Slate advice columnist, Dear Prudence, received this sad and poignant letter seeking guidance earlier this year.
“I keep making terrible decisions and can’t seem to stop.
“Last year I left my home, my family, my friends, a 20-year secure (if uninspired) career, to move 2,000 miles away to be with my first love. I’m 50 and I was his first love as well. He’s married and his wife invited me to their home. We decided to share him, although his wife and I were not interested in one another like that.
“My job here fell through. My dog died. The romance flopped spectacularly. I still love him desperately. And when he told me that it was over and that he didn’t love me and never had, I begged him to reconsider, only to have his wife come in and start screaming at me to keep my f***ing hands off her f***ing husband.
“I snapped. I tried to kill myself. I ended up in a coma and then went to the psych ward. I have been out for only a week. I’m back at work. I’m freshly diagnosed as Bipolar I. I’m on new meds I don’t think are helping. Of course I had to move out and I’m living a very lonely life. I do not feel stable and I cry for hours every night. The loneliness is killing me. I have psychiatric follow-up and intend to do what I can to survive and thrive.
“My former boyfriend is now making noises ab
out wanting to be ‘friends with benefits’ with me once I am ‘well again,’ which sounds more like he wants a self-supporting mistress that he can come and have sex with and then leave at will. I still love him but I realize this is a gross affront to my worth as a human being. I just don’t trust myself to say ‘no.’ Counselling may help but I still don’t trust myself to make good, healthy decisions. Everything I do blows up in my face.
We humans are shockingly prone to bad ideas, ideas that routinely grow into poor decisions and then metastasize into behavior that may undermine, severely damage or even ruin our lives and futures (see, e.g., Weiner, Anthony). In the words of Kant, “Out of the crooked timber of humanity no straight thing was ever made.” We share a pitiable and cracked nature desperately in need of a repair job nobody seems qualified to perform. We’d all like to think that we’re a lot better off than the letter-writer above, and most of us probably are (if not nearly so self-aware), but vanishingly few of us has a consistently good track record of decision-making and none of us is as good as we think we are. We’re all too much like the party girl in the Busby Berkeley movie musical Gold Diggers of 1935’s surrealist closing number, “Lullaby of Broadway,” who ends up dancing herself right out of a skyscraper window to her death.
Accordingly, the idea that we act in our own rational self-interest with any degree of regularity is, quite obviously, ludicrous and falsified every single day by our choices and our lives. Worst of all, we readily recognize such self-destructive behavior in others but consistently and tragically lack the ability even to see it in ourselves. As legendary physicist and Nobel laureate Richard Feynman warned , “The first principle is that you must not fool yourself – and you are the easiest person to fool.” The Apostle Paul also (an odd pair for agreement if ever there was one) made the same point (Romans 7:15): “What I don’t understand about myself is that I decide one way, but then I act another, doing things I absolutely despise.” We just can’t seem to help ourselves.
Despite the enormity of this problem, the investment portfolios we design, recommend and manage routinely discount or even effectively deny the overwhelming evidence of our cognitive and behavioral weaknesses and how they impact our financial decision-making and well-being in favor of technocratic attempts at efficiency and optimization. In the immortal words of Pogo, “we [may] have met the enemy and he is us,” but we don’t seem very willing to try to do very much about it.
William Goldman is an Academy Award winning screenwriter, novelist and playwright. He wrote Butch Cassidy and the Sundance Kid, All the President’s Men and The Princess Bride and some other excellent films. He famously said the following about the movies, but it applies much more broadly.
“Nobody knows anything…… Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.”
Josh Brown stated why perfectly: “People can’t be accurately modeled. And it’s people who work and vote and invest and trade and make deals and stick things into themselves that require a trip to the emergency room.”
This dangerous reality implicit in our portfolio construction choices ignores an irrefutable fact: no matter how fantastic the financial plan or how perfect the portfolio, they don’t do a bit of good if the plan isn’t followed and the portfolio maintained when times, markets, situations and feelings change…as they inevitably do. Or, to turn the problem on its head, as Josh would have it: “You can boil down whether or not a financial advisor is adding value into a single metric, you might even say it’s the only metric that matters: Retention. Do clients stay?” Therefore, a “Mary Poppins” portfolio – “practically perfect in every way” (when the “every way” means analytically and not behaviorally) – won’t usually be good enough, to the extent it even exists.
Our lives change. Our goals change. Our outlooks change. Our situations change. Our risk tolerances and profiles change. Emotions run high. Life gets messy. Are our financial plans and investment portfolios robust enough from a behavioral perspective to cope when that (inevitably) happens?
In my experience the answer is, “Usually not.” For example, we (clients and advisors alike) are always prone to performance chasing – buying what has been working well recently and selling what hasn’t been working and thus buying high and selling low – which inevitably leads to losses when mean reversion sets in and to excess trading generally. “In hot markets, money flows in,” says Professor Ilia Dichev of Emory. “In down markets, people get scared and leave.” As a result, stock investors lagged behind the stock market itself by 1.3 percentage points annually between 1926 and 2002, according to Dichev’s research. Even pension plans and other institutional investors earn an average of at least three percentage points less than the funds they buy. In other words, “past performance is indicative of future beliefs.”
How we might strengthen portfolios so as to withstand the weaknesses of human behavior is thus the enormous challenge this analysis sets out to explore.
A Nonfinito Approach
La Montagne Sainte Victoire vue des Lauves, 1901 – 06, Paul Cézanne
Earlier this year, New York’s revered Metropolitan Museum of Art took over the Whitney Museum of American Art’s Marcel Breuer building on Madison Avenue and rebranded it as the Met Breuer in an effort to broaden and deepen the Museum’s involvement with modern and contemporary art. Its largest opening show was Unfinished: Thoughts Left Visible. Its focus was unfinished works of various kinds from masters such as Titian, Leonardo, Turner, Manet, Rembrandt, Cézanne, Pollack and Rubens. Among them are “nonfinito” works. It’s a term that came into active use during the Renaissance and refers primarily to works that the artist deems finished even though they may look incomplete. For example, the artist may let the blank white canvas show through, in order to create an effect or to make a statement, as in the Cézanne shown above.
But how does an artist know when a work is complete?
