After many years of discussion with family, friends and colleagues, A. Michael Lipper, CFA, has written a book, Money Wise: How to Create, Grow, and Preserve Your Wealth (September 2008, St. Martin's Press) with former Wall Street Journal Money and Markets Editor Douglas Sease. The book is a delight to read not so much for what it tells you about investing per se but because it's a witty tome about life's lessons. By the way, these lessons apply to investing, too.
Many clients of wealth managers will know the Lipper name, attached as it is to many mutual fund indices and fund performance statistics, often with the phrase, "according to Lipper." Reuters bought Lipper's data company, Lipper Analytical Services, Inc. in 1998, now known as Lipper, Inc. As president of Lipper Advisory Services, Inc., and Lipper Consulting Services, Inc., Mike Lipper continues to engage in his philanthropic endeavors, to manage money for a select group of wealthy individuals and institutional investors, and to consult with financial companies.
Lipper is a member of the Board of Trustees of the California Institute of Technology (Caltech), which manages the Jet Propulsion Laboratory. In the book, he talks about what he's learned in the course of getting to know the physicists and professors there, and the parallels between physics and investing.
He sat down with Wealth Manager's Editor in Chief, Kate McBride, at his home in New Jersey in early June. [Full disclosure: The writer has known Mike Lipper for the better part of two decades, and worked for him for many years.]
In the book, you talk about science and the uncertainty of life, about change, and this ties in with your work with Caltech and the physicists there. How do you draw some of the parallels between physics and investing?
It has to do with probability and certainty. In physics you hope to discover or use a law that is totally repeatable and that anyplace in the world, somebody else can repeat it and get the same result not only today but forever. We know now [that] some of the past scientific laws weren't forever, but you're looking for [the ability to reproduce results] 100 percent of the time.
In investing, a good investor wins, in terms of dollar impact, something more than 50 percent of the time. A professional should win 60 percent and a great investor 67 percent-two-thirds of the time. You can look at Buffett, Soros, Neff, Peter Lynch. When you talk with any of them privately, they talk about the fish that got away, so while searching for investment truths we have to learn to deal with investment odds. The odds on totally replicating the past [are not good]; it's the ability to absorb error that is the way to stay in the game long enough for when things come right. The big tragedy of declines is that people sell out and say, "Never again," and they miss the upsides, and historically, in this country the upsides have been bigger than the downsides.
What got you interested in doing the work that you're doing with Caltech in the first place?
Like with almost everything in my life, it was accidental-I had heard of the school but really didn't know it. A neighbor and good friend is a graduate, bachelor's, master's and doctorate and invited [my wife] and I to attend what they call Caltech Associates Dinners where they bring in professors to talk about what they're doing, and we were fascinated-[it's] a whole different world than what I was used to-even though I was at one point an electronics analyst. This stuff was way above anything that I knew anything about, and I was impressed. I can go in there and learn something from very smart people-a lot of what I've learned is not immediately applicable. It's a different point of view; that they are the manager of the Jet Propulsion Lab opens up the concept of space and how a tiny error here on earth means that you miss a planet by zillions.
The stuff they're doing in neuroeconomics is fascinating. The theory is that they can identify the portions of the brain that make decisions-and quite probably economic decisions. Whether those are investment decisions, more work's got to be done. They have a game theory group-fascinating work. Bottom line, [they're] just a bunch of very bright people, and it happened at the right time in my life.
Are you applying anything that you've learned there to your own firm or investments?
Yes and no. Yes in the sense that a good investment program would have significant investments in the progress of science. No in the sense that I don't feel comfortable in finding managers that are heavy in technology [companies]. Most of them know more than I do, but it's temporal and current, and I'm looking for, not quite a law of physics, but I'm looking for people that are looking at the horizon and beyond, and how to invest for it. The problem is that there's a lot of work being done on this, but it's inside large companies and it won't have, near term, significant earnings-per-share impact.
So there's a lot of work being done on the forward horizon, going beyond, to what's next-so it's very long term?
It's very long term. Since we manage some money, and some of our own money that should be long-term oriented, I need to solve this one way or the other, but I haven't gotten to it.
How would you know when companies are doing that deep thinking [beyond the horizon] inside; is it evident-is there something that you look for?
Well I can't be categorical because I haven't solved it, but you talk to people who read the papers [that are] being produced. Only a small portion of the papers is truly future-oriented. To some degree I look for the equivalent to the Erie Canal-after the Revolution the government recognized that to develop the West you had to have a water route, so they helped fund the connection through the Great Lakes to the Hudson.
There's been an old investment principle-follow the government where it spends its money-they may not be right, they may not do it right, but they are a change element. Landing somebody on the moon-everybody says that's very nice, but how do you translate that?
The technology that has come out of that creates GPS, the cell phone, and a number of medical advances. The question comes: How do you tie it together? It's bit by bit. You have to be very patient, and any number of the [entities] will go broke, often not because of the science, which is pretty first rate, but because the business management skills are not there. Hopefully I can recognize reasonably good business management skills; I need somebody to make the scientific evaluations. This is why my preferred method of investing is through funds where the research and portfolio management people have the requisite technical knowledge, and questioning them, and doing some direct work, we can make a judgment as to their business skills.
Is there something in the book that wealth managers could take away, or maybe have a conversation with their clients about?
In many cases the first thing they have to do is devote more time and energy to listening, so that they can fashion an account that is specific rather than thinking of themselves as either manufacturer or distributor. They should be a custom tailor.
The other thing is to be suspicious of whatever the current trends are-it doesn't mean you have to spend your life fighting conventional wisdom, but you need to prove out, in the current phase, the conventional wisdom.
The earth was flat until you had some evidence that it wasn't. If you were an early adopter you found gold; if you were a late adopter, you were trapped in Europe.
Editor in Chief Kathleen M. McBride can be reached at firstname.lastname@example.org.