The Vulcan Financial Advisor

Within the Star Trek franchise there is a race by the name of Vulcan. Apart from their pointed ears, Vulcans are noted for their attempt to live by reason and logic, with no interference from emotion.

These characteristics would make them exceptional financial advisors.

Sarek: "Emotions run deep within our race. In many ways more deeply than in humans. Logic offers a serenity humans seldom experience. The control of feelings so that they do not control you."

Vulcans have many attributes that financial advisors can learn from. These range from long-term investment conviction to overcoming short-term behavioral finance biases.

Soval: We don't know what to do about Humans. Of all the species we've made contact with, yours is the only one we can't define. You have the arrogance of Andorians, the stubborn pride of Tellarites. One moment, you're as driven by your emotions as Klingons, and the next, you confound us by suddenly embracing logic.

Forrest: I'm sure those qualities are found in e­very species.

Soval: Not in such confusing abundance.

Soval, in this case, could be referring to the tendency of investors to believe they are better than others at choosing the best stocks and the best times to enter/exit a position. This belief persists regardless of the fact that professional fund managers, who have access to some of the best investment/industry reports and resources, still struggle on achieving market-beating returns.  

This arrogance and stubborn pride persists, while in some cases rational behavior is simultaneously embraced. This rational behavior does not necessarily involve the most monetary or material benefit, quite frequently the satisfaction is purely emotional. For example, an investor holding a security that was gifted to them by a loved one long ago, or an executive choosing to retire early rather than stay at a financially lucrative position due to time with family taking precedent.

In the following scene the Vulcan Spock had just attempted to sacrifice his life in an attempt to save an alien planet. His romantic partner, Uhura, becomes very angry with him as she felt that he was abandoning her.

Uhura: At that Volcano you didn't give a thought to us, what it would do to me if you died, Spock. You didn't feel anything, you didn't care.

Spock: Your suggestion that I do not care about dying is incorrect. A sentient being's optimal chance at maximizing their utility is a long and prosperous life…It is true that I chose not to feel anything upon realizing that my own life was ending. As Admiral Pike was dying I joined with his consciousness and experienced what he felt at the moment of his passing — anger, confusion, loneliness, fear. I had experienced those feelings before, multiplied exponentially on the day my planet was destroyed. Such a feeling is something I choose never to experience again. Nayota, you mistake my choice not to feel as a reflection of my not caring. Well I assure you the truth is precisely the opposite.

In the above passage one might apply Spock’s reasoning to the emotions that are produced during periods of extreme market volatility. Clients feel anger towards their financial advisors, confusion as to how no one saw the market downturn coming, loneliness as they may know others who are getting rich off of the correction (or those who had gotten out), and the fear that this is the beginning of something bigger.

We must be like Spock and choose not to experience those emotions. This is not based on a reflection of us not caring, but precisely the opposite. In the world of investing emotions cloud our judgement, they prevent us from providing objective analysis and maximizing the advantage that objective, long-term data provides. 

FANG, Diversification, and 2015

With a few days remaining in 2015, I created a couple charts that I thought were interesting. As Josh Brown wrote, it was the year of FANG (Facebook, Amazon, Netflix, and Google). The chart above shows how these four stocks have performed this year with the S&P 500 for comparison. It is easy to see why people may become enamored with owning them. On the other hand, investors owning any resemblance of a generally diversified portfolio probably didn’t do so well comparatively speaking. The chart below shows the performance of the S&P 500 (SPY), Total Bond Market ETF (BND), Emerging Markets ETF (VWO), and Developed Markets ETF (VEA). Not so fun.

Compared to each asset class, with diversification one will never be the best but will never be the worst by definition. However, this doesn’t make it any easier, especially depending on one’s frame-of-reference. Comparing one’s portfolio to a neighbor’s is asking for headaches. To paraphrase Josh Brown again, people don’t want to see the data when there is a party going on (Facebook, Amazon, Netflix, Google) and they are left out. As always, behavior matters just as much, if not more, than the investments themselves. A good strategy that one can stick with will always outperform a great strategy that one can’t, and while the change in the calendar year may not matter as it relates to the nitty gritty of one’s portfolio, it is a solid marking point to reflect on one’s behavior and thought process.

Learn to Unlearn

The ancient Masters didn’t
try to educate the people,
but kindly taught them to not-know.

