Most Popular ArticlesSeptember 29, 2009
Risk, I had learned through experience, tends to be a voracious consumer of principal when one is caught unprepared. True, it may have been hard for Mr. and Mrs. Patient to be at the same cocktail party with the Alpha Seekers because they were riding the wave of huge returns from their concentrated investments in energy and commodity stocks. Their success, it turned out, owed more to a rising but decidedly cyclical worldwide economic tide than to the stock-picking ability of their “Lehman Brothers guy” in L.A.
Lehman, it turns out, was about to enter its own season of Dickensian darkness. As oil fell from $150 to $75 per barrel and the market began its nosedive, Lehman experienced its own mighty fall. All of Paulson’s horses and all of Bernanke’s men couldn’t put Lehman together again. The most recent age of foolishness in investing had once again come to an end.
The Alpha Seekers learned a painful lesson at the hands of our Wall Street friends; they proceeded to lose over 60%of their portfolio’s value. Soon after, they come knocking on my door, somewhat shell-shocked and looking for answers. Jim Cramer (a.k.a. “the screamer” of CNBC) and his buddies have trained the masses well: The Alpha Seekers were looking for my personal version of the alpha-seeking, magic formula to restore their lost wealth.
“We lost it all in energy stocks, but can we make it back in precious metals?” they asked me at least once. Luckily for them and for me, by that point we were armed with what I believe to be the best tool the industry has ever developed for answering the all-important question every wealth manager has to answer for their clients: “Am I okay”?
Don’t laugh. As you contemplate the layers of this question, you will come to understand its extreme and never-ending relevance. Clients aren’t just asking, “Am I okay today?” No, what they mean is, “Am I okay forever, am I saving enough, am I spending too much, and am I sacrificing my lifestyle by saving too much or not spending enough? Are my kids okay? My grandkids, my favorite charity, my alma mater?” You get the point.
The real magic of our financial advising process is that it is dynamic, with data continually updating for fluid goals and changing markets. I have always had an affinity for the truth, and there is no better way to start a dialogue with a client than, “Here’s where we started, and here’s where we are headed until something changes.” You know – those little changes that crop up like market meltdowns, job losses unforeseen medical bills and all the rest.
Unlike financial planning, which tends to be static by nature, our process updates each and every quarter. I don’t just ask my clients a set of sterile questions one time and then walk away. After spending many hours asking poignant and relevant questions and explaining the futility of trying to beat the markets, we began the process of transferring Mr. and Mrs. Alpha Seeker’s battered and bruised accounts from Lehman.
But the process didn’t end there; it just began. After determining their probability of excess, we were compelled to uphold their relatively high equity exposure—and thank goodness we did, even when Mr. Alpha nearly lost his mind in early March of 2009 when the market dipped all the way down to 6500. Sure, it was tough, but we had eliminated opinions and replaced them with cold hard facts; real probabilities, not just hunches.
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