March Madness & Investing: Bad Coaching Eventually Gets Exposed

by: Brendan Magee

It seems like 10 years ago that March Madness began. Yet a few weeks and 60 teams later, we are down to the Final Four. Thanks to Villanova those of us in the Delaware Valley get to enjoy one of our teams finally playing a meaningful game. 

One of the things that I like about college basketball is that it is a coaches league, meaning that the coach is in control of just about everything. They recruit the players they want. They decide what offensive and defensive strategy the team will implement. They decide on how and when the team will practice. There is nothing that is not within their control. As such the coach bears the majority of the  responsibility for the teams success or failure. 

Good coaching is reflected in not only how the team plays, but also how it conducts itself during good times and bad. How a team behaves during the most difficult times of a game goes back to how the team is coached from the first day of the season. During a long hard season with its ups and downs players and a team's program will get tested. Do the players place the importance on the team's success or their own individual success? Do the players take as much personal responsibility for the team's success as they do the team's failures? Does the team members take it upon themselves to do the extra work needed to achieve success?

The two pictures above show what happens to teams who receive good and bad coaching. Villanova has played tough, gritty, team ball and made it to the Final Four. Baylor, not only lost to Yale in the first round of the tournament, but also during the game embarrassed itself and the university by fighting amongst themselves on live television. Villanova's coach, Jay Wright, is always talking about playing basketball the Villanova Way. He describes it as a family that sticks together, plays good solid defense, hustles, and puts the team first. I don't think anyone who watched Baylor play would associate those words with Baylor Basketball.

Investing is very much similiar to college basketball. Like the players, investors have big dreams. As opposed to playing in the NBA, investors want to educate their children, retire with enough money to do the things they have always dreamed of, enjoy financial security, and perhaps create some opportunities for their children. None of those goals are achieved overnight. They take time and hard work. Along the way there will be highs and lows. There will also be distractions that have to be dealt with.

Studies show that investors over the past thirty years have received returns that less than half of what the stock market has generated in returns. It also has shown that the shortfall has more to do with investor behavior than anything else. So perhaps investors should employ not so much an adviser, but rather a coach. Advisers typically advise about the products people should be investing in where as a coach helps to make sure the investor's behavior is consistent with producing the results they are after, and that is the hard part. Coaches also, and maybe most importantly, take personal responsibility for the results that are achieved.

During the summer time when we are at the shore or on the golf course, those college basketball players are training, running, lifting weights, and doing all the little things that go into competing at such a high level. Most of it is hard back breaking work, not stuff you jump out of bed and can't wait to get at. Coaches make sure and verify that the work is getting done. 

Investing when it is done properly isn't very exciting. You are sitting around for a long time waiting to reap the benefits of your labor. For the longest time it can seem as nothing is happening, that you are not making any progress at all. You'll hear one opinion after another telling you that your strategy is wrong and if you don't change, you are going to be left in the dust. You will endure stock market crashes, bull markets that you, apparently, are not participating, plus one investing fad after another telling you that the world of investing has changed and you need to get with it. 

What will gets investors and basketball teams through it all so that you can look back with pride on all that you accomplished is coaching. Without it, investors and basketball players wind up fighting against themselves.

Go Nova!

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions and comments e-mail brendan@coachgee.com or call 610-446-4322

Investors: There Is Some Work Involved

Investors: There Is Some Work Involved

by: Brendan Magee

Last night I was getting ready to do a presentation at a local library. The young woman at the desk who greeted me was very friendly and her interest was peaked when she found out I was an investor coach. She had a few questions about how she could become a better investor.

Now this woman is no investing novice. She has worked in a school district for over 20 years, has a nice pension, and has been participating in the school district's 403b plan since she started working there. However, she was bearing a few investment scars. There was the generous gift of stock her parents had bought for her. The stock,all in one company, had grown to $100,000 and then the company was brought out by a competitor and the value of her investment fell to $60,000. She was envious of the apparent success of day traders she knew and was feeling as if she was being left in their dust. She told me she drove by beautiful houses every day on her way to work and couldn't understand what those homeowners knew that she didn't.

She asked what advice I could give her. The first thing I recommended was a great book written by Charles Ellis,"Investment Policy, How To Win The Losers Game." She looked it up on the web and was more than a little displeased that it wasn't an audio book that would just walk her through the day trading experience. Even though the book was less than 200 pages long that was more work than she was willing to expend.

Next, I shared with her, that as a coach, I help people focus on the questions they need to be asking. I took her through a quick quiz and of the 20 questions she was able to answer yes to just a couple of the questions. I told her my job was to help a person get to the point where they could actually answer yes to all 20. I told her that in about three to four weeks most people could answer about seven of the questions and experience a pretty significant breakthrough. Her face sank even further.