Over the past couple of centuries or so, that question has become more and more important in the art world as well as more difficult to answer. It has grown into a common debate among artists, critics and scholars, such that it may sometimes be impossible to tell the difference between a completed work and one left intentionally incomplete. Early examples have gaps and missing parts such that it is easy to see that something is missing. But with modern art, the idea of the nonfinito became much more complex in that “ambiguity is part of the project of modernist painting.”
For example, as Cézanne aged, he left more and more blank canvas visible in his paintings. For Cézanne, this seeming incompleteness may have been a metaphor for the process of sight. Or he may simply have been unsatisfied with them. It’s impossible to tell.
As we expand our scope of vision (at least metaphorically), this problem is compounded because we so routinely miss things that are painfully obvious, perhaps because we are distracted or focused elsewhere. Moreover, anything like true objectivity either doesn’t exist or can’t be obtained. Even photographs, which we tend to think of as clear images of simple reality, are created and utilized so as to meet our stated and unstated expectations.
In today’s investment world, our client recommendations will necessarily be nonfinito in at least two senses. Initially, they should be intentionally less than optimal (and in that sense, unfinished) from a technical perspective so as to meet the behavioral and psychological needs of clients and thus be “stickier” for and to those clients. A good portfolio that is used always beats a great or even perfect portfolio that is abandoned. Secondly, a good advisor is always looking to improve technically (so as to create better portfolios) and psychologically (so as to make the created portfolios stickier). Thinking one has “arrived” in either sense is the best possible evidence to the contrary. So let’s get to work. Every good advisor has unfinished business to attend to, both literally and figuratively.
Investing as Science and Art
There is a new, growing and vital movement in our industry toward so-called evidence-based investing (“EBI,” which has much in common with evidence-based medicine). As Robin Powell puts the problem, “[a]ll too often we base our investment decisions on industry marketing and advertising or on what we read and hear in the media.” EBI is the idea that no investment advice should be given unless and until it is adequately supported by good evidence. Thus evidence-based financial advice involves life-long, self-directed learning and faithfully caring for client needs. It requires good information and solutions that are well supported by good research as well as the demonstrated ability of the proffered solutions actually to work in the real world over the long haul – which is why I would prefer to describe this approach as science-based investing.
But let’s not kid ourselves about how precise scientific investing can be in the real world. Physics – the hardest of the “hard” sciences – can be minutely accurate. We can know precisely when comets will return or how long various orbits take, for example. It is thus possible to engineer an astonishingly intricate space rendezvous or moon landing. But the more that humans (and especially human decision-making) become part of our study and analysis (as in the “soft” or social sciences), the less precision is possible. As London School of Economics philosopher John Gray explained in his book, Straw Dogs: Thoughts on Humans and Other Animals, “Science increases human power, and magnifies the flaws in human nature.”
That reality explains why our expectations and forecasts of markets and economies are most often wildly inaccurate. As Ronald Reagan famously quipped (even though the phrase was probably coined by Walter Heller), “an economist is someone who sees something happen in practice and wonders if it would work in theory.” Warren Buffett put it even more succinctly: “Beware of geeks bearing formulas.” We can send a rocket to the furthest reaches of the solar system with pinpoint accuracy but have no idea how the markets will perform tomorrow (or even later today). Many of our clients think that we should be able regularly and systematically to beat the market during a rally while avoiding any downturn and are all-too-ready to fire us when that doesn’t happen.
As if. There is not a lick of evidence that such expectations are remotely plausible.
The great Joseph Schumpeter, in the words of his biographer, appropriately concluded “that exact economics can no more be achieved than exact history, because no human story with the foreordained plot can be anything but fiction…. The best mathematics in the world cannot produce a satisfactory economic proof wholly comparable to those in physics or pure mathematics. There are too many variables, because indeterminate human behavior is always involved.” EBI, as economics generally, is therefore far less science-based than we’d like and much more crude art than we’d care to admit. Human action is a much different thing than the movement of planets or even the development of cells.
Legendary economist F.A. Hayak put the problem nicely.
“The term ‘science’ came more and more to be confined to the physical and biological disciplines which at the same time began to claim for themselves a special rigorousness and certainty which distinguished them from all others. Their success was such that they soon began to exercise an extraordinary fascination on those working in other fields, who rapidly began to imitate their teaching and vocabulary. Thus the tyranny commenced which the methods and techniques of the Sciences in the narrow sense of the term have ever since exercised over the other subjects.”
Hayak went so far as to assert that even careful attempts to use scientific methods have “contributed scarcely anything to our understanding of social phenomena.” Yet economics generally and investing more particularly still suffer from acute “physics envy.” Instead of looking to be and settling on being generally right, we rush headlong into being precisely wrong.
Despite what television procedurals routinely espouse, decisions based upon “the gut” are notoriously inaccurate. But the all-too-frequent “expert” decisions whereby the alleged authority claims or assumes to know more than s/he truly does, often based upon advanced math (and usually to multiple decimal places), are pretty lousy too.
Over seven years of generally strong markets has not erased the memory of the 2008-2009 financial crisis. No one should forget the failure of Long-Term Capital Management in 1998 either, despite participation from some of the best mathematicians, economists (including two Nobel laureates), and bond traders on Wall Street. LTCM ended up holding a portfolio that lost a major multiple of what they thought was their worst case scenario. It was a spectacular failure.
LTCM’s strategies worked extraordinarily well for a while, generating annual returns in excess of 40 percent over several years. But then, due to financial problems in the Far East and a governmental default on debt in Russia, they stopped working, seemingly overnight. I sat on a cavernous and eerily quiet Wall Street fixed income trading floor in 1998 and watched a fax machine expurgate page after page listing (largely derivative) securities for which LTCM sought liquidation bids, often in vain. Genius indeed failed and failed utterly. Our most complex and carefully crafted investment theses work right up until they don’t.
Even when these strategies work, we are rarely patient enough to stick with them when they go through inevitable periods of difficulty so that we can reap their rewards. Sometimes an investor or investment approach can be fundamentally rock solid but experience disappointing investment results for several years. A good case in point would be the tremendous underperformance by globally diversified portfolios relative to their domestically focused counterparts for most of the past 8 years. Similarly, value outperforms over the long-term but has underperformed for seven years (see below).
With the gift of hindsight, every single one of us would be proud to call Warren Buffett’s investment record our own. In the postwar era, American business has racked up an average return on capital of about 10 percent annually. Berkshire Hathaway, in the 51 years since Buffett took command, has compounded its book value at 19.2 percent annually. That enormous advantage, sustained over half a century, represents a standard of outperformance that has no close rival and probably never will. His stock price has vaulted from $18 a share to $223,000.
