Friday, January 22, 2016

Emotional Intelligence and the Financial Adviser

Q4 2015 Commentary
Kim Miller, Certified Financial Planner™

“The only person on the plane I have to worry about is me. If I get there safely, then everyone on board gets there safely.”
          Tom Schuchat, former airline pilot

“Emotional intelligence is the ability to identify and manage your own emotions and the emotions of others.  It is generally said to include 3 skills:

·       Emotional awareness, including the ability to identify your own emotions and those of others;
·       The ability to harness emotions and apply them to tasks like thinking and problem solving;
·       The ability to manage emotions, including the ability to regulate your own emotions, and the ability to cheer up or calm down another person.”
          Psychology Today

In my practice I frequently encounter emotional responses regarding money.  Unfortunately, emotional responses regarding money are generally unhappy or negative emotions: “I don’t have enough money.”, “I’m not going to have enough money to retire.”, “I won’t have enough money to retire comfortably.”  “I’m afraid to invest my money – I might lose it!”, “I’m afraid I might end up a bag lady!” and etc.  Upon inquiry it often turns out that these unhappy feelings are deep-rooted and manifest themselves the most when “things look bleak”.

Financial advising as practiced at my firm is in two distinct, discrete parts: understanding the present while planning for the future and management of investment capital within the planning framework.

Here are the basic planning steps I take with every planning engagement:

·       What are your objectives?
·       What resources (known and unknown) do you have to meet your objectives?
·       Is there a gap between your objectives and required resources?
·       What steps can you take to close the gap?
·       Develop an action plan targeting success.
·       Like shampoo, rinse and repeat as necessary.

The process is intentionally designed to remove fear of the unknown.  The closer we can get to having adequate resources to meet the objectives, the more comfortable we get in knowing that we can “get there”.  We have removed – or at least reduced – the fear of the unknown.

I’ve had clients let out audible sighs of relief when they discover they don’t have a gap to fill or that the gap – or other perceived financial shortfall - is easily bridged.

People think they come to financial advisors for solutions, but what they really want is assurance that “it’s going to be alright” or “it’s going to be alright if you follow this list of action items”.  They want their emotional feelings about money to be soothed, dampened, made manageable.  This is what true financial planning advice provides.

Managing investment capital isn’t much different for the emotionally-intelligent financial adviser.  Applying a process provides the adviser and client a framework in which rational decisions can be made and provides a level of comfort for those times when we’d rather run.  I often say that the investment business is the only business in which people run for the exits when the goods are on sale.  If we have a plan with which we approach the risk of investing, we can rely on that plan instead of relying on our emotions.  This works for up-swings as well.  Chasing “green arrows” as I call it is as dangerous as running from “red arrows”.  Investors who invest with their emotions nearly always end up “buying high and selling low” even when every bit of investment advice ever offered in the history of the world has been reduced to “buy low and sell high”.  The emotionally-intelligent adviser knows the difference and is able to convey that conviction to his or her clients.  I often tell investment management clients that I earn my management fee not by trading accounts but mostly by waiting.  Not panicking in a downturn and selling and the opposite – not panicking in an upturn and buying.  If we have formulated our plan and placed our capital accordingly, patience is usually rewarded.  Of course, no plan is perfect: sometimes we have to exercise more patience than at other times.  It is always amazing to me how impatient people can be, but my response is always the same:  “We have a plan and we’re sticking to it”.  The corollary to this response is: “If you needed the money next week or next month we wouldn’t have put it at risk in the first place – if your time horizon has truly changed (not changed merely because you are anxious) then we should change your plan”.  I remind them that we can always sell and reduce their exposure if they really want to do so, but unless their objectives have really changed, we need to stick it out.

As I write this, the capital markets have declined on nearly every trading day in 2016.  “Things look bleak”.  I’m keeping in mind what my Uncle Tom Schuchat* said, knowing that I’ll arrive safely, and so will you.

*Tom was an Air Force pilot; flew for Flying Tiger Air and then for Continental Airlines, “the proud lass with the golden ass” as he once said.  He was married to my mother’s youngest sister.  He died in March, 2013 at age 78 following surgery for pancreatic cancer.  He never crashed a plane. 

