Growing up, my friends and I loved to shoot hoops after school. My best friend, Andrew, had a basketball hoop set up in the front of his house, and we could spend hours out there. We would emulate our favorite players and reenact our favorite plays.
The great thing about Andrew’s hoop was that it was adjustable. We would lower the hoop to 7 or 8 feet, and then we could dunk. Whether it was Shaquille O’Neal or Vince Carter, or any other dunking phenoms, we would try to mimic their acrobatics.
Dunks were to basketball, what home runs were to baseball. It was the reason we watched the games.
Nowadays, some 25+ years later, new superstars have surfaced, and the game has changed. The highlight reels are scarce of dunks and littered with exquisite ball handlers and three-point shooters. There is no need for an adjustable hoop, the future stars of today are more interested in draining a 40 foot 3-pointer like Steph Curry.
Whether it’s basketball or investing, humans like to elevate their superstars and seek to mimic their behavior. It’s just part of being human. Steph Curry will forever change a generation of hoopsters, just as Warren Buffet has impacted a generation of investors.
An Insatiable Curiosity
The same passion I devoted to collecting basketball cards, perfecting my crossover, and keeping my jersey/shoe collection up-to-date has now translated to a love for investing and personal finance. This is not just my day job; it’s the subject matter that I find most intriguing and devote much of my free time to studying.
I’m not alone in this interest and appetite for understanding. Many of my clients and friends share a similar curiosity to some degree. With the internet, one can delve into endless podcasts, articles, blogs, books, etc. You can embark on quite the treasure hunt.
While on this treasure hunt, you are bound to bump into some financial superstars, Gurus that have been elevated by the media and fans alike. Their quotes, opinions, philosophies, etc. all readily available and often shared.
Comments Without Context
If you watch basketball, you know that Stephen Curry, point guard for the Golden State Warriors, has made some incredible shots in his career. Buzzer beaters from half-court and circus-trick-shot-like layups; incredible stuff. Things that would be fun to try on the schoolyard courts with your friends, but not something you should attempt in a competitive game, not unless you are Stephen Curry.
Curry spends hours, hundreds of hours, perhaps thousands of hours perfecting his craft. What you see him do on the court is not a first-time attempt or an accident. It’s the result of practice, practice, and more practice.
Imitating a basketball superstar without putting in the practice is like following a famed investor’s advice without knowing the context.
Let Me Give You an Example…
If you watch daytime financial television – I don’t recommend it – but if you do, then you’ve come across a commercial where one famed founder is constantly touting that he hates annuities. The man literally says, “I would die and go to hell before I would sell an annuity.” That is some strong language, and it catches your attention, which I am sure is the marketing message’s intent.
Now, back to this idea about comments without context, what is an investor to derive from this bold statement? I would assume most would interpret this as advice to avoid annuities like the plague.
So, would anyone disagree with this claim? They sure would. Countless professors and academics reference certain types of annuities (e.g., Single Premium Immediate Annuity) as a potentially great solution for some financial plans.
Wait a tick… How do we reconcile this? We have an emotionally charged protest against annuities from one talking head and then a community of academics promoting annuities as a viable solution.
Let’s start with our first character that would be willing to take a one-way ticket to hell as an opt-out to selling an annuity. I don’t want to speak on his behalf, but let me tell you what I think he means and where he is coming from.
Annuities have gained a bad reputation because they can be confusing, expensive, and have long lock-up periods. Historically, these products were often promoted by commission salespeople, and the compensation associated meant they were sometimes sold regardless of whether they were the best solution for the client.
Not that annuities themselves were evil, but that a generation of less-than-wholesome representatives misrepresented these products and preyed on uninformed consumers. This perspective and experience for some in the industry have put such a strong distaste around annuities that you see responses much like that commercial I referenced.
Again, this is a perversion of the product and the sales process, which can also be a distraction from the actual product’s intent and purpose. An annuity is a type of insurance. Insurance is meant to protect against a potential loss. An annuity is meant to insure against the potential loss of income or running out of money. Each of us has an unknown variable in our financial plans, and that is our longevity. Annuities can be used to insure against the risks associated with this variable. Annuities are not the only solution, but one potential solution to mitigate this longevity risk.
Academics tend to like the simple, stripped-down, low-cost types of annuities. Our disgruntled protestor saw industry participants’ questionable behavior, which colored his opinion on the product. Many academics are attracted to annuities because of their impact on financial forecasts and the projection benefits of a non-varying income stream. If you spend your day running Monte Carlo simulations and you are working on creating high probability outcomes for not outliving a nest egg, then having solutions with linear payouts is treasured.
Again, context matters. One person has adopted a belief system based on the negative experiences they’ve viewed within the industry. In contrast, another has adopted a belief system based on the positive experiences they’ve viewed within their calculations.
I would argue that both viewpoints are a bit narrow, and one can benefit from slowing down to understand the context behind each. I, too, have seen these products oversold and the associated expenses. I also know the financial planning benefits of finding solutions that create reliable and sustainable income streams. And it’s this type of first principles approach that leads you to the conclusion that cost-effective income-generating solutions can be powerful. This is perhaps how I fell in love with Dividend Growth investing, but that is another story for another day.
Don’t Try This at Home
I come across a lot of people that implement strategies from investors they admire. Much too often, these strategies are constructed without understanding the context or reasoning behind the strategy. This misunderstanding often leads to disappointment, as the outcomes don’t always meet the investor’s expectations.
You have goals, and these are often unique goals. These goals revolve around what’s important to you. Your financial situation is unique, and that uniqueness should be understood and reflected in your financial plan and your portfolio. Some billionaire sharing a soundbite in passing doesn’t know you, your goals, or what’s important to you. Mimicking their approach is about as silly as me trying to emulate Steph Curry on the basketball court.
Opinions are just the tip of the iceberg. Just like our discussion today on annuities, you have to peel away the layers to understand the basis for these opinions. Then you take those first principles you derive from this process and use that reasoning or those objectives to craft a solution most fitting to your situation.
It’s not easy, but that’s the fun part. The journey is never over…