This month marks my 30th anniversary in the financial services industry. Time flies. The industry remains immensely challenging, ever-changing and rewarding. I cannot imagine not going to work. Thinking through the investment process and helping people navigate landmines is incredibly worthwhile.
Despite the benefits, there have been many unexpected lessons.
When I started in 1993, I had a Quotron machine and an S&P guide on my desk. Shortly thereafter, I placed the first “online” trade for a client. During this time, if people wanted information, they either spent enormous time researching or came to a person like me.
Today, the flow of information is overwhelming. Our world is awash in data, and worse, opinions. Everyone speaking at once does not help.
I’m not sure what is worse, too little, or too much information. You must filter information to things that matter. The daily droning of news regarding “the latest odds of a recession” is meaningless to the average person. However, the long-term profitability or debt structure a company has is extremely important.
Investing, budgeting and financial planning should be logical and disciplined. However, humans are a hot mess of emotions. Probably 90% of our decisions are emotion driven leading to erratic and bad outcomes. Jealousy, bravado, fear, envy and irrationality invade our brains. To succeed you must intertwine logic, discipline and guardrails with the psychology of how humans stumble through life.
It is funny to see people get mad at companies. Investments don’t care about you, but people obsess about them. This makes no sense. Companies do not have feelings.
Markets exist to serve people. Most investors don’t allow this to happen. Instead, the average investor thinks the market is a casino requiring constant spins of the roulette wheel. This rewards self-destructive short-term behaviors.
Many bad things may happen in the world. However, unless discussing the end of the world, then bad is a relative term. Most concerns can be insulated against by having liquidity, patience and a 10-year time frame.
Everyone wants to grow wealth like Warren Buffett. However, they are unwilling to look 10 years down the road. A lack of patience forces illogical and random outcomes. The Morningstar fund manager of the decade from 2000 through 2009 produced returns of 17% per year while the market returned zero. And yet, the average investor in this stellar fund lost money during this decade because they couldn’t sit still.
The “get rich quick” mentality pervades the investing landscape. This leads to very bad outcomes blinding investors to potential risks.
FOMO, the fear of missing out, is the most underestimated four-letter word, ever.
Although it has always been this way to some extent, social media tricks us into thinking others have spectacular lives. Realistically, we all spend significant portions of our day changing diapers and cleaning toilets.
The Wall Street machine is most creative at inventing new products to separate people from their money.
The industry creates products to make people think they’re doing something smart or unique. However, the industry is riddled with conflicts of interest. As long as investors are excited to invest in something “different” there will be someone to sell something different, exciting, opportunistic, etc.
Complexity correlates with higher fees, but not better outcomes. The more complicated the product or explanation, the more people should step back. The more pages in a prospectus or offering memorandum, the more the average person should look elsewhere.
If products or services cannot be reasonably explained in sixth grade terminology, avoid it.
The most important financial decisions are often the most boring and the best plans begin by protecting people from themselves. No hot tips. No get-rich-quick schemes. Limit use of debt. Ignore your neighbor. Spend less than you make. Invest for long time frames. Have sizable emergency cash on the side.
Emergency cash is not a rate of return decision, but a liquidity decision. It is an insurance policy. Bad things happen when least expected. Cash and liquidity offer room for error. Cash and liquidity allow you to battle another day. This protects from having to liquidate good long-term investments when encountering short-term blips.
Lastly, the rules of compounding prevail. Unfortunately, so does man’s inability to remain calm and focused. Find a good plan and stick to it.