Benjamin Beck, CFP®It is one thing to deliver an investment process. It is another to own it.
First pitch of the game. Home run. I was back in my hometown of Maine this weekend at a Portland Sea Dogs game, and the very first pitch of the night, a fastball, flew out over the fence to left center.
If you don’t know, all of the minor league affiliates of the Boston Red Sox set their fields up as a sort of replica of Fenway Park. The Portland Sea Dogs are the Double-A affiliate, and they have their own Green Monster. A lot of the things around the park are made to look like Fenway.
It reminded me of back when I was in college, when Major League Baseball was smack dab in the middle of what became known as the steroid era. Home runs were flying out of ballparks left and right, at a pace that had never been seen before in history.
One of the most prolific home run hitters of all time was Mark McGwire of the St. Louis Cardinals. I distinctly remember watching him during the Home Run Derby at the 1999 All-Star weekend, held at Fenway Park. He was absolutely littering Lansdowne Street and the parking lots behind the Green Monster with baseball after baseball after baseball. One of the most incredible displays of power I think most people have ever witnessed.
Now imagine for a moment that you’re the manager of his team, the Cardinals. You’re halfway through the season, and somebody walks into your office and says,
“Hey, the average Major League player hits about 20 home runs in a season. Mark has already hit 20 so far this year. He’s reached the average. It’s time to sit him down for the rest of the year.”
That would be ridiculous, right? Not because having an average number of home runs is necessarily bad, but because average has nothing to do with why Mark McGwire is on the team in the first place. You don’t need a statistician to explain why he’s there.
You know why he’s there. He’s your power hitter. He serves a specific purpose. He fills a role. He gives your team a better shot at winning.
Owning the Process
And that leads me to my question. How many advisors can sit down, point to every investment in the portfolio, and explain why it’s there? I’m not talking about the ticker symbol. I’m not talking about the Morningstar category. I’m not talking about some obscure reference to metrics or analysis you might find in an analyst report. I’m just asking, in plain English, why do you own it? Because if you can’t explain it, I’d argue you don’t own it.
And I’m not picking on active management. I’m not talking about passive management either. I don’t care about the S&P 500 necessarily. This isn’t about whether one investment is inherently better than another. It’s about whether you, as an advisor, understand the role that the investment plays within the larger process.
Because owning an investment is not the same thing as having an investment process, and I think that’s where a lot of us advisors get ourselves in trouble.
Three Questions
Over the years, I’ve become convinced that every investment strategy, whether it’s passive, active, growth-oriented, tactical, strategic, dividend-focused, or anything else, ultimately has to answer three questions. In order for a strategy or a process to be legitimate, you have to be able to answer three things.
What do you buy, and what is the process you go through to determine what to buy?
When do you sell something?
When you do sell, where do you reinvest the proceeds?
Three categories
Now these are very simple. Simple, but not necessarily easy. In fact, I’d argue they’re the only three investment questions that really matter, because every investment decision ultimately falls into one of these categories.
What should I buy?
Should I continue to own it?
Should I buy more? Should I sell half? And if I no longer own it, what comes next?
Where things get interesting is this. If you ask a strategist those questions, or a portfolio manager, or an investment committee, they can probably answer them. If you ask an analyst at a big firm, most likely. But can you? Not your strategist, not the home office, not the investment committee.
Can you clearly explain what you buy and why? Can you articulate when it’s time to sell? And can you talk about where the proceeds go after you sell something?
"Because if you can’t answer those questions, I’d argue you don’t really own the investment process. You’re delivering an investment process, and I think there’s a difference."
WHy it matters
And if you’re wondering why this matters, after all, clients aren’t calling us every day of the week asking about our investment philosophy.
Most clients really don’t care about the intricacies of portfolio management. That’s true.
But eventually, every client experiences discomfort. The market falls. The economy weakens. Headlines become scary. Predictions become pessimistic. Fear starts creeping in. And when that happens, clients begin looking for confidence.
The problem is that confidence can’t be borrowed from someone who doesn’t possess it. Clients don’t need to understand every dividend payment, every valuation metric, every detail about the companies they own. What they need is confidence that there’s a thoughtful process in place.
A process that isn’t driven by emotion or gut feelings or economic forecasts or political opinions or market noise. A process designed to guide them toward the returns necessary to accomplish the goals that matter most to them.
"Because understanding creates belief, and belief drives behavior, and it’s behavior that ultimately determines the outcome."
The advisor who understands that process communicates conviction. The advisor who communicates conviction can influence behavior. And the advisor who influences behavior can give clients a far better chance of staying the course when that inevitable discomfort arrives.
So here’s a question I’d encourage you to think about over the next week.
Can you sit down confidently with a client, pull up their investment portfolio, and clearly explain the process: what you buy and why, when you sell, and when you do sell, where you reinvest the proceeds?
"If you can, you probably own the process. If you can’t, maybe you’re simply delivering it."
Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.