What I thought would be the most important event of the summer, my sixtieth birthday, turned out to be an afterthought. Starting off the chain of events that got in the way of my big day was the birth of our first grandson. He was named Dominic after his great-grandfather, although there was some discussion of naming him Otis after the manufacturer of the elevator he was born in. Needless to say, he became the center of attention. And as he settled in and the family settled down, the center of attention shifted to preparations for my youngest daughter’s wedding.

I thought there was a chance they could schedule a party for me between the events. But with the declining health of my wife’s mother and her eventual death the week of my birthday, that chance evaporated. The sum total of the attention I received was an unwrapped pair of shorts given to me by my wife with the comment that I could exchange them if they didn’t fit.

The lack of attention, while understandable, still hurt. That’s why I was so excited when my oldest daughter invited us to a party for the new baby in the lull before the next big event, my middle daughter’s wedding. It was obvious that this baby thing was just a ploy to setup a surprise party for dear old Dad. As the party approached, I kept telling myself to act shocked when they sprung the surprise on me. As it turned out, I was genuinely surprised because the party came and went without any mention of my birthday or me. It really was a party to introduce the new baby.

Maybe if I had read Dave Foster Wallace’s famous This Is Water speech, I would have had a more realistic perspective. The point of his talk was "that the most obvious, ubiquitous, important realities are often the ones that are the hardest to see… Because, my natural default setting is the certainty that situations like this are really all about me." In other words, we are hardwired "to see and interpret everything through the lens of self." So, "a huge percentage of the stuff that I tend to be automatically certain of is, it turns out, totally wrong and deluded."

Bob Seawright, who did read Wallace’s speech, takes his premise a step further in Finding What We’re Not Looking For, by saying "if you are automatically sure you know what reality looks like… you will miss out on… opportunities to learn..." And it’s not only "our default settings that conspire against us… [but also] our increasingly data soaked and algorithm-dominated world." Amazon, Google, and the rest of the internet don’t challenge our defaults, they cater to them. They are "unparalleled at allowing us to find what we are looking for. [But,] if we are going to do better and be better we’re going to need to find what we’re not looking for."

Finding what you’re not looking for is hard because you’re never sure if you have found it. You are always in an uncomfortable state of uncertainty. Certainty, on the other hand, may be delusional but it feels better. And that, explains Seawright, is why we look for investment professionals who show themselves to be "confident and decisive at all times… [when we should be looking for advisors] who show caution and humility in the face of uncertainty…" Why? Because when we invest with certainty, "we are usually wrong, often spectacularly wrong."

"How can it be wrong when it feels so right?" asks Barbara Mandrell in a song with David Houston. The answer is that the feeling of certainty is based on a self-centered perspective we reinforce with handpicked facts, which may or may not be grounded in reality. So, Seawright is adamant that we need to be "curious, humble, self-critical, give weight to multiple perspectives, and feel free to change [our] minds." But, even though we know he’s right, our default settings delude us into believing that it’s different this time and we can trust our feelings. And that’s why, contrary to the most obvious and ubiquitous realities, I still can’t believe the party wasn’t for me.

Reading A Brief History of Time was like taking the red pill offered by Morpheus in the 1999 movie The Matrix. Having recently seen Stephen Hawkins’ obituary in The Economist, I was reminded of the impact his book had on my life. The reality of theoretical physics, as explained by Hawkins, is a different paradigm than the reality of our senses. The obituary’s author suggests that this “…departure of scientific reality from what common sense suggests is going on… threatens the human psyche just as much as it did in Galileo’s day,” because we just can’t “…cope with facts like these…”

I would argue that facts are illusive and we are actually having to cope with continually morphing theories of what is real. For example, speculation that we may be a three-dimensional hologram encoded in a two-dimensional universe, is gaining popularity. This eerie similarity to The Matrix is both fascinating and frightening. It is at points like this, where comfort and curiosity diverge, that we have to choose whether to take Morpheus’ blue pill “…and believe whatever you want to believe... [or] take the red pill… [and see] how deep the rabbit hole goes.”

As an investment advisor, I came to such a point where I started questioning the basic principles of the comfortable business I had built. And just as Neo followed the person with the “white rabbit tattoo,” I began a quest to discover the reality of investing. So, like Alice who, in Lewis Carroll’s words, popped down the rabbit hole “…never once considering how in the world she was to get out again,” I sold off my business and fundamentally started over again in my late 40s. And, while my cast of characters was not as bizarre and eclectic as Alice’s, I did find experts who, similarly, not so much taught me things as helped me to discover them for myself. That last sentence is a Galileo paraphrase that reminds us that we must learn things for ourselves before we truly understand them. One thing I learned, and can honestly say I understand, was the subject of a recent paper published by the brains behind The Big Bang Theory -- the TV show, not the origin of the universe.  I’m not that smart.

