As financial advisors everywhere are fielding phone calls, emails, and meeting requests from clients who are stressed out about the current global economic and health crisis, and also (understandably) about the safety of their retirement accounts, advisors are once again in the position of conveying confidence and reassuring their clients that the best course of action, as history has proved itself time and time again, is to stay the course and stick to their financial plans. But given the seemingly unprecedented nature of the coronavirus pandemic, how can advisors convince their clients to stay the course if they themselves have their own (natural) nagging doubts and concerns, not only for their clients, but for the viability of their own businesses, and whether the coronavirus pandemic really will be resolved in a timely manner and not compound into something even worse?
In our 30th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about their experiences in dealing with past bear markets and financial crises, and that no matter how different these events have started out in the beginning (with each event’s seemingly ‘unprecedented’ nature at the outset) or how destructive the events may have been as they ran their course, history has consistently repeated itself with respect to how these events have always ended: they eventually wind down and pass, things regrow, and life returns to normal. Yet, even so, especially in times of crises, it is sometimes impossible for individuals – even for financial advisors themselves – to be 100% confident that, even in the end, things will turn out okay.
In other words, it is normal for even advisors to experience at least some small level of doubt and fear about our now-more-uncertain future; yet, even so, we persevere through that doubt and continue to reassure clients that things will ultimately be okay, trusting in the likelihood of a good outcome (based on the weight of historical evidence) much more than the fear of a bad outcome.
This practice of ‘rational overconfidence’ – being perhaps a little “overconfident” based on the available facts and still-limited historical data, but rationally so as a way to be a leader for our clients – is often best, simply because for unprecedented events, there usually is no truly feasible alternative plan other than staying the course, which makes the original plan (based on research using 95+ years of stock market data) the most logical (or “only” viable) course of action.
Which means that while it may not actually be possible to completely quell the doubts we as advisors may still have about future uncertainty, it doesn’t have to stop us from trying to convey confidence to clients to help them stay the course, and recognizing that often doing so is still better than any other potential alternative. In fact, asking questions such as, “How frequently in the history of modern markets, has that [alternative] solution ever really made sense? And would it really make sense to forsake the original financial plan, which can involve a whole restructuring of goals and long-term assumptions, for something that makes sense for probably just a fleeting moment in history?” can help both advisors and clients re-focus and dampen some of the alarm.
Ultimately, though, the key point is that advisors are just as prone to fear and doubts as their clients, and it is perfectly normal and okay to have those feelings of fear and doubt in the face of such uncertainty. More importantly, it is critical for advisors to acknowledge those doubts, to give them space as valid concerns, and to understand that while doubts are a natural human response to uncertainty, advisors can (and should) practice some level of “rational overconfidence” with their clients. Because in the end, clients rely on their advisors to be a confident leader during difficult times!
***Editor’s Note: Can’t get enough of Kitces & Carl? Neither can we, which is why we’ve released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.
- Self-Care And Self-Compassion In Times Of Financial Stress And Anxiety
- Markets Plunge. Economies Stall. Panic Spreads. It All Feels Very 2008.
- 20 Years Later, the Y2K Bug Seems Like a Joke—Because Those Behind the Scenes Took It Seriously
- Kitces & Carl Ep 18: Talking Clients Off The Ledge From ‘Scary’ Markets
- Kitces & Carl Ep 26: Talking Clients Out Of The Bunker Portfolio
- Nick Murray
Kitces & Carl Podcast Transcript
Michael: All right. Welcome, Carl.
Carl: Greetings, Michael. How are you?
Michael: Well, doing mostly okay. It’s been a little bit of a stressful few weeks. The world is in a global pandemic and it’s a little freaky right now.
Carl: Yeah. It’s super-interesting, yeah, and really crazy, really crazy. So yeah, it’s going to be interesting for us to chat a little bit about how we handle this. I’m assuming that’s where you’d like to go.
How Advisors Face Their Own Anxiety As They Reassure Their Clients During Times Of Uncertainty [00:01:27]
Michael: Yeah. We separately did a webinar recently on calming client anxiety of coronavirus. So I thought an interesting discussion today would be calming our own anxiety, right? It’s one of those things I don’t think we talk about much, this realm where markets are going crazy, the world is going crazy, I suppose like, “These are the times we make all our money. These are when we add our value, keeping clients on board, talking them off the ledge when they’re scared, when they’re anxious, when they’re freaking out.”
