Chapter 12

Investing

I can be an unreasonable investor because I can afford to take more risks.

Even so, I choose investments in the same methodical way I make business decisions: I start by doing my homework. When I’m unfamiliar with an investment category, I research and then develop a working thesis. As I read the newspapers each day, I am constantly processing and analyzing business developments, market movements, consumer trends, political shifts, and economic indicators.

My talented two-person investment team thought I had lost my marbles when I started to increase our position in gold in 2008. Gold, after all, is the favored investment of people who keep large stocks of canned goods and ammunition while scouting for signs of the apocalypse. At the time, though, I saw a series of events unfolding—the Fed lowered interest rates and injected liquidity into the market, which told me the dollar would decline and no other currency would be a viable option. Taken together, those things led me to believe that people would turn to gold. I increased our position from 1 percent to 5 percent of our holdings, and as our investment appreciated, it eventually increased to 15 percent, an allocation unheard of for any family investment office, any foundation, even most individual investors worth more than a billion. But I had a thesis and I stuck by it. From 2008 to 2011, gold increased from around $800 an ounce to more than $1,600 an ounce. My team didn’t think I was so crazy—or even particularly unreasonable—then.

Don’t Fear Risk, but Don’t Take One if You Don’t Have to

When assessing an investment, I look for what I like to call asymmetric opportunities, where my likelihood of earning a lot of money is higher than the risk of losing what I’ve put in.

Such opportunities don’t come around often. Looking for assets that the market has underpriced, for whatever reason, can be an exhausting search. Recently, however, I found a prime one: A chance to purchase First Republic Bank.

Not long ago, First Republic was acquired by Merrill Lynch, which in turn was purchased by Bank of America. Bank of America needed some liquidity on its balance sheet, so it wanted to sell First Republic.

For me, the chance to participate in the purchase with private equity firms Colony Capital and General Atlantic was a no-brainer. Merrill had paid $1.8 billion for First Republic and now Bank of America was putting it on the block for about $1 billion. There was no need for lengthy analysis. I needed to know only a few things before I made a quick decision: what the valuation was, what type of bank it was, who was selling and why, the quality of the balance sheet, and how much influence we, as new owners, would have.

The bank had a very attractive valuation—priced at just one times book value. It was a healthy institution with a strong franchise in financial services, wealth management, and business banking. Bank of America also needed to raise money in a hurry, usually a clear signal of an asymmetric opportunity. Finally, our investor group would have a lot of influence because we would be a direct owner. That was it—I didn’t need to look at every last financial statement.

First Republic was one of the largest investments we’ve ever made, and it paid off big. Some people would say it was irrational to invest major money in a bank so soon after the largest credit crisis in the nation’s history, but I disagreed. Experience and instinct made me unreasonably confident that First Republic’s niche serving higher-income customers would continue to grow, and I knew we had the opportunity to make good money. Under the worst outcome, we still would recoup our investment. In five months the bank went public at a significant premium to book value, and we ended up doubling our money in about a year.

Opportunities like that aren’t available to everyone. My wealth gives me access to investments most people don’t have.

Focus on Picking an Advisor, Not Stocks

When I’m asked the question “How should I invest my money?” I give an answer that isn’t very satisfying to most people: Don’t invest your money yourself. Hire a professional to do it for you.

Most people don’t have the time or the expertise to be a successful investor. Unless you’re willing to put in the 24/7 sort of diligence that a professional investor does, don’t try to pick your own stocks or other investments. Nothing can get you into more trouble than occasionally dabbling in the market. You would be surprised how few billionaires do much day-to-day investing. I have employed a talented two-person investment team for more than a decade, and they research, advise, and execute.

What matters, though, is that you do invest your money. You can’t save your way to wealth. When I grew up, only a small minority of Americans were investors. Prudent people, like my parents, counted on a lifetime’s savings, Social Security, and in many cases, an employer-funded defined benefit pension plan to carry them through retirement. That’s all changed.

Today, you have to take more risk per dollar to get a decent rate of return. There is no passive way to make your hard-earned money grow. The lowest-risk savings instruments—such as certificates of deposit, municipal bonds, or Treasuries—are paying historically low rates of return. With fewer workers and more retirees every year, Social Security faces collapse when current deposits aren’t enough to cover retirement payments. If you’re like most American employees, your company has replaced its defined benefit pension with a 401(k) retirement savings plan. Take advantage of that. If you’re under 50, the government will let you shield a maximum of $17,000 of your gross salary from taxes if you put it in your 401(k). If you’re over 50, you can sock away up to $22,500 pretax. No matter your age, your employer will likely match at least some of what you save. Though the contribution limits and employer matching amounts may change year to year, it’s still free money.