In Now and Then, Dave Goetsch, Executive Producer of The Big Bang Theory, reflects on his investment journey. He describes the state of panic he experienced when the stock market was down 50% in February 2009. “Markets were going up and down in ways no one could predict, and I couldn’t trust those folks who said that they could anticipate what was going to happen. So when the market went down, I went down with it – sinking into a depression, knowing there was nothing I could do.” But, according to the famous chemist and physicist Marie Curie, “Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less.”

Curie’s antidote for fear is understanding and action--and that is what Goetsch did. He learned, “I was right not to trust those people who thought they could predict what was going to happen in the markets, but I was wrong in thinking that there was nothing to do.” He learned to “understand the uncertainty of the market” and came to realize that you have to have a long-term perspective “when you’re being assaulted by noise…” Like most of us, he needed help with his journey down the rabbit hole. He admits, “There is no way I could have done this without my financial advisor.” He not only helped him with his asset allocation, but also with his thinking about investing.

Goetsch’s advisor and I both took the red pill of investing. In my case, the pill was Roger Gibson’s book on asset allocation and risk. It could easily be titled a Brief History of Investing. It taught me to manage client expectation, the primacy of asset allocation, and that uncertainty cannot be avoided. While it would be nice to offer our clients a blue pill which, in his words, would “…eliminate the uncertainties that are so difficult for them to live with,” that’s not reality. And reality can be a hard pill to swallow.

My wife and I used to receive compliments for being perfect parents... then our third child came along and no one ever mentioned that again. It wasn't that she was bad, it was just that she had a different way of learning. Her oldest sister learned by logic. Sister number two learned by observing. And she, like the guy who had to pee on the electric fence to get it, learned by doing. To her logical, observant father, it was a flaw that drove me crazy. So, when she did something particularly stupid, she would have to endure one of my angry rants, after which she would usually acknowledge, "That wasn't very smart, was it?" At that point I would smile and reply, "Ya think!" She was basically a great kid, but damn, she was really a hard one to raise.

Then again, the Association for Psychological Science informs us that parenting any child isn't easy. A recent post, The Myth of Joyful Parenthood, states that "Raising children is hard and any parent who says differently is lying." And that isn't an unsubstantiated opinion, explains John Cloud in a Time Magazine article -- Kid Crazy. "Researchers have known for some time that parents are... more depressed than nonparents..." They're more depressed and stressed, writes author Jay Belsky, PhD, because of "...a fundamental truism about the world we inhabit: The future is uncertain. As a result, no parent...can know for certain what would be best for his or her...child..." Neither can investors know with certainty what is best for their portfolios. So, like parents, "investors hate uncertainty," points out Wall Street Journal columnist Jason Zweig. But certainty, which he defines as "...a state of clarity and predictability... doesn't exist, never has, and never will." However, "Our need for certainty in an endeavor as uncertain as raising children [or, I may add, investing for retirement] makes explicit 'how-to-parent' [or investment] strategies both seductive and dangerous," warns researcher and TED Talk sensation, Dr. Brené Brown.

Therefore, it is hard to resist "...seductive-sounding ideas that will supposedly enable you to beat the market," writes Zweig or be a "perfect" parent, Brown would add. But you must. That's why Brown says you have to "let it go" and Zweig says to "get over it." By doing that, Zweig explains you can then "...try to control the things that are controllable," which is mainly your behavior. So, Brown encourages parents to "Be what you want your kids to be" and Zweig admonishes investors to adhere "...to a set discipline... [to] prevent yourself from making impulsive decisions..."

Investors should heed both pieces of advice and try to emulate the behavior of disciplined role models like Warren Buffett. That means not only knowing what he does but also doing it. "Only when you combine sound intellect with emotional discipline do you get rational behavior," Buffett maintains. For him to nurture such intellect and discipline, he told CNBC, "I do more reading and thinking, and make less impulsive decisions than most people in business." It's something "All of you can do," he points out, "but I guarantee not many of you will do it." And that's the reason why so many investors make the same mistakes over and over.

As humorist Franklin P. Jones observed, "Experience enables you to recognize a mistake when you make it again." Regrettably, there is more truth than humor in that statement. It's true because, "...it turns out that our brains are hardwired to get us into investing trouble," laments Zweig. In other words, nature has cross-wired our brains in such a way that we believe that the world is more predictable and controllable than what logic, observable facts, or past experiences would suggest. Because of that, neither parents nor investors can let go of the belief that perfection (or near perfection) is possible. And that's not very smart, is it? Ya think!

Upon entering the London Underground for the first time, I had no idea what "Mind the Gap" meant until I saw it written on the station platform as I crossed the gap to the train. Being visual, I got "Look Right" immediately. It appears that many Americans are prone to the pedestrian's equivalent of a "California Stop." Coming to the curb, we naturally look left and only look right after we have begun stepping into the street. Do that too often in London and you will become a hood ornament on a lorry.

