I have always been known for my smile.  It is a unique characteristic that has always distinguished me and occasionally benefited me.  For example, in the 70s I was working long hours in a very remote area, and rarely got into town.  On one of those infrequent trips, I stopped by a Bank of America to cash three paychecks totaling a thousand dollars.  Unfortunately, I had forgotten my wallet and didn’t have any I.D.  However, instead of turning me away, the branch manager called my home town branch to see if there was a way of identifying me.  After a few minutes, he came back chuckling and said he would be glad to cash my checks.  When I asked him what was so funny, he replied, “Your banker asked two questions:  Does he have long blond hair and is he smiling?” Back then, that was two-factor authentication.

The process used in authenticating my identity in the real world of the 1970s was radically different from how it’s done in the digital world of today. But the objective, to identify who I am, remains the same. In the real world, my body resides at a specific location that I can identify with my phone’s GPS.  On the other hand, in the digital world my identity resides on a vast array of servers known as the cloud. And that’s a problem, says Frank Abagnale, the con man immortalized in the 2002 movie – Catch Me If You Can. “Technology breeds crime.  What I did in my youth is hundreds of times easier today."

It’s not only easier, but also more lucrative and less risky.  So, client information is under constant attack by hackers and identity thieves. At first, we dealt with it by protecting our server with various types of hardware and software solutions. But, after talking to experts, we determined that trying to stop the bad guys from getting in was not good enough. According to a 2016 Fortune article featuring Michael Hayden, the former head of the National Security Agency and later the CIA, “Most of the history of what we call cybersecurity has been in… vulnerability reduction.” However, breaches are inevitable and hackers are “…going to get in.” If Marvin Gaye and Tammi Terrell were to describe the problem, they would say, “…there ain’t no firewall smart enough. Ain’t no software patches good enough.  Ain’t no password strong enough, to keep hackers from getting to you, babe.” So, the article’s author declares that “authentication – validating identity – becomes key.” In this new paradigm, what matters most is determining who should be granted access to “…what, when, and from where.”

The solution to that question, and a number of others, was a cloud-based delivery system that allows us to securely access client databases, custodial platforms, emails, documents, and other applications in a manner compliant with SEC/FINRA protocols. So, instead of using our own server, we access all our applications and websites through browsers that monitor the identity of people and devices to limit entry to only those who are authorized. Two-factor authentication is an important part of that process.

Today we use codes sent to our phones for authentication, but Niall Cameron, Global Head of Corporate and Institutional Digital at HSBC, says, “Multi-factor biometric identification is the future.” Biometric authentication uses unique facial and other characteristics to identify individuals. However, the Applied Recognition website warns, “As face recognition authentication becomes mainstream… hackers are busy looking for ways to trick the… authentication hardware and software.” They explain that the best way to protect against spoofing (tricking) is by Liveness Detection, in which the individual is asked to do some motion such as winking or smiling.  It turns out that our motions, as well as our features, are unique.

We want the best cybersecurity because protecting client data is our first concern. And since all security is vulnerable, authentication is necessary. Currently we use numeric codes, but in the future, we will use biometric characteristics and motions that are difficult to replicate. So, as unlikely as it may seem, the best multi-factor authentication of tomorrow may be what my banker used decades ago – a smile.

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.

Do you remember the 1964 film Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb, in which Peter Sellers played a crazy nuclear physicist? Well, I actually met the real life Dr. Strangelove, Edward Teller, who fairly - or unfairly - was believed to be the inspiration for that part.

It was 1960, and my sister was just about to start her first year at UC Berkley. Our family was on campus for a student/parent orientation day. Among the activities was a tour that allowed us to see the facilities and to meet some of the more famous faculty members. One of our stops was in Sproul Plaza, where we sat by the fountain and listened to Dr. Teller tell an amusing story about the development of the atomic bomb. He explained that he was briefing some army officers when a general interrupted him with a question. The general wanted to know if the fission process the scientists were trying to create could result in an uncontrollable chain reaction that couldn’t be stopped. Teller responded. “It is possible, but not very probable.” Looking concerned the general asked, “How probable?” Teller answered by explaining that the room in which they were sitting was full of oxygen molecules which were relatively evenly distributed. However, it was possible - but not very probable - that all the oxygen molecules could end up congregated under a desk, causing everyone to suffocate. After contemplating this information for a moment, the general turned to an aide and ordered, “Open a window.”

The general obviously wasn’t comfortable with uncertainty, but Teller was. Teller knew that the laws of quantum physics are complex. With trillions (if not more) individual actions affecting the distribution of oxygen molecules, it is impossible to predict their dispersion with certainty. Predicting is impossible - not because the actions are random - but because there are too many variables to consider.

Investing is similar to quantum physics in that it involves a complex system with an indeterminate amount of variables. Counter intuitively, in financial markets we make money not by fleeing risk, but by embracing it. Weston Wellington of Dimensional Funds, explains, "We don't make money in the stock market in spite of the risks. We make money in the stock market because of the risks." To understand this dichotomy, consider Biff in Back to the Future II. He went back in time (by the way, in violation of the laws of physics) to give his 1955 self a 1985 sports almanac. With this knowledge, Biff was able to amass a fortune betting on sports events. However, if you think about it, who would ever bet against Biff if he never lost? With no uncertainty, no one would take the other side of his bets.

