While people need good advice, what they want is advice that sounds good

I came across a truly exceptional article today and thought it was well worth sharing some of the most important points made by the author and a few comments of my own.

1. “That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”

Dave: I love this comment not only because it identifies an important truth about financial advice, but does so by playing with the difference between the similar-meaning words “good advice and “advice that sounds good.”  In my practice I have often told clients that I can recommend investments they think they want or investments I know they need, but not both.  The quote in the article left me with a similar feeling.

2. “Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.” 

Dave: This reminded me of a saying I adopted many years ago when teaching financial classes: “the value of financial literature is inversely proportional to its frequency”, meaning that there is a far greater chance of finding value in a book that condenses the lifetime work of an expert than there is in a news article.

3. “…people who receive frequent news updates on their investments earn lower returns than those who get no news.”

Dave: This invokes the same sentiment as the previous quote.  In recent years, regulatory requirements have led to a proliferation of statements in the mail for many clients, and I have often had mixed feelings about this.  On the one hand, I certainly want clients to be well informed but on the other the frequency of statements of different sorts often leads to both confusion and more short-term decision-making.

4. “…regression to the mean is the most powerful law in financial physics…” “My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.”

Dave: This quote calls up the 200+ year chart produced by Prof. Jeremy Siegel that all clients have seen multiple times.  One of its key features is the regression line showing how the average price level of the stock market returns to its growth trend line time after time – in fact all of the time.  This identification by Prof. Siegel has been named Siegel’s Constant, yet I believe most investors pay it scant attention in their mostly futile attempts to beat the market or beat some made-up benchmark instead of measuring progress towards their great lifetime financial goals.

It also refers to a critical value that I provide as part of the fees I earn – the avoidance of mistakes.  Mistakes not made cannot be measured on a statement, show little or no evidence of ever being considered, yet can be the most profound of values, both financially and in terms of goals achieved or stresses avoided.  Never underestimate the power of (once you have a solid plan in place) doing nothing to change the plan.

5. “That’s why I keep at it, even though I have profound doubts that most people will ever learn how to be better investors. I never expect everyone to listen; all I ever hope for is to get someone to listen.”

Dave: After some years as an advisor I came to realize that I could not help or save everyone and that I should be much more careful about choosing clients.  Since then, I try to be sure and discuss my value and philosophy very clearly with prospective clients and consistently remind existing clients of these through my spoken words and writing.  I have found the personal rewards of seeing a long term client achieve success despite tough times to be tremendously satisfying.  This is truly a profession where one can do well by doing good.