Wade, your book is titled How I Managed $20,000,000,000 By Age 32. What was the greatest lesson you learned while managing that vast pool of cash?
Wade Slome: Managing $20 billion is like captaining a supertanker – maneuvering is tougher and requires much more forward thinking. Buying and selling large stakes in companies for a fund that size is a challenging endeavor. Now, at the company I founded in 2008, Sidoxia Capital Management, managing my hedge fund and separate accounts for high net worth individuals is more akin to handling a speed boat. Since my firm is earlier in its growth cycle, shifts in direction can be triggered instantaneously. When it comes to trade execution, the difference of managing larger asset pools is like the disparity of a baseball batter facing a Randy Johnson fastball versus an underhand softball pitch. There really is no comparison.
Do you prefer using technical analysis, fundamental analysis, or some combination of those and other factors to understand the market direction?
Wade Slome: Fundamental analysis is the main engine I use for generating new investment ideas. In many instances, the two forms of analysis do not align. There is a lot of noise, volatility, and misinformation that permeates through the market on a daily basis, which can cause a lot of false signals, thereby leading to excessive trading, transaction costs, and ultimately subpar investment returns. However, I do believe technical analysis can add value when interpreting short-term supply-demand trends. For example, I use basic forms of technical analysis such as volume, relative strength, and pricing bands when I trade around core portfolio positions. As a recreational golfer, I consider fundamental analysis as my group of drivers and irons, whereas technical analysis acts as my lob wedge – useful and valuable in certain situations.
Wade Slome (photo left)
Why do so many people give up on their dreams of success in the market, and sell their holdings at a loss?
Wade Slome: There is always fear in greed in the market, but the pain of losses is more severe than the pleasure garnered from gains. Amos Tversky, former professor at Stanford University, and Daniel Kahneman, Noble Prize winning professor from Princeton, were pioneers in the study of behavioral finance and the impact of “loss aversion” on human beings. Through their studies, they showed that losses experienced by people are more than twice as painful as gains are enjoyed. Fear is a powerful emotional force, but eventually memories forget the pain and greed takes over. We see it time and time again.
What are the most common mistakes you see investors making with their portfolios?
Wade Slome: The three areas where I see the most mistakes are excessive trading, excessive fees charged by brokers, and an emotional ad hoc approach to investing. Most recreational investors, or aggressive brokers, read newspaper headlines and are overconfident in their ability to generate short-term profits. They feel they can never be wrong, if they are constantly buying ideas based on good news and selling on bad news.
These tendencies may feel right or work in the short-run, but evidence shows, come the post-mortem review of trading statements, that individuals get crushed over longer periods of time. John Bogle, the very successful founder of The Vanguard Group, did an eighteen year study showing that individual investors underperformed the “do-nothing” index strategy by more than 10%...PER YEAR. Astonishing how much trading, fees, and emotions can impact long-run returns.
We are in a down economy today, and the recession may last for awhile. Are the ideas and techniques you present in the book still useful in tough economic times?
Wade Slome: Absolutely. This has been particularly difficult period over the last 10 years, when the stock market effectively has managed a flat return, but most people forget that this stagnant period came off of a multi-decade run in the 1980s and 1990s when the market increased by more than TEN-FOLD. There have been about 15 bear markets since World War II and historically these have absolutely been the best times to buy equities.
So when Warren Buffett advises investors to “buy fear, and sell greed” it pays to take notice. But stocks are not the only area of opportunity, there are great investment prospects in a wide range of fixed income securities as well, whether you are talking about corporate bonds, high-yield, TIPS (Treasury Inflation-Protected Securities), municipal, and hybrid securities (i.e., convertibles).
This period is particularly unfortunate for retirees that were improperly allocated in their portfolios or did not save adequately, however for the vast majority of investors that have, 10, 20, 30, 50+ year time horizons, this current environment is dramatically more fertile than it was 12 months ago.
When someone is seeking a financial adviser, what qualities should they seek?
Wade Slome: From my perspective, the decision boils down to two key factors – experience and trust. But I’m not talking about sales experience; I’m talking about investment experience. So many of my supposed stock broker competitors are commission-quota sales people that have little to no investment experience and they handle hundreds of clients simultaneously.
I pride myself on the statement that I eat my own cooking, or in other words, I invest in the same types of strategies and investment vehicles that I offer my clients (subject to each client’s goals and circumstances). If there are no material conflicts of interest and there is transparent disclosure of fees charged, that is a good foundation to build a long trustworthy relationship with your adviser.
What are the most important questions a person should ask their current or prospective financial adviser?
Wade Slome: First and foremost, understand how your adviser gets paid. Not all commissioned sales people are evil, and there are indeed some good ones out there. But it’s imperative to understand any potential conflicts of interest that may exist. I am strongly partial towards “Fee-only” advisers, and at Sidoxia Capital Management we certainly are not the only Fee-only advisers around. Fee-only is the minority, but the trend towards this fee structure is increasing.
Secondly, get to understand the educational and training background of your adviser. Do they have a bachelor’s (and master’s) degree? Are they a Chartered Financial Analyst (CFA), or a Certified Financial Planner? These are indicators of how committed your adviser is to his or her profession.
Lastly, find out what you are paying in fees. People are embarrassed to ask, but generally people are not shy when they buy other high ticket items like homes and cars – so don’t be bashful, you are paying your adviser a lot of hard-earned money. Investors should be paying closer to 1% than 2%, and if you’re not, then you could be pushing out your retirement. Good advice can help your situation, but not if fees strip away the results.
What is next for Wade Slome?
Wade Slome: More of the same. This is an extremely exciting period in the investment world, even in the face of tough economic times for the U.S. and global economies. I find it extremely gratifying to educate and advise investors in these difficult, uncertain times. I will continue to selectively build my base of long-term investment clients and add to the incredible number of good ideas available for my hedge fund.
The feedback from my new book has been positive thus far, but I will have to assimilate the responses from other readers and reviewers to determine whether an encore book will be in the cards?!
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Wade Slome (photo left)
Wade W. Slome, CFA, CFP®
President and Founder of Sidoxia Capital Management
Wade Slome is a CFA charterholder (Chartered Financial Analyst), a CFP® certificant (CERTIFIED FINANCIAL PLANNER®), and a member of the CFA Institute and the FPA® (Financial Planning Association®). Wade Slome has worked in the investment industry since 1993, and Bloomberg identified him as the second youngest manager among the largest 25 actively-managed U.S. mutual funds in 2005. Wade Slome has also been a media go-to resource, quoted in USA Today, The New York Times, Dow Jones, Investor's Business Daily, Bloomberg, and Smart Money, among other publications.
Wade Slome's website: Sidoxia Capital Management
The full tour schedule and details of Wade Slome's blog book tour are posted at Virtual Blog Tours.
Autographed copies pf Wade's book are available at Amazon.com or from Sidoxia Capital Management for $23.95
His book is also on Amazon.com for the retail price.
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