Transcript: Investing Lessons From Alvin Hall

Published in Investing on 29 May 2009

This is a transcript of David Kuo's podcast with Alvin Hall.

You can listen to or download this podcast here.

David:

This is Money Talk, the investment podcast from the Motley Fool. I'm David Kuo, and today I am joined by the maestro of money, the Eddie Murphy of finance, the wizard of Wall Street -- Mr Alvin Hall! Welcome to the studio, Alvin.

Alvin:

Thank you, I've never heard myself called so many different things at one time!

David:

Well, you are all of those things, and in addition to all of that, you are also presenter on "Your Money or Your Life", that was for BBC2, and also you're on the Radio 4 show, "The Alvin Hall's World of Money".

Alvin:

Yes, and we're getting ready to record another summer series of that.

David:

How wonderful.

Alvin:

Yes.

David:

So you're here in London at the moment, are you enjoying your stay in London?

Alvin:

I always enjoy my time in London, well I've been coming here since the early '80s, so I know London very well, I'm very comfortable, I've lots of friends here, and I see a lot of things when I'm here, so I have a good time.

David:

Has London changed at all for you?

Alvin:

Yes, it has changed. Living here, when I first came here, it was a real eye-opener, how the level of services you get when you live in buildings were substantially less than New York City, you don't have doormen, you don't have porters here in buildings -- I've adjusted to it over the years, and over a period of time I've chosen to live in a hotel. (He laughs)

David:

Very good! Now, the one thing about the UK, or in particular London, is that people are feeling very concerned, especially about their wealth, because we've seen house prices fall, and people are saying, "Well, we've seen our wealth shrink at the moment", and consequently they're reassessing their goals, and they're saying, "Well, how do I make all the money back that I've lost previously?", so how do people go about setting clear financial goals for themselves, especially when we have such uncertainty in the world?

Alvin:

Among my friends, I've seen many of them lose as much as 50% of their net worth because of declines in the stock market or loss of property prices. During times like this, people need to realise that your major objective must be to build a safety net, because in uncertain economic times, we don't know what's going to happen, and there's one thing that always saves you during a period of uncertainty, and that is cash, so one of the things that people need to focus on is building a safety net equal to six to nine months' worth of their living expenses, so that if something goes wrong -- they are made redundant all of a sudden, the economy gets substantially worse -- they will have a safety net in order to protect themselves. 

Then, beyond that, you need to sit on the sidelines for a while and watch to see where the market is going, to determine if you are willing to deal with the risks of the marketplace. Everyone talks about the market's hit a low, you and I both know, David, that it could go even lower. You need to realistically sit down and say, "If I go into the market today, if I set a goal of putting a small amount of money back into shares, into bonds or some other investment, am I willing to lose another 20% of that money in order to get into the market?" They must ask themselves those questions, up front.

David:

You mentioned risk there, but how do people assess how much risk they can tolerate themselves? I mean, are you a risk-averse person, or are you somebody who embraces risk?

Alvin:

I probably embrace risk actually, I couldn't have done as many things as I've done in my life if I were risk-averse, because I would have stayed on the farm in Florida, or stayed in New York City, I would have worked for a corporation; you can't go freelance, which is essentially what I am, I travel around the world to do all these projects, unless I embrace a certain degree of risk. In my investments, I do the same thing, but I also divide my money very carefully, and I tell people this all the time -- you need to determine what percentage of your assets you want to place at risk, and of that money that you choose to do that with, use the sleep test -- if you can sleep at night and not worry, and think about that money, then you're probably below your risk tolerance, but if you wake up in the middle of the night, or as soon as you hear news about the stock market, you hear your heart go "Oohhh!!", you know, flutter, flutter, flutter, it's time to back away and reduce your exposure.

I've seen this so much recently, when friends of mine, as soon as we sit down at dinner, the first topic is, "Did you see how much the stock market dropped today?", and I keep telling them, "If that's the first thing you're talking about, then you're already at or beyond your risk tolerance, it's time to reduce that exposure, so that at least it's a secondary issue in your mind, not the primary issue in your mind", and this is something that people have to determine for themselves.

Over all the years I've been talking about money and personal finance, people always think there's a magic formula out there, somewhere high on the hill, covered in a beautiful gold veil, there's this little meter that if they attach it to their bodies, it will tell them how much risk they have! No, it doesn't exist. Instead, use the sleep test -- if you can't sleep at night, or the first thing you do when you get up in the morning is to turn on your computer and go and check stock prices, you're at your risk tolerance or beyond it.