When they think that they know the answers,
people are difficult to guide.
When they know that they don’t know,
people can find their own way.

If you want to learn how to govern,
avoid being clever or rich.
The simplest pattern is the clearest.
Content with an ordinary life,
you can show all people the way
back to their own nature.

-Lao Tzu-
Tao Te Ching, chapter 65

I must learn to unlearn.

I say this not with ignorance, but with humility. The most challenging conversations one finds themselves engaging in are ones in which the other party has taken a polarizing view on an issue that many see as grey. As with many things, I learn of my own faults while observing others. Having a brief conversation, listening to a podcast, or reading an article somehow entitles me to an opinion on a matter that arguably takes a lifetime to fully understand. This leads me to underappreciate true wisdom or expertise when I encounter it, rather than have an open mind and fully understand the limits of my knowledge. I see this in others and I see this in myself.

To quote a colleague, when asked about her expertise on a specific piece of international tax she replied, “if I don’t have the exact piece of information that is necessary to diagnose a client’s situation, I want to find the person who wrote the book on the topic.” Or, as a Silicon Valley executive once told me, “I am not about being the smartest person, I am about leveraging the smartest people”.

Seeking out wisdom when wisdom is needed requires the understating of one’s own limits. This may require one to unlearn.

Arthur Conan Doyle in A Study in Scarlet draws the comparison between a man’s mind and an empty attic. He describes the fool as one who takes in all kinds of lumber, not knowing when or if he is going to use it. This forces the knowledge that actually is useful to him to get crowded out. The skillful workmen, however, is very careful about what he allows in his brain-attic. Doyle describes him as one who only has the tools that are necessary for him to do his work. Point being, knowing what to avoid accumulating is crucial to have a neat and efficient attic, and this might require some occasional cleaning. Similarly, knowing what to avoid is crucial to having an efficient thought process, and this might require some occasional unlearning. This is why Nassim Taleb says in Anitfragile, “Keeping one’s distance from an ignorant person is equivalent to keeping company with a wise man.”

What unlearning means to me is possessing the modesty to recognize that additional education and experience does not make one an authority, it merely assists in being able to recognize authority. The anticipated result of this, the sought after goal, is to possess the ability to provide objective council (in my case this is referring to financial planning).

The hardest decision for a book-worm is not “what good book should I read next;" rather, it is making the more challenging decision of what not to read next. The identification of quality literature stopped being a problem for them long ago. The new problem is capacity.

“1. Good men are mutually helpful; for each gives practice to the other's virtues and thus maintains wisdom at its proper level. Each needs someone with whom he may make comparisons and investigations. 2. Skilled wrestlers are kept up to the mark by practice; a musician is stirred to action by one of equal proficiency. The wise man also needs to have his virtues kept in action; and as he prompts himself to do things, so is he prompted by another wise man. 3. How can a wise man help another wise man? He can quicken his impulses, and point out to him opportunities for honorable action. Besides, he can develop some of his own ideas; he can impart what he has discovered. For even in the case of the wise man something will always remain to discover, something towards which his mind may make new ventures.”

-Seneca, Moral letters to Lucilius, letter 109

In the financial advisory industry, this logic applies to professionals as well as clients, and we are all a bit of both. The ones who are least likely to seek out financial help are those who are confident that they possess the technical and emotional capacity to effectively produce the same product, with little or no monetary cost. The financial industry’s asymmetric distribution of information is almost certainly flattening; both sides arguably have access to the same information, leaving many to conclude that an outside professional is unnecessary. However, where I see the value is in the power of skepticism and the power of question. Through experience and study, the right financial advisor knows what questions to ask, what concerns to raise, and what direction to take the conversation.

Recognizing limits and identifying deficiencies are essential to produce mental clarity. The skill of the professional should not be having all the answers, but possessing the ability to procure what is necessary. 

This is not a defense of the traditional financial advisor, this is a defense of traditional lifelong learning. And lifelong learning is achieved, in part, by recognizing what you have yet to learn.

My journey in this field has recently begun, it is therefore much simpler for me to acknowledge my deficiencies, as there are many, and eagerness for learning, as everything is new and exciting. I hope to always maintain the personal philosophy that I am a student first, and a teacher second.

“If someone is able to show me that what I think or do is not right, I will happily change, for I seek the truth, by which no one was ever truly harmed. It is the person who continues in his self-deception and ignorance who is harmed.” 

-Marcus Aurelius