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.
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!
What I saw was unforgettable. What I heard was unrepeatable. Many years ago, I was helping a mortician and a police officer pull a car with a dead body in it from the Sacramento River. It appears that the driver had driven her car into the river, probably at the old Ord Bend ferry ramp and, over the course of the next few months, it had drifted a few miles downstream. The low summer water flow eventually exposed the vehicle. Hooking a cable to the car, we used a tractor to pull it out of the river. Once on dry land, the mortician reached into the car and what happened next was so repulsive that I had to turn away. It was at that moment that the cop made one of the most vulgar and dehumanizing jokes I had ever heard. It was my introduction to how many first responders cope with death.
On the Nurse.com website Cathryn Domrose wrote, "Nurses often use humor to deal with death... Sometimes it's just the way you maintain your sanity." The same reality applies to police officers and first responders. Mary Roach in Stiff: The Curious Lives of Human Cadavers explains that we all find ways to avoid the reality of death. "It's the reason we say 'pork' and 'beef' instead of 'pig' and 'cow." She goes on to say that medical students in their first anatomy class quickly learn that "Dissection and surgical instruction, like meat-eating, require a carefully maintained set of illusions and denial."
It appears to me that the propensity to deny the certainty of death is only surpassed by the predisposition to deny the uncertainty of life. In Managing with the Brain in Mind, David Rock writes, "Our brains don't merely prefer certainty over ambiguity. They crave it..." So, in an effort to reduce this uncertainty, Julie Adams pens in Mindful Leadership for Dummies, that "...your brain seeks information. The problem is that often this information is unavailable until later... [Thus], in a bid to create certainty where none exists, your brain starts to construct stories about what's happening and what's likely to happen... It then treats these stories as facts and uses them as the basis for decisions and actions."
Jason Zweig, the author of Your Money and Your Brain, concurs and cites a study which shows that most investment managers "felt that the most important task in evaluating an investment is to arrange the facts into a compelling story." More often than not, these stories are based on an "attempt to create meaningful patterns where there are none." Carl Sagan referred to this delusion as the "characteristic conceit of our species." While most animals can detect patterns, we are "uniquely obsessive about it," explains Zweig. "[Our] brains perceive anything that repeats a couple of times as a trend."
So investors, says Zweig, think a "...manager who beats the market for three years in a row is a... genius." And "The biggest investors on earth fall just as hard for this 'three's a trend' fallacy." That's why pension funds and endowments have for years poured money into hedge funds that were on hot streaks. However, the Economist points out what I have been preaching for years "...hedge-fund performance shares a trait boringly familiar from other forms of investing...past performance is not a guide to future returns." Of the "...93 funds that finished in the top decile during the crash, only three remained top performers." It appears what looks like genius is "...little more than a guessing game: one in which, over time, the losses from bad guesses eventually top the gains from good ones."
Sam Houston's Last Will and Testament refers to, "...the uncertainty of life and the certainty of death..." These are undeniable truths that the human brain, nevertheless, tries to deny. However, as we have seen, there are times when denial is acceptable and there are times when it isn't. So, when faced with unforgettable traumas, it's acceptable for first responders to say unrepeatable things. But when faced with random patterns, it's not acceptable for investors to see repeatable trends.
"Tell me what the symptoms are and if I don't have them, I'll get them for you." I actually said that to my doctor and he smiled, not because he thought it was a joke but, because he knew it was the truth. When you're a borderline hypochondriac, it's hard to distinguish the real from the imagined. That's why I ask my wife to read the side-effects for any medications I may be prescribed because, if I know what they are, I will get them.
With that type of mentality, it was only a matter of time before I started having panic attacks. I remember my first panic attack: I was in my car when my chest got really tight, breathing became labored, and I started sweating profusely. Having no idea there was such a thing as a panic attack, I thought I was dying of a heart attack. Since my doctor was closer than the hospital, I made a mad dash for his office. Parking in front, I ran in past the startled receptionist and into the exam room where he was with a patient. "Doc, I'm having a heart attack." He turned and put his stethoscope to my chest and made a few quick checks. After a short time he said, "I think your heart is fine. It's probably a panic attack." I asked what that was and he explained that my heart wasn't the problem, it was my mind that was screwed up. I replied, "Oh, I can live with that," and walked out.
