The Art of Investor Construction
“The Art of Portfolio Construction in the New Normal” was the headline of the column in a magazine. Such titles always make me think about what if the healthcare industry could advertise. Imagine a Neurosurgery magazine writing a post that people would read “The Art of Brain Reconstruction in the New Normal”. Can you imagine that? However, it might really be the need of the hour because despite thousands of years of evolution and centuries of investing, our investing brain seems to be practically pretty much where it was. In fact, it is affected a lot more now with all the noise we are exposed to constantly (24 *7).
It is fascinating to learn about all the progress humankind has made whether in the field of science, business, manufacturing, automation, and even space research. There are inventors who want to send you to space and some who want to even fight death. Yet there is nothing that more amazes me than how little progress we have made in making people better investors. This despite the core fundamentals of investing can be summed up in these many words – save and invest monthly, behave well, and let compounding do its job.
Morgan Housel in his book “The Psychology of Money” writes that we have become better farmers, and even skilled plumbers but we have still not become better with our personal finances. He writes that most of the reason is that we think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).
This physics like approach has caused us all to believe that it is really about mathematics, numbers, finance, and calculus. Most are attracted to institutions that sing a song about how investment success is all about products, markets, economy, and complex stuff.
Ask yourself “Have people become better investors over time with all the progress humankind has made? Have we become better investors with all this complexity? Certainly, we have not.
- We still Buy High and Sell Low.
- We still Panic when the Markets fall.
- We still don’t Understand Risk because we say “I want to participate in the upside, but I don’t want to participate in the downside. I will elaborate on this point a bit later.
- We still compare our performances with our neighbours. We still have meaningless cocktail conversations about our super investments.
- Finally, we still believe any Bullshit. Therefore, not only Ponzi schemes thrive but also high energy and high hormone salespeople who can spew any nonsense such as Option Trading is the safest way to make 1.5% per month. Just to clarify, there is nothing safe about it.
I can go on and on, but I guess I have made my point about how we have not yet become better investors.
Thus, the focus really needs to be on the Art of Investor Construction. This is because of all the above reasons and this simple formula (I am sure you love formulas).
Average Portfolio with a Better Investor > Great Portfolio with a Mediocre Investor
I can bet my life on the validity of this formula. I know the ideal state is to have a Great Portfolio with a Better Investor. However, the hunt for the Great Portfolio and a lack of satisfaction with an Enough Portfolios causes an investor to commit many of the great investing sins. Thus, have an Average Portfolio and Learn to be a Wiser Investor.
Majority of the industry is wasting its time on making better portfolios and getting people to believe they need a better portfolio. However, the need of the hour is to focus on the Art of Investor Construction.
The Art of Investor Construction includes the following
a. Getting the investor to understand an advisor’s role. It is not that of avoiding turbulence or ensuring turbulence does not happen but to course correct and ensure the investor reaches the destination safely.
b. Getting the Investor to focus on what is important to him(goals) and how much is enough.
c. Getting the Investor to understand the concept of Risk. There is no such thing as an asymmetric risk return formula. When risk goes down, returns also go down. There is no way to get higher returns at lower or lowest risk. This is Fantasy at its Best. One must also understand the difference among the 3 types of risk. Volatility, Inflation and Capital Loss (VIC). Getting the investor to understand the fundamentals of market volatility (15% down in any year, 30% correction in 3-5 years and 50% plus a few times in your investing. lifetime).
d. Creating a portfolio that is in line with point a.
e. Getting the investor to invest regularly in a disciplined way no matter what the environment.
f. Wisely counselling the investor regularly but at least annually so she /he can behave wisely during turbulent times.
The Art of Investor Construction is not the scope of work of an Investor himself/herself as some childish people who do not understand either psychology or evolution might claim it to be. It is a professional endeavour and one that is best left to the real professionals. It is for some reason that no matter what we do, we can never see ourselves. We need a mirror to do so. A real professional is like that mirror and blessed are those who get to experience one in their lives.