Tariq Dennison – Know the Value of Your Time, Know Your ‘Edge’

Tariq Dennison is a Hong Kong-based manager of US and offshore retirement plans at his own firm, GFM Asset Management. Prior to GFM, he worked in the wealth management divisions of Société Générale in Hong Kong, CIBC in Toronto and London, Bear Stearns and JP Morgan in New York, after a few years in Silicon Valley. Tariq holds a master of financial engineering degree from the University of California at Berkeley and a bachelor of science degree in mathematics and the history of philosophy from Marquette University, and is a visiting professor of fixed income and alternative investments at ESSEC Business School Asia-Pacific in Singapore. Tariq is an IFPHK Certified Financial Planner and the author of Invest Outside the Box. He is a frequent speaker on RTHK Radio 3’s Money Talk program, HKIBN Cable News’ All About Money program. He has also presented on ETFs, investor education and retirement plans at multiple public conferences. “The number one difference between whether or not someone has a million-dollar retirement account is whether they put money in the account early on, not whether they invested in stocks, or bonds, or international, or value, or growth. It was whether they simply had the discipline to save regularly and not do stupid things. And the second thing is just making sure that we have the proper tax structuring and we take care of accounts in the right way. There are enormous differences between having something in a taxable account and a tax-free account, being able to touch it and not being able to touch it.”  Tariq Dennison    Worst investment ever Tariq offers listeners a tale in three parts, spanning the 20-odd years of his entire investment career. But like many investors Andrew speaks with in his podcast, Tariq says the challenging experiences made him the investor he is today. Part 1: Pre-bubble Silicon Valley beckons He started working, investing and made his first real money in Silicon Valley in the late 1990s. He was invested heavily in tech stocks of companies he truly thought he knew well as he either worked for them himself, or had friends working with them. He was buying the companies’ stock as he and his friends watched them prepare to go public, they were progressing, he thought he understood their business models and saw the path to success before them. And, like many others in the aftermath of the burst tech bubble, he lost money in those stocks. He points out here though that these would fail to make them his worst investments ever. It was early, the amounts were small and in total he lost less than US$10,000. Part II: Not about what he lost but the gains he walked away from His Silicon Valley forays happened before he learned proper financial analysis. “That was stage one.” At this point he was still in his early 20s. In the next stage of his journey, he went to the other end of the spectrum, becoming overly focused on target companies’ financials, and wanted them to have a lot of cash, big dividends and big earnings. He especially loaded up on two very familiar blue chip names: Apple Computer (Apple Inc., AAPL:US, APPL.OQ) and Philip Morris, a pair of the best performing stocks in the past 20 years. And thus, part two of Tariq’s story is that he sold them much too early compared to the potential they would realize even years later. He bought big parcels of each at $20 a share between 2000 and 2002, then sadly sold all his positions in them when they hit $50 a share. He had made in each stock 150% returns and was happy. But also sadly, he denied himself huge gains by selling those stocks early than he had ever lost in the tech group (Apple stock has made a simple percentage gain of 650% [or an averaged 32% per year, without compounding] since 2000). Part III: Decision to go pro leads budding investor to Berkeley At this point, Tariq attended Berkeley to study financial engineering to really understand investing in a world-class way. He wanted to learn how to analyze investments and put portfolios together. This too however came with another problem. By combining the lessons learned from parts one and two of his story, he was making his method very complicated. He came out of his master’s course with an intensely rigorous investing system with checklists, risk limits, and very careful portfolio construction involving the reading of beta analysis and multiple calculations.   Learned master invests a lot of time in highly complex system, but it works In all fairness to himself, he says of the methods he has used that this one has worked the best as it is extremely systematic and disciplined. But its complicated nature makes it cumbersome and he says that perhaps part three of his worst investment might be the amount of time he has invested in it. To his relief, within the past few years, companies such as BlackRock have taken a lot of his disciplined checklists that he created to measure financial quality, valuation, and gauge for low risk, and have incorporated them directly in an ETF that he himself buys for 20 basis points. This has freed Tariq from the tasks to do the same and lets him return to finding the next Apple or Philip Morris.  Some lessons From Part I Know the financial reasons for why you’re investing. Tariq invested in these companies because he thought he knew the companies, their business models and some people involved. If you’re going to put $100 into an investment, ask yourself whether that investment is going to make $10 a year for the next 10 years? Or is it maybe going to lose you money upfront but you see that it is going to make you $20 a year, eventually giving you a return in financial terms. Don’t be too quick to sell. So Tariq’s first mistake was perhaps buying too high. His mistake was selling too low. Even if he had held on to a fraction of his Apple or Philip Morris shares, his investment would have been far better than selling all of the shares when he did. There was no reason for him to have sold all his shares. They were paying good dividends he would have simply made money that way. Keep it simple and focus on your “edge”. Here Tariq refers to Peter Lynch’s One Up On Wall Street, he likes to look for cases of investment in ordinary products or services that he sees every day, things he can understand and see how they make money. He said that is what he refers to as a better “edge” on the target company’s valuation than do his counterparts. Respect the value of your own time. If you like spending your time actually reading financial statements and valuing companies, that is different than somebody who is busy and is happy either letting a professional or a robo-advisor take care of an automatic investment program. “For many of your (Andrew’s) listeners, one of your greatest assets that you’re likely to undervalue is the value of your own time.” Tariq Dennison   Andrew’s takeaways Whenever you are looking to invest, you must look at the whole picture. Many people think they really understand a company, they like it or really know it, but all of that knowledge can, in real terms, be meaningless because investors must understand the market, the share price, and so many other factors. There is a lot that goes into the determination of the difference between a great company and a great stock. Investors can always move in and out of an investment position – slowly. Andrew here highlights the fact that investors do not need nor should they be “all or nothing” people. “You don’t have to jump in”. “A lot of the mistakes people make that I’ve...