The Mayo Clinic defines a panic attack as "...a sudden episode of intense fear that triggers severe physical reactions..." On the ABCNews.com website, a post states that "...during a panic attack the individual is seized with terror, fear, or apprehension..." Based on that definition and explanation, financial markets recently had a panic attack. The NY Times reported that "After Brexit... fear seized world markets... [as] investors are gripped by a panic last seen in 2008." Sam Ro, writing for Yahoo Finance, used similar emphatic language when he stated that Britain's unexpected vote to leave the European Union (Brexit) caused a panic that went "parabolic." In other words, the number of investors that had panic attacks soared exponentially (or for math majors - quadratically.) These individual panic attacks triggered simultaneous severe reactions to a perceived danger. The result, as described by Ro, was that "In the days that followed, markets around the world sold off sharply."
At times like this, I have two responsibilities to my clients: First, I need to help those clients, who are experiencing a financial panic attack, to realize that it is important not to react to their fears.
Because, as Ro points out, "Ironically, history shows that fear of a crash has a poor track record of predicting crashes. Conversely, some of history's worst crashes came when no was expecting one." And secondly, I need to educate all my clients so they can avoid having financial panic attacks in the first place.
To do that, I turn to The Keys to Overcoming Panic Attacks, written by the Anxiety Coach®, David Carbonell, Ph.D. Like his advice to patients, my advice to clients is as follows. First, "...acknowledge the present reality, that I'm afraid and starting to panic." Second "...accept the fact that I'm afraid at this moment." Third, "Wait... don't just do something, stand there." And fourth, "Watch. Use the occasion to observe how the panic works, and how you respond to it."
If you tell me one of the symptoms of a disease, I will get it. If you are having a financial panic attack, I can tell you one of the symptoms you already have. As Carbonell explains, "The thought that I am in danger is...[a] symptom of panic." But there is no relationship between the level of fear and the amount of danger, so it is "not an important or useful thought." And that's exactly what the financial research says about the perceived and actual danger from events like Brexit and other periods of uncertainty. Fear is normal during such times, but patience is more productive than panic because markets will stabilize and recover. So, acknowledge that your mind is the problem and - like me - learn to live with it.
"Who do you think is the most financial secure person in the world?" It was a question I asked finance students when I was invited to speak at the local university. It was the mid-1980s and at that time one of the professors had me and other professionals talk to his graduating seniors about careers in finance. Most of the talks were about how to get rich with a finance degree. My talk was a little different.
As I remember, the two most popular answers to my question were Donald Trump and the Shah of Iran. But, as I pointed out to the students, "Those guys could lose everything and there would be no end to the line of people waiting to dance on their graves." I followed that by giving them my own suggestion - "Mother Teresa." After a pause I would continue, "Think about it. If she gets sick, there is a 747 waiting to take her to the best hospitals in the world. She can stay in the most expensive hotels and eat in the finest restaurants and no one would dare charge her. And she can't lose it. So it's strange, the person with the most financial security in the world is the one who gave up everything."
About the same time I was giving these talks, there was a television commercial showing a guy in a business suit scoring a long touchdown as his teammates knocked-down the opposition. During the ensuing end zone celebration, a voice-over proclaims, "You've done it! You've reached financial security!" To which I would reply to the TV, "That's a lie!" It's a lie, because financial security can never be achieved with certainty since we live in a world of uncertain probabilities, not certain guarantees.
To illustrate my point about uncertainty, I used to show prospective clients pictures of a smoker and a jogger and ask them which one would live longer. Everyone would say "the jogger" and I would answer, "Probably - but it isn't guaranteed." Just think about the running guru, Jim Fixx, who died at age 52 while George Burns smoked 10 to 15 cigars a day and lived to 100.
Recently, I read a New York Times article by Jeff Sommer about 83-year-old John Bogle who, after six heart attacks and a heart transplant, ought to know a little about uncertainty. Bogle believes that the unprecedented uncertainty in markets today is the result of "A culture of short-term speculation... superseding the culture of long-term investing that was dominant earlier in the post-World War II era." To better understand what Mr. Bogle was talking about, I read his book, The Clash of Cultures: Investment vs. Speculation. In the book, he laments that the financial services industry has "...become primarily a marketing business rather than a management business, a business in which salesmanship has come to overwhelm stewardship." In this shortsighted culture, he says, the interest of investors has been subordinated to "...the maximization of fee revenues..."
In contrast to this high-cost and shortsighted culture, Mr. Bogle preaches a gospel of low-cost investing with the long-term discipline to, in his words, "stay the course" in uncertain times. Such an approach cannot guarantee financial security because such guarantees only exist in that "better place" where Mother Teresa now resides. But, even though there are no guarantees, a long-term perspective greatly increases the chances of overcoming the curse of time and chance.
For Mother Teresa, "long-term" meant eternity, and that's how she lived her life. For Bogle, "long-term" means decades, and that's how he invests his money. For the rest of us, it would not be a bad idea to consider living more like Mother Teresa and investing more like John Bogle.