Three Investment Lessons from Coolio

“They say I gotta learn, but nobody’s here to teach me. If they can’t understand it, how can they reach me?” These words, written by the rapper Coolio, are from the title song of the 1995 film “Dangerous Minds” starring Michele Pfeiffer. The story of the idealistic teacher saving the souls of impoverished and neglected minority students has been played out many times by Hollywood. In reality, these stories are a rare occurrence because the mission is an almost impossible task. I know this because I spent five years of my life teaching in such a place.

The school I taught at is located in Far Rockaway, Queens. When I taught there from 1993-1998, it was known as one of the most violent schools in the district. Its reputation was so fearsome it was hard to find substitutes when the regular teachers were absent. The school had airport security before it was fashionable. There were metal detectors and wands to check for mini instruments of mass destruction. Seven full-time security officers, three deans, and three Assistant Principals, along with a youth unit from the NYPD were assigned to keep law and order. Their mission often resulted in failure. When students left school, they were guided to safe zones that were manned by police officers. This trail enabled them to reach home safely where they were often met by far worse dangers.

This is not to say my experience was similar to one attending a horror movie. On the contrary, I can say at no time did I ever feel I accomplished more and my efforts were so desperately needed and appreciated. I learned more about life there than anywhere else, including a prestigious University and the trading floors of Wall Street. For this I am very grateful. I would like to share some of the things I learned about life and investing from this experience. Most memory experts will tell you it is necessary to connect a unique experience to a concept in order for it to be stored and easily retrieved from your brain’s vast library of information. Fancy jargon is actually a detriment to memory retrieval. Here are some investing lessons with some memorable true stories from these days:

1. The only certainty is uncertainty – This is one of the cardinal rules of investing. All can be going very well and all of a sudden an unanticipated event takes place and all hell breaks loose. Think back to 2001 and the magnificent sunny day on September 11, many effects of those planes crashing are still with us today. I learned this lesson years earlier at I.S. 53. Seemingly innocuous, pleasant events could suddenly turn very violent with unpredictable repercussions. One event that sticks out was a talent show the school organized. Many of the students had unique talents in music without any formal training. Some of the children sang in their local gospel choirs, and had amazing voices. This event was designed to showcase these skills and give the community an added boost. In this case, the Hollywood ending that leads to a recording contract for the brave underdog never came to fruition.

Many people wanted to attend this event. In this closed-off community where many residents did not own cars, local events were a rare and huge deal. In fact so many people showed up that it became a fire hazard. The administration had to turn people away. After some expletive-filled grumbling, the rejected audience took things into their own hands. Rocks and bottles were tossed at the school in a World War I-like artillery barrage. In desperation the overwhelmed and incompetent principal turned to a teacher who had ties to the local community. He pleaded with him to go outside and try to reason with the crowd. The teacher’s was response was, “Are you crazy? I’m not going out there!” Eventually, the police were called and order temporarily restored. The lesson from this event was ingrained in me. Anything can happen at any time in life and in the markets.

2. Mean reversion is inevitable – When markets overshoot and rocket higher or desperately plunge, the reaction is predictable. The mob assumes this new trend will last forever resulting in super depressions or infinite bliss. In reality, like a rubber band things bounce back and the dead-enders and cock-eyed optimists are lead like sheep to slaughter. This was no different in this urban middle school. The Reading test scores were atrocious. Many students scored in the first percentile. This meant that 99% of New York City students scored better than most of the students in my class. Though I was a history teacher, I was also teaching English due to the lack of available “candidates.” I knew one thing: things couldn’t get much worse at this point and there had to be some sort of bounce back if I could only spark it. Though I was young and very inexperienced, I knew I had to tell them the truth about how bad the scores were. I laid it out in no uncertain terms but finished with a promise that I knew they could do much better and were not as hopeless as everyone thought they were. I promised them if they worked and listened to me, they would do much better. We began an intensive effort to accomplish their goal though nobody at the school really cared because it was assumed in this institution if you kept the kids relatively quiet and under control, you were a master teacher. I read to them, they read aloud to me. We had free reading sessions every day in which the only rule was they had to read quietly for 30 minutes. The topic was up to them (though I did have to confiscate a pornographic magazine when one student took my words too literally). We practiced vocabulary and used our tattered grammar books religiously.