And nobody ever talks about what happens when we’re freaking out maybe on the inside because you can’t say that to clients because then you just freak them out even more.
I remember going through this in the tech crash, because I started my career before 9/11, and then probably even more so I remember it in the financial crisis. There were these moments of trying to keep clients invested to stay the course while the financial system was melting down, and it was hard not to have this nagging thought in the back of your head of like, “What if it is actually coming down?”
I was telling people to stay on board because we were going to get through, the system is resilient, then we’ll recover, and the economy will grow back again. But it’s hard not to have that nagging thing somewhere in the back of your head of like, “Well, unless it doesn’t.”
And these are never the same, right? History never repeats, but it always rhymes. So last time it was, “I wonder if the financial system is going to survive.” This time it’s, “I wonder what happens to all of our economies as the pandemic rolls through.”
So let me start there, because you’ve been through this journey as well. Let’s maybe start in 2008. As you were going through this with clients, did you have doubts yourself? And how do you handle them, or think about them, or process them, or just deal with them? Because we don’t get to talk about it with clients because we’re supposed to be their anchor.
Carl: Yeah, yeah. So first I think there are a couple of quick stories and then I think we can get to some really practical things we can do. So the answer is yes, I had massive doubts, which I’m sure we’ll have a chance to talk about in another episode, but I was really sort of a crushed human after I got through it.
Part of that was just my own anxiety and fear, and doubts around things, but I think we’re now starting to remember what that felt like. If you’ve been through it maybe… I didn’t know of any people actually that were saying it. Now we look back at Y2K and we’re like, “Oh, wasn’t that cute?” Right?
Michael: Yes. At the time where it was like, “Oh, my God. What if all elevators stop working because the clocks and the floor timers were tied to the wrong number of digits?” I remember this queuing up to Y2K.
Carl: Totally. Yeah. I was trying to explain this to somebody who wasn’t even born yet and they couldn’t even process it. My point is that I don’t think we’ve gotten to the point yet where we are saying 2009, 2008, 2009 were cute. People who’ve been through that still have that in their memory.
Here’s a story. I remember I had a friend; his name is Brad. Brad had built this business and he had an offer to sell it. Somebody was going to buy it from him and Brad was one of my best friends. I consider him my brother. I had seen him build this business and I had known what it did.
Just those of us who built businesses; sometimes it’s pretty intense, right? I’d seen the sacrifices he had made and he had an offer to sell it. And this was in the middle of all this going on. And he called me and said, “Carl, hey, if I sell this, how are we going to invest the money?” And I remember saying, “Man, I don’t know.” Right? I don’t know.
Michael: It was supposed to be the big moment, clients having liquidity events!
Carl: Yeah. And let me be clear. Brad was not a client. So this is a friend who I could say, “I don’t know.”
Michael: We didn’t say “advisor friend” having their own liquidity event?
Carl: No. This is a friend who wasn’t an advisor, right? He was building a different business and he was coming to me saying, “Hey, I’m… Obviously, whenever I have money, I’m going to trust you to invest it.” And I was saying, “I don’t know.”
I remember telling my wife that and my wife was like, “Well, wait. How should we invest our money?” And I was like, “I don’t know.” So where do we go from, “I don’t know?”
So this is the other story that I think is really valuable. Dan and Barbara were two clients of mine, and to make a long story short, Dan was laid off because of his age. They were downsizing and he got a buyout. That’s what we’ll call it, a buyout package. 95% percent of his net worth was in the stock of the company that he worked for when he came to me. It was a substantial amount. It was close to $2 million in the early 2000s and the stock was at $40 without getting into the details of which stock it was, but it was at like $40.
And I said, “Dan, if you’re going to become a client of mine, we’re going to sell all of that.” And Dan said, “Well, why? Because you think the stocks are going to go down.” And I said, “No, no, no. Because I don’t know. In fact, I would prepare; if we sell, it will double the day after we sell it and if we don’t sell it, it will get cut in half the day after we decide not to sell it. But that’s not why we’re doing it. We’re doing it because of our principles, right?” This is all important to the story. Dan, I said, “You can’t become a client unless we sell this and we’re going to diversify using correct portfolio design principles, not because I know about the stock.”