Even though we had a little conversation about how day trading was actually gambling and speculation which wasn't a profitable endeavor, she still wanted someone to tell her how to do it. She wanted the magic pill. I could see the disappointment well up in her eyes as she was beginning to realize I wasn't offering a magic pill.

Hell, if one existed I would love to be able to have shared it with her, but that pill just does not exist. There is some work involved in becoming a successful investor. The work involves being able to answer and understand the answers to certain questions. Amongst them are:

-How do markets work? What produces the returns of the market?
-Have you defined your investment philosophy? How is that you want your money to be managed?
-What is your true purpose for money? What is it that you really want out of your money and life?

These are just a few of the questions that only the investor can answer for themselves. Someone (a coach) might be able to help you arrive at the answers, but the answers will only come between the investor's ears, no one else's.

An investor who cannot answer those questions and doesn't do the work that is necessary can easily be manipulated by advertisers, the media, and the investment industry trying to sell them one product after the other. For example, one could easily be manipulated into behavior, day trading even after they have agreed it is a harmful activity.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions e-mail brendan@coachgee.com or call 610-446-4322

Choking or Investing: Someone Has To Know Exactly What They Are Doing

Choking or Investing: Someone Has To Know Exactly What They Are Doing

by: Brendan Magee

There is nothing as frightening as sitting down for a meal when all of a sudden someone starts choking on a piece of food. The person's face turns bright red and they are struggling for air. Such a situation happened to a gentleman I was sitting with and oddly enough I had gone through a little training in the Heimlich Maneuver a few months ago.

Problem was, he wasn't choking on a piece of food. He was having an acid reflux attack and administering the Heimlich would have done the man more harm than good. Fortunately, his sister was there and she was a nurse and familiar with his condition. She instantly knew what to do to help her brother.

Honestly, of forty to fifty people in the room, all with the best of intentions, there was one person who had the qualifications to help him. The rest would have been creating more problems for the man.

As I drove home, I thought about all the people who are seeking good advice with their investments, but who are not in the position to determine if the people they are seeking the help of are truly qualified to help. No doubt the majority of investment professionals are sincerely out there to help people, but are they truly qualified?

Truth be told, some twenty five years ago, I  was not in a position to help people make good investment decisions. That didn't stop me though. I had a great mutual fund manager who was producing great returns and all I had to do was get people's money to him and everyone would be happy. Right?

What I didn't realize is that what a mutual fund manager did in the past had nothing to do with what he or she would produce in the future. Oops! Double oops!! Track records are what people are still given to validate their investment decisions. 

So how does an investor protect themselves from well meaning, yet unqualified investment professionals as well as well meaning friends and family offering heart felt advice? The answer lies in knowing the questions to ask. This also works when the unqualified person is the investor themselves.

The question to ask the investment professional is, "Can you tell me the academically proven rules that need to be followed in order to produce successful long-term investment results?" If there is anything less than a short concise answer coming from that adviser's mouth that should be a warning sign that you are not dealing with someone who is qualified to help you.

The question to ask of yourself if you are considering managing your own investments is, "When it comes to building an investment portfolio, do you know exactly what you are doing and why?" Be honest with yourself here. If your answer is any thing less than a 100% yes, do yourself a huge favor and get rid of the notion of managing your own money. It may hurt your pride a little, but that pain will only last a little while. Better that pain than the irreperable damage that can come from misinformed investment decisions.

Today, my uncle is enjoying a great life rather than lying in a hospital bed (or worse) having to undo the damage I could have done in applying the Heimlich, and as an investor you will get a lot more enjoyment and peace from your money if the people who are truly qualified to do so are helping you to make your investment decisions.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments e-mail brendan@coachgee.com or call 610-446-4322.

From Morningstar-Are You A Self Deceiver?

Why Don’t Investors Stay True to Their Principles? 

Think Self-Deception

By Stephen WendelHead of Behavioral ScienceMorningstar

It can be remarkably difficult for investors—and advisors—to stay true to their stated investment principles over time. Whether an investor focuses on momentum investing, minimizing fees or using a valuation-driven approach, there are many pressures to stray—from the urge to chase returns, to getting caught up in fads, to running scared when the markets turn rough.  But why don’t investors resist those temptations?  Why don’t investors stick to their guns? One of the most troubling reasons is simply self-deception:  investors (and their advisors) just don’t realize that they breaking their own rules.

Here’s a personal and, frankly, embarrassing example. I recently moved to Chicago to be at Morningstar’s home office. Due to the particular timing of the move, I needed to liquidate some investments last year, and have been sitting on cash ever since the purchase. While I’m a valuation-driven investor who researches common investor mistakes...I’ve basically been trying to time the market. I’ve been avoiding my advisor and dragging my feet about reinvesting the money.  It’s a really, really stupid thing to do.