A recent edition of The Economist brought these memories to the forefront. Maybe it's my age or a morbid interest - but I start every issue of The Economist at the back, reading the obituary. In this particular issue the famous person featured was Phil Sayer, the voice behind the "Mind the Gap" announcement. It was a voice, the article says, that had "warm, confident tones... [which] smoothed the edge of... anxiety and displacement... [of] travelers...caught between two worlds - They are neither where they anticipate, nor where they were..."

Enacademic, the investment dictionary, says financial travelers are also caught between two worlds --"Where you are [and] where you need to be..." And getting from one place to the other "...is not so clear cut, [because unlike the London Underground] there are no maps on the wall. So most people have no idea where they are."

To solve this conundrum, James Parnitzke, in How to Build a Roadmap - Gap Analysis, writes that you must establish "a clear and unambiguous understanding of the current state, define the desired end state [and then use that information to] develop a well-thought-out road map to close the gaps uncovered in the analysis." If you try closing the gaps without proper planning, author Charlie Gilkey warns that it could lead to "a lot of incoherent action, wrong turns, fits and starts, [and] confusion." That's why the traveler's warning "to 'mind the gap' between the platform and the train is apropos for the investor undertaking estate planning as well," says William Anderson in his post "Mind the Gap" and Avoid Costly Estate Surprises!" As an attorney, he complains: "While you can make every good effort to execute what you believe to be a sound estate plan, in many cases these fail to be completely executed [because execution is not just] about signing your will, trust documents, and/or powers of attorney." It also involves properly titling your assets and synchronizing your beneficiary designations with your estate plan.

I first became aware of this execution gap as a young advisor when an attorney told me, "Stock brokers, insurance agents, and title company clerks do more estate planning by accident than all the attorneys in the country do on purpose."  Recently, another attorney referred to this situation as "appalling" and lamented the "tremendous dangers" of seemingly innocuous actions. Being aware of this problem, we have always focused on the gaps in the execution of our clients' estate plans, as well as in the implementation of their overall financial plans. Way too often, clients and their advisers do things that seemed like a good idea at the time without stepping back and looking at the situation from all directions. That can be as dangerous as stepping onto a London street after only looking left. Ill-conceived actions can lead to unintended costs, taxes, and other consequences. Advisors, brokers, and insurance agents should be required to take a Hippocratic Oath pledging to "first do no harm."

In your financial travels, "If you don't know where you're going, any road will take you there," cautions George Harrison in a Lewis Carroll paraphrase. However, as long as you're not eligible to be on the last page of The Economist we can help you get and stay on the road that leads to where you need to be. And we do that by proper planning and prudent execution that is careful to mind the gaps.

How We Help Fill The Gaps
For our management clients we offer free access to the eMoney Personal Financial Software. Its powerful aggregation, organizational, and analytical capabilities provides us with the information we need to eliminate your savings and behavior gaps as well as spot and help correct gaps in your portfolio allocation, asset ownerships, beneficiary designations, tax efficiency, and so much more.

“You can’t buy a game.” Even though I know my brother-in-law is right, it hasn’t stopped me from trying. If you don’t know what I am talking about, you are obviously not a golfer.

Golf is a hard game to master. It requires lots of practice. My brother-in-law, a former teaching and touring pro, told me I would need to hit 300 balls a day if I wanted to get good. I have neither the desire nor discipline to do that. So, I keep buying the latest and greatest golf equipment in hopes that it will make up for the deficiencies in my swing or, as a golfer would say, “the gaps in my game.”

It seems to me that many investors have a similar problem – They try to make up for deficiencies in their savings by employing investment strategies they hope will beat the market. And this is not just an issue for individual investors. A large percentage of public pension plan administrators are hoping that alternative investments will provide the extra returns needed to make up for their funding gaps. But, according to Greg Mennis, director of Pew Research Center's retirement systems project, “…policymakers cannot count on investment returns to close the pension funding gap.” Both individuals and institutions need to realize that only in Lake Wobegon would this be possible because that’s the only place where all the investors are “above average.” In the real world “…the average investor underperforms the average investments,” according to Carl Richards the author of The Behavior Gap.

This last paragraph illustrates an important point. Just as most golfers have multiple flaws in their swings, so do most investors have multiple deficiencies in their retirement plans. They have funding gaps caused by saving shortfalls which, unfortunately, aren’t often compensated for by excess returns. More often than not they are exacerbated by a return underperformance flaw which Richards calls the behavior gap. To explain this flaw he “…started drawing a sketch on whiteboards during meetings. The sketch has a tall bar labeled investment return, a shorter bar labeled investor return, and the space difference labeled behavior gap.” The gap is a result of the quirkiness of the human brain. "It's not that we're dumb. We're wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right - but it's not rational."

