Why Professionals And Their Clients Need To Get Comfortable With Being Uncomfortable

 

Key Takeaways

 
The low prospective return environment requires investors to examine what discomfort they prefer. [I wonder how many advisors are being up front with their clients about the challenges we face as investors. I am skeptical that they are framing the discomfort transparently for the same reason that the realtor who shouts the highest price tends to win the listing.]
 
In 2008, the level of discomfort was massive. So I remember advisors not being able to return the calls for the clients where, advisors were just not coming into work, clients not looking at their statements for months on end. Advisors calling me at 4 am for conversations, about what was going on in Asia. I was a therapist, definitely. Everybody was getting therapy. You, you were gonna get a big whopping dose of discomfort.
The question is, do you wanna kinda dull it out a little bit every year by being regularly uncomfortable via alternative portfolio or do you wanna happen like [Taleb’s] turkey?
 
[Taleb’s turkey: The turkeys is nurtured by the farmer. He's fed by him every day. The pen is guarded to keep the foxes out so that turkey can reach its full potential. And when the turkey crunches the numbers, he sees that with a higher level of confidence every single day. Every single day there's more data to back up the fact that they are truly loved by their masters.
 
And then thanksgiving comes.]
 
Axis of Discomfort
  • An uncomfortable truth: High valuations and low bond yields imply market returns that can be as much as half historical averages.
  • Discomfort is inevitable compared to historical expectations so you need to consider the spectrum of choices:
    • increase savings rate
    • reduce your expectations for your retired lifestyle
    • retire later
    • consider investments that are uncomfortable or require more effort to understand
      • Tells the story of a conference where a group of allocators asked for Robert Shiller’s guidance in how to deal with an environment where everything is expensive. Shiller:
        • “Nothing's cheap? Well, you have CAPE ratios in Russia, Czech Republic and Turkey and Greece that are in the five to nine minutes single digits.
        • The room scoffs “no one can do that.”
        • And that’s where the excess risk premium lies. That's why it's there. Because it's hard to do.
Biases
Home Country Bias Is a Bias Towards Comfort. Exists everywhere.
  • In Peru, 90% of capital is invested in the stocks listed on the Lima Exchange
  • In Canada, 87% is allocated to Canadian stocks despite the fact that Canada is less than 3% of global market cap. Highly concentrated investing!
Leverage aversion
  • Allows low return high Sharpe strategies to be overlooked
These biases toward comfort provide the “willing loser”
  • Someone wants a certain amount of comfort and is willing to give up excess returns to those who are willing to be more thoughtful about diversification across many different domains and axioms. This is an opportunity for someone willing to be uncomfortable.
You or your clients biases should be worked around not dismissed
Whether you're advising pools of allocated, long-term assets, or individual assets, figuring out the tracking error that the person or entity is most susceptible to is of paramount importance. So if someone has a number of friends and they are all Apple employees, well if you sell their Apple for them because you want to diversify, and all of their friends are still holding their Apple stock, you're going to be a very unpopular advisor, even though you're trying to do the right thing by diversifying the portfolio. Figuring out the tracking error that the person or entity is most susceptible to is of paramount importance.