But I only realized that I was doing market timing-through-inertia when I started to prepare a presentation on this topic last week. I’d nicely deceived myself that it was okay to bend the rules a bit and wait for the market to fall further before reinvesting. And the markets have shot back up, of course.

How could this happen—in my case, or with the investors you work with?  A few years ago, behavioral economist Dan Ariely published a fascinating book that summarizes recent research into self-deception.  Here’s what the research says.

THE FUDGE FACTOR

When an investor, or anyone, commits to a virtuous course of action there’s usually a temptation to cheat, too.  For example, for a die-hard value investor, there’s a temptation to pick up a few overvalued but hot stocks, “just in case.”  When markets are bumpy, the temptation to break from one’s strategy is particularly intense.

When people are faced with conflicting incentives like this, they try to follow both sets of incentives at the same time. They balance their self-image as an honest person (following their stated course of action) with the temptation to cheat (chasing returns) by fudging things a bit.  

The degree to which they can rationalize the bad behavior determines how much they cheat—which Ariely calls the “fudge factor” (Ariely 2013—see footnotes below for all citations).

But there’s a limit to how far we can fudge—how far we can cheat and still maintain our image of an honest, virtuous person. Nina Mazar, On Amir and Dan Ariely (2008) ran a series of experiments to determine how much we cheat under a variety of scenarios. 

They started by asking people to complete some basic math problems and compared two randomly selected groups: those who self-reported how many they got right versus those who were independently rated.  The former group cheated, in experiment after experiment, by a whopping 50% or more; that’s right, they over-reported their number of correct answers by an average of 50%.

If that isn’t bad enough, there are three particularly terrifying things about their research:

1. It wasn’t a few bad apples driving these results. The researchers found that many people cheat when given the chance by just enough to still feel like an honest person.
2. People had no idea they were doing it. When forecasting future scores on a non-cheating version of the test, they deceived themselves about their abilities.
3. Many situations can make the fudge factor far, far worse. For example, being tired or hungry increases cheating (Mead et al. 2009).  So does ambiguity about one’s exact commitments (Schweitzer 2006), lack of supervision (Ariely 2013), working in groups, seeing others cheat and being a particularly creative or intelligent person (Gino and Ariely 2012).

STOP THE FUDGE (FACTOR)

As an advisor, what can you do to help your clients stick to their guns?

Thankfully the same research on self-deception also gives potential solutions—it isn’t specific to investors, but can give us great ideas for the investment realm.  

One of the most powerful techniques researchers have found is reminders—reminders of one’s commitment to a path, which occur before the person tries to bend the rules. In the advising world, a quick review at the start of a client meeting, an email or call could all do the trick.  

Other techniques you can use are:

1) Remove ambiguity. If an investor says “I want to minimize investment fees,” ask them: “Excellent, how shall we measure that?” Make sure the investment strategy is carefully measured and the data is regularly seen by the client.

2) De-normalize. If a client is getting cues from other investors who are doing foolish things (chasing returns, etc.), don’t argue. Instead, point out the other investors who are following the strategies and reaping the profits accordingly, i.e., show it’s normal to stick with the plan.  For valuation-driven investors, that may mean invoking Warren Buffett. 

3) Take a pause. Because the temptation to break the rules is dependent on being hungry or tired, ask the investor to simply talk about it tomorrow—perhaps first thing in the morning.    

Over the coming months on this blog, we’ll talk about other ways you can help investors stay the course and limiting the room for self-deception is a great place to start.  And yes, I’m setting up a meeting with my advise to get back in the markets now.

Research Referenced in This Article

Ariely, Dan. The Honest Truth About Dishonesty: How We Lie to Everyone--Especially Ourselves. New York: Harper Perennial, 2013.

Gino, Francesca, and Dan Ariely. “The Dark Side of Creativity: Original Thinkers Can Be More Dishonest.” Journal of Personality and Social Psychology 102, no. 3 (2012): 445–59.

Mazar, Nina, On Amir, and Dan Ariely. "The dishonesty of honest people: A theory of self-concept maintenance." Journal of marketing research 45, no. 6 (2008): 633-644.

Mead, Nicole L., Roy F. Baumeister, Francesca Gino, Maurice E. Schweitzer, and Dan Ariely. “Too Tired to Tell the Truth: Self-Control Resource Depletion and Dishonesty.” Journal of Experimental Social Psychology 45, no. 3 (May 2009): 594–97.

Schweitzer, Maurice E., and Christopher K. Hsee. “Stretching the Truth: Elastic Justification and Motivated Communication of Uncertain Information.” SSRN Scholarly Paper. Rochester, NY: Social Science Research Network, October 11, 2006.

Special thanks to Fred Taylor for sharing