We sell it, and six months later that stock has gone from $40 to $3. Right? And so Dan starts calling me Santa Claus because of that. And I keep telling him like, “Dan, I didn’t know. I would have never even wished that to happen. It was just a principle, right?”
Okay. So fast forward, Dan who calls me Santa Claus through every single scary market we’ve had and he would just be like, “Carl, I don’t even care…whatever.” Scary markets. He was like Teflon from that point on. It was just like, “Whatever.” So anything we had happen between Y2K and September 11, as crazy as that was, and all that stuff just didn’t faze him.
And then he goes on a cruise in late 2008, early 2009. They leave from LA (which apparently means there were more retired folks?). They get to the first port and Dan calls me. This was with Lehman, AIG – that week. He was on a cruise that week with a bunch of other retired people and he was like, “What’s going on? Should I come home?” And I said, “No. Listen, things are pretty serious. When you get home, come meet with me. But just finish… You’re on a boat. You don’t need to jump in the water.” And he’s like, “Well, half the people are flying home from the first port.” So Dan comes home.
So the reason that all this context matters is because Dan was calling me Santa Claus, right? So this was a big deal. Dan comes home. Dan and Barbara come into my office and I took them through the scary markets conversation that you and I have talked about before. This is the point for the conversation.
I remember looking them in the face and saying, “Dan, look, we’re in a lifeboat. It makes no sense. We’ve kind of prepared for this, but remember, risk is an arbitrary concept until you experience it, right? So all the lifeboat drills in the world – they’re good, but they’re not the same as actually getting punched in the face, right? So you’re in a lifeboat. The only thing…” After taking them into the whole scary markets conversation like, “Look, it makes no sense to jump in the water. We just need to stay the course.” You guys can go review the scary markets conversation.
This is the point for this thing. I remember closing the conference room door and thinking to myself, “Oh, my gosh. I hope I’m right.” Right? So there’s an internal conversation that we need to be having that we probably do need to keep separate from clients. And in the internal conversation, we need to acknowledge that when we say that cute little phrase where we say the last four words of any great investor, “This time it’s different,” what we mean is the end is never different, meaning they always end. So far they’ve always ended.
And so we need to acknowledge two things. One, the beginning is always different. Right? The stimulus for these things is always different, enough that you feel like…
Critical Events Precipitating Client Anxiety May Always Start Differently, But They Have Always Ended The Same [00:11:05]
Michael: Right. This time it’s coronavirus pandemic. Last time it was a financial system meltdown from the mortgages. The time before that it was 9/11 and the tech boom and crash, then it was algorithm trading in ’87. It was an oil crisis in ’73. They are always different.
Carl: They’re always different.
Michael: The precipitating thing that at least sets off the chain reaction is always different and, right or wrong, the presumption is always, well, it’s going to end the same and the ending is, “We get through this, things get growing again, scary stuff eventually ends, and then we move on.”
But as you said, there’s this lingering thing, right? Clients have this lingering doubt, “Okay. But what if it actually is different?” And right or wrong, true or false, we’ll see. That seed gets planted in our own heads as advisors, like, ”Oh, my gosh. What if it is different this time?”
Carl: Yeah, yeah. And I think there are a couple things that are super important. One is that the beginning is always different enough to make you feel like it’s unprecedented. We’ve never seen anything like this before. That’s always true.
So it feels like, yeah, in the middle of 2008 and 2009, we weren’t just talking about, “Oh, it’s scary.” We were talking about things we never heard of before, the credit default swaps and who knows? And people didn’t even know how to explain it. It’s always different. So first, we need to feel that, “Okay. This is different. It’s okay for me to be scared because this is unprecedented. We’ve never seen this before.”
Number two is the idea that it will always end. We just need to acknowledge that that little creeping doubt… We weren’t basing this off 95 years of stock market data. Right? And then you want to go back a little bit further and say, ”Oh, no. I’m not. I’m betting on the concept of capitalism.” Okay. That’s fine too, but the concept of capitalism…when we talk about the window of human history, we’re still talking about a relatively short time period.
Michael: Okay. You’re ratcheting up my fear here, Carl.
