Charlie Munger earned the nickname “The Abominable No Man” working for Warren Buffet at Berkshire Hathaway has his number two. A nickname earned by Munger’s ferocity in rejecting potential investments, some of which Warren would have made without Munger present. Munger aided the investment philosophy of Berkshire Hathaway in two key ways. First he encouraged Warren Buffet to end his pursuit of “cigar-butt investments – mediocre companies at bargain prices” and to instead look for splendid companies selling at reasonable prices. Secondly, Munger encouraged Warren Buffet to invest in technology companies, something Buffet was previously trepidations about, yet now makes up over half of the investment companies current holdings. While Charlie may have been known as the number two, no equal business partner has ever played second fiddle better than Charlie Munger.
There have been many “yes men”. Generally these people have been serving someone were afraid to displease. What all these people have likely had in common is the fear of upsetting someone, the inability to speak the truth, and courage to say what is truly best for the person they advise. A “yes man” is afraid, unable to say “no” due to the fear of what implications may unfold if they do so. One could say these individuals were likely not fulfilling their fiduciary duties. While some of these “yes men” occurred in the past, some still exist today, and some are advising clients.
When investing money, trends can be dangerous. Trends occur from year-to-year and decade-to-decade, but we often hear about them too late to have any positive long-term impact on our investments. Sometimes following the latest trend can result in financial harm. Investment companies are constantly creating new products, but those based on trends should be scrutinized heavily.
When advisors try to satisfy their client in the short-term, they may compromise their fiduciary duty by causing long-term financial harm to their client.
A true fiduciary is not a “yes man” and should emulate the ethos of Charlie Munger, the “Abominable No Man”. Investors are constantly bombarded by new investing ideas, funds, and trends. Some of these can sound appealing.
Fiduciaries shouldn’t fall prey to these short-sighted investment decisions. A fiduciary applies the discipline of goals-based investing, and relates how an investment affects the total portfolio and their client’s probability of reaching their goals. For example, while investing in commodities may offer a short-term inflation hedge, does the client in question need a short-term hedge? Or is their time horizon quite long, and might the addition of commodities to their portfolio cause a drag on performance?
Following trends usually doesn’t work for everyone. Addressing an investor’s goals and how changes to their portfolio relates to their goals is a more prudent approach. This is why there can be significantly different allocations and strategies for investors still working and saving, and those in retirement, who rely on their portfolio to support their spending needs.
Advisors often receive calls from clients asking for their take on investment trends. Rather than being in the business of following client requests, advisors should be in the business of doing what is best for their clients, which can often involve the answer “no”.
Fiduciaries must manage their client’s assets for the benefit of their client, not themselves. Sometimes what is best for a client is a difficult conversation, a “no” and an explanation on why a flashy new investment is not best for the client. While these conversations can be scary, and may even result in the loss of a relationship, it is the duty of a fiduciary to not be a “yes man” but to take a page out of Carlie Munger’s book and learn to politely and intelligently explain why the answer is no.
Jack O’Brien CIMA® is a Certified Investment Management Analyst educated at Chicago Booth School of Busisness and Virginia Tech. EVOadvisers is a fee-only financial advisor based in the Scott’s Addition area of Richmond, Virginia. EVOadvisers also has an office in Irvington, Virginia to better serve clients in the Northern Neck of Virginia. If you have any questions about financial planning and would like to talk with one of our Certified Financial Planner professionals, check us out at www.evoadvisers.com or call (804)794-1981.