The 3 Most Important Words in Finance

There are generally 3 stages of growth for a successful investor:

Stage 1. I know everything (when you’re first starting out)

Stage 2. I know nothing (after you learn a bit about markets)

Stage 3. I know what I don’t know (after you realize how hard markets are)

That last stage is difficult for many people in the world of finance to figure out. Or even if they admit it to themselves it’s difficult to let clients in on the fact that even the masters of the universe don’t know what’s going to happen next when it comes to the markets.

A number of years ago Jason Zweig interviewed the late Peter Bernstein and asked him some of the most important things he had to unlearn over the course of his career:

Q. Over the course of your career, what are the most important things you’d say you had to unlearn?

A. That I knew what the future held, I guess. That you can figure this thing out. I mean, I’ve become increasingly humble about it over time and comfortable with that. You have to understand that being wrong is part of the process. And I try to shut up at cocktail parties. You have to keep learning that you don’t know, because you find models that work, ways to make money, and then they blow sky-high. There’s always somebody around who looks smart. I’ve learned that the ones who are the most smart aren’t going to make it. I don’t know anybody who left investing to become an engineer, but I know a lot of engineers who left engineering to become investors. It’s just so infinitely challenging.

When I first started out in the investment business I was always overly impressed with the smartest people in the room who seemed to have it all figured out about what was going to happen with certain stocks or the markets in general.

It took a while but I eventually discovered it was those investors who had enough self-awareness to admit they didn’t know what was going to happen next and they didn’t have all of the answers who were truly intelligent.

The 3 most important words in finance are “I don’t know” because the markets will humiliate you without the requisite self-awareness to recognize your own deficiencies.

It’s actually quite freeing for yourself and your clients when you’re willing to admit you don’t know what’s going to happen next.

Useful financial advice does not have to be predicated on your ability to predict the future. In fact, pitching yourself as someone who can predict the future is the fastest way to create a mismatch between expectations and reality. Eventually you will be disappointed or caught off guard when you’re wrong.1

Honesty and transparency are now an edge in the financial services industry because information is so abundant.

The old age of “Trust us, we got this” is now over.

Remember those old EF Hutton commercials?

The name on the door doesn’t matter as much as it once did because brands have moved from companies to individuals.

Those individual brands are not only built by being honest with clients and prospects but also being more transparent than finance people were in the past. That’s how you build trust as opposed to assuming it should be handed to you unequivocally.

Transparent with how you invest, what you own, why you own it, what you won’t invest in and who you are personally.

My colleague Josh Brown likes to remind us from time to time that most clients generally do business with people they like, respect and trust.

Honesty and transparency can build that trust faster than commercials or names on a sign.

Which is why I so thoroughly enjoyed Josh’s new book he put together with Brian Portnoy — How I Invest My Money.

Josh and Brian asked a number of financial advisors and professional investors to share how they invest their own money.

It’s one of the most original investment books I’ve read. It doesn’t tell you how to invest like many other investment books but how certain individuals invest and why.

I enjoyed reading about the various ways these people allocate their capital but it was even more helpful to hear everyone’s personal stories, past experiences and circumstances that shaped who they are as people and how that colors what they invest in.

It was pleasantly surprising how open many of the authors were about their family histories and experiences. Reading those stories helped better understand what they do with their money and why. Many of the stories actually left me wanting more.

Each chapter acts as its own standalone story so every reader will likely get something different from each of the writers and explanations.

The Internet has given anyone and everyone a platform if they so desire. Many people end up oversharing but the finance industry has certainly benefitted from this explosion of information.

Transparency is becoming table stakes in financial services if you want to build trust and work with the right people.

How I Invest My Money is a perfect example of this.

Reading this book inspired me to share my own story of how I invest money which I plan on doing in the coming weeks.

Further Reading:
The Secret Sauce of the Investment Business

1Every investor makes a forecast of some sort depending on how they position their portfolio. But if you’re constantly relying on your ability to guess what happens next eventually you’re going to be severely disappointed and on the wrong side of, oh I don’t know, a pandemic.

 
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