But how many of us would have been willing to live through the drawdowns and long periods of underperformance he endured to get there? (See below, complements of Newfound Research.) Investors in Berkshire Hathaway have had to endure underperformance as compared with the S&P 500 more than half the time (over various time-periods) and have suffered huge drawdowns in order to outperform so dramatically in the aggregate. No pain, no gain.
For many, EBI focuses primarily on the creation of optimal portfolios, which means that one’s investment process is the paramount consideration. Indexing (of various potential sorts) will be a crucial default setting for many because of the poor track records of active investors. Low fees will be sought as the best indicator of good performance. Diversification will also be required. If active management is used, concentrated and smaller portfolios or particular risk-mitigation strategies should be sought from managers with significant “skin in the game.”
Asset allocation will trump security selection both because it has more influence on performance and because it enhances a portfolio’s risk/reward characteristics. Because certain investment factors (such as size, value, quality, low volatility and momentum) repeatedly and persistently crop up over time in various global markets and different market conditions as indicators of investment success, they will be sought out for investment. And investment choices based upon predicting the immediate future are avoided because it simply can’t be done with any degree of consistency – there are, as noted, too many variables.
That is the science of investing, broadly construed. I agree with and advocate it despite a few minor qualifications and adjustments. But because humans are involved at every level and in every step, markets are always less predictable than we think and our human responses to those markets are always less rational than we’d like (and like to think). Accordingly, art is necessarily involved in the investment process too. To be clear, I don’t mean that our solutions should be any less evidence-based because of our human frailties. Indeed, they should be more evidence-based in that they also consider the science of human behavior and how that behavior manifests itself, especially under stress. Accordingly, our proffered solutions will necessarily be more realistic too.
At a conference I attended recently, Betterment CEO Jon Stein seemed to claim that investing is essentially easy because “[i]t’s just math.” That claim (if I understood him correctly) cannot be supported. It’s not just wrong. It’s shockingly and demonstrably wrong, wrong with the arrogance of an ideologue with something to sell. As Charlie Munger famously said to Howard Marks, “none of this is easy, and anybody who thinks it is easy is stupid.”
“It’s supposed to be hard. If it wasn’t hard, everyone would do it. The hard is what makes it great.”
Investing successfully over the long haul is really, really hard, largely because human behavior cannot be predicted with anything like mathematical precision. There is certainly no certainty. There is no technocratic Nirvana, no quant-generated (or otherwise generated) safe harbor. Historical interrelationships between valuation and price, various correlations, and ongoing market cycles are neither consistent nor uniform. Good ideas work for a while. Great ideas persist but bumpily and uncertainly. Our best strategies, approaches and ideas work…but only until they don’t anymore.
Great interpretation of difficult data sets, especially those involving human behavior, involves more sculpting than tracing. Portfolio optimization is a wonderful scientific ideal. But portfolio optimization alone pays insufficient attention to the needs, desires and vagaries of the investor who owns it. As AQR founder Cliff Asness stated succinctly, “The great strategy that you can’t stick with is obviously vastly inferior to the very good strategy you can stick with.” If we can’t cope with our human failings and shortcomings, we can’t and won’t get very far. The analysis that follows is designed to help us do just that to the extent possible – which is to say generally but not very specifically.
“You can have it all.”
“[T]he test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise.” F. Scott Fitzgerald, “The Crack-Up“, Esquire magazine (February 1936).
We want it all. It’s part of being human. We want big returns without risk. We want healthy food to taste great. We want the lowest price to provide the best quality. We want to have our cake and to eat it too.
But in our saner moments, we recognize the inherent disconnect in that sort of thinking.
In psychology, the uncomfortable tension that results from having two conflicting thoughts at the same time, from engaging in behavior that conflicts with one’s beliefs, or from experiencing apparently conflicting phenomena is called cognitive dissonance. The underlying theory holds that contradictory cogitative states serve as a driving force that compels the mind to acquire or invent new thoughts or beliefs, or to modify existing beliefs, so as to reduce the amount of dissonance (conflict) between these states. At the simplest of levels, it would be crazy to believe that the world is both round and flat at the same time, so we have to adjust. But when human behavior is involved, when we move from harder to the softer sciences, the demarcation between what is correct and what is incorrect is often murky at best.
The 2016 Global Survey of Individual Investors demonstrates this reality by showing that advisors will increasingly have to manage inconsistent and unreasonable client expectations. On average, worldwide, individuals in the 2016 investor survey say they are expecting annual returns of 9.5 percent above inflation. American clients expect a still crazy 8.5 percent above inflation. Fully 70 percent of investors say they can realistically reach that level of return over the long term. Millennials are even more optimistic, with American investors between the ages of 18 and 34 expecting long-term annual real returns of 8.7 percent. Meanwhile, advisors expect (a still aggressive) 5.9 percent above inflation.
Given low bond yields, high stock valuations and inconsistent equity returns, those expectations are problematic to say the least. U.S. stocks have returned an annualized 10 percent from 1926 through August 2016, according to Morningstar. Inflation during those decades has averaged nearly three percent annually, which very roughly works out to an annualized seven percent real return in the aggregate. Those historical numbers alone show how far from reality client expectations are. Yet despite that historical data, Research Affiliates projects that the U.S. stock market could provide just a 1 percent annualized real return over the next 10 years. GMO’s well-respected projections (see below) don’t provide any comfort either.
Still, and despite their outsized expectations, more than three-quarters of investors said they would prefer safety in their investments over performance.
Thus we humans not only have unrealistic expectations, we also frequently want inconsistent things and resist the idea that they’re inconsistent. We want high returns without risk and frequently succumb to sales pitches that ridiculously promise both. We crave simplicity but, when in doubt and under pressure, readily assume that the more complex solution must be smarter and better. We rightly recognize that broad and deep diversification makes sense – “don’t put all your eggs in one basket” – but still want to beat the market, even though those two ideas work at cross purposes. Thus we want our portfolio approaches and holdings to be “different” somehow but will still fire our money managers when what is different doesn’t perform well (as every approach and strategy necessarily will a significant proportion of the time).
