AJ Mooney: A History Professor from The University of Oklahoma Takes on Wall Street

AJ Mooney, or also known as John Mooney, does not have the typical profile one would perceive as an active investor.  John holds not only a Bachelor’s Degree, but also a Master’s Degree in History, currently teaching at The University of Oklahoma as a history professor.

He is also one of the select investors from Covestor who has been selected as a model for Covestor Investment Management (CVIM).

John was kind enough to spend some time with me discussing more about his background, his experience, and the market.  Now, a degree in history may seem far fetched from Wall Street initially.  However,  in our interview, John walks us through some of the interrelationships between the two, and how he leverages his knowledge in history for investing.

“John, you have a very interesting background.  You’re the first person I’ve interviewed with Bachelor’s and Master’s Degree in History. How did a History Professor get into the world of investing?”

I was investing on my own time before I had a job teaching history, and I’ve been fortunate enough to find the time to keep doing it.  It’s been a matter of inertia as much as anything.

“How have you been able to leverage your expertise in History for investing?”

History is a much more useful tool for the investor than most people understand.  For one, familiarity with the past greatly expands your conception of what is possible in the world, and by extension, in the markets.  The general investing public’s conception of what can or cannot happen in the markets draws for the most part from a pool of personal experience that they have accumulated since they left college.  If the market has gone up in that time, they will tend to “anchor” (as the behavioral finance people would put it) to that experience, expecting still higher prices, and vice versa.

The range of relevant data available to a person familiar with history is much larger.  History offers you thousands of years of examples of unintended consequences, decisions gone wrong, and people being surprised by things that seemed impossible at the time.  If you read history carefully and with a deep understanding that you are no fundamentally smarter from the people you are reading about, you can actually gain something that is very, very close to experience.  I don’t know of any other discipline that can do that.

As a specific example, knowing something about the characteristic historical features of booms and busts, and the consequences of credit overextension, helped me and many others keep from being blindsided by the financial crisis of 2008.  These sorts of disasters, which Wall Street tends to dismiss as “hundred-year floods,” have in fact happened regularly over the decades, as something that people who are familiar with financial history know.

Historians are also experienced at reducing complex sets of information into simple, clear arguments, and determining whether those arguments are or are not well-supported.  If you take every investment thesis you come across and treat it like an argument, you will find it easy to discard some of them right away. Furthermore, you realize that others are maybe more compelling than you had realized at first.

Additionally, there is a barrier to entry to gaining the informational advantage that comes with historical knowledge that is just high enough that most people don’t take the time to learn it.  History’s connection to finance is not readily apparent, so familiarity with history is not a strategy whose effectiveness is diminished much by competition.  This contrasts with strategies reliant on complex math or economics, where floods of new entrants have tended to erode any initial advantage.

“It’s great to hear that you started out your investment career with successful trades.  Now, we know that most of us go through a losing experience as well.  Was this the case for you?  What did you learn from the experience?”

Losing is part of the game, of course.  What I try to do is not fixate on wins or losses, but to make sure that the net expectation of my portfolio is as positive as I can make it.  So if I lose, I look back to see if the loss was a bad break, or if my analysis was flawed.  For example, if you have a stock that you believe has a 50% chance of going to zero and a 50% chance of going up 10 times, you have a wildly positive expected value, and, as long as you are sizing the position appropriately, you buy as much as you can get your hands on.  If it does go to zero, and you are convinced that your analysis at the time was sound, you just shrug and move on.

“Can you tell us a bit more about your strategy in value investing? What resources and strategies do you use to determine your next plays?”

My core strategy is the same as any other value investor will tell you: to buy assets on the market at less than they are worth.  This is linked with an idea of trying to take advantage of the capital cycle, by investing in under-capitalized industries.  I get most of my ideas from Value Line, although the very best I tend to come across before they get into Value Line.  If it’s a company, once I have the idea, I do some thinking about the company’s position in its industry and make sure the accounting appears to correspond with reality.

“You’ve gone through the market stages in which the fundamentals themselves simply could not explain the stock price. How does that challenge you as a value investor? Also, how do you cope with such a phenomenon?”

The dyed-in-the-wool value investor doesn’t see that as a problem, because the price is just noise.  At some point or another, the share price is going to gravitate to an approximation of the discounted future cash flow of whatever asset you are holding, and investing simply becomes a matter of waiting for the market to acknowledge it.  Having clients, or having politicians decide they need to get involved, does make it a little more complicated than that, but those are considerations a good investor would have been aware of in the first place.

“So in your mind, what does it take to be a successful investor?”

I’ve done a lot of research over the years on who is and who isn’t successful at investing.  My conclusion was that the single common feature among successful money managers is that, to a person, they are not afraid to do something different from what everyone else is doing.

Whether these people understand it or not, they are following a strategy that exploits the market’s status as a broken discounting mechanism.  The market consistently overvalues events perceived as certain and consistently under-prices events seen as unknown or unlikely.  However, the reality is that there is always a greater chance that people are wrong than they believe.  There’s plenty of money to be made in betting on events that everyone agrees are impossible or far-fetched, and plenty of money to be made by fading the obvious.  I don’t know if there is a fundamental axiom of investing, but this is as close as I’ve been able to get.

“Thanks very much for your time John.  Best of luck with your current and future initiatives.”

You too, Hiro.  Thanks for the opportunity.