David:

Are you saying that people shouldn't be having a look at their portfolio to see how it's doing?

Alvin:

No, that's normal, I think people want to know how your portfolio is doing, but if you wake up in the morning, and it's the first thing on your mind before a cup of coffee, or before a shower, and this is happening daily, that's too much. Money needs to have a role in people's lives, but it needs to have a balanced role. If all you're thinking about are the share prices every single day, and you're not a day trader, you're way beyond your risk tolerance.

David:

So you're saying that people shouldn't love money then?

Alvin:

That's a brilliant question, and I say that because one of my flaws as an individual is that I don't love money. I like some of the things that money can buy, MAs, products, Loro Piana -- I can think of many things, but I think that money needs to have a balanced role in your life. I think people who see me on television and hear me on radio think that I think about money every day of my life. This is not true at all, typically on a Friday I will stop working around one o'clock, I will go out in New York or London, and I will spend the majority of my time looking at art, I'll go to the National Gallery, I'll go to the Serpentine, I'll go to the British Museum, and money is the last thing that's on my mind. I've said, "Well today I'm going to learn about this", and so I do all of these things that don't involve spending money, or thinking about the value of assets.

David:

But that's OK as long as people have money, but I mean going back to what you were talking about in terms of investing in the stock market, now if somebody says, "I want to invest in the stock market", how do they go about having a look at shares that they think are of the suitable risk for them to invest in?

Alvin:

Start by looking at your own life -- where do you spend your money? What does your children or wife talk about that's out there in the marketplace? What's captured their interest? -- and use those as the beginning points to determine where you want to invest your money. I tell everyone, don't go in and throw your money in the market immediately; instead start by investing on paper, and I'm telling you this from my own experience -- before I ever put any of my money in the market the first time, I went out and followed those companies for three to six months on paper to determine if I liked what I saw, if I found out any additional information about the company, how the companies' share prices responded to news in the economy, was I comfortable with that degree of volatility in the marketplace? By doing that, I determined, OK, I can tolerate the ups and downs of this company, I see the impact of news, and it gave me time to learn about the company. Do it on paper first, before you put your money into the market, and you'll be a smarter investor.

David:

So are you saying that past trends can tell you what's going to happen in the future then? They constantly tell people, don't look in the rear view mirror about what the past is going to tell you about the future.

Alvin:

I think the past does not tell you the type of return you're going to have in the future, but I think it can give you a clue about the type of volatility you may face in a particular market condition. The past gives you wisdom, but it doesn't give you foresight.

David:

Right, that's very good. For those people who say, "Well, stock picking is much too difficult for me, I really haven't either got the time or the ability to go out and pick stocks", and they say, "Let's go and get some mutual funds, let's go and buy some unit trusts" – now, are you a fan of mutual funds and unit trusts?

Alvin:

I am, I'm writing a book right now called "Getting Started in Mutual Funds", the second edition; so yes, I am a fan of mutual funds. I think that, for the average person, they are a good investment. However, if you look at the stats about mutual funds, they don't appear to be that good an investment compared to index funds. Something like 70 to 80% of mutual fund managers under-perform the market, as measured by any of the broad indices, so I think that people should use mutual funds in a method called "core and explore", this means that you put a substantial portion of your money in an index fund that tracks the FTSE, the Dow Jones industrial average, the S&P 500, and then you use managed mutual funds to explore other areas, such as the international markets, technology, biotech -- you use them much more industry or sector specific, and you're able to create a diverse portfolio, but there's a risk even in this strategy, and the risk is the following: many of the index funds are required to be fully invested at all times, so unlike a managed fund, they can't move much of their assets to cash, so that means you will experience the ups and the downs of the stock market in their real form. As we know, reality has been brutal lately.

David:

Can I just move away very briefly away from the stock market into something that you obviously love, which is art. There are people out there who would say, "Let's go into alternative investments right now, I'm not interested in shares, I want to invest in things like wine and art and antiques and cars", so how good an investment is art for you, Alvin?

Alvin:

For me, art is never an investment, art is a passion of mine, something I've really spent a lot of time walking the street, looking at galleries, looking at artists, and when I see an artist who hits my soul, who goes straight to my gut, I know it's good, I know it's good. If it's in my head, it's not good, so when I buy art, I actually buy it from a deep-seated passion, but with a very educated eye, an experienced eye, because I look all the time. If I look at how art has done for me overall, I cannot deny it's done very very well. 

