Former Goldman Sachs Banker Says ETFs May Pose Problems

  • Holger Graf is a finance professor and former Goldman Sachs banker.
  • He explained why broadly diversified ETFs could create problems in the future.
  • Graf looks for “alternative” investments that don’t correlate with the market.

Holger Graf recalls that his first stock was from Swiss pharmaceutical company Roche. He bought it in 2003, when he was just 18. 

“Completely naïve of me, but at the time there was fear in the press because of bird flu,” he said. 

It was when Roche developed the drug Tamiflu to be used against the flu that Graf decided to buy it. 

“I started listening to the news early on with the ulterior motive that maybe I could make a return on that,” he added. 

What he didn’t realize at the time, unlike today, is that such publicly known information is already factored into the stock price, so it won’t have much of an impact. 

Graf invests his money “a little differently”

He decided to study mathematics at school, as he thought dealing with numbers was “pretty cool.”

After graduating and earning a doctorate in financial mathematics, he started working at Goldman Sachs.

After more than three years, he quit and became a professor of international financial management at a university in southern Germany. Today, he lives near Stuttgart and is married.

The 36-year-old not only teaches his students how the world of finance works, but also actively invests. However, he invests his money “a little differently,” he said. 

He doesn’t do that because he thinks it’s better, but because he “really, really enjoys” learning about new companies and analyzing financial products. 

“A bigger part of my day is actually spent doing that,” he went on.

Shares will end up going down a bit, despite growing profits

“I enjoy looking at the slightly more obscure stuff more, especially since I work under a big premise,” Graf said. 

Graf said that if central banks start pulling


out of the market now — that is, if they stop making as much money available to commercial banks — then “the big well-known companies that did great in the last 12 months may continue to generate high profits, and continue to grow as well, but the ‘valuation multiples’ will go down.”

That means stocks will end up falling a bit, despite growing profits. 

“In the next few years, you’re not as well-positioned with a broad ETF,” he said. 

That’s because, for example, in the S&P 500 or even the MSCI World indexes, those large companies have “relatively large weights.” 

Accordingly, Graf looks for stocks that he believes can still perform “reasonably stably” even in a changing environment. He looks for investment opportunities that don’t correlate with the broad market, the so-called “alternatives,” he said.

Using class action lawsuits and music to hedge your portfolio

He cited the Round Hill Music Royalty Fund as an example. Round Hill is a management company that essentially buys the rights to songs and then gets money when the song is played. This fund is normally listed on the market and therefore available for retail investors to buy. 

“Of course, these stocks aren’t on page one of the daily newspapers, so you have to look for them,” Graf said.

Another of these investments, he said, are class-action lawsuits. To invest your money in such lawsuits, you can invest in corporate funds, listed on the stock exchange, that finance lawsuits around the world. The best known here are Burford Capital and Omni Bridgeway, Graf explained. Burford Capital, for example, is a US investment firm that specializes in financing lawsuits and pays the costs of litigation.

So there are ways to diversify with these “alternatives.” 

But you shouldn’t just buy them because that’s what’s out there; there are many factors at play. 

Graf says you should ask yourself certain questions — How well have fund managers performed so far? Were they reasonably successful investments or not? What are the plans for the future? 

“Good analysis takes a very, very long time,” he said. 

That’s why he believes that for most private investors, an ETF portfolio on a broad index is still “probably the best thing” if you don’t have much time to spend on it.

For Graf, that’s not a problem to deal with — even in his spare time. In addition to his job as a finance professor, he also runs his Instagram account “prof.goldgraf,” which already has more than 13,900 followers. 

His Instagram account started off the back of a joke in a lecture, Graf said. At the time, students were putting up a lot of stories on Instagram.

He joked with them, saying:  “If you’re going to put up Stories, you might as well link me.” But he didn’t even have an account at the time. 

“Then the fun started,” he said. 

On his account, he regularly reports on important news from the world of finance and explains basic stock market knowledge.

It doesn’t matter if a position is “massively in the red”

Ask Graf about the biggest mistake many private investors make, and he’s quick to answer — investors want to make a profit on every position. 

“You look at a portfolio and then you see something red and you’re horrified. I think that’s absolutely the wrong way of thinking,” Graf said. 

“If you want to build wealth, you don’t have to make a profit on every position, but rather you should look at the overall return and the overall risk of your portfolio,” he added.

It’s also not a bad thing if a position is sometimes “massively in the red.” You shouldn’t sell it immediately. Rather, ask yourself why you bought the company or ETF and if the investment case is still valid.

“You can definitely add something to a portfolio that keeps losing a little money,” Graf said. 

“If that’s kind of a hedge, in the sense of, if the rest suddenly falls, this will probably go up. Then it’s a perfectly legitimate way of adding value.”

The most important thing is to just start with ETFs, follow the market and get used to the fluctuations, the financial expert said. Because the second big mistake, he went on, is being too “emotional.” 

You shouldn’t get “nervous” when the portfolio goes into the red, he said. 

“At some point, a portfolio will also fluctuate by a number of monthly salaries and it will be completely normal,” he went on. 

You shouldn’t associate your portfolio with a month’s salary and feel as though you’ve now lost that salary. 

“That will drive you insane,” said the professor. His advice? Stay calm.

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