What I propose is the creation and use of multiple investment strategies and approaches, each designed to have desirable characteristics – not just technically, but for “human consumption” too. From a behavioral perspective, I’m after “portfolio hacks” to make the difficulties and vagaries of investing easier for emotional and excitable humans to abide. Not all of these hacks will be sure-fire winners. None will work in every instance. Some may not work at all. But it’s worth the effort and ongoing discussion (please share any others you may have with me). Again, a perfect portfolio abandoned is worthless.
- Needs and Goals
Focusing on investment performance in the abstract, without relation to the holder of any investment’s needs and goals is counterproductive and spectacularly misses the point. When a client’s needs and goals are met – that’s a win for the client and the advisor (Full. Stop.). Advisors should want good investment performance but only as a means to an end. Ultimately, it’s client outcomes that matter most.
Good advisors provide substantial real value and most of that value extends beyond investment performance. The 2016 Global Survey of Individual Investors shows that two out of three investors worldwide say professional advice is worth the fee and believe that investors with advisors are more likely to meet their financial goals. But the survey discloses two other common and telling issues that trouble clients: a) failing to understand their savings and investment goals; and b) investment views that differ from their advisor’s.
These issues can be dealt with both specifically and generally. For example, most active managers market themselves based upon their pre-tax returns but, quite obviously, the specific investor results that matter are after-tax results – the absolute bottom line – thus suggesting the use of active “asset location” strategies. Moreover, and perhaps more fundamentally, if a client’s needs and goals are being met, the advisor’s mission is accomplished and the client is unlikely to deviate from the plan or leave the advisor. By remaining laser-focused on client goals and needs, an advisor can help clients stay the course when markets are scary or performance is less than ideal.
One area where advisors may want to listen more closely to clients is in finding investments that more closely align with clients’ personal values. Respondents in the 2016 Global Survey of Individual Investors, for example, demonstrated a clear demand for ESG (environmental, social, governance) strategies. Thus seven in ten investors want to invest in companies with sound environmental records. Millennials are particularly focused on sustainability.
More broadly, in excess of three-quarters (78 percent) of individuals say that it’s important to invest in companies that are ethically run. Three-quarters say it’s important to invest in companies that reflect their personal values. Almost seven in ten want to invest in companies that have a positive social impact. But even given this strong indication of interest in connecting their investments to their values, only 51 percent of investors say their advisor has spoken to them about strategies to do so.
Clearly expressed client wishes that aren’t being met by the marketplace provide real opportunities for growth. Moreover, and more significantly as it pertains to this study, careful focus on client values as they relate to investing (which can be both difficult and problematic) allows advisors more broadly to meet client needs and to increase retention. An investor convinced s/he is doing the right thing is much less likely to leave an advisor.
According to the 2016 Global Survey of Individual Investors, when investors who had terminated advisor relationships over the prior year were asked why, the number one answer was investment performance. That’s a recent phenomenon. In an earlier study, for example, performance trailed lack of contact and a failure to provide good ideas. An even earlier study had performance trailing further. And the further back one looks, the less important performance is to clients. Clients are increasingly caring when they aren’t getting market performance and getting market performance is increasingly scarce. That problem begins with poor performance by active managers generally and is compounded by poor investor decision-making.
According to the most recent data from Morningstar, over the 10-year period ending December, 2015, investors cost themselves from 0.74 percent to as much as 1.32 percent per year by mistiming their purchases and sales. The average annualized investor-returns gap for the 10-year periods ended 2012 to 2015 was negative 1.13 percent. And when investments are held in volatile vehicles or in vehicles with high tracking error (remember, the higher the tracking error, the more a portfolio deviates from the benchmark), investor performance was worse and the likelihood that they underperformed was higher. Therefore, an investor with a high volatility portfolio and/or one that deviates a lot from standard benchmarks – for good or for ill – is much more likely to make bad choices. As the great Benjamin Graham sagely warned, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
What that means in our current context is that a significant allocation to market beta will help to limit poor decisions. It also suggests that such an allocation will keep clients stickier. Many advisors assiduously avoid beta portfolios because they fear that clients won’t think they are needed.
But that view is short-sighted because of the longer-term stickiness a beta allocation offers. Smart advisors use multiple investment strategies and investments to “smooth” returns over time and to limit major downturns. But including a beta allocation as one part of an overall portfolio will provide additional diversification and thus protection. Long-time advisors recognize the risks of a portfolio that doesn’t seem “normal” to clients, especially when the clients’ understanding of it is less than optimal. A beta allocation is a readily understandable and low cost option that it as “normal” as anything in the markets. It’s a really good idea even for those committed to some form(s) of active management.
Bonds have performed spectacularly for roughly 35 years.
An investment in U.S. Treasury 10-year notes from 1981 to present would have returned nearly 7 percent per annum. That’s very good on its face, if a good bit less than the historical returns of stocks, but downright remarkable when the relative lack of risk is considered.
However, what has essentially been a 35-year rally in bonds has tended to obscure the primary purpose of bonds in an investment portfolio. It is not to generate high returns (the recent past notwithstanding) but, rather, to dampen total portfolio volatility by balancing out riskier holdings such as equities and real estate. Bonds provide ballast. In particular, high-quality bonds generally help insulate a portfolio when stocks suddenly and unexpectedly plunge.
From August of 2000 through September of 2002, after the tech bubble burst, the S&P 500 fell 41.3 percent. During that same time frame, short-term U.S. Treasuries (as measured by the Bank of America Merrill Lynch 1–3 Year U.S. Treasury Index) returned 18.3 percent while 10-year note return exceeded 12 percent annualized. From October of 2007 through February of 2009, when the housing bubble popped, stocks declined by 50.2 percent but short-term Treasuries gained 8.7 percent and 10-year note return exceeded 13 percent annualized. Over time, investors who held U.S. Treasuries along with their riskier assets experienced a substantially smaller drawdown at the total portfolio level during severe market downturns than did equity-only investors during those times.
Over the period from January of 1975 to date, the worst three-year period for stock performance was from April of 2000 through March of 2003, when the S&P 500 lost 16.1 percent annualized. Adding a 40 percent allocation to 10-year U.S. Treasury notes to an all-stock (S&P 500) portfolio over this period would have cut the annualized loss to less than 6 percent, a dramatic reduction in volatility and much easier to withstand, practically and emotionally.
As Andrew Miller has explained and as outlined above, bonds have provided significant diversification benefits during really bad periods for stocks. However, most of that excess performance has been driven by the income return component of bonds, and not by price appreciation, which makes their diversification benefits in a very low interest rate environment problematic at best.
