An Expert Tale
Brenda was in labor with her first child. Something serious was going on. Both mother and baby were in danger, and there was no one there to save them. Brenda’s blood pressure was dropping, and she was in crisis. My father was called, he rushed to the room and before he even got to her bedside said the following—turn around. Seconds later, as though it were magic, Brenda and her baby were fine. As he likes to tell the story, these two simple words in a time of crisis were the difference between life and death. Confident knowledge during times of crisis is the value of true expertise. This applies to medicine as well as investing.
My father told me this tale. It speaks to the true meaning of the word expert and the only type of financial expert you should ever hire. We’ve learned we are ultimately responsible for our own financial health. I like to say this makes us all responsible for our own financial ship, and we must utilize the services of advisors, act as do-it-yourselfers or implement some combination of the two.
This tale addresses the issue of expertise from the perspective of the medical field. Its purpose is to illustrate just how easy it is to get lulled into a false sense of security when it comes to expertise. It also illustrates how much effort is truly necessary to earn the designation of expert. The parallels between this tale and the do-it-yourself investor are striking.
My father was a board-certified OB/GYN, which is the highest professional designation a physician in his field can attain. By all standards, he was an expert. The tale is simple but eloquent in its message.
It seems that one of my father’s patients was in labor. We’ll call her Brenda. She was in a top US hospital and she had the best technology and skilled attendants at her disposal. She was delivering her first child, the labor was progressing smoothly and Brenda and my father were passing the time in between contractions by making small talk. Brenda was a long-time patient and would kid with my father and tell him that she was doing all the work yet he was the one getting paid. He would kid her back and this went on for a few hours.
What had happened to Brenda? It seems that a very small percentage of women will develop vena cava syndrome when in labor. In this syndrome, the blood flow through the vena cava is restricted and results in a blood pressure change. It’s a mechanical process that if you know about it, the two magic words can save a life. The change in blood pressure once the patient turns over is almost immediate, and in Brenda’s case, she was back to herself in no time at all. However, she was no longer joking with my father about her doing all the work. Brenda immediately recognized the value of expertise.
A few weeks later, they had the follow-up visit. My father and Brenda, with her beautiful baby girl, had a chance to discuss the events of her labor and delve a little deeper into what the meaning of expertise means to a patient. As my father likes to point out, women have been having babies without the help of a board-certified OB/GYN forever, and in most parts of the world, mothers are still giving birth without this expert assistance. So why hire an expert? One of my father’s many self-evident sayings is, “People don’t need help, until they need help.” In the case of women giving birth, it has been his experience that they require expert assistance less than 5% of the time. However, he often points out, using his common-sense Cuban math, “Unfortunately, if you happen to be that 5%, it represents 100% of the time to you.” The more they discussed the situation, the more Brenda came to understand the reason highly trained physicians are paid to do what appears to be nothing. They are paid to be present. It is for the years they invested learning what to do when the unexpected happens. As my father likes to say, a true expert gets paid not only for his knowledge, but more importantly for his conviction. Thus is the case for hiring experts. You hire experts to assist you through the infrequent times when events fall outside of normal.
How does this relate to hiring a financial advisor? I think most people know the answer by now, but let me spell it out. Just like most women have been having babies forever without complications, anyone that can read and has access to the Internet can find out what the best performing this-or-that investment has been for the last year or three or five years. Additionally, there are countless newsletters, pundits and advisory services that all profess to be the very best. Information is everywhere, but knowledge, expertise, common sense, wisdom and conviction are rare commodities. To make things worse for the average investor, there isn’t a mutual fund family or major financial institution that doesn’t have a do-it-yourself section on its website where one can calculate the best mortgage, plan for college, develop an asset allocation model or select a target-dated mutual fund that doesn’t seem just ever so perfect for their situation. Even worse, just like the skilled nurse who didn’t know the two magic words since she wasn’t an expert, there are countless skilled advisors posing as expert advisors. So you can see how in a time of crisis, this leaves the individual investor without a true guiding hand. You don’t want to hire skilled advisors; you want to hire expert advisors.
