Editor’s Letter

Over the past 12 to 18 months, this letter has discussed a topic a few times: the tendency of commentators and more distressingly investors to follow narratives rather than facts. Our point today is not to return to the same issue once more. Rather, we feel a need to discuss a “relative” of that issue, which must be an important part of our work as investors or investment consultants.

Any reader of ours who is a parent will immediately associate with the following observation: young children, usually between two and four at least, never seem satisfied with any answer we may give to their questions. They keep asking “why” not only as their first question, but as a follow up to any answer we may give. Their inquisitive minds use that process to discover more about the world around them. They keep digging until the parent, or grandparent, or uncle or aunt (or child!) grows tired of the game.

This observation gave me a thought. Reflecting on what we have been seeing in capital markets over the past few years, I am struck by the fact that I so rarely heard people use that very adverb “why.” Consider the willingness of a number of people to adopt the principles of Modern Monetary Policy lock, stock, and barrel, without asking why eminent Nobel economics prize winners did not seem to agree. Consider how quickly a majority of commentators were willing to accept the notion that the early signs of inflation we were seeing were transitory; for politicians to come up with the idea cannot surprise, they have a position to defend, but what about intelligent commentators. Consider how broadly people accepted that cryptocurrencies had to be the future, without really asking why they were needed and what they would bring to the party, or even more importantly whether the shortcomings that everyone could see could turn out to be more damaging than those of the system they meant to replace. The list could continue, but the point is hopefully made.

Asking question after question unfortunately does not ensure that one will operate in an error-free manner. Even when we ask all the relevant questions, we are still exposed to the risk of picking the wrong assumptions, or of applying faulty logic, or even of choosing the wrong alternative among the one or two that seemed the most probable. Yet, it is worth reminding ourselves that investors must go through a sequence of three questions if they want to reach at least a defensible conclusion: (a) What do I think? (b) What do I believe the general consensus is? And (c) How different is my view from the consensus? And this is really only the first step in the decision process. The next step involves digging deeper in somewhat of an iterative manner, still on the same principle: (a) What has to be true for my view to be sensible? (b) What does the consensus view as relevant facts to argue its position? (c) How are our two sets of assumptions similar, different, or simply contradictory?

When I first entered this business slightly over 45 years ago, I remember vividly noticing that the most successful and respected investors were those who, on the surface, seemed to be odd balls. I recall the New York banker who came to work with a pinstriped suit and cowboy boots. Or the seasoned investor who one day almost blew up the banking platform as he had topped up his pipe with gun powder in his right pocket rather than tobacco that was in his left pocket. Or the senior portfolio managers who would throw a football across the portfolio management floor right after the clock told them it was 4 p.m. and thus that the New York Stock Exchange trading had closed for the day.

Having studied both finance and marketing, these observations reminded me of what I had been taught about advertising: creativity requires a different way of thinking. One rarely captures the crowd’s attention with platitudes. One needs something to “grab” the audience’s attention. Subsequent experience taught me that, similarly, one rarely makes much money by moving with the crowd in the investment world either. It takes an inquisitive mind, one that is not prepared to accept common wisdom, to have a real chance of “seeing” what others are missing.

Being a cynic is not a nice-to-have, it is a sine qua non. And cynicism starts with honest questioning. The past several years have shown to all who were willing to look that people have become so overwhelmed with the potential information available “out there” that they have started to avoid primary research. While, defensively, this may make sense, not to mention the fact that it may be inevitable, such an approach can only work if one is dead set into a cynical frame of mind. While I always need to ask myself whether I have looked at all the data I should, it is even more important to ensure that the person to whom I listen has covered all the bases, data-wise, and applied tried-and-true principles on the logic front.

Unfortunately, I am sure that a number of readers will fully anticipate what comes next. The focus on narratives rather than facts contains, in itself, the seeds of defeat. The story might be interesting, and thus one tends to forget to ask what is known and what is assumed. What is not known can lead many an investor astray. Remember a few years back when some people declared—most likely without having totally thought the “concept” through—that we were but a few years from self-driving vehicles. A friend of mine went further, when he affirmed that his son would never need a driver’s license… While possibly conceivable in large cities, how likely was that to come to pass very quickly in the countryside?

Over the past two to three years, I can tabulate no less than a dozen pronouncements that were delivered to clients of ours or to me directly, which seemed odd at the time and have been, if not totally at least partially, demonstrated as ill-advised. A simple set of half a dozen “whys” for each of them would have served at least to shake one’s confidence and possibly to trigger a re-think.

The lesson for me therefore is that investors, particularly those whose experience either does not cover at least a couple of full cycles or is not based on deep experiential knowledge, would be well advised to ask “why” a few too many times as they confront investment decisions. If done with both intellectual honesty and rigor, this is bound to help them separate the completely crazy ideas from several others, one or two still probably not terribly good, a few more just about OK, and one or two nothing short of brilliant.

Yet, one last point is necessary: never confuse brilliance with intelligence or knowledge. While that might ensure that one will not be the next Bill Gates or Elon Musk, it also makes it highly likely that one will not end up with a small fortune only because one started with a large one!

Jean Brunel

Co-Editor

In this issue of the journal, Tom Arnold, John H. Earl, Jr., and Terry D. Nixon analyze a question of prime importance in financial planning: should recipients opt for early payment of their Social Security benefits? The problem is an interesting question of time horizon, return expectations, and life expectancy. The authors provide simple Excel-based templates for advisors to make the model useful in practice.

Several of the articles in this issue are focused on behavioral finance. Particularly, Tobias Lauter, Marcel Prokopczuk, and Stefan Trück formalize how investors’ personalities have an effect on their investment decisions.

Financial literacy is an important determinant of whether people are included in the financial system and benefit from the wealth generation associated with saving and investing. This is especially interesting in the developing markets. We present four articles, looking at these questions from different angles: 1) Rajesh Desai, Kedar Bhatt, and Avani Raval look at the role of gender, 2) Smita Tripathi examines evidence from India, 3) Tania Driver, Mark Brimble, Brett Freudenberg, and Katherine Hunt tackle the question of confidence in personal insurance from an Australian perspective, and 4) Caroline De Oliveira Orth, Clea Beatriz Macagnan, and Rodrigo Machado Rossetto look at the effects of financial education in family offices in Brazil.

Finally, an issue of the JWM wouldn’t be complete without an investment management topic. Crystal Evans, Gregory Evans, and Maria A. Quijada examine whether a 90% equity, 10% bond portfolio (Warren Buffet’s approach) is superior to the traditional 60/40 portfolio that is favored by endowments.

Paul Bouchey

Co-Editor

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