The day of the test came and we were ready. Unfortunately, the rest of the school was not. The usual chaos erupted after about 40 minutes. We pressed on as I told them to ignore those around them. The other kids did not care because they did not put in the sweat and blood that we had. I refused to let the students leave the safety of our room when the Assistant Principal came around to collect those who needed extra time. One student, who had such behavioral issues he had his own separate exit at dismissal, stayed in my room for 5 periods to finish!! In the end, many of the students received 20s, 30s and 40s, a huge jump from the proceeding year. This was not unnoticed to them or me, even though the school couldn’t care less. I still have the results in a notebook I keep, and consider it one of my life’s finest moments. Lesson learned: What can’t go on forever will eventually stop and reverse with the proper catalyst.This goes for the markets and unbelievably bad test scores.

3. We must rely on probabilities and hope for some good luck – Investing is not math. The best we can do is look at historical data and eliminate bad behavior: Think long term and hope for the best. Most won’t admit that but investing is a very imprecise business because of the multitude of variables that can affect outcomes, especially in the short term. Sometimes you just have to take a calculated risk. Buying equities while the market plummets is a good example. There is no guarantee the market will go back up but the probability of this occurring is much greater after a 50% drop than not. It is a leap of faith, so to speak. Sometimes you just have to be lucky. Being a Tech Fund manager in 1995 or an owner of real estate properties in 2004 would qualify under that category. These people were not geniuses. They happened to be in the right place at the right time. I took this risk and bet on probabilities, learning a lesson I will not soon forget. My first year teaching was a nightmare. I had a class that not even ISIS would take as hostages. Several of the students were given district suspensions, meaning they had been thrown out of the district! The stupidity of this was the law of reciprocity. I would lose some hooligans and they would be quickly replaced by some exiles from another district. Essentially it was a wash but one would be spared from the eventual mayhem for a little while until the new entrants became acclimated. This class would not respond to anything I did. It did not matter and bedlam was usually the result.

On Christmas, I decided to try the nice guy approach. We planned a party with chips, soda and candy. I arranged to get a VCR, no small feat for a school which had one inoperable copy machine, and we began the festivities. No sooner than it started, food and drink were being thrown, profanities screamed, and a large mess ensued. At that point I had had it and relied on the probability that things could not get worse, so I took a calculated gamble. I basically told them that I was done. I didn’t care if they killed each other and proceeded to turn my chair toward the wall and got out a newspaper and began reading. Looking back, I now realize this was a ballsy move and I was pretty lucky. Someone could have just as easily smashed me in the back of the head with a chair and I would not be writing this today. Things actually could have gotten a lot worse. Then it happened. It became eerily quiet. I heard a closet door open and the scratchy sounds of a broom’s bristle dragging across the floor. The screech of desks being moved about filled my ears. Someone put the movie in the VCR and I began to hear the actors’ dialogue. I still refused to turn around. I noticed the bell was about to ring and to my surprise the room was spotless; the rows were straight as arrows; and the students looked like choir boys and girls in Sunday School. I guess I hit a nerve. They realized that I was actually trying to help them and the fact that someone who genuinely showed concern for their welfare had given up on them really hit home. The rest of the year we still had moments that would have made headlines in wealthy suburban districts, but we had a better understanding of each other. This never would have happened if I didn’t look at the probabilities for success and make that leap of faith. No math formula would have helped me out here; I calculated the probability of success and had luck shine upon me.

The world is a pretty unfair place. Most of us are just plain lucky to be born in this country and to be raised by responsible adults. These kids did not catch that break. Though they were born here, responsible parents were often missing from the equation with tragic results. Like investing, luck plays a huge determinant for success in life. I consider myself very lucky in three ways. I was born in this country, had responsible parents and had the privilege of being around these children. Unfortunately I know many of them did not make it. Coolio sums things up in a line from “A Gangsta’s Paradise”: “As I walk through the valley of death, I take a look at my life and realize there’s nothin’ left.” Sadly, this reality replaced having their dangerous minds saved by Michelle Pfeifer.