What makes this problem so insidious is that it’s very easy to lull yourself into delusional thinking. You may think you actually have an expert on your payroll, when you don’t. You may think you can do it yourself, when in fact you can’t because you have no methodology. It’s my experience that for the individual investor they couldn’t be more delusional. These individuals are lured into a false sense of confidence, in my opinion, that most of the time they can do about as well as an expert advisor, but it’s that other percentage of the time that kills their financial plan as surely as Brenda or her baby might have died without an expert by her side. Expert advisors are thus not paid for the portfolios they construct or the advice they give, they are paid for the conviction that the portfolios they construct will perform according to the client’s objectives. Their advice is time tested with real people. Most importantly, expert advisors are paid for the years they have spent learning to reprogram their investment circuitry so that they don’t buy high and sell low like the typical investor. They learn to be aggressive when others are fearful and fearful when others are aggressive. In this regard, expert advisors are “made” and not “born.”
A dictionary defines an expert as—a very skillful person; a person who knows a great deal about some special thing; authority; specialist. Furthermore, dictionaries use the words proficient and skilled as synonyms for the word expert, but they are quick to point out the subtle differences between the three words. They wouldn’t want to confuse people into thinking that just because one is skilled at something, they are proficient, and that just because one is proficient at something, they are expert.
As is the case with Brenda, she was skilled at giving birth, implying she knew how to do it. The attending nurse was proficient. However, neither was an expert. Expertise implies having mastery or unusual ability as the result of experience, in addition to training and practice. Lastly, the same dictionary uses the words novice, beginner and amateur as antonyms for the words expert. What can we learn from this bit of word play? Simply the following—in a crisis there is a major difference between someone who is an expert and someone who is a non-expert. It doesn’t matter if you are skilled or proficient. It is just not sufficient. In practice, if you don’t have an expert by your side or you have not created your own expertise, you are no better off than the novice, beginner or amateur. In fact, you are no better off than with a person just a notch below expert. I suggest that given the fact that most people won’t attain expert status when it comes to money, and since most people will find themselves invested in financial markets that are under some stage of extreme volatility at multiple points in their life, that they hire an expert and pursue individual satisfaction in other areas of their lives. Unfortunately, experts come at a price, and most people don’t have enough money to hire one. So you must initially learn how to do it yourself. If you do, you will be much better at hiring an expert when it is time.
There is still one unanswered question when it comes to expertise. The question is—should expert do-it-yourselfers hire an expert advisor? There are differences of opinion on this matter. On one hand, the do-it-yourselfer obviously has a passion for the investing game. He/ she has spent countless hours developing their skills and has come up with a methodology that suits their fancy. In addition, the do-if-yourselfer sees no reason to pay an expert a fee when they can do it themselves. At times, I completely agree with this way of thinking. When do I disagree? I disagree with this approach in cases in which the do-it-yourself expert has an inexperienced investor dependent on their continued expertise. What this means is the expert do-it-yourselfer better have a succession plan.
Let me close with one last short tale. I met Bart several years ago. We knew each other from the golf course. He had sold his company for a tidy sum and wanted to discuss finances with me. I met with him, and he said he wanted to hire me, but only on an hourly basis. His theory was that he was an expert do-it-yourself investor. I recognized quickly he was knowledgeable. I had no idea if he could execute under pressure, but he did know his jargon. He said he would pay an hourly rate for a portfolio review, but not an ongoing fee for me to manage his portfolio. I told him I thought it was a mistake. Bart’s wife had no interest in investments. If Bart predeceased her, she would be in trouble. Like I told Bart, the fees you save between today and the time you die will all be paid to someone neither you nor your wife have yet met. In fact, one day your wife might end up losing all of her money because she is inexperienced and you are unwilling to have a succession plan in place. I then pointed out he would be in good company if he took my advice since even legendary investors such as Warren Buffett and George Soros hire other expert advisors. Bart told me to pound sand. A few months later, he opened up a small account with me. He kept the bulk of his money under his management, but realized he needed to have a succession plan in place. Even if you are an expert, if your loved ones are dependent on your expertise and have no interest in attaining their own expertise, you should do what Bart did.