Bob Seawright: 'There Is No Such Thing as a Passive Investor'

Our guest this week is Bob Seawright. Bob is chief investment and information officer at Madison Avenue Securities, a Registered Investment Advisorand broker/dealer based in San Diego, California. Bob has received a number of accolades through the years but is perhaps best known for his popular newsletter, "The Better Letter," where he writes about a wide range of topics, including human behavior, decision-making, and investing. Before coming to the finance industry, Bob was a practicing lawyer. He later joined Merrill Lynch, where he worked as a financial advisor until joining Madison in 2010. Bob earned his bachelor's degree from the State University of New York at Fredonia, his J.D. from Duke University, and is a CFA charterholder.

Background

Bio

The Better Letter

How I Invest My Money: Finance Experts Reveal How They Save, Spend, and Invest, by Joshua Brown and Brian Portnoy

Ubiquity: Why Catastrophes Happen, by Mark Buchanan

Terrance Odean: “The Average Investor Is His Own Worst Enemy,” Forbes.com, June 10, 2010.

Confirmation Bias and Addition by Subtraction

“The Better Letter: Believing Is Seeing,” by Bob Seawright, betterletter.substack.com, May 21, 2021.

The Geometry of Wealth: How to Shape a Life of Money and Meaning, by Brian Portnoy

“A Hierarchy of Advisor Value,” by Bob Seawright, RPSeawright.wordpress.com, Feb. 12, 2016.

“The Better Letter: Addition by Subtraction,” by Bob Seawright, betterletter.substack.com, July 30, 2021.

Error Avoidance

“Investors’ 10 Most Common Behavioral Biases,” by Bob Seawright, RPSeawright.wordpress.com, July 16, 2012.

“Not Stupid Wins,” by Bob Seawright, RPSeawright.wordpress.com, Dec. 20, 2019.

“The Better Letter: Crash Protection,” by Bob Seawright, betterletter.substack.com, Sept. 24, 2021.

“Forecasting Follies 2020,” by Bob Seawright, RPSeawright.wordpress.com, Jan. 2, 2020.

Skill Versus Randomness

“The Better Letter: Randomness Rules,” by Bob Seawright, betterletter.substack.com, July 16, 2021.

“The Better Letter: Process, Probability, and Power,” by Bob Seawright, betterletter.substack.com, Aug. 14, 2020.

Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, chief ratings officer at Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance and retirement planning for Morningstar.

Ptak: Our guest this week is Bob Seawright. Bob is chief investment and information officer at Madison Avenue Securities, a Registered Investment Advisorand broker/dealer based in San Diego, California. Bob has received a number of accolades through the years but is perhaps best known for his popular newsletter, "The Better Letter," where he writes about a wide range of topics, including human behavior, decision-making, and investing. Before coming to the finance industry, Bob was a practicing lawyer. He later joined Merrill Lynch, where he worked as a financial advisor until joining Madison in 2010. Bob earned his bachelor's degree from the State University of New York at Fredonia, his J.D. from Duke University, and is a CFA charterholder.

Bob, welcome to The Long View.

Bob Seawright: Thank you very much. I'm honored to be here.

Ptak: Well, we're honored to have you. Thanks again for doing it. We wanted to start off on a biographical note. We're going to spend a fair amount of time today talking about your writing and your observations through your weekly email "The Better Letter," but you're also the chief investment and chief information officer for Madison Avenue Securities. What does that firm do? And what do you do for them?

Seawright: We're a boutique investment advisor and broker/dealer. And my job predominantly involves information. I write a weekly market commentary. I do a monthly chart piece with the best charts from the previous month. I do a quarterly magazine and an annual investment outlook. That's a lot of writing besides "The Better Letter," and that's a big part of my job. I'm also responsible for advisor education and the Investment Committee and due diligence for the investments that are on our platform.

