Millennial Investing: Q&A with Patrick O'Shaughnessy
About Patrick O'Shaughnessy
Patrick O’Shaughnessy is a Principal and Portfolio Manager at O’Shaughnessy Asset Management (OSAM). Patrick is the author of Millennial Money: How Young Investors can Build a Fortune, published by Palgrave Macmillian. Patrick is also a contributing author to the fourth edition of What Works on Wall Street and the author of several market commentaries, including “The Same Old Bear” which earned awards from Advisor Perspectives for The Top 25 Venerated Voices™ by Author and The Top 10 Venerated Voices™ by Commentary. Patrick holds a B.A. in Philosophy from the University of Notre Dame and is also a Chartered Financial Analyst. He lives with his wife and son in Greenwich, Connecticut.
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P
Harvest Interview Series: Quantitative Equity Manager
Patrick
O'Shaughnessy
Principal & Portfolio Manager:
O’Shaughnessy Asset Management
{ INTERVIEW BY KHAI NGUYEN }
Patrick O’Shaughnessy is a Principal and
Portfolio Manager at O’Shaughnessy Asset
Management (OSAM). Patrick is the author
of Millennial Money: How Young Investors
can Build a Fortune, published by Palgrave
Macmillian. Patrick is also a contributing
author to the fourth edition of What Works
on Wall Street and the author of several
market commentaries, including “The Same
Old Bear” which earned awards from Advisor
Perspectives for The Top 25 Venerated
Voices™ by Author and The Top 10
Venerated Voices™ by Commentary. Patrick
holds a B.A. in Philosophy from the
University of Notre Dame and is also a
Chartered Financial Analyst. He lives with
his wife and son in Greenwich, Connecticut.
Khai Nguyen: I’m here with Patrick O'Shaughnessy, author of
the book, Millennial Money: How Young Investors can Build a
Fortune. Patrick thanks for joining me today.
Patrick O’Shaughnessy:
I wish there were more long form
interviews like the ones you conduct, so thank you for including
me in your series.
KN: Patrick, your book has received excellent reviews. What
inspired you to write the book?
PO:
Do you know how there are some things in life you just feel
natural doing? For me it’s always been reading and writing. To
write a decent book, I think you need to first read 300 to 400
other books, so I spent my early mid-twenties reading. When I
was 27, I felt like I had accumulated enough knowledge to start
writing.
Because I am young myself, I wanted to write a book addressing
younger investors. They make an ideal audience for several
reasons. First, they have such a long time horizon, so they have
enormous investing potential. Second, the millennial generation
has been underserved thus far by the financial services
community. As a group, they haven’t accumulated enough wealth
to make them lucrative clients. They own just about 4% of mutual
fund assets. Most financial authors are much older, so I thought I
had a neat opportunity to appeal to younger readers. It has been a
blast connecting with them. Thus far I’ve found that hearing from
someone their age helps millennials get interested. Many that I’ve
talked to have started investing sooner than they would have
otherwise.
KN: How has the experience of authoring the book affected the
way you look at investing?
PRO
Professional investors, funds and allocators contact
Khai@hvst.com
to be part of our Harvest Interview Series
The millennial generation has been
underserved thus far by the financial
services community. As a group, they
haven’t accumulated enough wealth to
make them lucrative clients.
PO:
Writing a book made me realize how little I know. As I read
and researched more and more, the amount that I knew grew, but
the amount that I didn’t know grew even faster. For every
question answered, three new questions popped up. Faced with
so many questions and so little time, I’ve realized that investors
simply can’t know it all. Instead, I think it’s best to identify areas
where you have an advantage and stick to it. Sometimes simple
rules—and investing strategies—work very well. I lay out five
pretty basic attributes to look for in stocks in Chapter 6 of the
book. They may not be the absolute best attributes, but they have
worked very well. There is a common saying in the art world that
“perfect is the enemy of good.”If you try to get everything exactly
right you’ll never get anywhere. Trying to build a perfect
investing strategy is impossible. This was a liberating realization.
KN: What was your earliest experience with investing?
PO:
One of the first photographs of me as a newborn is of me
napping, with a copy of the book “Stock Market Logic” laid across
me as if I’d fallen asleep reading it. My father was experimenting
with osmotic learning.
KN: Can you describe your investment style and philosophy?
PO:
It is a very straightforward recipe. First, find the attributes
shared by history’s most successful stocks. Basically, avoid stocks
with the worst balance sheets and suspicious earnings quality and
buy those with very cheap current valuations, strong recent price
trends, and high total yields. Second, build portfolios of stocks
with similar attributes today. Third, rebalance to move the
portfolio back towards stocks with these same attributes as
market conditions change. That’s pretty much it. The key is to
never, ever deviate from this model and to keep doing it for a long
time.