Indeed, the prospects for bonds from today forward aren’t very good generally. When one subtracts a reasonable inflation forecast from current (really low) yields, the real expected return on short-to-intermediate U.S. Treasury notes is effectively zero. That is, an investment in a U.S. Treasury portfolio can be expected to just keep even with inflation. TIPS (Treasury inflation-protected securities) do just a bit better. Investing at a zero real return is better than earning no nominal yield at all, as investors in money market funds and other cash instruments did until recently. But that is about the best one can say about it.
Portfolio ballast is an important characteristic to ameliorate the loss aversion of clients. Given the prospects for bonds going forward from today, you might consider other forms of potential ballast too, but ballast in some form is imperative. A portfolio with insufficient ballast is, quite simply, a recipe for disaster.
- Be Different
The famous Volkswagen advertising campaigns, originally introduced in 1959, changed the way automobiles were marketed to consumers. Frequently applauded for their visual and verbal wit as well as their dramatic, uncluttered layouts, these Volkswagen ads also stand as a triumph of segmentation marketing. Consider the challenge. VWs were small, slow, Spartan, ugly and foreign. Adolph Hitler had proclaimed it the “people’s car.”
VW couldn’t win by playing by advertising’s normal rules. Cars at that time (much as now) made important statements about their owners and so-called muscle cars dominated the landscape. But Volkswagen didn’t need to become the dominant brand to sell a lot more cars. So the new ads differentiated Volkswagen from the then-reigning brands by appealing to a different sort of consumer.
Bold headlines proclaimed VWs as ugly and small and that their design had barely changed over the years. The Volkswagen buyer, in the eyes of marketers, shunned convention and ostentation, taking pride in practicality and value instead. One famous ad invited buyers to “Live below your means,” presenting a car for people who could afford to spend more but chose restraint. This wildly successful, long-running advertising pitch was selected by Advertising Age magazine as the greatest advertising campaign of the twentieth century.
But whether the appeal is segmented or broad, the idea is to differentiate the products and services offered from what is available elsewhere or more typically. Marketing has long purported to offer the “new and improved,” or at least the “different.”
This Steve Jobs classic – featuring Albert Einstein, Bob Dylan, Martin Luther King, Jr., Richard Branson, John Lennon (with Yoko Ono), Buckminster Fuller, Thomas Edison, Muhammad Ali, Ted Turner, Maria Callas, Mohandas Gandhi, Amelia Earhart, Alfred Hitchcock, Martha Graham, Jim Henson (with Kermit the Frog), Frank Lloyd Wright and Pablo Picasso – was instrumental in Apple’s resurgence once Jobs famously returned to the company he had founded and left.
For investors, it is axiomatic that the only way to beat a benchmark is by being different from the benchmark, as discussed here. Most clients also want something they perceive to be different, even though “different” may mean different things to different people. Thus investors typically overpay for perceived innovation while they discount stability. Yet in the present context, figuring out what investments are truly “alternative” – the most obvious sort of difference available – by delivering both healthy returns and low correlation during bad markets, is difficult business indeed. But being different in this sense or in a broader one remains highly desirable.
Advisors want products and services that readily differentiate themselves from their competition, often because they are insecure about the services they provide. Clients respond positively to them too. Accordingly, portfolios that can be shown and perceived to be different (however defined) will have inherent advantages from a “stickiness” perspective.
- Goldilocks Simplicity
My grandsons love their Legos. As a kid, I loved my Legos and I still love to join the kids on the floor to build an endless variety of elaborate and complex structures. Legos don’t invite simple, clean lines. Sure, once in a while some insane person (but not a kid) makes a Lego Fenway Park or something like that, but crazy and complex is the norm (not that a Lego Fenway Park isn’t a different sort of crazy). That’s why they’re so much fun. And maybe it’s putting too fine a point on it but, as Einstein didn’t really say but might have, “Logic will get you from A to B. Imagination will take you everywhere” (what he really said was, “I am enough of the artist to draw freely upon my imagination. Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world”).
We love complexity. It’s why it is so hard for us to employ the law of parsimony established in the 14th Century by William of Ockham (Ockham’s Razor*): “Entia non sunt multiplicanda praeter necessitate,” which boils down to the more familiar “All other things being equal, the simpler solution is the best.” We should of course go with the simpler explanation or approach unless and until something more complex offers greater explanatory power. But we don’t. We want to include our pet political ideas, convoluted conspiracy theories or favored market narratives. We are ideological through-and-through, and the more complex the better.
As Edsger W. Dijkstra explains, “Simplicity is a great virtue but it requires hard work to achieve it and education to appreciate it. And to make matters worse: complexity sells better.” One key goal of simplicity is to reduce decision fatigue, the psychological phenomenon in which the more choices we make in any given day, the worse we are at making them.
We think that complexity offers security. In the investment management world, complexity is often deemed necessary for both protective and marketing purposes. Complexity says, We’re doing all we can (and thus, It wasn’t my fault). Or, What we were really after was…. Or, I’m an expert. We’re afraid that if the answer were truly simple, clients wouldn’t need or want us. No matter how simple the proper approach, clients would always need us to protect them from themselves, of course, but we’d rather see ourselves as market gurus than as psychologists. After the 2008-2009 financial crisis, there was a lot of press about the supposed “lost decade” in the markets. But with the markets having subsequently roared back, that talk has disappeared (even more so because the most commonly proposed antidotes, typically employing strategies described as complex and proprietary, such as hedge fund investments, have performed so dreadfully in comparison). As with Ockham’s Razor, simplicity should be our default choice.
For many years, the famous card wizard Ralph Hull bewildered even professional magicians with a trick he called “The Tuned Deck.” He claimed that the deck was magically tuned so that he could “hear” which card had been selected by a volunteer asked to “pick a card, any card.” No matter how many times Hull did the trick, even for expert audiences, nobody figured it out. As it turns out, the problem was that everyone was expecting and looking for something too complex.
Hull’s audience would expect a singular and complex trick. Instead, Hull would start by doing a relatively simple and common card presentation trick (call it a Type A trick, perhaps a false cut). His professional audience would recognize that possibility and seek to test it and thus asked Hull to do it again. He would, but this time he’d do a Type B – but still common – card presentation trick (perhaps a palm), making it obvious he wasn’t using a false cut. The experts would thus recognize it wasn’t Type A and would consider Type B. They would test that hypothesis on the next viewing but, this time, Hull would use a Type C trick while making it clear he wasn’t palming. And so it would go for as many kinds of tricks as Hull knew before he would circle back around again, always at least one step ahead of the posse, because the experts thought they had already ruled out the earlier types of tricks.
