I have a weird situation for you guys, looking for advice to give to someone.

I have a friend with extremely wealthy and connected family. They are launching a family office and he, straight out of undergrad, will be responsible for $10MM+ to do with as he pleases -- full discretion over the funds. He (and they) do not want him to hire external managers, they essentially want him to use this as a learning opportunity and once he can get some performance they are looking to raise more capital from people they know. Apparently they can quite easily round up 20MM+ from high net worth individuals alone. He is straight out of finance undergrad (early 20's), fairly smart, and has 12 months to learn everything possible to be able to start this venture. He will be the sole PM. Stupidity of the situation aside, what advice do you give a person in this situation? He's essentially looking for a list of stuff to read. He's straight out of finance undergrad so he has the basics of accounting, economics, finance down (he went to an ivy league school FWIW).

I've recommended, and rounded up the following for him so far:

Industry primers from the CFA Institute
Industry primers from wall street analysts (have access as I work in the industry)
I personally have access to almost any sell side research report so I will provide those for him as well when he asks for them
The Intelligent Investor
Securities Analysis
Buffets letters to investors
Damodoran on Valuation

Recommend either learning strategies, books, or anything else that you believe leads to the highest chance of success in this situation

Thanks!

He should intern somewhere. When you're that wealthy and connected it's not hard. 3-6 months in a working firm are worth 20 years of books.

He should understand that this is the most challenging thing he'll ever do, and to hope that he is humbled sooner rather than later. It's pretty reckless to think this has any chance of being successful.

1. This is a bad idea and he should not do it.

2. If he is going to do it he should set a stop loss for just about every meaningful timeframe he can think of.

I don't know anything about the stock market but I know some things about life and this is doomed to fail. He needs real world experience, I agree with the others. He needs to understand the value of money, people, and how the world works. That doesn't happen till you're in your 30s minimum.

Step 1: Buy $10mil of SCHB
Step 2: Forget about it and spend his time and effort getting a real job/internship in finance and learning things that aren't in every book everyone in the finance industry has already memorized.

EXPERIENCE! There is no substitute. He needs to start a lot smaller and treat it like it means something. Mistakes will be made and made again and then repeated. You need to take your lumps and learn from them. You also have to be able to understand any success in the concepts of being fooled by randomness.

He's going to make many mistakes, he should focus on trying to minimize the impact of his inevitable self inflicted errors due to lack of experience. Find a mentor, read like crazy, hopefully he's obsessed with investing otherwise he's going to lose interest and/or lose all the $$. Ivy league education might actually hurt him because he might end up thinking he is smarter than he actually is. Its important to be self aware about what you know, what you don't know, what you know you don't know, and what you don't know you don't know, with particular emphasis on the last one, "what you don't know you don't know".

Perfect size to start a micro/small cap investment fund. If he networks with people in the same industry, follows blogs, reads books, he could run a successful fund. I don't think it's necessarily a herculean task like some people in this thread are making it out to be. Odd situation for sure, but if he plays it conservatively and doesn't blow his load out of the gate, it could work. OP, make a follow up post in a few years.

Have your friend run simple sorts on value and momentum, such as what's presented here - http://faculty.chicagobooth.edu/tobi...tmcomments.pdf

Hopefully the results after ~12 months should be sufficient to fool the idiots who gave him this opportunity (and, in turn, the idiots in line for the next 20 MM). While that simple portfolio runs in the background, your friend should get himself an internship.

Short the housing market and get a book and movie made about you

He should skim a milly off the top and hire an mba from the ivy league school he went to, then go to lunch early and read the menu

I appreciate the advice. FWIW I told him not to do it too but it's not an option. He/they are dead set. Just looking for the path that most likely leads to success. Internship is #1 priority, I agree. What about reading specifically for portfolio management?

Despite the snark, no one is really saying that your bro should not go through with this. One of the best lessons he can learn is "fake it till you make it".

+1 to BCI and TS's posts

Also he should probably know exactly what his family wants from his investments. If he YOLO's the money in super risky stocks trying to get a multi-bagger and loses the 10mm is that an acceptable result? Are they looking at absolute return or do they want him to beat a benchmark, are they going to check his portfolio against the benchmark to see if he is generating alpha?

I read Expected Returns by Antti Illmanen a few years ago and thought that it was pretty interesting (although its really about how factors like Value, Momentum...etc affect returns and how small the amount of true alpha there is in the market)

The deck is stacked against him true being successful on a risk-adjusted basis, but he prob could closet index (or just buy VTI) 80% of his portfolio and then look at small, value plays imo, but as BCI said he better really like pouring over 10ks and grinding through investment opportunities (plenty of small investment funds already looking at the space with a lot more experience in evaluating investments)...If he can not for whatever reason get an internship, trying to find a PM (through his connections?) to mentor him or at least bounce his ideas off of (as well as investor message boards VIC/ Zerosum) would seem to be pretty helpful.

An even better lesson is get your family to give you a job and $10 million to play around with.

Standard advice: you can't really find a whole lot in books, best to learn from others, best to tackle market where you can have edge in one day, etc.

Personal advice: it sounds like a great opportunity just keep the expectations low. And if you run hot don't really get too excited. Sample sizes are very small with most strategies. I started a fund young and while I had 5 years experience there was still a ton to learn. Focus on keeping costs (trading/admin/legal/audit/tax) low and building some sort of repeatable process. GL

Put it in Vanguard and go to the beach.

This is of course going to be a disaster.

this is pretty useful advice. My firm often has interns do 2-4 month stints. I started that way. You learn a ton and see how things actually work instead of in a book.

