History of Pizza
In light of the New Year and the onslaught of Healthy Resolutions that commonly arise this time, I wanted to pay tribute to a globally loved food staple – pizza. Pizza entered the United States around 1905 by a gentleman named Gennaro Lombardi in New York City. Gennaro applied to the New York City government for the first license to make and sell pizza at his grocery store on Spring Street. Ever since that revolutionary day, the concept of pizza has evolved into a massive industry generating roughly $47 billion in sales and creating some outlandish dishes, such as the hot-dog-crusted pizza at Pizza Hut or a more Orange County version, Cauliflower crust pizza with a Lemon Vinaigrette. In a world where options are endless, and there seems to be a new creation every month, the foundation of crafting a truly great pizza requires two ingredients: simplicity and quality.
Back to the Basics
I am not the only one who values simplicity; Albert Einstein referred to this principle when he stated, “Everything should be made as simple as possible, but not simpler.” Now, he was not commenting on pizza in this quote, but rather, the Mental Model of Ockham’s Razor, which can be summarized as follows: the simplest solution is almost always the best. William of Ockham, a 14th-century friar, philosopher, and theologian, coined this theory. William believed that when comparing two outcomes, the option with the fewest assumptions was preferred. The scientific community uses this framework in the development of theories, as well as the medical community, in diagnosing patients. A common phrase taught to medical interns is, “When you hear hoofbeats, think horses, not zebras.” For example, a person displaying COVID-like symptoms during a super-spreader time of the epidemic is more likely to be fighting COVID than a rare illness. Investors should note that context is also paramount; medical interns should think of horses, not zebras unless they’re standing in the African savannah.
Sophisticated Temptations
So, if the pursuit of simplicity has existed for much of modern civilization, why do so many families (and financial advisors, to be fair) yearn for complexity? The culprit is the allure of sophistication. We all desire to be considered competent, capable, educated, and valuable. It’s a core part of human nature that is not so easily changed. A quick search in Chat GPT on why people are drawn to sophistication yielded the following results:
- Social Status & Success: Sophistication is often associated with higher social status, education, and success.
- Perceived Competence: Can create an impression of competence and intelligence.
- Media and Advertising: The media often portrays sophistication as desirable. Images of elegant lifestyles and refined aesthetics in the media can influence people’s preferences.
I have seen all three of these themes with financial advisors over the years, overcomplicating investment portfolios beyond what may have been necessary. One common theme for advisors is the inclusion of unique investment products, for example, attempting to explain Structured Notes and Covered Call Options to clients who, in hindsight, did not necessarily need the extra layer of complexity in their investment portfolio. Not to say any of those strategies are inherently wrong, but to illustrate that professional advisors are just as susceptible as retail investors to the strong pull of sophistication.
Quality Control
Nick Murray is a current-day writer and excellent thinker in wealth management. He had an excerpt from the January report I found to be acutely relevant.
“There has been a marked tendency of large firms…to drift toward increasingly complex ‘solutions.’ I can only guess this is a misguided impulse toward showing how ‘sophisticated’ they are in terms of the products and services they offer. Personally, I think this is a mistake”.
As Leonardo da Vinci said, “Simplicity is the ultimate sophistication.” The ultimate goal is not complexity, but a life well lived and resources well managed. The extent to which a client requires a certain complexity level depends on their circumstances. Ockham’s Razor (the theory of prioritizing simpler theories) is a tool we can use to think efficiently, evaluating whether our investment framework would benefit from an additional technique. Or if there is an opportunity to leverage addition by subtraction.
Building Your Personal Pizza
The pizzas most loved ignore the latest trends, toppings, or gimmicks. They are pizzerias that value quality over quantity, sourcing the best-in-breed ingredients and obsessing over the refinement of their process. They ignore the outside noise. If your investment portfolio was a pizza, how would it look? Crammed with the latest and greatest toppings, undercooked with little fundamentals, falling apart from lack of a foundation? Below are a few points to consider in the development of your portfolio.
- Correlation – Understand how your investment holdings are correlated together. If one stock goes up, how likely will other positions increase with similar intensity? One example where there appears to be a strong correlation is between technology stocks (Nasdaq 100) and cryptocurrency.
- Diversification – A general rule of thumb is holding 20 – 30 individual stocks in various industries to achieve a baseline diversification level. If your portfolio has close to 40+ holdings, there may be an opportunity to trim the excess.
- Objective – Take the time to write down the investment objectives you seek to achieve. A few common themes are performance, stability, income, protection, or taxes. It’s possible to accomplish 1 or 2 of these at a time. However, there is a point where more of one means less of another. Trade-offs are very real with investments, and an investor should know how these themes play off against each other.
The temptation to overcomplicate wealth management in the name of sophistication is strong. Financial advisors are especially prone to fall into this category as we seek to add value to our clients. I encourage our readers to focus on the north star, not to be pulled away by the clever gimmicks that pop up every year, and to exercise discipline in our process. I encourage our readers to build wealth that withstands the test of time so that many generations can benefit from the strong foundation you have created.
James Andrews
Private Wealth Advisor
jandrews@thebahnsengroup.com
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