Richards didn’t discover this phenomenon, which has been well known for decades, but his sketch and the publicity it received did increase the awareness of the issue. And that is important because it helps investors and their advisors to focus on behaviors they can control instead of on returns that they cannot. That’s why a couple of decades ago I told an employer, “I think DFA offers the best mutual funds for your 401(k), but your employees would be better off if they had mediocre funds and behaved wisely, than if they had the best funds and behaved poorly.” Mr. Richards said something similar in his book, “…investors could just own an average fund, and if they behave correctly, they will outperform 99% of their peers… So, if I could just get clients to behave correctly, I could…close [their] behavior gap.”

While most investors think my job is to eliminate uncertainty, I understand. As Richards explains “…[my] job is to help people make massively important decisions under conditions of irreducible uncertainty.” And to be effective at my job I ask the same question he does, “…why keep wasting time on returns when there are so many other questions we can ask that will make a difference?” Things like how to shrink the funding gap by saving more or how to reduce the behavior gap by trading less.

There are no shortcuts in golf or investing. You can’t count on new clubs or exotic investments to fill the gaps in your game. However, since I am still irrationally trying to buy a golf game, I understand why investors feel like they can. But, as an advisor, I know that it isn’t rational. “You can’t buy a game.”

How We Help Fill The Gaps
For 401(k) plans we can help by designing plans where the default options are good options. For our individual clients we offer eMoney’s financial software for free. It not only helps eliminate the savings and behavior gaps but also the management gaps in your personal finances. It aggregates, organizes, and analyzes all your financial data so we can help you may wise informed choices about ownerships, beneficiaries, taxes, and much more.

I want to do great things, but it is the little things I do each day that are the great things. That paraphrase of an Ann Kiemel quote is my life motto. It both inspires and frustrates me. It frustrates me because I wonder if I will ever do anything noticeably great. At the same time, it reminds me of the importance of life's little - and often unnoticed - acts of thoughtfulness and generosity.

A text I got this week from my oldest daughter, Sarah, perfectly illustrated this point in a way that was very touching to this Grandpa. She wrote, "Olivia [age 5] has been urgently asking to make her 'Christmas list' all evening. She's feeling behind. I assumed she'd be writing all the things she wanted on the paper. Instead she put each family member's initial and drew what she wanted to get them."

Sarah's text got me thinking about a Wall Street Journal article by Alison Gopnik on the neuroscience of generosity. In How Children Get the Christmas Spirit she asks, "Are we born generous and then learn to be greedy? Or is it the other way round?" To answer that question, researchers have built on the work of Nobel Laureate Daniel Kahneman who discovered that human behavior is not so much explained by the differences between the left and the right brain as it is by the differences in what he calls fast and the slow thinking. In his book, Thinking, Fast and Slow, he explains that fast thought "...operates automatically and quickly, with little or no effort and sense of voluntary control." Slow thought, on the other hand is, "... the effortful mental activities... [of] the conscious reasoning self that... makes choice and decides what to think... and what to do."

In her article, Gopnik says that two researchers from the University of Chicago explored this 'born or learned' question by monitoring the electrical activity of children's brains while they were engaged in various structured activities. They wanted "...to see which patterns of brain activity predicted the children's generosity." Was it the areas of the brain related "...to automatic instinctive reactions..." or to "...more purposeful, controlled and reflective thought?"

"They found that the quick, automatic, intuitive reaction didn't predict how generous the children were later on. But the slow, thoughtful...brain wave did. Children who showed more of the thoughtful brain activity when they saw the morally relevant cartoons also were more likely to share later on." So, while there are automatic responses "...to help or harm..." it is the "...more reflective, complex, and thoughtful responses..." that appear to determine our "...actions like deciding to share..." In other words, generosity is more likely a purposeful decision than it is an intuitive instinct.

Interestingly, investing is not an intuitive instinct either. Kahneman reminds investors that they operate in a very unstable environment and "...intuition cannot be trusted in the absence of stable regularities in the environment." So, as investors, you have to have a plan and make purposeful decisions to follow it. I would also suggest that you make purposeful decisions on how to use your money. John Wesley, the Anglican cleric and theologian, recommended that you should strive to "Earn all you can, give all you can, save all you can." At this time of year, the lesson of Scrooge reminds us that our instinct for self-preservation that manifests itself as greed needs to be tempered by conscious acts of generosity.

As I get older, I get more enjoyment out of the accomplishments of my kids and grandkids than I do from my own. While Olivia is not the youngest child in her family, she is definitely the runt of the litter - but good things come in small packages. Little Olivia got the Christmas spirit. Instead of thinking of herself, she made a purposeful decision to be generous. And while that may be a little thing, it truly is a great thing. Merry Christmas!

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