Several of the paintings that hang on the walls of my apartment are worth a quarter of a million, a half a million dollars -- that's pretty good for some stuff that I may have paid, maybe a couple of thousand dollars for, five thousand dollars for -- that's really good, but you only gain that by looking. At the same time, I have other things I couldn't give away to a museum, you couldn't even give them away to a charity, they're worth nothing! -- so with everything, it's like stock investing, some artists did well, some did badly; the same thing with my share portfolio -- some things did well, some things badly, but you want to have overall more winners than losers.

David:

So how long do you think it takes for somebody to get that kind of eye for art then?

Alvin:

I tell everyone, if you're interested in investing in art for the first year, you should look, look, look, look, look, and not buy a single thing. The second year when you buy, buy what you love and realise that, by the third year, you'll realise that everything you bought that second year was bad.

David:

But how can you explain something like Damien Hirst? -- I mean, most people would look at Damien Hirst's art, his art form, and say, "I don't get it", and yet the price appreciates so rapidly?

Alvin:

Well, Damien did create a new vocabulary, a new way of looking at things. You may be cynical about those stuffed sharks or those stuffed lambs, but they were at the time ground-breaking, and quite forward-thinking. The problem for me with Damien's work is that it's now become a factory, it's coming out too many multiples, he's generating all this art, because he wants to make his art accessible to the broad masses. When one person is issuing that much art into the world, eventually it's not going to be worth a lot, so it's only the primary pieces that will be worth much. All those people go out and buy those prints, those prints will never have that much price appreciation.

David:

OK, so can I just go back to investing in shares again? Now, people are saying, "How much of my portfolio should I have exposed to shares?" I know you touched on it earlier on about the sleep test, but people are saying, "Well, in that case, I'm not going to be generating a great deal of wealth myself, if I only have say 5% of my portfolio in shares" – what criteria do you think people should be using to decide how much exposure they have to the stock market?

Alvin:

I think if you're in your twenties and thirties, and you have built yourself a good safety net of three, six or nine months' worth of your living expenses in the bank, today, given the economy, I would say six to nine months -- once you have that in the bank …

David:

But can I just break in ever so quickly on that, how are people going to get nine months' worth of savings when they are living from hand to mouth at the moment?

Alvin:

It's very difficult, that's very difficult. If you're living from hand to mouth, then you cannot do that, you need to cut back on other things to try to put some money away, because we all need a safety net. David, I remember those years when I was earning $16,000 a year, or $22,600 dollars a year, and I really had to scrimp and save just to get three months' worth of savings in the bank, but I became a specialist in cheap living. I would clip coupons or vouchers, I would go to cheap movies, when I ate out with friends, everything had a limit on it, so that I could put three months away in the bank.

David:

Do you still do that?

Alvin:

Oh yes, I still do, now because I'm essentially freelance, I'm a little bit more, shall we say, paranoid? So now I try to have a year's worth of living expenses in the bank, because I tell everybody, you have to think of the "what if" situation. People don't like to think that way, but you really do -- what if the company that I work for is sold and I get laid off? What if I'm made redundant? What if a terrorist attacked, like 9/11 happens? What if the stock market crashes? If you don't have this safety net behind you, then surviving that becomes very difficult, very difficult, and I have lived through every one of those "what ifs" in my life, so I know it's important to have that. 

Once you have that in the bank, then you can consider investing, and when you are young, twenties and thirties, you have a long time to ride out the ups and downs of the stock market, so I would probably have the majority of my money in well-chosen blue chip stocks, some in growth areas, and you can't expect to make money on everything, God knows, I lost money. The first time I went into the stock market, David, I lost 50% of the money that I had in shares. 

Now, you would think, that having lost 50%, that I would be bitter, twisted -- but no, one of the early lessons I learned about share investing was that, if you fall down, you get up, you take a deep breath, you look at the mistake that you made, you learn the lesson, and you're a smarter investor than next time. As one gets older, you may want to reduce your exposure to shares. I think that, once you have a family, kids in school, and you have the set series of needs, preservation of capital becomes a really key objective, especially when you're in your fifties, because you don't want to be exposed so much to the stock market. When I turned 50 (just the other day, by the way) …

David:

You don't look a day over … 50!

