I attribute a big part of my success in various areas of my life to the fact that I love networking and meeting new people. This in turn leads to amazing conversations or new nuggets of knowledge that I then build upon. Almost every single big win that I’ve had can be traced to a person or string of connections who inspired me or showed me the way in some form or another.
Today I have the pleasure of presenting to you my friend Michael Hebenstreit, who has been one of the main influences in my stock investing journey so far. Of course, I’ve also done my part by covering the basics by devouring many books related to investing in the stock market, including the biographies of historically successful investors and their frameworks for decision making. Have a look at this book (actually just vol.1 of a series of books on the same topic) if you want to learn how to think about the world like the very best amongst us.
Reading and experimenting with small amounts, in my opinion, is not enough. You need successful and trustworthy people to bounce ideas off from and make sure they stop you in your tracks before you go off and take some dumb decision due to your inexperience. Michael is one of these people for me. In a recent conversation (November 2020), we discussed having him share some insights with my blog readers, and we both thought it would be a fun activity. The result is the following post, which we decided to do in a Q & A format, with myself asking some of the questions I most struggled with over the recent years, and Michael sharing his thoughts.
What’s your take on ETFs and index funds? Do you agree with the criticisms lately leveled against them and the claims that they are distorting the market since so many people invest in them?
Personally, I invest in individual stocks only and usually don’t pick ETFs or other funds because stock picking for me is way too much fun, compared to just simply investing in ETFs or other similar tools. However, that is a personal preference.
I’m personally involved in the financial markets for almost my entire life in one way or the other. I get that this approach isn’t suitable for most average investors. For investors without the necessary time or know-how to do stock picking, it can definitely make sense to pick low-cost ETFs. Several studies show that ETF investing, in the long run, can pay off very well. So why not! However, the massive inflows in ETFs certainly come at a cost. We see this already with the high concentration on a few companies that are part of most ETFs (for example the FAANG stocks).
On the other hand, the rise of these companies is justified and their valuation isn’t extreme when taking the current low-interest-rate environment and other factors into account. Anyway, it still needs to be discovered if there are negative long-term effects of ETF investing, especially if we’ll see liquidity problems or accelerated sell-offs during market turbulences.
In general, it’s actually questionable if index investing will still pay off in the future as it did in the past or if instead, a more active approach would be better at some point.
But personally, I think the massive market intervention by central banks is a larger threat to the markets than ETF investing.
Do you recommend any particular portfolio strategy from the popular ones out there (all-weather, golden butterfly, etc)?
I’m not a fan of the “one strategy fits them all” approach as each investment strategy has its pros and cons. In the end, you’ll need to find a strategy that you’re personally comfortable with and which fits your personal needs and goals as an investor. If you’re young and in the accumulation phase as an investor, it may make sense to run a growth portfolio.
If you’ve already accumulated wealth and want to live off your investments, it makes sense to run an income portfolio. You can also combine growth & income strategies and of course the portfolio structure also depends on your personal risk appetite. My personal goal as a long-term investor is a mixture of capital preservation, solid and steady cash flows as well as capital appreciation. That’s why I primarily run an income portfolio with solid blue chips and dividend stocks.
My overall exposure currently is 61% stocks, 12% real estate, 2% precious metals, 1% cryptocurrency and 24% cash. The current cash position also will be invested in stocks over time, as I expect more market turbulences while the COVID-19 crisis and the negative effects are ongoing.
I don’t invest in fixed income, simply because I personally don’t like that asset class, especially not at the moment.
While I personally focus on dividend income, I try to avoid dinosaur dividend stocks and rather focus on companies from future-proof sectors that are still growing and I mix this with innovative and promising growth stocks. That also means that I try to avoid traditional banks, legacy oil companies and companies from other “dying“ sectors. The megatrends/sectors that I focus on in my personal portfolio are healthcare, technology, renewable energy, e-mobility, 5G / IoT, smartcity, e-commerce, automation, gaming / VR / AR, and fintech.
When choosing a broker, should we use different brokers depending on what we are trying to do? For example, are there brokers that are better for ETFs, while others are better for traders, and yet others for picking stocks and holding them long term?
