Evaluating Reports & Surveys: The 3.8 Billion Dollar Question Mark

The New York State Department of Financial Services issued a report on October 17th regarding the state’s public retirement systems. Specifically, the report reviewed the “Common Retirement Fund” from March 31, 2009 to March 31, 2016. That is, the two state pensions over the last seven years. Unique compared to other state pensions, in New York they are run solely by the State Comptroller. The report found that “under the Comptroller’s watch the State pension system has spent large amounts of pension system funds chasing returns and performance that has fallen far short for years. Specifically, over the past eight years, the System has paid over $1 billion in excess fees to hedge fund managers who underperformed to the tune of $2.8 billion.” The report makes several very valid points, and you can read it in its entirety here. Reserving judgement on the overall situation, one major red flag jumped out at me: the dates of the report. As a general rule of thumb, it is never a good sign when a date range starts or ends right before or after a significant crash. This report starts March 31, 2009. The exact market bottom was March 9, 2009; 22 days earlier. That is like conducting a report on the most successful teams in NBA history and starting the report Michael Jordan’s rookie year. It doesn’t make the facts any less valid; however, it frames the situation in a certain way that may distort the picture. If the New York State Department of Financial Services wanted to analyze the Comptroller’s decision to invest in hedge funds, why not look at the entire time these investment were held? Why cherry pick a date close to the market bottom of one of the greatest market declines in U.S. history?

This is what you need to know - whenever a financial report has a starting or ending point right before or after a significant market event, the authors are almost always doing so, intentionally or otherwise, to frame their argument in support of their message. Regardless of the content of the message, it is something to be cognizant of as affecting the conclusions of the report.

Three Years of Reading

From October 1st, 2013 to October 1st, 2016 I kept track of every book I read. The final tally was 211 books. My favorites, in no particular order, were the following:

  1. Quiet: The Power of Introverts in a World That Can't Stop Talking - Susan Cain
  2. The Compound Effect - Darren Hardy
  3. The Picture of Dorian Gray - Oscar Wilde
  4. Atlas Shrugged - Ayn Rand
  5. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets - Nassim Taleb
  6. Liar's Poker - Michael Lewis
  7. The Tipping Point: How Little Things Can Make a Big Difference - Malcolm Gladwell
  8. The Count of Monte Cristo - Alexandre Dumas
  9. Thinking, Fast and Slow - Daniel Kahneman
  10. Gone Girl - Gillian Flynn
  11. To Kill a Mockingbird - Harper Lee
  12. The Fish That Ate the Whale: The Life and Times of America's Banana King - Rich Cohen
  13. A Tale of Two Cities - Charles Dickens
  14. The Tiger: A True Story of Vengeance and Survival - John Vaillant
  15. The 48 Laws of Power - Robert Greene
  16. East of Eden - John Steinbeck
  17. Master of the Senate: The Years of Lyndon Johnson, Volume 3 - Robert Caro
  18. When Breath Becomes Air - Paul Kalanithi
  19. Sunny's Nights: Lost and Found at a Bar on the Edge of the World - Tim Sultan
  20. Moonwalking with Einstein: The Art and Science of Remembering Everything - Joshua Foer
  21. The Power of One: A Novel - Bryce Courtenay

Here are a few things I learned about reading from the past three years:

  • Read a wide variety of both fiction and nonfiction.
  • If you don’t enjoy reading, you aren’t reading the right books.
  • The problem you are struggling with? Somewhere at some time someone had the same problem and wrote a book on it. Go find that book and read it.
  • Few things create instant rapport like having read the same book as someone else.
  • Kindles are really great but not the same.
  • Certain books deserve rereading.