© 2016, Kim Miller, Certified Financial Planner ™

Wednesday, December 30, 2015

‘Twas the Night After Christmas –or- Santa’s Last Stand-Up Routine v.2015

“Is this thing on?”  [tap tap schreeeee] “Hey Mr. Sound Man – fix this mic wouldya?  Don’t think I don’t know what you did last summer, ‘cause I do.  Well, well, well boys and girls!  I just flew in from Damascus and boy are my arms tired.  [cymbal crash]  How many times you think I’ve used that one? Ho-ho-ho!”  [scattered laughter]  “Whatever.”  [takes a flask out of his pocket]  “A little hair of the dog ya know?  It’s been another back-breaking season.”  [takes a long swig]  “So…what’ll it be tonight?  Sugarplums? Fairy dust? Rudolph?  The old routine gets kinda stale when you have such a limited range of topics.  Hmmm…how about a little game I call “Santa FAQ”?  You ask all the questions you’ve always wanted to ask and I answer ‘em – OK?  Keep in mind that just because I know everything [sing-song voice] (“…he knows when you are sleeping, he knows when you’re awake…”) doesn’t mean I can answer – the Patriot Act and the NSA, ya know.  You there, in the back.” 

“Uh, how do you get to the homes of all the little boys and girls in one night?”  “I have a sweetheart contract with FedEx and now Amazon wants to build me a drone fleet that will darken the sky – no one on earth will see the sun from Dec 20 til Christmas morning!  Next?”  “Do you really eat all the cookies and drink all the milk?”  “Heck no – I’m lactose and gluten intolerant!  Most of it goes in the sleigh to feed the elves at the North Pole.  Boy, do they get sick of cookies and milk.”  “What about the carrots for the reindeer?”  “They eat ‘em – how do you think they see in the dark?”  [takes out the flask and takes another long swig]  “How do the elves make all those toys?”  “Since I instituted the best management plan on earth, they’re afraid not to!  Who do you think Wal-Mart learned from?  You wanna make money in manufacturing or in retail?  Come to “Santa’s Management Workshop” (Ó Santa, Inc., all rights reserved).  Keep ‘em hungry, underpaid and scared of getting fired.  My record speaks for itself.”  “Hey Fatso!  How do you keep your suit clean after going down all those chimneys?”  [raises his hand to his mouth and speaks into a microphone hidden in his sleeve] “Security?”  [points to a man in the third row, stage right.  An elf runs out from backstage and zaps the guy with a cattle prod]  “Oouuuuugh!  Ok, sorry!”  [elf zaps him again before returning back stage]  “Ouuuch!”  [speaks into the hidden mic again]  “Note to self: add that man to the PNL*.” “How do you really know who’s been naughty and who’s been nice?”  “I used to have contracts with all the spy agencies: CIA, FBI, MI6, KGB, Mossad, NSA, but now I just use Facebook - they’re the best – and - “It’s free and always will be”.  Ho-ho-ho: boys and girls, if there’s no charge for the product then YOU are the product.  By the way, 9/11 really helped in that regard – I was able to put over half the world on the PNL*!”
“What about the members of the Miller Family?”  “Whoa.”  [takes out the flask, drains it]  “Let’s see, hmmm…Sean is the top salesman in Oregon for Georgetown Brewing - you can guess what he wished for; Kelly migrated from Italy to France to London trying to gain a ladder hold in the fashion industry, a look-see period in San Francisco is the next rung so you know what she wished for; Andera is happily married to Ray in Connecticut for nearly 12 years now, and was recently promoted at her work to more responsibility with higher pay and more hours – her wish came true; Diane keeps plugging away as an RN with “retirement” on her wish list; and Kim works as a Certified Financial Planner ™ trying to figure out which way is up in the capital markets – heh, heh – you KNOW what he asked for.”  “Yeah, yeah, but have they been Naughty or Nice?”  “Uh, that information is Classified and requires a Top Secret clearance.”  “What about President Obama?”  “Ho, ho, ho – are you kidding?  EVERYone knows which list he’s on – just ask Donald Trump.”  “Uh, who really shot Bin Laden?”  [frowns] “I told you there were some questions I can’t answer.”  [speaks into the hidden mic]  “Security?  You know what to do.”  [elf runs out from backstage and zaps the guy with a Taser.  3 more elves appear and drag the guy out, still twitching].  “Boys and girls, it’s been a pleasure.  I’ll be back next year - same day, same time.  Until then – Merry Christmas!  I’m outta here.”

*PNL = Permanent Naughty List

© Kim Miller 2015, all rights reserved

Tuesday, October 13, 2015

Q3 Commentary

Fast N’ Loose

I love the classic car shows on TV.  More precisely, I love the classic cars on the car shows.  The characters on the car shows I can mostly do without, but to see the cars, you have to buy a ticket to the entire circus.  Someday there will be a box that allows you to fast forward a live broadcast – not only will you be able to skip the commercials, you’ll be able to skip the boring and annoying parts of the programs.  I can hardly wait.