Benz: That's a lot. I want to talk about "The Better Letter," and what the impetus was for starting it--"The Better Letter" is your weekly email. Curious, why do you style it as an email versus doing a blog or some other format like that?

Seawright: Well, I did a blog for a long time--"Above the Market”--and when COVID hit, I realized I had a little more time than I had previously had so that I could experiment a little bit. And so, I decided to experiment using Substack, which yes, it's a weekly email, but it's also a stand-alone website. So, you can find all previous issues readily online. It's not like you have to save the emails; they're readily available. So, it's blog-like in that sense, but it goes out weekly as an email. The Substack platform has been really easy to use. And what I wanted to do at the start of COVID was discipline myself to do something weekly and also to write more broadly. I'd written for almost 10 years on the investment world alone. I wanted to expand that a little bit since I had a little time to try it. It seems to work pretty well. There's a large and growing number of subscribers and so, at least for the foreseeable future, I'm going to keep doing it.

Ptak: Well, and selfishly, we hope you continue to do so because we enjoy reading it so much. You're a true omnivore, connecting the dots across disciplines. You're weaving together insights drawn from things like music, sports, movies. Where do you find inspiration for what to write about with "The Better Letter" each week?

Seawright: That is about the least-disciplined part of my process. Mostly, I pay attention and when something strikes my fancy, I put it into my note-keeping process, which is pretty disciplined. I have a variety of approaches to save ideas. And if I see something that I think that might be of interest at some point, I write it down either as an impetus for further research or simply as a reminder that hey, I want to explore this. And it can be newspaper article. Christine actually sent me an idea a couple of weeks ago from Twitter that I'm planning to use that I haven't gotten to yet. And sometimes I get emails from readers that provide an impetus. Sometimes because they think I'm right, other times--and usually the more interesting times--when they think I'm wrong. And so, pretty much from anywhere. I carry around something to take notes with all the time. So, even if I'm sitting in Petco Park as I want to do to watch the Padres--I wish I was still watching them now, but that's another and very sad story--I have the ability to write something down to remember later.

Ptak: I wanted to follow up on that really quickly. The fact that you range across disciplines to the extent that you do, do you see that as a source of edge? A lot of time people sort of stay in their pockets. But we have spoken to some folks on the podcast, in fact, who specialize in sometimes referred to as consilience, which is this notion of trying to connect otherwise disparate disciplines. I think they see it as a potential advantage. Do you see it the same way?

Seawright: I think it can be. But I think it's really hard to pin that down. It's like the difference between branding and marketing. If you're branding yourself, you are positioning yourself as a reliable expert. But it's hard to see exactly how that helps you marketing. It's easier to tell--you did this ad and you got these many calls in response to it. I think thinking broadly is the same way. My biggest insights have generally come from something outside the investment world that applies. I remember I read a book called Ubiquity by Mark Buchanan, and he talks about complexity and how that impacts earthquakes and sand piles, and then that pushed me to the broad and deep scientific research on those subjects. And I thought it was really helpful to looking at markets, because how we can look at earthquakes, or avalanches, or whatever applies pretty well to markets. And that was probably 15 years ago that I read that book. Don't hold me to that date, but a long time ago. And that was a big moment of insight for me.

Benz: I wanted to ask about your contribution to the book, How I Invest My Money. You wrote a lovely essay for that book, which I also contributed to, about your wife's family's lake house in the Adirondacks. You talked about what a wonderful investment that has turned out to be for you and your family. I'm wondering if you could discuss that with us. And I'll also say that I'm so glad that I read your essay after I wrote mine, because I think I would have been paralyzed because yours was so excellent. So, I'm hoping you can talk a little bit about that one.