A good financial advisor will create an investment strategy that, ideally, combines a diversified portfolio of investment vehicles and takes into account how much you have to invest, what your goals and timeline are, and your willingness to take risk. To find the best advisor, ask friends and relatives for recommendations or consult with reputable firms like Charles Schwab. When you identify one or two advisors, make sure you ask for several references you can call. Picking a good financial advisor will be the most important investment decision you make.

If you insist on directing your own investments, I recommend that you buy quality, low-cost mutual funds through firms like Vanguard or Fidelity. Some of their funds will let you set a target retirement date and the fund will adjust your asset allocations into lower-risk instruments as that date approaches, taking the guesswork out of saving for the future.

As you consider different asset classes, let me plug annuities and suggest you discuss them with your advisor. I’ve had annuities in my portfolio since the first days SunAmerica pioneered the tax-deferred savings vehicles. Variable annuities let you make payments or deposit a lump sum, which you then invest, usually in a range of mutual funds. Your ultimate return is determined by how well your investments do. They are attractive instruments because they allow the holder to adjust the asset allocation as frequently as necessary—all without paying taxes.

I first bought annuities from SunAmerica, but then I switched to Vanguard because their fees were lower and I didn’t need the financial planning advice SunAmerica offered. You should always consider taxes and fees when you’re selecting investment vehicles—and make sure you ask your financial advisor about the tax and fee implications—because they will reduce the amount of money you keep from your investment returns.

Diversify or Die

In addition to a reasonable fee structure, you want to make sure your financial advisor maintains a diversified portfolio.

I didn’t follow my own advice on diversification until I stepped away from the day-to-day management of SunAmerica after our merger with AIG. Virtually my entire net worth was tied up in our companies because I knew every detail of their financial health. It was the best investment I could make at the time. But when I left the company I wanted to diversify and sell some of my shares. That didn’t sit well with AIG CEO Hank Greenberg, so I left the board in 2005. Shortly thereafter, I went from having more than 80 percent of my net worth in AIG to about 10 percent.

In investing, as in life, it’s sometimes better to be lucky than smart. I never saw the precipitous fall of AIG coming—and to this day, it troubles me that a legendary company could drop in value as it did in 2008. Fortunately, our foundations had none of their funds in AIG.

These days I am highly diversified. Name an asset class and I probably have some exposure to it. Between my portfolio and that of the foundations, we have more than 200 investments, none of which amounts to more than 5 percent of our holdings.

Volatility Happens

Diversification helps ease the pain of a volatile market, when losses are inevitable.

Conventional wisdom suggests that investors should wait around for a certain return—like doubling or tripling their money with a particular investment. As a consequence, people end up selling their best stocks and holding on to their losers. Lots of investors follow the sell-it-when-it-doubles rule and miss the multiplier that comes from holding a great performing investment for a substantial period.

One of the toughest losses I have ever taken was during AIG’s liquidity crisis and bailout in the general financial meltdown of 2008. I had sold all but a small percentage of my AIG stock a few years prior to the crash, but I watched in disbelief as the value of my remaining stock plummeted on September 15, 2008, when Lehman Brothers filed for bankruptcy and AIG accepted a bailout from the U.S. government. But as soon as prices bumped up a bit in 2009, and I concluded that any further recovery could take years, I sold without emotion, keeping just my stock options, which I couldn’t exercise.

I have lived through a lot of recessions, but that year was probably the toughest crisis I’ve seen. Even so, I tried very hard not to become emotional and I took ownership of all my decisions. There’s always money to be made somewhere in the market if you have a balanced portfolio and maintain some liquidity.

Accept that volatility happens. There’s no formula for avoiding it, and there’s no way to predict it. The only thing to do is maintain the long view of your investments and make sure your investment advisor is doing the same. It’s tempting to want to check your portfolio when the market dips or spikes and to react in an emotional, knee-jerk fashion. But if you invest, you will lose money from time to time. Learn from a loss, but don’t take it to heart. Equally important, don’t fall in love with any particular company or fund for any reason apart from performance. If you decide to sell, do it and don’t look back. Think of yourself as somebody with an eye on the future and a mind educated by the past.