There is a lot of nuance in this approach—how to rebalance, how
to calculate your factors, how in incorporate new and better
methods uncovered in ongoing research, and so on—but the core
philosophy is quite simple.The secret sauce of this style is
persistence. If you use this strategy, you’ll end up with a unique
portfolio—one that will often look unappealing and have recent
performance to match. The key is to not get scared out of the
strategy when it is lagging, which it will from time to time.
There is a lot of evidence that simple models are better than
humans; be it in predicting wine prices or stock returns. But it is
very hard to continue to trust a model when it isn’t working. As
such, I only recommend this type of strategy for those who
recognize this fact and are prepared to stick with the model.
KN: Who were some of the people that influenced your investment
style along the way?
PO:
David Dreman, for his sharp insight into the power of
contrarian investment strategies. Joseph Campbell, whose writing
on mythology contains countless lessons for would be investing
heroes. Daniel Khaneman and his various research partners, whose
exploration of psychology gives me the comfort that our approach
will continue to work in the future—because human nature doesn’t
change. Jiddu Krishnamurti who taught me the value of
investigating for oneself and never simply taking someone else’s
word for it. Michael Mauboussin for his countless insightful papers.
James Montier for the same reason. Philip Tetlock for curing me of
any desire to forecast the future. Nassim Nicholos Taleb, Arthur
Koestler, and Edward de Bono for building frameworks to help me
think differently—although Taleb would probably not like my
portfolio with its lack of disaster insurance. The authors of the
Upanishads, for helping me stay calm. So many others! James
O’Shaughnessy for too many reasons to list.
KN: You’re a big fan of leveraging historical market performance
patterns to invest. What are the advantages of using such an
approach?
PO:
For anyone trying to outperform the market—a less and less
popular pursuit—it is very valuable to be able to test whether your
strategy would have worked across a long period of market history.
Having 50-80 years of data in which to test ideas is a luxury. I love
the idea of value orcontrarian investing, but I like it a lot more
knowing how well it has worked historically. Some things sound
appealing, such as high sales growth for example, but work terribly.
You’d want the lowest sales growth companies, if anything. Having
the historical data allows us to weed out these bad ideas.
KN: Where do you see the most compelling investments in the
current market environment?
PO:
My answer is so boring because it’s the same no matter the
market: cheap stuff that isn’t pure junk and that the market is just
beginning to notice. Said differently, value and momentum, with
some attention paid to avoiding the worst quality stocks. Markets
are pretty expensive across the board in 2015, but there are almost
always small pockets of opportunity, and these factors have proven
to be the best ways to find those pockets.
KN: What are some of the mistakes you’ve seen investors make?
PO:
Usually they are timing mistakes. They abandon a strategy
right at its performance nadir. They invest in a stock or strategy
after it has done really well, when they should instead be doing the
opposite.
Professional investors, funds and allocators contact
Khai@hvst.com
to be part of our Harvest Interview Series
Writing a book made me realize how little I
know. As I read and researched more and more,
the amount that I knew grew, but the amount
that I didn’t know grew even faster.
KN: In your book, you talk about the importance of Millennials
to start investing and building wealth early. Why is this so
important and where do you see the investment behavior of
millennials trending?
PO:
Returns in the stock market get much steadier the longer
your time horizon. Stocks yield terrible results in some short term
periods, but once you get to 30-40 years, they’ve delivered
remarkably consistent and strong results. Stocks would be very
risky for a 50-year old. They are much less so for a 22-year old.
Time is a huge asset for millennial investors right now, so the key
is reaching them young. If you are a parent or know a young
person, please help set them off on the right foot!
Sadly, many millennials are already making common mistakes.
In their portfolios, they are favoring exciting stocks that they
know well—think Tesla, Twitter, and Facebook. But these stocks
are very expensive and priced to do poorly. I wish they’d instead
either index their money or focus on cheaper stocks, even if these
cheap stocks aren’t nearly as much fun. Now of course if all
millennials followed this advice, the cheap stocks would no longer
be cheap, but I am confident only a very small minority will do so.
KN: Any advice you would give to professionals coming into the
investment industry?
PO:
Read nonstop. Never assume those in prominent positions
know any more than the rest of us, although some do. Never
forecast, you’ll be wrong constantly and often immediately.
Experiment with unconventional ideas. Realize that if you want
to beat the market, you need to be very different from the
market—otherwise you might as well just index your money.
Follow Templeton’s advice: don’t ask where the outlook is best,
ask where the outlook is miserable—you’ll find much better
opportunities there.
KN: What is your approach to introducing investing to your
son?
PO:
I’ll give him a stack of 50 books—many of which will only be
indirectly related to investing—tell him to read the 10 that
interest him most, then read the 10 that interest him least, then
we will talk about them!
Contact Info:
O'Shaughnessy Asset Management, LLC
6 Suburban Avenue
Stamford, CT 06901
(203) 975-3333
info@osam.com
For members of the press:
Ena Gong
(203) 975-3302
Ena.Gong@osam.com
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