Portfolio Investing 101: David Neubert

How would you build a portfolio?

We put that question recently to David Neubert.

A man of wide experience, Neubert spent ten years at Morgan Stanley in a number of trading roles including head of Global Portfolio and Program Trading. Then he moved on to Lehman Brothers where he was Head of Equity Trading Strategy and Technology for a couple of years.  He knows how the big institutions on the Street trade. After retiring (early!) in 2005, he spent a few years working on investor education initiatives.

Now he’s focused on Kapitall,  an investing tool with a heavy dose of gamer influence and psychology behind it. Kapitall aims to capture those 45 and under, people who are used to learning visually. A co-founder and VP of Trading for Kapitall,  Neubert says the goal of the platform is to make investing “a task that is intimidating or boring to most people, less so.” We all have to do it, Neubert notes: our retirement is in our hands.

Neubert’s lived in New York, London, Tokyo and Sao Paolo. He spoke to us from Seattle, which he now calls home. Did we mention he also sits on the board of the company that owns Brother Jimmy’s BBQ?

Investing professor for a day, here’s Neubert’s take on smart investing:

  1. Individual Investors have some real advantages over Institutions. First, they can think with a time horizon of more than one year.“The only other investor I know who can do that is Warren Buffet,” Neubert says.Big fund managers “have all these non-economic incentives. Like at the end of the quarter if there’s some loser stock they’ve been buying, they’ll sell it so that no one thinks they’re stupid. Then right after the quarter, they’ll buy it back… A mutual fund manager may be 100% in the market at all times, but they’ll often get caught by the same manic greed. If they think the market’s going higher they’ll bet on the riskier stocks (in their portfolio.) They’ll take stocks with low betas and put more money into high beta stocks like tech stocks. If the Dow is going up 1%, they might be up 2% or 3%. Even fund managers get caught up.”Their biggest disadvantage is that they get paid once a year based on their performance. If they have a trade where they would say ‘I know this will make money in the next three years, but don’t know when,” they can’t make that trade. It’s a waste of the space in their portfolio because they don’t know when it will pay off.”For example, inflation index bonds move very slowly, they’re not that interesting to a trader. But if inflation hits, they’re really going to do well. I’m allocating some of my assets to those bonds. I’m willing to take 2% while I wait for inflation to come. I don’t feel forced to make a bunch of market timing decisions right now. If I was a fund manager, I couldn’t do that.”The best thing an individual can do most of the time is nothing, and they have the flexibility to do nothing. Institutions cannot.”
  2. Individual investors are “better at identifying long term consumer trends than professionals.”“Wal-Mart (WMT) versus Target (TGT), Target versus Wal-Mart. Abercrombie & Fitch (ANF). Boston Chicken. Wall Street doesn’t know about that. They don’t go into Target and shop there. So individuals who can take that knowledge and then do the fundamental analysis so they don’t make mistakes have an advantage.”You have to do the analysis.  Apple (AAPL). Individual investors may say I have an iPhone and a Mac, those guys got me, I’m going to buy Apple (stock). They aren’t looking at the fundamentals  of Apple. It is priced for massive success. Even if it just grows really well and not fantastically, the stock will go down.”
  3. Institutional Investors make a lot of the same mistakes individual investors do.“All that Behavioral Finance that applies to individuals also applies to big fund managers. They make a lot of the same mistakes. They have anchoring problems, they get used to a price being at a certain level. “
  4. There are two ways he recommends someone new to investing can build a portfolio. Option One: “Put 90% of your money into a mutual fund or ETF that’s indexed and take 10% to learn with. Put that 10% into one or two stocks.Option Two:”Force yourself to buy one stock in at least eight different sectors and make sure they are among the 50 largest stocks in the US. Those are the ones whose price is most likely to reflect their fundamental value because so many analysts and people follow them. Their accounting statements are the most likely to be reliable and well understood by other people. There are exceptions, but overall analysts get it right more than wrong.Once you’re looking at a sector, say retail, “you know Wal-Mart and Target and Safeway (SWY) are all in the top 50. Now look at which of those is doing best. Rank them for their quality and their valuation. Start with the forward price to earnings ratio. A professional would kill me for saying this, but it’s an easy way to look across industries. Within any industry that varies. It makes more sense to look at price to book for financial stocks, ebitda (cash flow) for retail. But overall forward P/E is pretty good. It gets you 80% of the way there.

    “Make sure you have at least 8 sectors, of the 15 or 18 sectors. You’re forcing yourself to diversify even if you don’t want to. Say you love technology and know everything about it. Force yourself to own a utility and you’ll be better off in the long run. Diversification is the only free lunch on Wall Street.”

  5. “People with a negative net worth should be paying off their debt.” For them, Neubert says, investing can wait, though at sites like Kapitall they can construct model portfolios and see how they fare.

Note: Neubert shares his own investing portfolio with people who sign up at Kapitall. He currently has holdings in two stocks mentioned in this piece: Safeway and Wal-Mart. (And Apple as he notes below.)

4 thoughts on “Portfolio Investing 101: David Neubert

  1. stock trader

    Well written article David and I think you high light a lot of excellent points. The average investor typically doesn’t have the time or inclination to keep of with the needed research on the economy and individual equities and we believe longer term investors need to stay out of these markets and preserve whatever capital they have till we put in a true market bottom.

  2. minifesto

    My style of investing is completely different. I have been investing for fifty years mainly in oil, forest products and electronics. For the last 15 years I have been increasingly focussed on R&D intensive companies with biotechs being the current favorites. I focus on areas where I have specific knowledge. Diversity is not for me. When challenged recently I calculated I had achieved over 12% compounded annually over last 28 years. Unfortunately do not have records for the fifty years.

  3. Michael

    It is important to diversify your investments and if you make your own portfolio you can put there shares from different companies. That is a great stuff!

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