Seawright: Well, first, thank you. And secondly, I want to emphasize that it has been a fantastic investment but only when you define investment very broadly. Typically, vacation homes are terrible financial investments. And I have no illusions that mine is going to be any different. According to various real estate sources, the pandemic has upped its value as a real estate investment significantly. But that's largely irrelevant to me because I don't plan ever to sell it and I hope my children never do. But it has been a wonderful investment in terms of family. As I say in the book, my wife has been going up to that place in the Adirondacks her entire life. Her first visit was in utero. I started going at 17 for a summer job. I met her, my wife, there, and our children have gone every summer of their lives, and we love it there and the kids love it there and now their kids, our grandchildren, love it there. And so, having a place where everybody can gather and be together in the summer is fantastic. And it's also pretty smart grandparent strategy--the grandkids want to be there, so, by golly, they're there. And that's a win for grandparents everywhere.

Ptak: One theme of that essay is the importance of purpose in the financial-planning process. You wrote that “repeated consideration and articulation of our purposes can help us stick with our financial plans.” You call it having our whys--W-H-Y-S--in order. Do you have any recommendations about how people can help ensure that they're frequently revisiting and reconsidering the purpose of their savings?

Seawright: It's very easy to lose sight of why you're doing things. An example I see a fair amount is people who say they have a particular purpose for investing and a particular goal, and then when they meet the goal, they don't change anything. They decide to make the goal higher. Well, that may have been because the goal was designed to be reasonable, and it worked out really well, so you make an uninformed decision to increase it somewhat. But often, it's simply, “Yeah, but this is working, let's keep going.” Instead of, “Wait a second, if you've won the game, there's no necessary reason to keep playing.” And if we emphasize our whys, and especially if we have put them in writing--an investment policy statement is usually the best mechanism for that or it could be in your financial plan, wherever it is--if you keep revisiting those, it helps to make the decision to however it is you planned to change course at that point, it makes it easier to do. It helps if it's in writing and you've looked at it regularly, and it's like, “That really is why I do this; that's my purpose for this investment, or this set of investments, and I've reiterated that every time I've looked at it, every quarter or twice a year,” or whatever it is you choose to do. When you do that and keep revisiting it, it's easier, at least for me, to follow through on it when the time comes.

Benz: You focus a lot on decision-making and human error in your writings. And you've implored others to be humble in the way they approach challenges and problem-solving. You're in a profession—finance--that is not exactly known for qualities like humility and circumspection.

Seawright: No.

Benz: So, what led you to these conclusions? And how do they inform the way that you go about the work that you do?

Seawright: Well, the easy laugh line, which also happens to be true is marriage. But there's more than that. Life does that, experience does that, my faith does that. I'm well aware of my sins. And I mean that both in a religious sense and in a broader colloquial sense. The more you pay attention to such things, the easier it is to see how much we screw up and how often we screw up. And I know our cognitive senses are designed for us to be optimistic, and that's mostly a good thing. But if we lose sight of where we have gone wrong, and particularly importantly, as a practical matter, where we could go wrong, we're asking for all kinds of trouble.

Ptak: I wanted to follow up on that, asking you what's an everyday example of something you do or refrain from doing because you know it keeps you from making something worse either in the doing or in the undoing, I suppose? Does anything come to mind?

Seawright: Well, I have no online access to my investments. And I look at the statements only twice a year. Because I know from the literature and I know from past experiences, the more I look at it, the more I pay attention to it, the more I am going to be inclined to trade. And one of the clearest evidences in the literature--Terry Odean at Berkeley, for example--the more we trade, the less well we do. And so, I'm conscious of that. I make it hard to do that by not giving myself online access so I can't look at those little red or green lights all the time. And I don't even look at the statements all that often.

Benz: Do you think we're setting investors up for failure by making it even easier for them to check their trades and for them to check how their portfolios are doing on their phones and what have you?