I think this definitely depends on your portfolio size, how active you are and if you’ve planned to do anything unusual. Most regular brokers can be good if you simply want to invest in ETFs, stocks, bonds, etc…
However, if you want to trade more frequently, trade on exotic exchanges or trade derivatives like futures or options, it makes sense to select a broker that has the trading tools and appropriate fee structure for what you’ve planned. It also always makes sense to check how a broker is regulated and how your capital is secured in case of bankruptcy. This is even more important if you own a larger portfolio and also hold a large amount of cash. A broker for active traders that I can definitely recommend and use is Interactive Brokers. They offer plenty of international exchanges and you can basically trade everything there. But if you just want to buy and hold a stock portfolio, this can be done at most regular broker firms.
Do you think there are any asset classes that are currently being ignored by most retail investors?
Yes, cryptocurrency. Although Bitcoin has been the best performing asset in recent years, it’s still rather complicated for the average Joe to get involved in cryptocurrency. This may change in the future, especially now since companies like PayPal are opening up for cryptocurrency.
Given the 2020 COVID crisis and its effect on the various market sectors (some positive, others negative), do you have any investment ideas that could prove hugely profitable in the next 10 years?
The COVID-crisis has been a game-changer in many ways. Although it still is a disaster for many people, I personally think we’ll get out of this stronger, better and more efficient than ever.
While crucial trends like automation and digitalization have been largely neglected in some sectors and countries in recent years, this quickly needed to change during the pandemic when suddenly employees were required to work from home and companies have been heavily disrupted. I’ve been an advocate for remote work for many years and while working from home was already on the rise in some countries, here in Germany it was rather rare. Until COVID-19. Now companies suddenly realize that remote work isn’t only cost-efficient, but for most employees also more productive while offering a better work-life balance and more flexibility.
I think in the future companies won’t be able to attract new talent without offering WFH. In general, the COVID-crisis has been a huge accelerator for automation and digitalization. However, this also comes at a cost. When processes are automated and jobs disappear, it obviously is a problem for people who are affected. But overall I think we’re in a transition phase and the way we work may drastically change in the future anyway.
When computers, robots and artificial intelligence take care of most of the work, we’ll all have more time for other things. Instead of working at least 40/50 hours per week, we may only work 15 hours in the future. I also think there definitely is a need for universal basic income (UBI) at some point. Not everyone can suddenly become a programmer, data scientist or IT expert.
As an investor, this transition offers plenty of investment opportunities. Just think about remote working tools, communication tools, artificial intelligence, virtual & augmented reality, cloud storage, SaaS, virtual fitness, gaming, food delivery, IT security, telemedicine, online education and in general other megatrends like e-mobility and renewable energy.
If you’re a contrarian, then COVID-19 has also created other more risky investment opportunities. Just think about tourism and air travel. While I personally would avoid tourism companies and particular airlines, I see potential in stocks like for example Airbus and MTU Aero Engines. However, this is my personal opinion and not investment advice.
How does an investor balance the time spent on research with the potential returns? I see some people spend way too much time on research when you take their portfolio size and potential returns in consideration.
Yes, when people with a 10k portfolio spend 15 hours per week on research while generating market returns, it obviously isn’t justified, unless they enjoy the research work and do it as a hobby. Otherwise just investing in ETFs probably would be more effective. On the other hand, when you manage a significant portfolio and enjoy looking into innovative companies, spending time on research can be very rewarding and also a lot of fun. You learn a lot about many industries and also get a feeling about what usually works and what not, especially when you think like an entrepreneur.
Research also doesn’t have to be very time consuming as it’s not always necessary to read dozens of papers or annual reports. Tools/websites like for example SeekingAlpha.com or SimplyWall.st can be very helpful for your research activities and can save a lot of time. These kinds of platforms are also very effective for keeping track of the quality of your portfolio positions. I personally use these sites extensively. But of course, when people want to invest without having experience in financial markets and the particular businesses they want to invest in, then usually ETFs will be more suitable for most people. However, with the drawback that ETFs may include companies that you personally may not have invested in when you would have done the research in the first place.
What is the role of automated trading and AI in the current and future markets. Do manual traders stand any chance?
Most of the trading nowadays is performed by algorithms and high-frequency trading (HFT). Personally, I’m a long-term investor and I’m not a fan of short-term trading. There is a reason why 98% of day traders are losing money. While this is more related to human emotions and lack of discipline, the existence of HFT doesn’t make it better.
Personally, I think if you want to be successful in today’s financial markets, you’ll have to be a long-term investor or at least a highly successful swing trader (medium time period). Anything else very likely isn’t worthwhile. Investing doesn’t have to be hard or stressful. A simple buy and hold strategy with a diversified portfolio and focus on excellent and future-proof companies usually is enough to have long-term success.
