Monday Money Matters: Chris White, CFA On Investing, Emotions and the Future

World's earliest paper money, Song Dynasty

"Money makes the world go round." 
--Joel Grey, Cabaret

Whatever your take on money, whether practical or cynical, it's a reality of life. We've all read stories about pro athletes who made boatloads during their careers and ended up bankrupt five years later. According to BusinessPundit.com, "More than two-thirds (78%) of former NFL players are broke or financially stressed after retirement, and 60% of former NBA players go broke five years after retiring."

In short, it's not how much you make that matters, but how you manage what you've got. For this reason I reached out to Chris White, CFA, on themes related to money. I liked his Mark Twain quote below and have used it myself more than once.

EN: The new president is being pilloried by media pundits yet the markets kept climbing. What is really happening here?

Chris White: It could be that the market is just being irrational and is carried away by the enthusiasm that something might get done in Washington to “fix” the problems our economy faces. It wouldn’t be the first time the market has been “emotional” and blinded by, in this case, greed.

But I think there’s more to the rally than emotions. Productivity over the past ten years has fallen dramatically from a multi-decadal average of between 2% and 3% growth to now under 1%. Work by the Economic Cycle Research Institute (ECRI) in New York points to under-investment in productivity-enhancing projects and assets by businesses as being the major contributor. Why is this? In part, it may be caused by the uncertainty for managements in terms of what the “new” regulatory landscape might look like. Couple this with an economy that seemed to be “hooked” on repeated monetary easing in the form of quantitative easing instead of an economy where actual revenue growth and earnings growth was taking hold, and you have a prescription for great caution on the part of corporate managements. Better to simply do financial engineering (issue debt, repurchase shares and shrink shares outstanding to grow earnings per share.)

Now there is a promise that the regulatory uncertainty may be dissipating. If regulatory reform, a more market-friendly health care policy and tax relief, including the ability to repatriate cash held abroad at less punitive tax rates, might take place as is being discussed, then the prospect of both the corporate top line and bottom line growing again would be welcomed news. It’s that prospect, and the emotional excitement that goes with it, that is propelling the markets ever higher.

EN: Why don't the schools do more to help young people manage their money?

CW: Don’t blame the schools. This is a cultural thing and much of the blame rests with parents, the family and our culture’s value system. In the words of Pogo, “We have met the enemy and he is us.” The schools simply reflect our culture’s choices. And these choices have been made for well over a generation as teachers are told to adopt the last mandate and change the curriculum, moving away from those “boring” topics of home economics, civics and basic financial “truths” of living within one’s means.

There are many other subjects taught today that have crowded out these basic truths. Further, curriculum adoption forces teachers to throw out one teaching approach in order to embrace the next one. Ultimately, this detracts from teachers teaching core subject matter. It also saps the energy of teachers. These changes are driven by whatever is the current issue, the concern du jour. The more basic stuff gets pushed to the side because it’s not seen as “relevant.” But it’s perhaps the most relevant.

EN: What are some of the mistakes people make when it comes to investing?

CW: One of the most difficult emotional decisions for people to make is to save money. How to get employees to participate in contributing to their IRAs, for example, is legendary. Some personality types are better at saving than others. In my book Working with the Emotional Investor, the Survivor personality type is more likely to salt away money, knowing that there may be tough times ahead. But the other personality types—the Fixer and the Protector—have endless reasons why they must spend money today, even money they don’t have!

Besides this issue, we tend to be very short-term in our thinking. It’s something about wanting gratification quickly. Yet, the real power of investing is driven by compounding and compounding takes place over time. When I work with clients, I’m often thinking in terms of decades and generations, not this week or even next year. By controlling our expenses and saving the income we don’t need to spend, we can allow the money to work for us rather than the other way around. Isn’t that a much more satisfying concept? Emotionally, it’s more sane. After all, who’s “boss” around here?

Finally, investment counselors and investors themselves don’t take the time to listen to themselves and what the markets may be saying to them. By slowing down our thinking and by taking time to listen and reflect, we can consciously move away from the “gotta have it/do it/buy it now” syndrome and give ourselves the luxury of time to figure out what really makes the most sense.

EN: Can you offer advice to people who are mid-life, maybe their forties, on what to expect in the future?

CW: Mark Twain said, “History doesn’t repeat itself, but it does rhyme.” There’s great wisdom here. Study history in order to better understand the future. The markets present us today with options similar to what were there ten, twenty, fifty, even a hundred years ago. If you want to grow your assets over time, you need to be in equities. Further, unless you can time the markets, you want to hold stocks of high quality companies with superb managements through the ups and downs of the market cycles. It’s not too late to start investing and it’s not too late to start investing this way, even if you are in your mid-forties. You have at least 20 years to go until you retire, so allow for time and compounding to work in your favor.

EN: All my life I've been told "Social Security" will not be there for you when you retire. Yet many of us will be retiring soon and Social Security continues to offer promise. How do we know what predictions to trust and what to ignore?

CW: It’s best to not rely on a government program to fund your retirement if you can. After all, the benefits may not be there when you retire. And if they are, they may well be taxed away anyway. Our currency says it all, “In God we trust.” The tag line could well be, “Everyone else pays cash.” I’m skeptical that our Social Security and Medicare retirement funds will be there in today’s form when we need them in the future. They might provide a little cushion, but it won’t be enough except to give the thinnest of cushions.

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Chris White, CFA, is an experienced wealth management advisor and strategist, who has invested on behalf of hundreds of individuals, families, couples and institutions for over 25 years. Through this work, he has developed a keen sense of human nature, and has come to understand how human emotions, life experience, and family history (more than rationality) typically drive decisions people make about their money. He is a chartered financial analyst and a member of the CFA Institute, the Boston Security Analysts Society, and the Boston Economics Club. An avid sailor, White lives with his wife in Boston. For more information, visit theemotionalinvestor.net.

This blog post does not constitute an endorsement of his financial services. It does aim to shed light from one person's long experience in managing finances, a skill we all need to develop and assume responsibility for.

Meantime, life goes on all around you. Engage it.