Hull’s expert audience was fooled into thinking they were seeing a singular but complex (and heretofore unknown) trick. Notice that the trick was called “The Tuned Deck.” Instead, they got a series of simple tricks but in a relatively random order. They were expecting uniformity and complexity. They wanted complexity. They wanted new and different. What they got was repeated but adaptive simplicity.
Of course, the right answer really was simple. But it wasn’t simplistic. The trick was set up beautifully and the multiple but simple (to the initiated) tricks were rolled out randomly so as to confuse the experts (a routine audience would likely have been fooled by constant repetitions of Type A tricks). Per what Einstein (this time, sort of) said, the trick was as simple as It could be but no simpler.
That’s significant because, in a fascinating paradox, we also love the simplistic as well as the complex. We want sure-thing formulae. We want black-and-white. We don’t want the hassle of fine distinctions and careful analysis. We want big returns without risk. We want to think that we can tune the markets.
Markets are binary. They can only move up or down. That makes it seem as though it ought to be simple. We even talk that way. The market rallied today due to positive earnings releases. But markets are actually moved by the interrelationships of an infinite number of variables. We tend to want to focus on one big thing – e.g., the Fed, trading sentiment, or the political landscape – and to concoct if/then scenarios in response. We want a tuned market.
Unfortunately, markets are anything but tuned. They exhibit the kinds of behaviors that might be predicted by chaos theory — dynamic, non-linear, sensitive to initial conditions. Even a tiny difference in initial conditions or an infinitesimal change to current, seemingly stable conditions, can result in monumentally different results. Thus markets respond like systems ordered along the lines of self-organizing criticality – highly complex, unstable, fragile and largely unpredictable – at the border of stability and chaos. A single grain of sand dropped on a big sandpile can (but won’t predictably or necessarily) cause a catastrophic avalanche.
Accordingly, an overly simplistic analysis – guided perhaps by a singular variable – is a disaster waiting to happen. Complex solutions don’t often offer more (and usually less), but cost a lot more. The best we can hope for is to create and test an appropriately probabilistic outlook, recognize its limitations, and act accordingly.
Unfortunately, doing so is far easier said than done. Our inherent biases and perceptual difficulties make our success rates all too low. Our lack of sufficient knowledge (we can’t begin to know all the relevant information) can doom us from the start. And (paraphrasing what Mark Twain is alleged to have said but didn’t) what we think we know that just ain’t so makes matters far worse.
Our problems are compounded at the personal level. Intuitively, we tend to think that the more choices we have the better off we are. However, the sad truth is that while choice is indeed good, too many choices can lead to decision paralysis due to information overload. In one famous and remarkable study (which has since come under some attack, mostly to the effect that for people who know a domain well – experts – more choice seems better than less, and if options are organized into categories, the too-much-choice effect is mitigated), shoppers at an upscale food market saw a display table with 24 varieties of gourmet jam. Those who sampled the spreads received a coupon for $1 off any jam. On another day, shoppers saw a similar table, except that only six varieties of the jam were on display. The large display attracted more interest than the small one. But when the time came to purchase, people who saw the large display were just one-tenth as likely to buy as people who saw the small display.
Further study has established that choice paralysis can be a real problem. It might explain why Costco has a wide variety of products but few choices among competitive products (4,000 products at a typical Costco versus 80,000 at a typical Target – also explained by efficiencies). For example, participation in 401(k) plans among employees decreases as the number of investable funds offered increases. We are readily paralyzed by too many choices, especially when we don’t understand the choices very well. On the other hand, we also suffer from “single option aversion.” We want some choice.
Choice is generally good for us, but its relationship to satisfaction appears to be more complicated than we typically assume. There is diminishing marginal utility in having alternatives; each new option subtracts a little from the feeling of well-being, until the marginal benefits of added choice level off. What’s more, psychologists and business academics alike have largely ignored another outcome of choice: More of it requires increased time and effort and can lead to anxiety, regret, excessively high expectations, and self-blame if the choices don’t work out. When the number of available options is small, these costs are negligible, but the costs grow with the number of options. Eventually, each new option makes us feel worse off than we did before.
As always, investing is really hard. We should resist complexity for its own sake. Proper default settings and a data-driven approach are vital. The markets aren’t tuned. They are a boisterous cacophony of competing forces and interests. If we are to succeed, we need to keep things as simple as possible, but no simpler. As the great Benjamin Graham actually said (page 524, emphasis in original), “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”
Overly complicated systems, from financial derivatives to tax systems, are difficult to comprehend, easy to exploit, and possibly dangerous. Simple rules, in contrast, can make us smarter and create a safer world.
But, as NASA’s Gavin Schmidt explains, the world we live in is really complex. Similarly, the interworkings and interrelationships of the markets are especially complex. It is natural for us to ask simple questions about complex things, and many of our greatest insights have come from the profound examination of such simple questions. “However, the answers that have come back are never as simple. The answer to big questions in the real world is rarely ‘42’.”
Still, we keep acting as though simplistic answers always exist. It’s easy to find investment managers eager to explain how they’ve found “it,” how they’ve calculated the complexities and vagaries of the markets and come up with “42” (or at least that the right answer is between 40 and 44). We cling to the idea that the investment markets can be solved. Only charlatans claim to have done so, and maintain the charade by hiding behind unnecessary complexity.
Simple processes are more robust to uncertainty than complicated ones, which is an important factor in delivering consistent, repeatable results. What that means is that high complexity is a prelude to vulnerability. The level of fragility of a given system is the product of the complexity of that system and of the uncertainty of the environment in which it operates. In other words, in an environment with a given level of uncertainty or “turbulence” (sea, atmosphere, stock market, etc.) the more complex system will be more fragile and thus more vulnerable. In a turbulent economy, which is to say all economies, highly complex portfolios and financial products are more exposed and more volatile. Complexity can manifest itself in a variety of ways, such as excess trading, complex strategies and complex instruments (such as many derivatives). We are thus almost literally (modifying Andrew Zolli‘s telling phrase slightly) tap dancing in a minefield.