Seawright: Yes and no. The problem is that the greatest lack in our society is trust. And unfortunately, that's very well earned. And so, the kind of transparency offered by instant access is really important. And there are all kinds of opportunities for malfeasance if at least theoretically we didn't have instant access. So, I'm not opposed to it. But, fortunately, if you have enough trust in the process or in your custodians, it makes it easier to not look. And I think I am better off for not looking. I think most people would be better off for not looking. But I understand the trust problem at the heart of it. And if it's really a trust problem, I get it. Unfortunately, at least in my experience, people often say it's a trust problem, but it's more a gambling problem.

Ptak: Let's switch and talk about a bias that I think is regular fodder for you and your writings and rightly so, that's confirmation bias. You're an admirer, like so many of us, of Nobel Prize winner Danny Kahneman and had the opportunity to ask him how we can avoid mental errors like confirmation bias. And he said, ask the smartest and least-empathetic people you know to tear your ideas apart. So, my question for you is, who do you go to for that?

Seawright: Well, my wife first. I've been married for 42 years, successfully. I married up in a big way. I was very fortunate that way. And I am fortunate that she hasn't thrown me out yet. And, fortunately, for me, she is not hesitant, albeit lovingly and kindly, to point out my mistakes, even if I don't ask for her to do that. That's partly a joke, but it's also dead serious, because she knows me best and she knows where I'm most inclined to err, and she points that out. Kids do that, especially adult children. And in a lovely way, grandchildren do that. “Come on, Grand Bob,” I hear more often than I'd like, and they usually suggest something else than what I had in mind. And most of the time we do it. But beyond that, I have made a concerted effort to foster relationships with people I disagree with profoundly. I think that's a good and healthy thing for its own sake. I don't want it to sound like those relationships are designed for me to get something; they aren't. But a side benefit of those relationships with people I profoundly disagree with is that it causes me to rethink positions on a regular basis and rethink what I have thought before. And sometimes I don't change my mind, but sometimes I do. And in politics, they talk about flip-flopping as a bad thing. For most of us in real life flip-flopping is a feature and not a bug, that's a good thing. If you change your mind a lot, you're probably going to be right more often.

Benz: What's something that you hate-read because you want to keep your own confirmation bias at bay? And also, can you give an example of something you consume because it gives you pleasure and confirms what you already think but doesn't necessarily add to your knowledge?

Seawright: That's a tough one for me because what I think about stuff doesn't fall in typical categories. What I think about in most areas of life cuts across categories. Some people think it's because I'm inconsistent. I think it's because that's what the facts justify, but that's part of the process, right? And it is not so much one particular source as a series of sources. I intentionally subscribe to publications with a wide variety of outlooks, both in the investment world and in the world more broadly. And then, with friends with whom I disagree--also agree, but with whom I disagree--we share articles and sources routinely. And I mostly send stuff that agrees with me as human nature generally works and they generally send stuff that they agree with, and all of it is challenging. In terms of stuff that I read for pleasure, even though it doesn't help, great writing does that. I can read the novels of Marilynne Robinson anytime. Her view of the world and mine are not all that far off. But I still find her insightful, and even if it's not insightful, it's lovely, and I could read that any time. So, I'm a real sucker for good writing generally.

Ptak: In your own writing you talk about the valuable role that skeptics can play in maybe clarifying our own thinking or just adding to a diverse pool of ideas. You're very well read and very plugged in to what's going on, especially when it comes to financial advice and investing. Who are skeptics we're not paying enough attention to right now within the investing or financial advice fields and what are they saying?

Seawright: I think there are probably two broad categories of areas we're not paying enough attention to, and it's not so much that they are skeptics of any particular approach. It's that they are skeptical of the ways we evaluate what's important. The one example I'm thinking of is the distinction between financial-planning advice and investment advice. We, too readily, I think jump to investment advice when that is only, in my view, secondary to financial-planning advice. And good investment advice in a vacuum doesn't help you all that much. It has to be based upon a plan that makes sense and is productive and promising to provide for one's future. And so, I think we generally don't pay enough attention to financial-planning questions as opposed to investment questions. We will spend an immense amount of time trying to eke out 5 extra basis points in an investment strategy and not spend nearly enough time about how we can invest in a tax-efficient way that could save us multiple times those 5 basis points.