Alvin:

Thank you! It's the help of a plastic surgeon, we need all this, a little nip there, a little tuck there! But when I got to be in my fifties, I went and had a conversation with the financial advisor that I worked with, and I said to him, "Listen, you need to help me preserve my capital." Now, people may be surprised to find out that I actually work with a financial advisor, I've done this all of my life, as a single person, I don't have a spouse there to balance my financial crazinesses, so I have a financial advisor with whom I have a really close relationship, we talk all the time. I describe him as my partner, but without the sexual obligation, so we talk about my money, we change the mix over a period of time, and now we're focusing on preserving capital.

David:

But the thing is, Alvin, I mean you could live until you're 100, so …

Alvin:

No I won't, David -- no male in my family has ever lived past 75! Not that good! (he laughs)

David:

No, but the thing is, people are living a lot longer now, so therefore if you aren't exposed to enough shares at the age of 50, what you could find is your preservation of capital would be eroded by inflation?

Alvin:

Yes.

David:

So even if you are say 60 years of age, you could live for another 20, 30 years? So shouldn't people have some exposure to shares, even at that age?

Alvin:

Always, I think they should have exposure, but a lot of people can't tolerate that kind of risk. Imagine if you were 65 now, and you had over-exposed yourself to shares, and you were facing this market downturn -- you are very nervous, you're very concerned, so I think as people get older, they need to reduce the percentage, 10 or 15% may sound conservative, but I think for some people in their sixties, more than that would make them nervous, so I think people need to sit down and say, "Yes, I need this exposure, but what percentage would work for me?" -- remember the sleep test.

David:

Right, now I think this final question is one that my listeners will not forgive me if I don't ask you, and that is, Alvin -- what are you investing in now?

Alvin:

Well, I've been in cash for quite some time, and working with my financial advisor, we came up with an interesting strategy. I am buying ETFs, exchange traded funds, and what I'm doing is averaging down. Basically we developed the following strategy: when the Dow Jones went to 8,000, we invested about $5,000, then when it went down to 7,500, we invested $10,000, when it got down to 7,000, that became $20,000, so at every time it goes down, we're doubling down, and then there's a point where we stop, I don't want any more than 10 to 15% of my overall portfolio exposed to this strategy. We try to buy all the way down, doubling up on the way down, and then if the market rallies, as it has done recently, we do very very well on the way up. We then liquidate and start all over again.

David:

So do you think the market is bottomed now? I know I said the last one was the final question, but this is now the final, final question – do you think the market is bottomed?

Alvin:

No, I think that if you look at what's happening in the US, the industries are still shrinking, the lay-offs are still occurring, although now many companies are doing what they call "stealth lay-offs", they do them slowly over a period of time, but unemployment is going up in the States, corporate profits are still going down, and while the banks have stabilised seemingly, other industries have not. I still think we have the summer to get through, and if we make it through the summer, I'll be a little bit more optimistic, but I don't think we've hit the bottom yet.

David:

So do you think 2010 could be the year for recovery?

Alvin:

I think 2010 will be the year for a stabilisation. I think when we use the term, "recovery", or when you hear it used in the news media, everybody thinks the markets are going to soar back up to their height, and "happy days are here again!" It won't be that way, it'll just stabilise and move sideways and then start that gradual movement up. I would take stabilisation at this point, recovery I don't see for many years because, you think about this -- all of these toxic assets that were sold out there, those losses have to be realised at some point -- when will they be realised? -- gradually over a period of time, so having a stable market would be a blessing.

David:

Well, thank you very much, Alvin. I think we ended on a positive note, do you think we ended on a positive note there?

Alvin:

Yes, I think we did.

David:

I think we did.

Alvin:

I think people need to recognise that this problem that was created by all of these assets is real, and the market won't jump back, but if we can just have a market in which share prices stabilise, and property prices stabilise, we can then start to set reasonable financial goals for the future. It's all about having a level plain to work on, it's like trying to walk in stiletto heels on pavements -- can you do it, David?

David:

I've never tried -- do you think I should?

Alvin:

Once, everybody should try it! (he laughs) Speechless, I think he is!

David:

I think for the first time ever, I am speechless! Well, thank you very much for coming in today Alvin, it's been an absolute pleasure. Now, I end each podcast with a quote, that I hope sums up what this podcast is all about, and today's quote comes from a man called James Bryant Conant and what he said was, "Behold the turtle -- he makes progress only when he sticks his head out."

Alvin:

I totally agree with that, because you have to stick your head out in order to move forward.

David:

Thank you Alvin, and now, if you have a comment about today's show, you can post it on our blog page, which you can find on our home page at www.fool.co.uk/podcast, and if you have any suggestions about future shows, you can email moneytalk@fool.co.uk.

 

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