Carl: I know, I know. It’s on purpose. We need to at least acknowledge that that is uncertain, but what do we do? So here’s the solution my head. The way I go through it is believing that this time, the ending is going to be different. Even though it’s a possibility, I think acknowledging the possibility is important. Not externally, internally between us advisors, it’s important for us to go, “That feeling I’m having, I need to acknowledge that, right? I need to find a safe space to talk about it.”
But just because something is possible doesn’t mean it’s likely. Right? So the only thing left to do is live in this uncertainty and say, “Okay. How do I make a decision? I’ve got to rely on the weighty evidence of history.” It would be unreasonable to assume that this time is going to end differently because the only precedence we have that we’re making all these decisions on is that you know what? We get through these, we figure it out, and we get through them. Right?
Michael: Well, it strikes me as well. I remember particularly going through this in 2008. It was different to me when the tech crash happened and 9/11 happened. The actual stock meltdown, well, for the tech crash was fairly confined to tech. Granted, everyone was obsessed with tech and they wanted to put all their money into the Nasdaq cubes instead of broad-based portfolios.
So people got to concentrate and portfolios got hammered a lot harder. But broad-based portfolios held up quite well. Heck, small cap value even went up while all the rest of the market was melting down because it had been so neglected in the late ’90s.
Even when 9/11 happened, I felt there was this reaction in the country of, “We got hit. America is strong. We’ll bounce back.” There was such a surge of patriotism that I felt this acknowledgment, “Yes. We got hit and this may have done some economic damage, but we’re better than this. We’re stronger than this. We will power through this.” And the surge of patriotism that came to me, I never had doubts in 2001 going through 9/11, of, “Would markets be okay? Would the economy be okay?” Yes, terrorism has hit home. Our lives have changed.” We haven’t gotten away from TSA since. But there were never doubts for me in telling clients that they needed to stay the course, about staying the course.
2008 and 2009 to me felt different, right? Even as participants in the financial services industry, we were seeing things that we had never seen before. Institutions that we were accustomed to, even within the industry, were suddenly disappearing and vanishing. Organizations that had been around for a hundred-plus years were suddenly vanishing basically overnight.
I remember conversations with clients of the firm in the fall of 2008, trying to keep them on board, and all the same stuff – this too shall pass, let me pull out the charts, here’s how long it typically takes for recovery and bounce back periods – all that stuff that we try to do to anchor people. But I’ll admit for that one, that nagging fear in the back of the mind was definitely there like, “Man, I hope this is actually true because if it’s not we’re all kind of screwed here.”
The irony to me, at least with the nerdy logical rational brain that I have, frankly, was that it was kind of a comfort in some ways. It sort of reminds me of the bunker portfolio scenarios even before the coronavirus. The folks that want to buy 100% gold because they think the whole economic system is going to melt down someday for all the various reasons that they think the whole economic system is going to melt down.
There was always a piece of those scenarios of like, “So what exactly are you going to do if it really melts down? Are you going to chop the gold with your knife?” You really need guns and food storage. And even that’s only going to last you so long if literally the whole economic system has melted down.
There comes a point where I feel like you have to keep powering forward not just because the alternative is too awful to contemplate, but because there are no tools for the alternative where you’re like, “We can talk about gold as a hedge, but if you really want to blow up the entire economic system, gold ain’t going to cut it.” That actually still assumes there’s some foundation of government and systems that cares about gold and the interchangeable nature of commodities as opposed to just owning hard goods.
It’s not exactly the same, I think, for this coronavirus cycle. But the more it grows, the more it compounds, the more these discussions of sadly how many people may die, how much loss of life there will be, how much permanent harm we are doing to the economy as travel starts grinding to a halt and business starts grinding to a halt. These questions start surfacing again like, “What if we don’t come back from this?” or “What if we don’t come back in the same way that we have all the other times that terrible things play out?”
But I still keep coming back to some combination of, okay, well, we actually still have some historical precedents for this like the Spanish flu. And yes, eventually, the world did come back and it did grow again. We still get through this. We’re not quite at the 12 Monkeys level and I don’t know what the alternative would be anyway.
There comes a point where you may as well bet on the system recovering because none of our bets really matter if you think it’s not going to. It’s sort of a Pascal’s wager. Do you want to bet that God exists or not? Not to go into an entirely religious direction here, but famous philosophy wager around should you bet that God exists or not. And it essentially comes down to well, you may as well because if you’re right this is going to go well for you and if you’re wrong this is going to go really bad for you. But if God doesn’t exist, you’re not giving up much by betting he does. So you may as well go for it.