At the other end, I don't think we pay enough attention to what to do post-retirement after we have "won." I've alluded to it before. I'm sure you guys have both read Brian Portnoy's great book The Geometry of Wealth, which talks about our whys--which we've already talked about as well--and funded contentment and how we get that but even more prominently for lots of my clients, what to do when we have attained it and how we go about living our lives at that point. I see lots of people in retirement that see retirement as a big goal without necessarily having thought out what their retirement is going to look like. And that's a big question for me personally. I turned 65 last week and retirement is not a far-off thing for me anymore. I hope it's years away. But I can't assume that it is because I'd like to work for a long time still, but health may not allow that. Not that I have any health issues; I don't. But who knows what could happen? As I get older the chances of something like that happening increase dramatically. So, I think that they aren't really skeptics, but I think we need to pay more attention on the front end before investing and on the back end after we have successfully invested.

Benz: I want to follow up on the piece about retirement, this idea of helping people envision their retirement. Can you talk about perhaps your own approach to that when thinking about your own retirement? It sounds like you want to continue working, and maybe you can give us a little background on how you arrived at that conclusion. But also, just in terms of imagining what your retirement might be like, how do you go about doing that?

Seawright: Well, in our family, my wife is a fifth-grade teacher. And so, the balance for her--she loves teaching, she still loves teaching, she's taught for a long time, but she still loves it. And so, it's going to be a balance for her between how much she loves it and wants to continue to do it and the call of the grandchildren. We have nine of them. Each of our three kids has three, and the oldest of them is 10. And they all live within a mile of each other, which is great, but it's on the other side of the country from where we live. So, at some point, she's going to want to move to a place where the grandchildren can get off the school bus and come to Grandy and Grand Bob's house. And so, when that happens, that will be when she retires and that will be a time for me to reevaluate. Thankfully, one good side benefit of this awful pandemic has been the recognition that it's much more easy for people in jobs like mine to work remotely. And I hope I'm going to be able to do that after she retires and after we move closer to the grandchildren, but that's the context in which I've thought about it.

And in terms of what I want to do, happily, I love what I do on a day-to-day basis. And the idea of playing golf or something else instead of that is not terribly appealing. So, there are some things I would like to do in "retirement." I have coached a lot in my life from little kids through varsity, and baseball and basketball and soccer, and in retirement, I would like to do more of that. But that call is not so strong that I at this point am at all interested in giving up my day job. But that's the context in which I've thought about it.

Ptak: I wanted to shift gears and talk about simplification. I think that you've referred to it as addition by subtraction. And one technique you've recommended for applying this notion of addition by subtraction is making fewer decisions by automating tasks, which I think really resonates with Christine and me; that's something that we talk about, and in Christine's case, she has written about extensively before. Can you give an example of automation you've done in your own personal affairs or those of clients in order to reduce the number of decisions that have to be made?

Seawright: Well, I invest automatically; I pay my bills automatically; I rebalance my portfolio automatically. And I have built a variety of mechanisms into my writing process to limit the number of decisions I have to make. The way I keep records, the way I keep track of ideas, it's designed to make it so that I'm not approaching a deadline and I have to come up with what to write about or how to write about it or what the focus is going to be. I have a process to do that. I don't have to make those decisions. Those are some easy examples right off the top of my head.

Benz: Do you think the advice profession overemphasizes decision-making in the way it markets itself to clients? And also given the way in incentives are structured, I have to imagine that a lot of advisors think it's hard to charge 1% per year for simplifying someone's financial life, even if it's the right thing to do versus doing things that have perceived value but require decisions, either now or in the future?