Stock markets function similarly. Return comes from uncertainty. “Risk and return are opposite sides of the same coin,” wrote Russ Wiles in his article, Embracing Risk, for the Arizona Republic. “Stocks are clearly more volatile and dangerous than bonds or certificates of deposit. Consequently, they must entice investors with higher expected returns. Otherwise, nobody would buy stocks. Instead, everyone would keep all their cash in CDs, Treasury bills, or under the mattress.”

Embracing risk may seem as crazy as Dr. Strangelove learning to stop worrying and love the bomb. But I’m not asking you to love risk, I myself don’t. I’m asking you to understand it and act on that understanding. By accepting the complexity of financial markets and the uncertainty it creates, you will be able to take advantage of the limited number of variables you can control and stop worrying about the myriad of ones you can’t. That’s accepting life as it is, not as you want it to be, and that’s not so strange.

When talking about exotic places, I will jokingly mention, “I have never been there, but I know how much it costs to get there.” While the statement is not all that accurate, it does give me an opportunity to bring up my oldest daughter and her new husband’s year-long world tour. Not long after they were married, they sold all their worldly possessions, outfitted themselves with REI equipment and, with the help of parents, purchased round-the-world airline tickets.

Cheap modern airplane technology made their trip possible by shrinking the size of the world. And cheap modern internet technology allowed them to stay in touch by changing the shape of the world. With the help of Susie (their Macintosh computer) we were able to talk using Skype, write via email, and see pictures on their personal website. However, it wasn’t until after they returned that we discovered that parents got the filtered version of their travels. The more harrowing events were relayed to siblings and friends but were censored from communications with worrying parents.

My favorite of these filtered stories occurred in Beijing. The kids had just finished a tour of the Forbidden City and had exited from the palace grounds into Tiananmen Square. The square was full but, as a light shower grew in intensity, the crowd quickly started dispersing. Having just experienced India’s monsoon season, they didn’t think the rain was all that bad. Sarah was convinced that it must be a bomb scare. Kyle suspected it was the rain driving the people away. Whatever the cause, they eventually were the only ones left in the vastness of Tiananmen Square. As they stood there contemplating their options, a police car made its way across the square, stopping directly in front of them. In my mind’s eye the scene of the car and the two solitary figures flashes back and forth with the images we have all seen of the lone man facing the tank. At this point, Sarah turned to Kyle and said, “See! I told you it is a bomb scare.” Getting out of the car the officer approached them, said something in Chinese, and then, to their surprise, he handed them an umbrella, got back in his car and drove off.

Sarah’s and Kyle’s trip was exciting, educational, and rewarding, but there were occurrences far scarier than the one I described where the dangers were real and the calls closer. But just like there was no way for them to take their trip without taking risks, so it is with my clients and their financial journeys.

To reduce exposing themselves to unnecessary risks, the kids got the advice of experienced travelers. As an experienced financial traveler, my advice is similar to Russ Wiles of The Arizona Republic who wrote in a recent article titled Embrace Risk, “Don't try to beat the market by picking individual stocks. Don't try to time the market. Be skeptical of market and economic predictions. Watch expenses.”

However, there was no way for the kids to experience the rewards of Machu Picchu, Petra, the Great Wall, or the Pyramids without accepting (and living with) some risk. As an adviser, I tell my clients what Mr. Wiles wrote in his column, “Figure out how much volatility you can live with; build a suitable portfolio using low-cost, broadly diversified funds; then find something else to occupy your time.”

I have numerous clients, and each of them is on their own journey to places where I have never been. But I do understand the basic principles that every financial traveler needs to know in order to prudently balance risk and reward. However, unlike my kids, I won’t hide the risks from my clients. Even the best travel plans cannot eliminate risks and guarantee success, but they can put the odds in your favor.

If you double-check something and get the same result, most people would assume it's right. I assume it is wrong twice and check it again. I do this because I am obsessive-compulsive, which is a good thing for my clients but not for me. It’s good for my clients because I am always trying to figure out what can go wrong with their portfolios and how to prevent it. It’s bad for me because I obsess about everything and I am compelled to constantly perform an illogical counting ritual that serves no purpose but to appease the dysfunctional portion of my brain.

In his book, Talking Back to OCD, John March describes the detrimental effect that this brain malfunction had on my education. “Obsessional thoughts can take center stage in a kid’s mind, shoving what’s going on in the classroom into the wings.” Since I couldn’t pay attention in school, I had to take my textbooks home and tutor myself in the material that the teacher had presented that day. That wasn’t all bad, because the ability to figure out things on my own has become a very useful skill to possess.

