If you missed part I of my Q&A with Wes Gray of Alpha Architect, check it out here for thoughts on his firm’s new ETF, the process of starting an ETF and more on quantitative value investing. Part II includes some of Gray’s biggest influences on his investment philosophy and lessons learned from serving our country in the U.S. Marine Corps. My questions in bold.
(1) Who are some of the biggest influences on your philosophy as an investor?
I was literally a cowboy as a young kid. I lived on a cattle ranch near Eagle, CO, which is located deep in the Rocky Mountains. I raised animals and sold them at the county fair to make money. And with my growing savings came decisions—what to do with the money? To jumpstart my learning, my Grandmother gave me a copy of Benjamin Graham’s The Intelligent Investor, which describes the philosophy of value-investing. I was 12 at the time and instead of being overwhelmingly appreciative, I was secretly depressed I didn’t get a Nintendo. Nonetheless, I read the book and loved it. I was hooked on value-investing. Over the next 10 years I devoured books on value investing and eventually put my hard-earned “skills” to work, investing in value stocks and special situations.
Part of my investing education included matriculating in the finance PhD program at the University of Chicago. The first two years of the program were similar to drinking from a high-powered fire hose, which spewed sometimes unintelligible information and math equations from the leading scholars in finance. It was not always the most enjoyable experience. However, I persevered and started researching the intersection between financial economics and psychology, a growing field that has since come to be known as “Behavioral Finance.” Although I wasn’t sure how I could apply my new knowledge, I recognized that psychology was a powerful force in understanding financial economics.
Simultaneous with my exposure to behavioral finance, I was managing a small amount of money I had raised from my family and friends. I soon realized that the “irrational, emotionally involved, overconfident traders” I read about in the academic literature were not theoretical investors dreamed up in the ivory tower—this crazy investor was me! I realized that no matter how many times I foolishly told myself that I was as smart as Warren Buffett, I would never actually be Buffett. I would always succumb to my innate cognitive biases. I guess sometimes it takes getting a PhD to realize you really don’t know it all.
In summary, I was originally infused with the “value-investing” religion at a very young age, but time and experience helped me realize that I’ll never be as smart as I think I am.
(2) Business Insider recently ran a profile on your time spent in the U.S. Marine Corps. How has that experience shaped your views as an investor?
My time in the Service changed my entire perspective on life (and investing). In some ways I’ve changed for the better, but in some ways I wish I was still able to live in ignorance to the realities of the world outside of the United States. At a high level, the military taught me a simple thing:
Money isn’t everything; but friends, family, and honor are.
The more tactical lessons I’ve learned in the military guide all of my business and investment decisions. The four biggest lessons learned are as follows:
- Human Beings Are Emotional: Losing money is an emotional event; getting shot at is even more emotional. A systematic approach for handling chaotic environments is critical to success.
- Rambo isn’t Realistic: Pumping iron and strapping hundreds of 7.62 shells around our chest might work in the movies, but in real-life evidence-based approaches to warfare are much more effective.
- Integrity is Everything: If you can’t trust the man to your left and your right, you can’t really get anything done. Honest communication and full transparency maintain integrity.
- Complacency Kills: Success is often the surest way to predict defeat. Victory leads to overconfidence, overconfidence leads to laziness, and laziness can lead to death.
To highlight just how much the military affected me, our firm’s 3 core beliefs and our mission statement almost map directly into the 4 key lessons I learned from the military:
- Human Beings Are Emotional: We believe in SYSTEMATIC DECISION-MAKING, not ad-hoc decision-making.
- Rambo isn’t Realistic: We believe in EMPIRICAL-BASED INVESTING, not story-based investing.
- Integrity is Everything: We believe in TRANSPARENCY, not black-boxes.
- Complacency Kills: We exist to EMPOWER INVESTORS THROUGH EDUCATION…because uneducated investors get eaten alive by Wall Street.
I want to thank Wes for taking the time to answer my questions. I always find it fascinating to learn about the investment approaches and backgrounds of smart people in the industry. Make sure to check out Wes’s blog at Alpha Architect and follow him on Twitter at @alphaarchitect.
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