“What led you to write this book,” I asked Meir Statman,
Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University and Visiting Professor at Tilburg University in the Netherlands, referring to his gem of a book, What Investors Really Want. Professor Statman, who learned resilience as a child raised by “holocaust survivors who persevered to make a life for themselves and their three children,” shared his thoughts about this and other questions. Our conversation of December 10, 2010 follows:
JS: What Investors Really Want is a fascinating and powerful book; after reading it, I want to change the name of my company from Jonathan Smith & Co. Investment Counsel to Jonathan Smith & Co. Investor Counsel. What led you to write this book?
MS: I wanted to share my knowledge with investors. I serve as a lab of myself and gain many insights by introspection. Some aspects of my behavior make little sense, and I ask myself whether my behavior is unique to me or common to all people. For example, am I unique in finding it difficult to manage my spending and saving such that I don’t overdo either of them? This introspection leads me to studies of self-control in saving and spending and to the conclusion that financial advisors must manage the behavior of their clients as much as they manage their investments. There is no shame in our need to be guided, taught, and managed.
JS: It’s very interesting that you mentioned no shame. We want, as you wrote, to nurture hope for riches and banish fear of poverty. How can we balance the two?
MS: It is difficult to find the right balance between desire for protection from poverty and hope for riches. Today fear prompts us to focus on the desire not to be poor as we see portfolios that have shriveled and an economy in great trouble. We have lost much hope. We say “I would rather keep what I have rather than aspire to more.” So we pile into bonds or they pile into gold, as they perceive a world that is collapsing. This is where science comes in, where knowledge of the behavior of markets and our own behavior is especially important. We know from science that fear is causing us to see moderately sized risk as giant risk, and so we become more risk averse. Knowing the effect of misleading emotions on us is the first line of defense against them. I say to myself, “I know that I’m scared, and I know how fear affects me.” I can then apply reason to moderate the effect of fear. I say to myself: “The world is not coming to an end. Stocks go down, and stocks go up. I shouldn’t overload my portfolio with stocks and I shouldn’t leverage them, but I also shouldn’t hide my entire portfolio in gold and bonds.
JS: The marriage of science and finance can be enormously helpful. You’ve written, and rightly so, “We want three kinds of benefits from our investments: Utilitarian, expressive, and emotional.” We want our cake and eat it too. We also want, I think, three other kinds of benefits from our investments, I believe, and from our cars, from our plumbers, and from anything else our money can buy: we want speed, price, and quality. We want all three, but in reality, we get to choose any two out of three. Only on rare occasions can we have all three. In your opinion, is it possible to have full buckets of utilitarian, expressive, and emotional benefits from our investments or will we have to settle for two out of the three?
MS: We cannot have it all in life or investments. We always face trade-offs between utilitarian, expressive and emotional benefits. But we should not deny that investors care about benefits beyond the utilitarian benefits of investment returns. Yes, investors who trade often sacrifice some returns, but they enjoy the expressive and emotional benefits of trading in the same way that we enjoy video games. Trade if you enjoy it, as long as trading does not undermine important goals such as retirement income and savings for your children.
JS: You’ve said, “We do not have computers for brains and we want benefits computers cannot even comprehend.”
MS: Sometimes we describe people who do not have computers for brains as irrational. By that definition, I’m irrational and I imagine you’re irrational too. We pay extra for a Lexus when a Toyota does the same utilitarian job of getting us from home to work and back. But it doesn’t mean that everyone who buys a Lexus is an idiot. We want cars that are beautiful in our eyes; we want cars that show that we are rich enough to afford them. We should be tolerant of one another and allow for differences in taste rather than say that people who have different tastes from us are idiots.
JS: We have become intolerant, it’s so true. “We want profits higher than risks, we have thoughts some erroneous, we have emotions some misleading.” The Web is creating a constant and heightened awareness of our holdings, how they make us feel, and what they say to others and ourselves about us, to say nothing about what the Web is doing to raise our awareness to an increasingly unstable world and time, for millions of investors, is running out, precisely when our earning potential and our intellect might have peaked. As an advisor, I worry that investors and advisors are caving in, calming investors’ fears instead of rebalancing their portfolios and buying lower yielding, and lower yielding investments, leaving us exposed to inflation and increasing dependence on a paternalistic government, exposing us to the threat of higher taxes. How can we possibly turn this around?