Seawright: One of the most difficult dilemmas in our business is that the advice clients need does not frequently line up well with the advice clients want. And we know from a variety of studies that managing behavior is probably the most important thing we as advisors can do. But the list of clients who think they need that advice is a short one, indeed. And so, the difficulty for our business is to manage those things in a way that is helpful for clients but also works from a business standpoint. And that is an ongoing and difficult dilemma that I don't have a great answer for. I wish I did. I wrote a piece years ago now about a pyramid of advisor influence or something like that. And the stuff that clients want to pay for is at the top of the pyramid that has the least value in the aggregate. And the most important stuff at the bottom, they think they have covered just fine, even when they don't-- especially when they don't.

Ptak: I wanted to follow up on that. It is curious--you do hear a number of advisors out there who sell on behavior modification. But like you just said, that will not resonate with certain, it sounds like, a large subset of prospective clients who feel like they're OK and they're looking for something else. And so, in your mind, as somebody who's been in the business a long time, what explains that disconnect? Why do advisors continue to push that if that's not something that's really going to click with whoever it is they're pitching their services to?

Seawright: Well, there are two ways to look at it. You can look at it from the advisor perspective, or you can look at it from the client perspective. From the client perspective, I think it's pretty obvious. We all tend to overconfidence, and we all tend to see what we want to see. So, we look back at our past and say, yeah, I might have made mistakes, but I've done pretty well overall, and I know what those mistakes were, and I'm not going to make them again. And so, I don't have a problem there. Instead, give me the next Amazon please.

And from the advisor side, it is a balance between the advice clients need and the advice clients think they want. And the honest advisor will say, “You know what, an important part of my job is to help you stick to your plan.” Now, some people frame that in terms of behavioral coaching. I haven't seen that work very well. I prefer to think of it in terms of developing your plan and helping you implement your plan, which I know is going to involve some behavioral coaching. And that's a lot easier to do when you can, for example, point to an investment policy statement that says, “I'm going to do X, Y, and Z and then when A, B, and C happens, this is how I'm going to follow up.” If you've established that carefully and in writing ahead of time and they see their signature or their initials next to each of those, it's easier for all of us to stick to it instead of the latest silly idea they found on the Internet.

Benz: If we can paraphrase some of your writing, you're a strong believer that the most value is added not by picking out performing managers or securities, but rather by avoiding costly mistakes. You published a piece in 2015 that enumerated some of the most common mistakes, 10 in all. A lot has happened since then, including a pandemic. If you had to update that piece today, are there other avoidable mistakes that you might talk about?

Seawright: I think you're talking about my piece about a new kind of investment outlook, which did make that broad point, and I listed 10 things that people could correct to get a better result instead of buy this stock or this sector. One thing I did not include in that list in 2015 that I would probably include today, even though I had written about it then, relates to politics. Politics and investing is a terrible mix. And if your investment decisions are predicated on your view of politics, you are asking for all kinds of trouble. And I didn't mention that in that piece. I would probably mention it today, because it's a bigger deal today, because we're so polarized politically. I remind myself all the time of the prominent conservative economists who I won't name but who published a piece in The Wall Street Journal on the bottom of the 2009 market, I think it was March 9, 2009, saying how things were going to get so much worse because President Obama was going to lead us to hyperinflation and the markets were going to tank way further. And it was on the exact day of the bottom of the market. And then, I remind myself of the people who on election night in 2016 said the market is going to crash, it's going to be terrible, and all of whom said, Trump is a disaster, the markets are going to crash. And if you make your investment decisions based on politics, you stand to be wrong probably half the time. I would probably include that today on my list.

Ptak: That makes sense. I wanted to jump back, if we can, to simplification in automation and ask you, is there automation that worries you? I think that you've written about the fact that there's a risk that automation could make systems harder for us to comprehend in some ways, and that eventually can lead to unpredictable outcomes. And so, in a sense, our efforts to avoid errors and simplify matters could backfire in a way, resulting in greater complexity and self-reinforcing impacts. So, is there a type of automation right now, or a manifestation of automation, that's got you worried for those reasons?