I feel like there’s a similar thing that comes forward, but even that to me still leaves this lingering doubt. It means that we’re sort of assuming this blind confidence for ourselves. I’m going to tell clients, “You gotta keep going, it’s going to be okay,” even though I’m actually not sure deep down it’s going to be okay because I don’t know where else I could take them anyway. So we may as well keep going down this journey together and we’ll all collectively pray it works out.
Carl: But here’s the deal with that. Right? So number one, what are you going to do anyway? What are your alternatives? That’s the way I always think through it. What are my alternatives? Okay.
Number two, the only rational conclusion based on the weighty evidence of history – at least the piece of history we’re using – the only rational conclusion is that we’ll get through this. Right? And we just have to remember that humans are uniquely qualified and really good at dealing with problems right in front of their faces. Right? MacGyver bubble gum and duct tape style. We’ll figure this out. I don’t know, but we’ll figure it out. Right? We’re terrible at understanding what’s going to happen two weeks from now.
What has Nick Murray been saying? Optimism is the only realism. Being irrationally optimistic about this is the only thing to do and it’s actually that “We’ll figure it out” has been true. So I’m totally cool with assuming otherwise. If I had a bunch of data that told me that, “Oh, you know what? It actually turns out 50% of the time, we don’t figure this out.”
But so far and what I’m talking about figuring out is the capitalist system speaking broadly. I have no idea. If you own individual holdings or you’ve made bets on Bitcoin, or you bet on whatever else, gold, any individual, I have no idea. I only know how to handle this: when I’ve got a broad-based globally diversified portfolio that’s aligned with what I said was important to me. The reason my money is invested that way is because it gives me the greatest likelihood of meeting my goals based on the weighty evidence of history. That weighty evidence of history included the idea that we would have markets like this (in air quotes).
We didn’t know when, we didn’t know how, but we knew they would come and we’re not even… Where are we, 25? As we’re speaking I don’t know what the numbers, but we’ve crossed into bear market territory. But we’re not down 50. The S&P 500’s not … The Nasdaq’s not down 82 or whatever it was in 2002. Right? And I’m scared to death. I’m talking right now as if I’m not, but, of course, I am. I’m human. But this is the dialogue we have internally.
And then there’s one more piece that I think is useful for people to remember. So now let’s talk a little bit about how you would feel it out with clients. There are times when overconfidence plays a productive role, where overconfidence becomes a tool in a backpack, right? And I can’t find the reference, but somebody told me about the role, the sort of research that had been done in military science around times where you have to look people in the eyes even though you’re not sure yourself and say, “It’s going to be okay.”
I’ve been in places like that in the woods in some of the adventures that I do. I’ve been in places where I was, “I’m not sure exactly this is going to work out.” I was the leader. I couldn’t look at the other people and go, “I’m not sure this is going to work out.” I had to look at them and say, “I know you’re freezing. I know you’re cold. I know that’s a really scary place to go, but listen to me. We’ve got to go there.” Right?
So, Dan and Barbara, that’s what I had to do in that meeting. I had to say, “Okay, look. I’m not sure. We’re in uncharted territory. I can acknowledge that. This field is crazy, but Dan and Barbara, I can’t think of anything better to do. We built this portfolio based on your values and goals. We’re broadly diversified. We followed all those principles. We got low-cost investments. The investments are working like we expected them to work in this environment. Right? There’s nothing broken there. There’s no fraud. I can’t think of anything we should do differently,” and then I have to walk out and go, “Oh, gosh. I hope I’m right.” Right? That’s all we can do.
If there’s something better to do, tell me, but I can’t think of something better to do. And we might be wrong. But to assume we’re wrong would be to deny the weighty evidence of history. How about that?
How Advisors Can Use (Rational) Overconfidence As A Powerful Tool For Effective Leadership During Difficult Times [00:25:21]
Michael: It’s an interesting point of just how we talk about these as behavioral biases, all the negative implications of behavioral biases, which overconfidence is always one of the big ones that’s out there. But yeah, I think you sort of indirectly make a good point. There’s a reason why this behavior got naturally selected for that, right? If it was actually counterproductive to our survival, the people that carry that trait tend not to survive. There’s a reason this is honed for us and I think you make a good point. Right?