MS: Advisors should know financial markets and human nature if they are to guide clients. A 40-year old client might say, “I’m going to put my entire portfolio in bonds.” You, as an advisor, can point out to them that if indeed they put it all in bonds they are likely to live on very little in retirement, a sure little, but still very little. All of life involves risks, and we are foolish to try to avoid all of them. Think about the risk in getting married. If you want more risk, have children. We take risk when we choose a profession. We take risk when we move from one place to another. The risk in our portfolios is just one of many risks in life. Yes, a portfolio containing some stocks is likely to bite you hard from time to time, but it might give you a better chance to reach your goals than a portfolio that is entirely in Treasury bills.
JS: I think advisors need to learn how to step up, and to be respectfully tolerant with their clients and, as you say, to lead and guide them, perhaps by their own examples, as you’ve done, into understanding the trade-offs.
MS: I think that advisors should think of themselves as financial physicians, knowing and applying the science of investments and the science of human behavior. Too often financial advisors think about themselves as investment managers and display no patience as clients describe family quarrels and jealousies. Good advisors place themselves in their clients’ shoes. An advisor might think that leaving money to the kids is fine only if clients have portfolios fat enough for ample retirement income. But some clients consider leaving money for their kids more important than ample retirement income. Good advisors listen to what clients want and help them make the distinction between what they want that is reasonable and what they want that is not. This is very hard work for advisors. But this is the great value they provide.
JS: Meir, I will take that as a call to arms from you. Thank you. Decades ago, when your father asked to tap his pension fund to build an extra room to his home for his growing family, the managers of the fund turned him down, and at the time he was sad, but he was grateful for them in retirement. Today we live in a society that is highly skilled in acquisitive ways, if someone tells us “no” we’ll keep on trying until we get a “yes.” How do we learn to say no to ourselves and accept that no?
MS: Being able to say “no” to ourselves is part of growing up. Toddlers aren’t very good at saying no to themselves, so you can see them scream in supermarkets aisles because they want the candy on the shelf. They need their moms to say, “No, you cannot have it.” But as we grow up, we hear our parents’ voices inside us. There is still the voice of a child in us who says, “I want that candy, I want that new car, I want to build this extra room,” and there is the voice of the parent in us who says, “no you cannot buy that car now because if you do you will not have enough for retirement.” Sometimes we need the help of others, such as financial advisors, to do what is right. My Dad understood years later that the pension managers who denied his request for money were smarter than he was, or at least more cool-headed. They considered the trade-off between spending now and having enough in retirement, and they’ve done him a favor by denying him the money.
JS: your Blog tour is a wonderful concept and I’m sure it’s stretched you in many ways. Is there a question along the way that you had hoped you’d be asked but that you haven’t been?
MS: The issues of values did not come up as much as I hoped and issues of children did not come up as much as I hoped. These are central for advisors because they answer the question “What is the money for?” Sometimes advisors speak about clients as if clients are kind of machines that accumulate money for ourselves during working years and spend it on ourselves in retirement. But what about families? What about children? Some children are disabled. Some children need help beyond age 21 or 22. We have to answer the question of “what is the money for” because money is only a vehicle for happiness. Financial advisors have a very important role in guiding clients away from decisions such as leaving money to one kid but not to another, which might feel right at the moment but destroy families later.
JS: I have a friend, 30 years old who has a note written on a sticky pad that he has placed on the dashboard of his car, which reads. “Comparison is the thief of all joy,”
MS: That is right. I think that it is very important to restrain our competitive instinct and direct it well. The competitive instinct was immensely important for our ancestors in the African Savannah when there was not enough food for everyone, and it’s still important for us today, because competition and ambition promote achievement. But if we let our ambitions run way ahead of us, we will always be frustrated. It is sad when we are unhappy with $50 million because Joe has $75 million. Learning to say “enough” is a banal lesson, but it is a true and useful lesson.
JS: I am profoundly grateful for your time and your thoughts today, for your book, and for your commitment to investors worldwide, and to the investment profession.
MS: Thank you Jonathan, it was a pleasure to speak with you.
Endnote: If investing for you feels like a losing game of Whack-A-Banker, put down that hammer, get a copy of Meir’s What Investors Really Want, and learn how asking yourself some new and different questions could make a difference in your investing.