Complex markets don’t require complex solutions — Ben Carlson
Posted by Robin Powell on September 9, 2016
Someone I’m particularly excited about meeting at the Evidence-Based Investing Conference in New York City in November is Ben Carlson. As well as being Director of Institutional Asset Management at Ritholtz Wealth Management, Ben also writes one of the best investing blogs on the web — the very aptly named A Wealth of Common Sense. Here he talks about his philosophy and, in particular, his belief in keeping things simple.
How excited are you about this conference? Which speaker or speakers are you most looking forward listening to, and why?
Our entire team is thrilled about the prospects of this conference and how everything is coming together. There are so many big names in the world of investing that are going to be there – Jim Chanos, Bill McNabb, Larry Swedroe, Savita Subramanian, Jim O’Shaughnessy and the list just goes on and on. But I’m most looking forward to seeing Charles Ellis speak. Ellis is one of my heroes in the investment world for his ability to take complex topics and simplify them so all investors can understand his message in a clear and concise manner.
What are you planning to speak about yourself?
I will be speaking and moderating on two different topics. The first will be on organisational alpha, which will look at how investment funds and organizations can add value through improved decision-making capabilities and policies. The second topic will deal with institutional asset allocators and how they can utilise an evidence-based approach when making portfolio decisions.
What were you looking to achieve with your book, A Wealth of Common Sense: Why Simplicity Trumps Complexity In Any Investment Plan? And what sort of response have you had to it?
When I set out to write my book I asked the Wall Street Journal’s Jason Zweig if he had any advice for a first-time author. Here’s one piece of advice he provided that I tried to remember throughout the writing process:
Imagine that your grandmother came to you and wanted to know ten things about investing that she could understand and that she needs to understand. What would you tell her?
My investment philosophy is grounded in the idea that less is more and complex markets don’t require complex solutions. And these things are true for all investors, both novice and professional. That’s what I tried to convey. The response has been great as more and more people are coming around to the benefits of simplifying your message and approach. Understanding what you’re doing and why is an underrated aspect of a simpler approach to the markets.
So, you’re a great believer in simplicity. But large sections of the industry often make out that investing is a complex process. Why do you think that is?
It’s really hard to change your behaviour once you’ve been doing things a certain way for an extended period of time. This is true of both individuals and financial firms. Because people are hard-wired to be swayed by narratives and storytelling, complexity has always made for a good sales pitch. And contrary to popular belief, the sales people will almost always trump the investment people when getting clients into investment products. Complexity has led to plenty of fee revenue over the years for so many financial firms, so why change now?
You have a very popular blog, which must take a great deal of time and effort. What are your motives for writing it? And would you recommend that other advisers consider blogging too?
I was never much of a writer before starting my site, but it really is a great addition to the learning process. Documenting your thoughts and ideas is a great way to understand what it is you really think about something. And I’ve found that the more I write the more I’m willing to learn. When I started writing the blog a few years ago I assumed I would run out of topics to write about fairly quickly. Instead, I find I now have more ideas than ever because my writing habit has increased my reading habit.
I do think it makes sense for other advisers to blog because it’s a great way to get your message and philosophy out there. But you have to make sure you’re writing in your own voice and not trying to emulate what others are doing. And in the worst-case scenario — i.e. no one really reads what you’re writing — you’re still forced to come up with new and creative ways to look at the world and what interests you.
You wrote recently about the lessons you’ve learned about personal finance and investing in your 30s. If you could pick out, say, two or three of the most important ones, which would they be?
For the majority of people out there mastering their personal finances will be much more important than mastering portfolio management. So one of the most important revelations I’ve had over the years is the importance of understanding the three pillars of personal finance – saving money, making more money and avoiding lifestyle creep. All three can be a challenge, but I feel the last one is the hardest for most people because envy can be such a destructive force when trying to get ahead financially.
The other important one for me personally is valuing experiences over material possessions. The things we remember and make us happy are not the clothes or cars we buy but the time spent with friends, family or community.
You specialise in advising institutional clients but you recommend simple, low-cost and low-maintenance strategies. Is this a problem for you in that institutionally investors often consider themselves more “sophisticated” investors?
Yes, it can be a challenge in many respects to get buy-in from institutional investors on a simpler, low-cost approach. Institutional investors tend to have a lot more money at their disposal than retail investors. The assumption is that more money should be able to buy more exotic or better investment managers and strategies.
Yale’s David Swensen, likely the greatest institutional investor of all-time, has actually suggested that most investors don’t have the expertise or resources at their disposal to pull off a more complex approach, when he said the following:
“Two types of investors inhabit the investment world — a vanishingly small group that makes high quality active management decisions and a much larger group that commands neither the resources nor the training to produce market-beating results. Membership in the active management cohort requires full-time dedication to understanding and exploiting market opportunities. Few qualify. Unfortunately, too many imagine that they possess active management skills, leading them to pursue costly strategies that all too predictably fail.”
The problem is that the majority of institutional investors assume they are in the vanishingly small group without realising they actually belong in the much larger group. This leads to all sorts of problems in an investment program. Fees paid tend to be far too high, trustees or beneficiaries don’t understand what exactly they are invested in and investment committees tend to chase past performance. All successful investing starts with the ability to admit your limitations and “sophisticated” investors often have a difficult time with that, to their detriment.
As institutions increasingly switch to more passive investment strategies strategies, is there still a rôle for investment consultants? How does that rôle differ from the traditional one we’re used to?
There definitely is a rôle for them. The majority of trustees or investment committee members don’t have the time or asset management experience required to run the day-to-day operations of an institutional investment fund. Plus, they’re more worried about running the organisation, not managing a portfolio.
Consultants can add value is by making their clients’ lives easier. They can handle all of the minor elements involved with running a fund that are boring, yet necessary, including monitoring results, performance reporting, rebalancing, implementing risk management protocols, and reviewing banking services and fees.
Client education and communication are also extremely overlooked aspects of any adviser-client relationship to provide transparency to the process. Setting realistic expectations and managing short-term liquidity needs can lead to improved organisational planning. Documenting the investment process can ensure everyone is on the same page. And behavioural management can help the client avoid making a huge mistake at the wrong time.
The best consultants are really there to help the client focus on what they can control.
Traditionally consultants have promised their clients that they will pick the best money managers. They promise outperformance. The research shows that just hasn’t been the case and alpha continues to shrink because of increased competition in the markets. Most consultants and clients would be better-served to focus less on traditional alpha and more on organisational alpha.
Finally, there clearly is a savings crisis — not just in the US, but globally too. It’s a big question, I know, but what do you think the answer is?
I wish there was an easy answer here, but the reality is that changing people’s behaviour is tough. No one wants to be told what to do, but automating good decisions ahead of time (automatic saving, increases in saving rates, investing, bill payments, etc.) would help a lot of people get out of their own way. Short of forcing people to save for retirement I think automated saving is our best bet.
Why not come and hear Ben Carlson speak at The Evidence-Based Investing Conference in NYC on November 15th? To register, follow this link.