Has your friend ever managed anything before, even a 20k personal account?

There's no book that tells you how to be a PM. Being a PM is just being an analyst with life experience thrown on top.

Does he know how to do individual stock research? What strategy/asset class is his fund going to focus on?

a few things:

1. how deep did his finance education go? did he learn to code in matlab or R? can he correctly backtest strategies/use out of sample data to test in sample results? if not, i'd highly recommend learning R. it's really not that hard and will be super useful in testing strategies once he's gotten this far.

2. from the tone and verbiage in this thread it seems he's 100% equity focused? it's useful to learn about hedging strategies, especially if he's going to be trading EM stocks. if it's solely a small/mid cap domestic fund, then ignore this.

3. given the OP and where we are in finance now, i'm assuming at the very least he can backtest to check for stop losses on a given trade, assess portfolio risk as a whole, and check his results logically? if so that at least is a good start. be sure he always knows what he can expect to lose on a 1sd day, a 2sd day, and if the world falls apart. many people have made HUGE mistakes planning for "the worst" when "the worst" is a 1sd day.

4. i'd recommend realllllllllly learning interest rates hardcore first. this was the most important lesson i learned for sure in overall understanding of markets. learn them inside and out including (especially) bonds and bond pricing, interest rate swaps, interest rate futures pricing, eurodollar markets, and benchmarks (which comes with the swaps, but LIBOR, EURIBOR, etc.). it's SO much easier to get a picture of what is priced in if you can look at the eurodollar curve (be able to take this table and create a nice yield curve: http://www.cmegroup.com/trading/inte...s_futures.html). also be able to fully understand fed funds futures and everything in this recap: http://www.cmegroup.com/education/20...03_rates_recap

5. when building a portfolio, diff bets are great. they can add value with little additional volatility since they're usually uncorrelated to directional bets (but as i learned the hard way, they can be correlated with specific sectors so be sure to test this too), which i'm guessing will be most of the portfolio if not all initially (here i mean taking two or more similar companies in a sector and going long one group and short the other group. this takes a little practice and knowledge in terms of how many shares of each to buy or short, but it's not too hard to learn).

so for example, one bet i made a few years ago was xlp/xly (consumer staples vs. consumer discretionary etfs); however, instead of just buying some of xlp and shorting some of xly, i recreated them. i.e. they've since fixed it but a while back, they had weird stocks in xlp (like louis voitton (sp?), which is clearly a luxury good imo), and weird stocks in xly (walmart used to be here for example). so i did research and chose 5 stocks to long and 5 stocks to short, built out the 2 indices, and created my diff bet. it ended up doing well, however, i overestimated how uncorrelated it would be with some directional bets. so even here i made a mistake and i shouldn't have made what i did on the bet. that's a useful lesson b/c it can easily go the other way (i could have lost more than i intended due to not fully thinking appreciating the correlation. i should have tested it more thoroughly).

6. the above example goes to show that no matter WHAT you do and HOW HARD you try to avoid it, mistakes will be made. i repeat. MISTAKES. WILL. BE. MADE. the key is to learn from them, get better at what he does every day, and be sure not to get too down on himself.

7. ********READ******** no joke. read everything. FT.com, economist.com, bloomberg.com, wsj.com, and find a few blogs (zero hedge, for example) and read and think about those writings. i can't tell you how many trade ideas i got from thinking about an article i read (the xly/xlp diff bet came from an article in the economist that had nothing to do with it). read the economist cover to cover. i know the stuff about latin america and russia can get boring, but being knowledgeable is really the best advice out there. you need to make sure he knows what's going on in the world at all times. the subscriptions to these huge sources of information online cost NOTHING. it's seriously pennies compared to how much value can be gained from them.

that's all for now. if i think of anything else i'll add it here. i will say #6 is huge imo. also #4 is big, at least it was for me. it helps with everything (choosing discount rates, understanding futures, understanding bonds, understanding options, everything). i'd say the most important classes i got to take (luckily b/c my former job allowed me to pass out of classes and create about 25% of courses of my own choosing as an MBA) were the derivative pricing courses, which were based heavily on interest rate maths and models.

that said, if he's ONLY ever going to focus on stocks, he doesn't have to go THAT deep into interest rates. i guess i just find it super interesting and insanely useful. but the reading thing he just has to do. like constantly. every morning read it all.

it honestly doesn't have to be. first, learn to calculate (properly based on well done risk calcs) VAR (value at risk) on all relevant time frames.

then set dollar VAR very low. like on a 10m portfolio, set daily VAR to like 10k (0.1%) for the whole portfolio.

then do everything good mentioned in this thread. learn to do all the good trading techniques on a low daily VAR. then build from there.

now, this **COULD** be a disaster, but it honestly doesn't have to be.

Curlyface, As long he has people like you around him. He be fine! Somebody said, to keep good company. Surround yourself with success.

one thing: my posts assume that he has selected a strategy, that he knows the basics of what he's doing, and i provided some tools and suggestions that will help.

if he hasn't selected what he's doing, then he's got a lot more work ahead of him. like ahnuld (lemme know if i've gotten your assumptions wrong here), i think he seems to be headed to small/midcap and he understands the basics of company valuation, market sector assessment, competition analysis, financial statements analysis, and all the basics that go into how to value a stock. if he doesn't have that, time to get all those tools first and fast

I would think the biggest advantage of having the kind of influence that comes with a portfolio of this size is that you can comfortably buy big enough pieces of companies that're just starting out so as to get involved in operations and find ways to add value yourself.

Doesn't cost anything to listen to pitches from companies that're very early on - and if nothing else it gives you a starting point for research.