Take it out of modern environments and back to our roots just a few thousand years ago. Almost everything in the world was scary uncertainty. We didn’t know how anything worked and every day was just survival mode with the herd, right, with fellow humans, where someone was the leader leading the herd. And you needed a confident leader, and the leader may or may not have actually known what was going on. But someone has to lead and you have to lead confidently or people don’t follow. Right? It’s one of the first things you discover. I still remember as a parent early on, learning that lesson that if you see your child fall and get hurt and you rush them upset that they got hurt, they just get more upset because they see you’re upset.
If you want to calm a child when they’ve gotten hurt, when something’s happened, you have to be calm and exude the calmness, and they feed off your calmness. And it helps to settle them down even if you’re still thinking about it in your head like, “Oh, my God. Did you just break a bone?” How about, “Is she hurt? What just happened?” Right? All those thoughts are rushing in your head as a parent, but you have to exude the confidence because it helps the other side even when you have the doubts or the worries in your head.
I think there’s a striking similarity; there’s a striking parallel here to me. It’s just recognizing that it’s okay to be confident. It’s okay to be overconfident. It’s okay to be irrationally overconfident sometimes. And you can still recognize that you might be wrong in the back of your head. Right? We don’t know these things. We don’t know the future. I cannot unequivocally know that this time won’t be different and if it will end the way it was kind of differently leading in. But at the end, I’ve got a role to play in trying to transfer that confidence to my client, which means even if I’ve got doubts, I need to carry the overconfidence. That’s part of the burden we bear.
Carl: Hey, Michael, one quick thing I just want to point out is it’s not irrational overconfidence that we’re talking about, right? Because we’ve already said the story; so yes, it’s overconfidence…
Michael: It’s rational overconfidence.
Carl: We’re not talking about a leader who’s going to take the whole world down in flames. I don’t want you to run with me off a cliff. What I’m saying here, based on everything I have, the course of action here is still uncertain, which is me acknowledging the reality of uncertainty internally and then saying, “We don’t know.”
And in the face of that uncertainty, this is a little different than a critical care doctor that looks at somebody knowing that person is going to die, but saying, “You’re going to be fine. You’re going to be fine.” Right? This is different than that in the sense of this is a critical care doctor that’s more like, “Well, this is touch and go. I don’t know how the situation is going to work exactly, but I’ve been through this a couple times before. And I think there’s an 85%, 90%, 95% chance that if we get this person in the hospital quick enough they’ll survive.”
They’re not going to talk to the patient, and say, “I think there’s an 85% chance that you’ll be okay… But there’s still a 15% chance you’re going to die.” They’re not going to say that. They’re going to look at you in the eyes… This is what we’re talking about here, right? This is rational overconfidence. They’re going to look at you in the eyes and go, “You’re going to be okay. Stay with me. We got you.” Right? That’s rational overconfidence. I don’t even know if it’s the correct way to say it, but that feels different to me than like, “Follow me. We’re going.” It feels different to me than “Braveheart” – against all odds and it will happen to work out. Well, if this were against all odds, we would be making a different decision right now.
How Advisors Can Deal With Lingering Doubts Even While Reassuring Clients [00:30:05]
Michael: So I like the framing of rational overconfidence. But I guess as we wrap up, the one other question I’d put back to you, Carl, is just how do you handle, how do you process, how do you quell the doubtful thoughts that still sit in the back of your mind as you’re trying to have that conversation with clients?
I think some of us, maybe more than others, but all of us, at some point, still come back to the thought of, “Man, I hope I’m right about this, but I’m not sure.”
Carl: Here’s the tool I wish I would have used in 2008 a little more explicitly. I was doing it in my head, but I didn’t realize I was doing it. And it’s what I do now. Write yourself an argument. Pretend like you’ve got to convince a court, a jury, of the position you’ve taken. Get it written out; it should just be one page, right, with a Sharpie even. That’s the level of resolution I’m talking about.
So you just go through like, “Here’s how I’ve made this decision that the best course of action right now…” You’re dealing with a complex adaptive system, right? It’s changing. New information’s becoming available. So you’re going to have to keep updating this thing.