Money and Happiness

Money can’t buy happiness but it solves 95% of the problems that make you unhappy.  - @gselevator

Money can’t buy happiness. There is a fair amount of truth to this. Research has suggested that the utility of additional wealth starts to significantly decline after about $70,000 of income a year. That being said, a good use of money as it relates to happiness is using it to avoid things that make you unhappy. For example, I absolutely hate doing laundry. It drives me crazy and I don’t like worrying about it. I pay someone about $20 a week to do my laundry. Over one year that is about $1,000, which could certainly be put to better use. However, for me it is worth it to avoid doing something that makes me unhappy. If I can go through life having never to do my own laundry, it will be money well spent. As we have discussed on this blog before, money is not the end; it is the means to an end. And while we all understand the phrase “money can’t buy happiness,” we might consider using money to avoid unhappiness. 

Believing in Your Value Proposition

I never realized how difficult crafting my value proposition would be until I froze mid-sentence during a mock advisor-client meeting about a month ago. Although my current role does not necessitate a perfect value proposition, the mock meeting led me to understand how important being able to articulate your value is for a Financial Advisor. During the mock meeting my mind was stuck on the idea that the prospect can always find a way to challenge your opinion since many financial advising services are subjectively valued. After my slip-up I decided to do a deep dive on the value proposition, and last week made an hour-long presentation on the subject at my company’s offsite retreat. I’ve put dozens of hours into researching and reflecting on the value a Financial Advisor can provide and will highlight the points that resonated with me most. In a later post I will take a deeper dive into other aspects of the value proposition.

My research started with the question, “Why is the value proposition so hard to describe?” Financial Planning is a complex, subjectively valued, intangible, long-term service. There’s no question that anyone who has worked as a Financial Planner for a few years knows exactly what a Financial Planner does, but we also know this industry so intimately that it’s easy to forget how entrenched the complex terms and acronyms are in our daily vernacular. Have you ever tried to describe what you do and almost immediately seen that person’s eyes glaze over? An explanation that was meant to be simple can quickly turn into data overload. If you can manage to take the complex and present it in a simple way, you still need to get around the obstacle of value often being subjective. Effectively proposing your value requires an understanding of what that person values. Finally, there’s a required element of trust that the relationship will be mutually beneficial over the long term. Trust in an intangible, subjectively valued service is difficult to build and maintain. So despite the fact that you may know what a Financial Advisor does, it’s no easy feat explaining the merits of an intangible service that the person may have never experienced when his or her sophistication and interest levels are unknown.

For me, the most important part of the value proposition is to believe in it myself. At its core, Financial Planning is a business that helps people navigate and develop a balance between their goals and their money. Although we may like different aspects of our roles for different reasons, I’ve seen a common theme in Financial Advisors’ underlying motivations of being in this business to help people. It should make you feel good to work in a profession that has the primary objective of helping people live out their goals through the proper management of their financial resources. Although you may feel as though you’re in this profession to help people, conveying your value proposition requires an understanding of your services and their impact, as well as the justification for your fee.

Only a portion of the strategies we implement yield quantifiable, consistent annual benefits such as tax loss harvesting, rebalancing, or tax planning. Many planning opportunities are subjectively valued and occur inconsistently over the years. Does the prospect have the resources and intellect to combat these issues as they occur? What about the time? Even if they are able, do they want to? For many, there is a high value on the peace of mind and free time that comes with having a competent advisor. These benefits are virtually impossible to objectively quantify, so advisors and clients need to mutually agree that the fee is worth the value. I could spend all day writing about our hard-to-value services, but the one that sticks out to me the most is a good Financial Advisor’s ability to anticipate planning opportunities during life transitions. An advisor who has taken the time to understand his or her client’s comprehensive financial situation (goals, values, interests, priorities, etc.) will be able to assist the client in avoiding expensive common pitfalls. When clients transition to new phases of their lives it can be exciting, but often comes with an overwhelming feeling of “I have no idea what I’m doing” as well. Having a knowledgeable, experienced partner can make all the difference in a person’s mental state during transition periods. Examples of life transitions include: starting a new job, moving to a new state, purchasing a first home or other large asset, getting married, having kids, sending your kids to college, getting divorced, selling a business, getting a promotion, or receiving inheritance. Having an intimate understanding of your hard-to-value services is essential to conveying your value proposition.