I often get my car fix watching “Fast N’ Loud” on the Discovery Channel but I also spend time with the Count on the History Channel’s “Counting Cars” as well as Discovery’s “Rusted Development” which is a combination of a lower-key “Fast N’ Loud” and “Hoarders”.  The latest entry in the genre is a Discovery Channel show about cars in Cuba: “Cuban Chrome”.  Predictably, it seems to revolve around the problem of obtaining the parts they will need to fix up their latest find – Yay Communism!  This one will likely die as the trade embargo comes down – there will be a fully-stocked Auto Zone store on the corner across the street from an O’Reilly’s – no more suspense.

Regardless of the premise or the theme, all of these shows feature scenes of “The Deal”.  You know, that moment when Desire and Greed meet Money, sometimes with a voice-over soliloquy featuring the characters’ thoughts or a cut-in of their thoughts as the deal goes down on camera.  The Bid and the Ask.  It always reminds me of a used car lot – since that’s what it is.  Often, the buyer and seller are far apart on their price, but as the back and forth goes on, a price somewhere in the middle is usually agreed upon, they shake on it and it’s on to the next deal.  Like a used car lot, the information asymmetry favors the seller – he knows what he has and knows his bottom line price, and I always hope he knows the real value.  I have to think that having the camera crew present puts extra pressure on the sellers in these situations – kind of like having your mom and dad observing in your 1st Grade classroom.  You want to be on your best behavior and don’t want anyone getting the impression that you’re not nice or you’re hard to deal with.  This pressure on the sellers sometimes leads them to accept less than they really wanted – sometimes a LOT less for the privilege of “Making a Deal” on TV.  They can tell their friends about it! They’re famous! It’s their “15 minutes”!  I wonder how they feel about it after they see the final, edited show featuring their trading acumen.  Films and TV shows (and political ads) are all about editing – anyone can be made to look like a genius, a rube or a liar from the same live footage – it’s all in the editing.  When you are watching, it is easy to forget that what you’re watching didn’t happen in real time, but in a series of live action scenes captured from different angles and at different times and then edited into a dramatic, coherent whole.

A recent episode of “Fast N’ Loud” had me pondering all of this and caused me to think about those archaic terms “honesty” (and especially) “integrity”.

The star of “Fast N’ Loud” is Richard Rawlings, the owner of Gas Monkey Garage - a classic car restoration and customizing shop in Dallas TX.  He is described in the show opening as a “Hot Rod Hunter” and is shown traveling around the country looking at old cars for sale, often what are called “barn finds” – a car that has been sitting in storage for a long time, sometimes in a true barn, but more often in a garage or storage facility.  They are invariably dusty, dirty diamonds in the rough.  His job is to buy it (or them) for the lowest possible price for resale at the highest possible profit margin.  Nothing wrong with that.

This episode featured a barn find full of classic Chevrolet Camaros and enough parts to assemble another barn full.  It was the kind of find all us tire kickers dream about (not that we want to buy it, just that we want to witness the discovery, kind of like archeologists).  The collection had been amassed by the seller and his wife over a period of 40 years or so – it was their shared passion.  He had recently been widowed and decided that it was time to sell.  Enter Richard Rawlings and the camera crew.

The seller wanted to sell everything – it was all or nothing – all the parts and all the cars.  His asking price was $225,000.  Rawlings’ counter bid was $150,000, and he said (off-camera) he knew someone who might be interested in the parts.  The seller countered, asking $175,000.  Somehow they ended up at $150,000 and shook on it (I did a double take right there on the couch – “Did I just see what I think I saw?”).  I can only think the seller didn’t really have it in him to stick to his guns and gave in.  But wait – it gets better – or worse, depending on one’s point of view.

The “guy who might want the parts” came on the scene – and right there in the seller’s garage (nothing had been moved) - said he’d take the whole deal and would pay Rawlings $200,000.  So Rawlings hem-hawed once and said “done”.  He re-sold something he’d owned for all of maybe 30 minutes (hard to know exactly) for a $50,000 profit without even lifting a finger.  And of course, they had the obligatory “brag shot” where he celebrates his wheeling and dealing.

So you might say “Where’s the problem? Ain’t this America – the land of Caveat Venditor* and Caveat Emptor?”  So here it is:

IF Mr. Rawlings was an honest dealer and had integrity, he would’ve done something like introducing the seller to his new buyer and letting the seller receive a better price, a 2/3rds retracement of what he had given up ($50k divided by $75k = 2/3).  He could’ve asked the seller to pay him a finder’s fee for his efforts, 5% ($10,000) would’ve been generous.  He did none of these.  Instead, we are treated to the brag shot.  I doubt that seller will be doing any bragging about the deal he made.

Another trader loses his shirt in the Market.

*Caveat Venditor: Latin for “let the seller beware” – it is the opposite of the more oft-quoted Caveat Emptor – “let the buyer beware”