But I think you write out, “Here are the principles. Based on the weighty evidence of history, da-da-da-da-a. I recognize that this time the beginning was different.” And at the end, you come up with this conclusion that, “Based on all of these facts, the only reasonable thing I can think to do is to stay the course because of all of this.”
Then if you have that written down, keep pulling it out, right? Just use it as a touchstone because what happens is you swirl and you lose track of what you’re even swirling about. And then you can go, “Wait, I’ve already made this decision” You can pull that document and go, “Is there any new information that requires me to change what’s on this document?” Because if you keep that touchstone there and keep going back, you’ll catch yourself. You’re going to still do it 50 times a day. Right? You’re going to wake up early and see how Tokyo opened or whatever. Right?
But if we can get to the point where we can take ourselves back to breathe at a touchstone, the things that we can control are on a piece of paper and then we have to let go of the rest. That’s it. Right? That’s all I’ve got. I’ve been thinking about this for a decade. That’s all I’ve got.
Michael: Yeah. And for me, I think it really comes back to this fundamental challenge. I don’t know what the alternative is that I would plan for anyways. There comes a point where there is no Plan B. Right? Markets may go down, they may go down a lot, and they may go down a lot, a lot. Some people may die. A lot of people may die. The economy may go down some. The economy may go down a lot. Heck, take it back to the Great Depression when the market crashed almost 89% from top to bottom – and we aren’t even that bad yet. We’ve had such horrible stuff, but at some point, humans move on and adapt. The system adapts. We start growing again. We move on to new opportunities and new highs because if the whole system just fundamentally breaks, I don’t know how else to plan for that anyways. And not to be totally morbid about it.
It’s amazing how adaptive the system can be even in the face of horrible, horrible stuff that has happened historically. But there comes a point where I feel like you have to power on with that belief, with that rational overconfidence framework, because I don’t have a solution for the alternative, “What if the entire system stops functioning?”
Carl: Look, I know we have to wrap up, but here’s one mental framework I use, around that exact thing. I would literally get down and say, “Okay. Great. Let’s go that path.” Right? So then you go down the guns and butter path, really. If we go that path – I used to have this conversation with clients. “Let’s just explore this together.” Right? “If we go down that path, what would be the reasonable portfolio? What would be our conclusion portfolio?” So let’s just go with guns and butter. My clients would say cigarettes and powdered chocolate. Somebody said powdered chocolate. She’s like, ”That way I can trade with all of you people who just have powdered milk; it tastes so gross.”
Anyway, guns and butter; then the framework I used was, “Okay. Guns and butter would be the appropriate portfolio in that environment.” And then the question that I found really helpful to myself was what percentage of the time in the history that we’re dealing with, modern markets history, what percentage of the time has guns and butter been the appropriate portfolio? Zero? Maybe if you’ve dealt with days? Like, “Oh, yeah. I could pick out a few days where it would have been…” But mainly it’s zero. Do I want to make a bet on zero?
That’s how I would get that. I realize the odds. Maybe it’s 5%. Do you want to make a bet on 5% or 95%? In the end that’s where we get to be rationally overconfident. Just the odds are in your favor of saying what you said, which I think we’ve got to remember. It’s unbelievable how good humans can be at adapting and making something work, at figuring things out. We’ve gone through way crazier stuff and we don’t even know what the role of the massive amount of news, social media, the stable market we’ve had, politics, and nationalism. And you mix all that in and it’s, “We’ll figure it out. We’ll figure it out.” So anyway, that’s all I got for you.
Michael: The takeaway to me: it’s okay to be rationally overconfident. It’s the reality of our role in trying to lead clients that sometimes as a leader, you have to express a rational level of overconfidence, even if there are some nagging doubts in the back of your mind, and it’s okay to have the doubts.
That doesn’t make you a bad advisor or a lesser advisor. You can acknowledge the doubts and recognize that you have them. And then do what you need to do to help move clients forward.
Carl: Yeah. I’m fine. I know we’ll record another episode about this probably, but just on that little note, just find a place where it’s safe for you to have those doubts. Right? Whether that’s a paid place or a friend, you gotta have a place that’s safe to have those doubts where you can just go, “I don’t know.”
Talk it through. Hug it out. Well, don’t hug it out right now. Air hug it out and then get back to being irrationally overconfident because we need you. Right? We need you, and the people need you. So thanks, Michael.
Michael: Thank you, Carl.