We don’t quite know when our next step is going to result in a monumental explosion. Our goal, therefore, must be first to survive and then to thrive in that sort of disruptive and dangerous environment. We need to be resilient. As the complexity of a system grows, both the sources and severity of possible disruptions increases. Resilient systems are not perfect or even perfectly efficient. Indeed, regular modest failures are essential to many forms of resilience (adjusting and adapting are crucial to success). In this context, then, efficiency can be a net negative and redundancy a major positive. Hedges matter. Learning from mistakes is vital.
Fortunately, diversification is already a well-established virtue in our world, even though its value is often honored only in the breach. In this context, resilient diversity means fluidity of structures, strategies and approaches but it does not extend to goals, values and core methodologies. An effective risk mitigation and management approach is thus much like playing jazz. We must be able to improvise often and well but within an established and consistent structure. The goal, then, should be a sort of “Goldilocks” simplicity – a simplicity that isn’t simplistic, that employs complex solutions when they are helpful and can be shown to work – that’s “just right.” As with limits in calculus, that “just right” balance of simplicity and complexity isn’t wholly obtainable. But the best advisors will keep striving for it just the same.
According to the 2016 Global Survey of Individual Investors, individuals believe professional help is necessary, but they are looking for a collaborative relationship that goes beyond advice to help them become better informed and more confident investors. They want their advisors to take them beyond traditional portfolio models with strategies that help them manage risk and give them better diversification.
This sort of constructive collaboration will involve lots of communication, ongoing education, a regular review and restatement of needs and goals, and careful management. A client committed to a vision and process created collaboratively, with pre-agreed decisions and adjustments over time where appropriate, offer the best opportunity for the client to reach his or her goals and objectives. That sort of relationship also offers the best opportunity for client loyalty and the client’s ongoing advocacy for you with prospective clients and referrals. A client advocate isn’t just sticky. A client advocate is essentially a committed partner. An advisor can’t have too many of them.
- Diversification of Strategies
According to the Uniform Prudent Investor Act, “Because broad diversification is fundamental to the concept of risk management, it is incorporated into the definition of prudent investing.” The theory behind diversification is simple: Don’t put all of your eggs in one basket. A single holding has huge potential for gains if the right instrument is selected, but even huger risks (because investing “home runs” are so hard to come by). In general, the greater a portfolio’s diversification, the lower its risk. Lower risk is a good thing, but only if the portfolio’s potential return is healthy enough to meet the client’s needs. Fortunately, a well-diversified portfolio captures most of the potential upside available with much lower volatility.
A diverse portfolio – one that reaches across all market sectors – ensures that at least some of a portfolio’s investments will be in the market’s stronger sectors at any given time – regardless of what’s hot and what’s not and irrespective of the economic climate. At the same time, a diverse portfolio will never be fully invested in the year’s losers. For example, according to Morningstar Direct, about 25 percent of U.S. listed stocks lost at least 75 percent of their value in 2008 but only four of over 6,600 open-ended mutual funds lost more than 75 percent of their value that year. Thus a diversified approach provides much smoother returns over time (even if not as smooth as desired!). On the other hand, a well-diversified portfolio will always include some poor performers, and that’s hard for us to abide.
Diversification works at the portfolio strategy level too. A diversity of sound investment approaches provides the same sorts of benefits as a diversity of individual securities or asset classes. Every security, asset class and investment strategy will have periods and almost surely extended periods of underperformance. That hurts. We like the idea of diversification much more than the reality because diversification is hard. If a portfolio doesn’t have assets that are doing poorly, it isn’t well diversified. Diversification is painful. But it’s healthy and it’s easier to abide if other securities, asset classes and investment strategies are doing better.
Losses happen, but diversification works over the long-term to mitigate that risk. It should deliver a smoother ride and decent returns over the years ahead. But diversification can’t and won’t swing into action on cue. Correlations can and do “go to 1” in a hurry during crisis periods.
Bill Bernstein provides a nice summary on all of this. “First and foremost, don’t even think about trying to extrapolate macroeconomic, demographic, and political events into an investment strategy. Say to yourself every day, ‘I cannot predict the future, therefore I diversify.’”
- Volatility Management
Most investors today have suffered through two monumental market meltdowns. The “tech wreck” of the turn of the century and the more recent financial crisis of 2008 pummeled investors with major portfolio losses. From March 11. 2000 to October 9, 2002, the tech-heavy Nasdaq Composite Index lost 78 percent of its value. Similarly, the S&P 500 Index fell 57 percent from its high on October of 2007 to its low in March of 2009. Those losses were obviously dreadful and difficult to bear, but they felt even worse because of our inherent loss aversion, which Nobel laureate Daniel Kahneman describes as the “real enemy” of wealth accumulation. In fact, we react to losses at least twice as strongly as we react to similar gains.
As Harvard’s Cass Sunstein purports, “…people dislike losses more than they like equivalent gains. Golfers really don’t want to lose a stroke to par. Teachers don’t want to lose money they now have. Even a small tax counts as a loss, and it affects people’s behavior.” As Andre Agassi explained, “A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close.” Or David Letterman: “Maybe life is the hard way, I don’t know. When the show was great, it was never as enjoyable as the misery of the show being bad. Is that human nature?” Accordingly, the threat of financial loss is valued as greater than the potential of financial gain. Thus we tend to respond too actively to downward fluctuations in our portfolios.
Many millennials came of age during the most terrifying financial crisis since the Great Depression, which shaped and still impacts their investing decisions today. Others got double-dipped – suffering through both the dotcom bubble circa 2000 and the 2008 financial crisis. It’s not altogether surprising then that nearly 60 percent of millennials in a recent survey say they distrust financial markets while just one millennial in three is invested in stocks, even though stocks have performed spectacularly since 2009 and are the most rewarding investment over time by far. Perhaps worse, only 43 percent of Americans own stocks, including 51 percent of people who are 36 to 51 years old (Generation X), and 48 percent of Baby Boomers, who are aged 52 to 70.
For investors who do own stocks, negative news causes performance-chasing. In other words, we abandon those holdings that aren’t doing well at a particular time to buy that which has been “hot.” The research is unequivocal. Performance-chasing is not restricted to specific groups or segments of investors. Both retail and institutional investors do it. The results are monumentally disconcerting. One ten-year Vanguard study showed that performance-chasing cost roughly three percent per year. Another study (of ETFs) got similar results. Morningstar demonstrates a lesser but still very significant impact.