The final area I will touch on is the need for you to believe the fees you charge are justified. There will always be prospects and clients that argue fees, which can lead to a defensive or even argumentative discussion if 1) you can’t articulate value clearly and 2) don’t know your fees well. I’ve always worked for firms that charge on a percentage of assets held with the firm, but if I’m speaking honestly, prior to my research I had never really paid attention to the actual dollar amount. For the average advisor the AUM fee arrangement can come across as clandestine, oftentimes shown only as a line item on four statements per year. If we tout our fiduciary responsibility we should have a solid understanding of what various clients pay in real dollar terms. Even though it may be easier for the client to stomach an automatic withdrawal from their account, we shouldn’t encourage that type of “out of sight, out of mind” mentality. An exercise I found beneficial was to calculate my firm’s fee in both a positive and negative 6% return environments over one year for $1M, $5M, and $20M portfolios. Justifying the fee is easy in positive market years, but an advisor’s behavioral finance knowledge is put to the test in down market years. When the client wins, we win, but when the client loses, we win a little less. Having a high level understanding of our additional impact on the losses clients undergo in the short term helps to build empathy, which is an important component to any advisor-client relationship. If we believe that our fee structure is fair, then we should be able to have frank discussions with our clients explaining that the justification for our fee comes from the understanding that the advisor-client relationship has historically proven to be mutually beneficial over the long-term. It’s no easy feat to gain a prospect’s trust when the relationship can take years to net positive annualized returns. Understandably, our value oftentimes needs to be regularly reinforced throughout the course of the relationship. On the flip side, that also provides opportunities to develop solid long-term relationships with our clients.

Ultimately, your success in this area will come down to experience conveying the value proposition to various types of people. There is no shortcut, this important skill takes time and repetition. I encourage you to write out a framework and practice delivering it to your friends, family, and anyone you think might be interested. The sooner you develop your value proposition the more opportunities you will have to practice it, making you that much more prepared to impress your future prospects. The longer you wait to develop your value proposition, the more opportunities you’ll let pass you by.

New Year's Resolutions Start Today

I am a fan of resolutions in general, but New Year’s resolutions are frequently unsuccessful. Let's assume, however, that 2017 is going to be different. There is a lot of advice on how to make the change stick. Here is one you may not have heard before though: start planning for your 2017 New Year’s Resolution now. 

Think about what a successful New Year’s Resolution looks like for a moment. It is probably not just a 6-week habit, or even a year-long habit, but more likely a lifelong change. To think that one can simply wake up January 1st slightly hungover and change one’s life is unrealistic. Rather, one must plan now.

Here is a hypothetical schedule:

  • October - 
  • Consider potential New Year’s Resolutions.
  • Make a decision to pursue one.
  • Decide what is going to be sacrificed. There are still only 24 hours in a day, but you now have added something to your life. As a result something must be given up, whether that is another activity, time, energy, or a combination of all three. What are you no longer going to do to make time for your new change?
  • November - 
  • Talk with other people who have achieved your resolution.
  • Read three to five books on the topic.
  • Create a few post-mortems. This is an exercise where you hypothetically assume everything went wrong, identify what could have caused this, and then learn from the mistakes in order to avoid actually doing them.
  • December -
  • Purchase the necessary equipment, supplies, or other required items. If your resolution involves waking up early, don’t start that January 1. Gradually ease into it, so come January 1 you are accustomed to waking up early.
  • Create a schedule or system to track progress and foster accountability - maybe in the form of a journal or simply marking a calendar.
  • Possibly test your New Year’s Resolution in advance to get an idea of anything you may not have anticipated.
  • Consider what you are going to do if you have an off day or get thrown off track.

Success lies in the preparation. Starting to think about New Year’s Resolutions now initially sounds ridiculous. However, consider a successful New Year’s Resolution: it is probably a big deal. Three months of getting ready is a minimum requirement. Start thinking and planning now.

