Harvey to make sure my portfolio reflected my decisions.
I still go through that process each year. All in all, I'm feeling pretty secure these days, although I'd feel more secure if I had someone good to back up Harvey. But if you happen to be a financial adviser or money manager, please don't take this as an invitation to send me your brochures. I won't read them, and they will provide tangible proof that you aren't the kind of investment person I'm looking for--that is, someone who understands that no means no. Then again, if you're an entrepreneur like me and happen to use someone who sounds like Harvey, I'd love to hear from you.
Norm Brodsky (email@example.com) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.