The sad fact is that serious drawdowns are simply par for the course in the financial markets. Investing requires that we be prepared for them. That risk is the price we pay for the excess returns provided by stocks relative to other investment choices. Even during a terrific bull market, serious drawdowns are part of the package. Note the extent of the drawdowns during the post-financial crisis period during which the S&P 500 has seen tremendous gains (shown below).
A broad index of U.S. stocks increased more than 2,000-fold between 1928 and 2015, but lost at least 20 percent of its value 20 times during that period. If you can’t stomach significant volatility as a price paid for much higher returns, you shouldn’t be in the market. Fully 64 percent of all years experience double-digit declines at some point but 57 percent of them finish the year in positive territory.
Even so, 27 percent of years end up negative for stocks, and that’s really hard to handle.
But we abide difficult markets because volatility is the price paid pay for much higher historical returns. Josh Brown, paraphrasing Emanuel Derman, explains things nicely, as usual: “Investors need to focus more on volatility acceptance than risk avoidance if they intend to ever make any money.” But what we usually do is something – anything! – to try to avoid further losses.
However, numerous studies have shown that those who trade the most earn the lowest returns. Remember Pascal’s wisdom: “All man’s miseries derive from not being able to sit in a quiet room alone.” As Brad Barber and Terry Odean showed via landmark 2000 research, “trading is hazardous to your wealth.” Nobel laureate Eugene Fama Jr. has a related saying, “your money is like soap, the more you touch it, the less you have.” Trading costs, taxes, bid-ask spreads all eat away at clients’ capital even before the consequences of buying high and selling low are felt. Yet our instinctive reaction to every market correction or downturn is to change something and almost always to sell something.
Thus most people need pressure relief when stress is high. It’s human nature.
One helpful possibility is essentially an If you can’t beat ‘em, join ‘em approach. Buy and hold advocates such as William Bernstein, Rick Ferri and even John Bogle himself have talked about adjusting asset allocation in the face of changing market valuations. In other words, you sell off a few percentage points of a particular asset class when its future return expectations are low.
This strategy, involving very small and infrequent policy changes opposite large market moves, more often than not improves overall portfolio performance. It’s a step-up from normal rebalancing – not just pruning the over-performing asset to its target allocation, but cutting it back still more in a maneuver Bernstein calls “overbalancing.”
“Simply put, although the individual investor will likely come to grief manipulating the selection of individual securities, the judicious adjustment of policy allocations according to expected returns – increasing an allocation slightly when its expected return is very high, decreasing an allocation slightly when it is very low – will on average slightly enhance long-term results” (even though overbalancing can fail). Better yet, it should keep clients more involved and more loyal – their advisor is acting on their behalf. Clients hate to be told to be patient (“You’re a long-term investor”) and do nothing (“Stay the course”), that things will get better (“The market will come back”). They want action.
Another strategy of this sort is a more direct “pressure relief valve,” a tactical overlay of the kind described here. No matter how skeptical you are about tactical strategies (and you should be very skeptical), a hack designed to allow some pressure relief selling under carefully controlled and pre-arranged conditions while limiting trading carefully and systematically will provide some real relief to nervous clients. And a prior commitment by both the client and the advisor with respect to what will and won’t be done will provide an accountability mechanism that should increase the ability of the client to hang on when the going gets tough.
Economics has few axioms, but one is that incentives work. We tend to do what we are incentivized to do. Thus advisors should take every opportunity to provide incentives for clients to remain loyal to them. Doing so should begin with quality work, communication and service, of course. But other amenities can help a lot too. I think education is one of those. Actively educating clients about what financial planning and investing are, what they can and cannot do, their limitations and their struggles is the right thing to do. That should be obvious. But education will increase client loyalty too, partly because clients will better understand the inherent limitations an advisor faces.
More specifically, our money management practices should also incentivize good client behavior using what Cass Sunstein and Richard Thaler call “nudges” – small incentives offered to induce good decisions. We could thus incentivize looking at portfolios less and provide loyalty rewards, for example, with fee reductions. The benefit of having patient capital – looking overwhelmingly at the longer-term – is one of the few truisms in investing. It should be rewarded and incentivized.
However, these incentives must be carefully constructed to make sure that they don’t backfire or produce undesirable unintended consequences. As the Harvard Business Review has explained, for example, when a group of day-care centers “began fining parents for late pickups, the number of tardy parents doubled. The fine seems to have reduced their ethical obligation to avoid inconveniencing the teachers and led them to think of lateness as simply a commodity they could purchase.” There is a great deal of experimental research demonstrating that rewarding self-interest with economic incentives is ineffective when those incentives undermine what Adam Smith called “the moral sentiments.”
Smart advisors will offer their clients healthy incentives that work. When they do, both clients and advisors benefit.
Kintsugi (“golden joinery” in Japanese) is a Japanese technique for repairing broken pottery and other ceramics with a special lacquer mixed with gold, silver, or platinum made to look like pure precious metal (see above). The philosophy behind the technique is to recognize breakage and repair as crucial aspects of the history of the object and therefore visibly to incorporate the repair into the piece instead of disguising it. The process often results in something more beautiful than the original. It is related to the Japanese philosophy of wabi-sabi, which encourages one to embrace the flawed and imperfect.
Investment portfolios that do not take our human foibles and shortcomings into account during their construction are broken even before they are implemented. By focusing a little more on human reality and a little less on technical perfection, we have an opportunity to improve our portfolios and even turn them into something more beautiful than the cold originals. If we are most meaningfully going to help our clients and if our clients are going to be able to stick with us and our portfolios, we must visibly incorporate our humanity into portfolio construction instead of disguising it or pretending it doesn’t exist. If we embrace the inevitability of our flaws and imperfections by creating kintsugi portfolios, portfolios that provide approaches, strategies, mechanisms and hacks to help us to withstand inevitable periods of turbulence and difficulty by trying to account for and patch up our metastasized poor judgment and behavior, we can give our clients a far better chance of real rather than just theoretical success – success that is substantive, obtainable and built to last.
* Or its modern corollary, Hanlon’s Razor: “Never ascribe to malice that which can be explained by incompetence” (which really comes from Goethe: “…misunderstandings and neglect create more confusion in this world than trickery and malice. At any rate, the last two are certainly much less frequent”).
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