The Most Valuable Class I Ever Took: Lessons on Exponential Versus Linear Growth

The most valuable class I took in college was Keyboarding 101. It was an entry-level typing class. I was a terrible typer, entering the class with zero knowledge or ability on the correct typing form. With maybe one or two exceptions, I was the worst in the class. 

The class was 15 weeks long. After we learned the correct finger positioning and first started recording our typing, I was around 18 words per minute, which is really slow. Each day we were assigned a homework assignment which always consisted of practicing lines on certain keystrokes. For weeks I saw little to zero progress. Half way through the course, at around the eight week mark, I was typing in the low twenties for words per minute. Again, not very good.

Then something funny started happening with about four weeks of class to go. I started seeing drastic improvement. All of a sudden I was increasing my speed and improving my accuracy at a remarkable rate. I remember thinking to myself, “wow, this is amazing.” It truly was an incredible change, seemingly out of the blue. I went from the worst in the class to one of the best in the final four weeks, tripling my words per minute from the beginning of the year.

I learned two important lessons from this:

One, I need to be patient. Whether it be exercising, learning a new skill, or simply adjusting to a change, one of the biggest mistakes is expecting results too quickly and then giving up when they do not occur in a rapid manner. Second, growth is not linear; it is exponential. I often expect the former, but it is almost always the latter. This look like the difference between the blue line and the red line:

The keyboarding class was useful because I now type every day. In addition, I’ll never forget going from frustrated to amazed as I saw little results the first ten weeks and a tremendous change the final five weeks. I can’t stress enough the importance of this takeaway and how much it resonated with me. It would be well-heeded to keep it in mind. 

Change: The Three Areas to Make It Happen

For several reasons I decided to make some changes and get back to the fundamentals in the month of July: exercising consistently, eating a healthy diet, spending more time outside and less time on social media, consistent meditation, writing in my journal on a daily basis, reading books every day, zero frivolous spending, and not drinking any alcohol. During the final few days of June I mapped out a specific plan with specific goals on each of these objectives. The next step was to figure out how to make these changes happen.

There are three main ways to change oneself:

  1. Change one’s daily habits or routines.
  2. Change one’s environment.
  3. Change the people one surrounds him or herself with.

Outside of these three change is improbable, if not impossible. In fact, without some combination of all three, it is not likely to happen either. Real and permanent change requires one take deliberate steps in all phases. For example, if I wanted to lose ten pounds, but I kept visiting the same bar (number 2) with the same group of unhealthy friends (number 3), the weight loss would never happen. It might in the short term, and if I have great self-control I might even be able to keep it up for a full year, but ultimately I would revert back to my old self. Point being, significant and lasting change requires not one or two adjustments, but mindful adjustments in three specific aspects of one’s life: one’s daily habits or routines, one’s environment, and the people one spends time with. As Darren Hardy notes in The Compound Effect, “Small, Smart Choices + Consistency + Time = Radical Difference.”

Deliberate Practice

I just finished reading Moonwalking with Einstein: The Art and Science of Remembering Everything by Joshua Foer. It was excellent. This passage really caught my attention:

In the 1960s, the psychologists Paul Fitts and Michael Posner attempted to answer this question (on plateauing) by describing the three stages that anyone goes through when acquiring a new skill. During the first phase, known as the “cognitive stage,” you’re intellectualizing the tasks and discovering new strategies to accomplish it more proficiently. During the second “associative stage,” you’re concentrating less, making fewer major errors, and generally becoming more efficient. Finally you reach what Fitts called the “autonomous stage,” when you figure that you’ve gotten as good as you need to get at the task and you’re basically running on autopilot. During that autonomous stage, you lose conscious control over what you’re doing. Most of the time that’s a good thing. Your mind has one less thing to worry about. In fact, the autonomous stages seems to be one of those handy features that evolution worked out for our benefit. The less you have to focus on the repetitive tasks of everyday life, the more you can concentrate on the stuff that really matters, the stuff that you haven’t seen before. And so, once we’re just good enough at typing, we move it to the back of our mind’s filing cabinet and stop paying it any attention. You can actually see this shift take place in fMRI scans of people learning new skills. As a task becomes automated, the parts of the brain involved in conscious reasoning become less active and other parts of the brain take over. You could call it the “OK plateau,” the point at which you decide you’re Ok with how good you are at something, turn on autopilot, and stop improving.