Learning to compensate for a handicap by enhancing other skills is a normal thing. The blind develop a keener sense of hearing and the deaf acquire better visual perceptual skills. In my case, being oblivious to the obvious I have become acutely aware of the obscure. While this may not seem useful, it is actually highly beneficial in today’s complicated investment climate. Back when I first got into the investment business, limited partnerships were the latest and greatest thing. People would actually beg me to invest in deals that promised high returns and big tax breaks. However, I never sold a single limited partnership because, as I told my clients, “There are three people involved in a program, the general partner, you, and me, and I know two of us are going to make a lot of money.” I knew that because I was compelled by my obsessiveness to read and decipher the convoluted and purposefully vague language in the plan prospectuses.

Since then, the computer age has ushered in a whole new generation of incredibly complicated alternative investment products. This complexity not only leads to confusion, but it can also hide unsubstantiated valuations, deceptive accounting, poor liquidity, inadequate transparency and excessive fees. In his 2003 annual letter to shareholders, Warren Buffett warned that these highly complex financial instruments are “...ticking time bombs and „financial weapons of mass destruction‟ that could harm not only their buyers and sellers, but [also] the whole economic system.” The result of this complication, according to the March 20th-26th, 2010 issue of The Economist, is that risk doesn’t end up being held by those “...best qualified to hold it...[but instead] it seems to have ended up in the hands of those least able to understand it.” Amazingly, this includes some of the most sophisticated institutional investors in the country. Just like the investors in limited partnerships of the early 1980s, present day managers for endowments, municipalities, and public employee pensions have been begging to get into alternative investments, which unfortunately, appear to conform to the same old “two out of three” rule I observed 25 years ago.

Recently a psychologist said he could cure my obsessive-compulsive behavior. I thought about it for a while and decided not to take him up on his offer. While I don’t like the personal hell it can cause me, I don’t want my clients to go through the “hell” that Mr. Buffett compares the alternative investment business to, “... easy to enter and almost impossible to exit.” Since escaping this financial purgatory is so difficult, you need to avoid entering the eternal damnation of alternative investments in the first place. You do that by hiring an advisor who is obsessive about due diligence and compulsive about counting costs.

“Can I have your autograph?” The question surprised me. I knew I looked enough like Andy North that some of the other golfers would kid my brother-in-law about having a US Open champion as his caddie, but I never thought anyone would actually mistake me for Andy North up close. The autograph request was made at the Transamerica Tournament in Napa on a weekend I was working for ESPN as an on course spotter. With my ESPN hat and my official looking headset, this sight-challenged golf fan had mistaken me for Andy North, the professional golfer-turned-announcer. As I stood there soaking up my five minutes of fame, my aging golf groupie gushed, “I really enjoyed following your career.” In a response that was technically true but realistically misleading I replied, “You don’t know how much that means to me. Very few people remember my career at all.” That little comment elicited a kick in the ankle and a glare from my wife, who was standing next to me. Jolted back to reality, I excused myself and hurried off down the fairway, but not before hastily scribbling a signature on her program.

As my story points out, reality is objective and independent of our assumptions and feelings, but determining what is real and what isn’t is not always so easy. Somewhere there is a golf fan who really believes she spoke with Andy North and got his autograph, but if you should ever see an Andy North autograph on a Transamerica program listed on eBay, you should think twice before buying it.

The older I get, the more I question many of the things I had previously assumed were true. I really believed there were people who had figured out markets and who could take the risk out of investing. Unfortunately, I have come to realize that isn’t true - but there is no shortage of investment experts out there who want you to think they can. The best of this group of advisors believe in false hopes; the worst rely on outright fraud. Probably the best-known of the worst type is Bernie Madoff. But frauds aren’t the only ones who sell “no fear”; insurance companies do, too. They call it ‘guarantees.’ Recently, a nationally known speaker sent me the following email about how insurance companies are attracting new business. He said, “…one of the ways they've been doing it is with minimum guaranteed returns of 5% and 6%, on a base that ratchets upward… At one conference, the room was rimmed with annuity companies. As you walked by [the] booths, each company hawked its guaranteed return and how often the base ratcheted up... ‘Anniversary date,’ said one… ‘Quarterly,’ said the next guy… ‘Monthly…’ Sure enough the last guy in line said ’DAILY!’…” The email went on to say that the conference speakers had all kinds of suggestions for ways to use and abuse the minimum guarantees in order to achieve high returns with no risk. One speaker went so far as to say, “What the heck. Why diversify? Put your entire contract into the riskiest, most volatile option, since there's no downside risk!” Fed up with these unrealistic guarantees, my friend concluded his email by saying: “I just want to short-sell the companies that are offering those deals. It's insane.”

The point isn’t so much to criticize insurance companies as it is to warn you that guarantees don’t eliminate risk. That reality has become all too clear recently with the inability of insurance companies, banks, and brokerage firms to cover losses on the credit default swaps that they sold as guarantees for mortgage-backed securities. So, don’t be blinded by guarantees as Madoff’s clients were blinded by two decades of consistent returns. What appears to be a safe investment may actually be a very risky one; in the real world there are some real Andy North autographs and some phony ones, but there are no investments that are really guaranteed.

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