Bet your own money, not OPM, to learn and win

I was excited to attend my first class on investing principles in graduate school. I was finally with like-minded individuals who share my pursuit of investing excellence.

My first conversation with a classmate dulled my spirits.

We discussed everything about a stock that we both liked. Our knowledge on its business model, finances, history, management, and competitors overlapped yet complemented. I have a substantial portion of my net worth in the stock. Yet the classmate said:

Classmate: I have a little invested in the stock. I would never have much invested in it.

I was in disbelief. For heaven’s sake, why?

Classmate: I know a lot about this stock to prepare for a job interview at a [insert well-known company] fund. Why bet your own money when you can bet OPM (other people’s money), take a large salary, and avoid losing your own money if you’re wrong?

My classmate would be a highly-paid employee at a large fund. Yet it is unlikely that he would become an outstanding investor.

Investing one’s own hard-earned capital and investing OPM have subtle yet important differences. Capital fuels life in capitalistic societies. It pays for food, water, shelter, and education. It supports families, relationships, and self-esteem (to an extent, arguably). Investing one’s own capital is an undertaking of personal risk. Enormous stress is an understatement. Investing OPM reduces personal risk significantly.

Yet investing one’s own capital confers huge advantages to the bearer of risk. Because the drive to protect and profit from one’s capital is strong and tangible, one starts to learn the exacting means to do so. One inevitably begins to see the irrational practices of the market. Does the business value of the strong company fluctuates as much as its stock price volatility or market commentaries suggest? The investor of own capital would find the answer, struggle with it, lose money, choose to believe in it more, lose money again, believe in it enough to make it part of one’s being, practice it right, and finally survive price volatility. Repeat the grueling journey for other investing principles enough, and one finally profits.

By taking significant personal risk with own capital, the investor learns from a journey that the OPM investor would not. The OPM investor has a large salary and bonus (yes, bonus is due even in a losing year) which guarantees a high standard of living. There is little incentive to take personal risk by betting personal capital. Being a good employee would suffice.

Humans are conditioned to seek security now. Now, not in the long-run. The majority of “investors” would seek the stable paycheck of a large fund. What the majority is giving up in exchange is significant – the opportunity to go through near-term grueling self-doubt and learning to achieve long-term life-changing profits.

As an illustration, consider the stock of The Trade Desk (NASDAQ: TTD). As a provider of advertising technology, its IPO was unpopular. Predecessors have risen and fallen. The Rubicon Project (now Magnite MGNI after merging with Telaria) was a high-flying SSP (supply-side platform) before crashing because it missed out on the crucial transition to header-bidding technology. The pace of technology change was so fast that even a leader could not keep pace. Why would TTD do any different? To top it all off, large competitors include Google and Facebook, which owned more than half of the digital advertising market with their walled gardens. How likely would a newly IPO company win against the titans?

If the investors of OPM did not give up on TTD pre-IPO, they would have post-IPO. TTD stock popped 60% on day 1 and declined 20% in the next two months. In the next four months, the stock did nothing from its day-one pop (see chart below). To avoid explaining why the stock didn’t perform (while the S&P was up 6%) and how TTD could compete with Google and Facebook, investors of OPM would likely replace TTD with a stock that can be easily explained to clients and bosses.

If one had focused on business value, one would have understood the value of TTD as a leading DSP riding the CTV wave, armed with a technically-savvy founder-CEO with a 50% stake proven by a previous successful exit to Microsoft. I’ll leave the competition with Google/Facebook for another day (or for the reader to find out). Even with the knowledge of business value, one has to suffer multiple significant declines, ranging from 5% to 50%, to profit from TTD (see chart below for multiple rises and declines. Yet TTD returned about 15x from day-one close to now over about 4 years). Those who profit have taken to heart the lessons from multiple rounds of grating mistakes and missing out on other profitable opportunities, driven by their investing of personal capital and taking of great personal risk.