I wouldn’t care too much about daily market noise, benchmarks and other distractions. Just invest in what you personally like (e.g. the products you use) and where you see potential. That also helps to identify yourself with your investments, stick to them during downturns or even, in the best case, accumulate when it makes sense.
When it comes to artificial intelligence (AI) there certainly are huge advantages, especially when it’s about dealing with large amounts of information within a short period of time. I’m currently working for Catana Capital, an asset management firm in Germany, and we’re using artificial intelligence for example to generate automated trading signals from millions of social media posts per day.
What are your thoughts on the efficient market theory?
I think that markets today are rather efficient, at least when it comes to liquid instruments and stock markets in the U.S. or in Europe. However, this doesn’t always apply and in times of increased volatility markets can behave irrationally and offer interesting investment opportunities. This always has been the case and probably will never change as long as human emotions are still driving financial markets. Also in times of unprecedented events markets can be highly inefficient as well.
You live in Germany, where cash is still widely used. What are your thoughts on governments’ drive to eliminate cash transactions, and the probable move to central bank digital currencies in the near future?
Personally, I see this as a double-edged sword. Cash always offered some kind of freedom and privacy. However, I personally live 99.9% cash-free since about 1.5 years. I don’t even have a physical wallet anymore and all I carry with me are my keys and my iPhone. Here in Frankfurt I can basically pay everywhere I go with Apple Pay and I avoid shops that accept cash only. This works great! But I realize that I’m a rather extreme example of living cash-less and most of my friends and colleagues are still using cash here in Germany. However, I think we’ll definitely see the end of cash, rather sooner than later.
Politicians have realized that cryptocurrencies won’t go away and in order to compete with that, they’ll very likely introduce a digital currency. I can even imagine that once there is a digital Euro, they’ll try to ban cryptocurrencies or at least make it illegal unless transactions are non-private for the government. Giving up our freedom and privacy is highly questionable and to be honest, at this point I’m not sure how this will play out. We’ll see. Governments have lots of arguments against cash or cryptocurrencies like the fight against money laundering, illegal activities, tax evasion, etc… I think it probably will be hard to argue against that but I hope there will be a way to retain our privacy and financial freedom without intervention from central banks or authorities. We’ll probably need to wait until it’s clear how a digital currency issued by central banks would be structured and what kind of transparency and control mechanisms there will be implemented. If authorities will have full transparency over your financial activities and for example ways to simply erase your account balance, lock accounts and whatnot, that certainly would be questionable and probably would result in heavy resistance.
In a world with so much information easily accessible, how do you deal with picking the right sources and staying on top of them? Does networking with other investors form an important part of your overall strategy?
As mentioned before, for my research activities I use platforms with aggregated information. This already helps a lot to ignore most of the daily noise and to focus on the most important information in order to make educated investment decisions. In addition, I try to think long-term as much as possible, which also makes short-term events rather redundant. Networking certainly also plays a role, especially in an industry where you can still be wrong if you are right and things can become rather complex. For most of my career, I’ve been working in the financial industry. At the beginning as a financial advisor and later several years as an equity trader.
I’m still connected with former colleagues and folks from the industry, which always results in interesting conversations. In addition, I’m actively following the FinTwit community on Twitter to gather insights and new investment ideas. However, especially on Twitter, it’s important to keep a healthy distance as it can become rather intense and distracting. Many posts there can also be the result of a conflict of interest. I also enjoy watching finance videos about stock analysis and other market-related topics on YouTube in my spare time. I definitely can recommend that to anyone who is new to investing as you can learn a lot there.
Is it worth investigating alternative asset classes, including art, wines and whisky, farming etc?
When it comes to investing, diversification is key! That means if you’re interested in a certain asset class and see potential, it can definitely make sense to diversify. Alternative asset classes like art, wine or whisky can be highly rewarding, but you need to know what you’re doing and you need to have a way to store that stuff properly. Personally, I don’t like to own many physical things, so this isn’t for me. But it might be something for you. A few years ago I was very much into luxury objects like watches (Rolex collection), diamonds and insane expensive phones (Vertu and the like). However, at some point I realized that owning all that stuff is rather a burden so I sold it all and instead invested the money in stocks and real estate. In the end, whatever you invest in, it needs to fit your character, interests and style.
What do you think about the answers Michael gave to my questions? Do you agree? I’d love to hear your questions and continue the discussion in the comments section below.
Follow Michael on Twitter.