But what if we are not OK with how good we are at something? What if we still want to improve? What if we still want to get better?

The secret to improving at a skill is to retain some degree of conscious control over it while practicing - to force oneself to stay out of autopilot.

This is what experts do.

What separates experts from the rest of us is that they tend to engage in a very directed, highly focused routine, which Ericsson has labeled “deliberate practice.” Having studied the best of the best in many different fields, he has found that top achievers tend to follow the same general pattern of development. They develop strategies for consciously keeping out of the autonomous stage while they practice by doing three things: focusing on their technique, staying goal-oriented, and getting constant and immediate feedback on their performance. In other words, they force themselves to stay in the “cognitive phase.”

Overall, Moonwalking with Einstein: The Art and Science of Remembering Everything is a worthwhile read. In addition, another book on my list regarding this same topic is Deep Work: Rules for Focused Success in a Distracted World by Cal Newport. The bottom line is this: in order to learn on a expert level, we must literally think about how we think.

America's Bank: The Epic Struggle to Create the Federal Reserve by Roger Lowenstein

An excerpt from America’s Bank by Roger Lowenstein:

When America last had a central bank, in 1836 (the year before J.P. Morgan Sr.’s birth), the country was a financial innocent. Its credit was borrowed in Europe; its stock market barely existed; its most common mode of transportation was the horse. The United States of 1913 was entirely different. The frontier had vanished; industrialization was a fact. Ford’s was churning out 170,000 Model Ts a year. The New York Stock Exchange listed more than three hundred companies, and corporate news was disseminated on glass-domed stock tickers. The banking industry had mushroomed, thanks in large part to the greater willingness of people to deposit their savings. The heady progress of finance was, however, an unfulfilled promise to the great wash of industrial workers. Capital in its formative stage was undemocratic. Workers’ pensions and other forms of savings were practically nonexistent. Leisure time was the province of the wealthy. America had far more banks than ever, but banks existed to serve business.

What struck me the most reading about “the struggle to create America’s bank,” was the similarities to the issues being debated today. In many cases the exact same questions are still being asked: what role does government have in business? Is Wall Street too powerful? Should we consider a gold standard or use fiat money? The excerpt from the book could practically be taken from the news today:

When America first established the Federal Reserve, in 1913, the country was a financial innocent. The Great Depression had not yet occurred; its stock market barely existed; airplanes were yet to become an accessible mode of transportation. The United States of 2016 is entirely different. The frontier has vanished; Silicon Valley is a fact. Musk is hoping to churn out some 300,000 Model 3s next year. The New York Stock Exchange lists more than two thousand companies, and corporate news is disseminated almost instantaneously via the internet. The banking industry has mushroomed, thanks in large part to a decrease in barriers of entry and a proliferation in financial technology. The heady progress of finance is, however, an unfulfilled promise to a great wash of workers. Capital is somewhat undemocratic. Workers’ pensions, 401ks, and other forms of savings are practically nonexistent. America has far more banks than ever, but banks exist to serve business.

Nothing is new, and everything is different. Frank Vanderlip is now Jamie Dimon. President Woodrow Wilson is President Barack Obama. Charles Hamlin is Janet Yellen. While we have all heard some version of “past performance is not indicative of future results,” it is important to read about financial history in order to gain some perspective. With the Federal Reserve garnering the attention of the financial industry with their every move, America’s Bank: The Epic Struggle to Create the Federal Reserve by Roger Lowenstein is a one place to start.