Everyone has their biases and hang-ups in financial services.
One of mine are the deceptive terms Asset Managers use to make the case for their investment strategy or product.
One of my favorite examples is ‘Risk Adjusted Returns.’
I used to jokingly say… ‘try going to the supermarket and spending your ‘Risk Adjusted Money.’ Or, based on your choice of Portfolio Manager, it looks like you will have a ‘Risk Adjusted Retirement!’
Do you know when that term gets used?
Usually only when the manager or strategy is underperforming!
I have always thought it was such a deceptive ploy when discussing a product, model or strategy.
Consider the Sharpe Ratio.
In my experience most professionals using this metric don’t even understand what it is calculating. They are just quoting ratios to justify what are most likely poor investment decisions.
The Sortino Ratio is what "real" professionals should use.
(Hint: If you don’t know why, ask yourself if a client ever fired an advisor because of the upside volatility in their portfolio?)
I have been absolute in my resolve on this for decades…to the point of arrogance.
Frankly, I was insufferable about it.
But it turns out … I WAS WRONG.
A client, who has also become a great friend, introduced me to the framework he uses called ‘Knowers vs Learners.’
The framework says that most people can easily fit into either of these two categories.
A ‘Learner’ is someone who is always seeking to learn more, understanding that they can’t possibly know everything.
A ‘Knower’ is someone who ‘knows’ everything and is not open to the opinions of others. In my coaching business I would refer to these people as ‘un-coachable.’ But, it goes well beyond that.
In my experience, the most successful professionals are ‘Learners.’
There are ‘Knowers’ who build successful careers and businesses.
But, what could their business have been if they only took the approach of a ‘Learner?’
The Psychology of Money
Last year I finally got around to reading 'The Psychology of Money' by Morgan Housel.
The first chapter, entitled ‘No One’s Crazy’ should be mandatory reading for anyone who manages money for other people.
Here is a great quote from the chapter:
“What seems crazy to you might make sense to me…..Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take, and so on.”
I had approached portfolio construction with my worldview exclusively.
I like to think I am a ‘Learner,’ but clearly I have not been in this area.
The investors and Portfolio Managers who worry about quarterly returns and year over year performance may find utility in ‘Risk Adjusted Returns.’
Just because I don’t see the real benefit, does not mean that it is not there for someone else.
Takeaways:
Maybe there is a place for ‘Risk Adjusted Returns.’
In investing, everyone is playing a different game.
Always be a ‘Learner.’