Seawright: I look at this both at the macro level and the micro level. At the macro level, I think that's a real problem. Black boxes are always scary. Because if we don't understand them, we don't have any good idea of where or how they could fail. Figuring out how an idea we like, a concept we like, an approach we like, figuring out how or why that could or might fail is hard enough on its own when we understand all the components. When we don't understand the components, there's virtually no way to do it. I deal with that at the micro level, at the personal level by trying to understand in my areas of expertise what I'm using and why. And for other areas, I try to develop trusted experts to rely on so I can hand off the worry to them. Easier said than done. I have already mentioned that trust is the biggest lack in our society today, and I'm convinced of that.

I'm fortunate enough that my brother-in-law, my wife's brother, is a doctor. We've been friends for 45 years. And he's a terrific doctor and a medical professor. And I offload a lot of my broad-based medical decisions to him. He runs a pulmonary ICU. So, he's treated COVID extensively. When I have a COVID, a pandemic question or how we should relate to that, I just say, “Tom, what should we do.” And when he tells me, I do it. And I don't understand the hows or the whys to that, but because I trust him, I do it. And that's how I deal with that on the micro level. That's particularly difficult in our current spot, because the Internet makes everything available. You can get every possible opinion on anything on the Internet, and you can find a significant group of people that will propound it in a seemingly persuasive way. So, it helps that I don't have to look at that stuff because I have an expert I trust.

Confirmation bias is not just a constant problem, it's a constant. It's a reality. We aren't just prone to it; we all do it. And so, the extent to which we have real experts to rely on, that's an enormous help. It allows us not to have to try to become experts on something we have no expertise in. And that's the biggest argument for seeing a bull market in financial advice. Something like 5% to 7% of Americans have a financial advisor. And that means 93% of people don't. Now, not all of those are going to be good clients or good prospects for a variety of reasons. But there is an enormous need for good financial advice. And talented, ethical, hardworking financial advisors have a lot of opportunity for success if and when they can build the requisite trust so that people will take advantage of their services.

Benz: You recently wrote about the folly of trying to predict the next market crash noting that while crashes are inevitable, predicting the cause or the timing of the next one is impossible. How would you recommend that people make peace with that uncertainty so that their plans are flexible enough to survive a crash but not positioned for any one specific outcome?

Seawright: I came to that conclusion based on one of those consilient ideas that was from earthquakes. Earthquakes are unpredictable. And the other area was the three-body problem in physics that if you have three separate bodies that are all influencing each other, there's no way to predict exactly where they're going to head next with just three variables. Obviously, markets have millions of variables. So, it seems obvious to me that there is no predicting the next crash.

How I deal with that personally and in terms of advising clients is to have a plan. Build a plan that is going to adapt over time. A great financial plan is only great when it's written. Like military and battle plans, you have to throw them out as soon as the enemy is engaged. And financial plans are the same. A great one I produce today isn't going to help me very much necessarily tomorrow, much less 10 years from now. So, a well-conceived plan that is designed to be adaptable, to adjust portfolios based on real things that happen, the obvious one being age and circumstance. But there can be others. An unexpectedly strong market can impact that; an unexpectedly weak market obviously can impact that. But every plan should be designed with the expectation that things like that are going to happen. And that's the most challenging part of the financial plan. Somebody who wants to spend some time learning the rudiments of investing can come up with a perfectly competent portfolio. But a perfectly appropriate financial plan is much harder to do.

Ptak: Another topic that you return to often in your writings is randomness and the tension between randomness, skill. I think you've said that in probabilistic fields like investing, the best performers dwell on process and they diversify their bets. Do you agree that the vast majority of investors are probably ill-equipped to identify those best performers in advance because it is so difficult to recognize the telltales of someone who is dwelling on processing and who diversifies their bets? And in those cases, do you think those folks are just better off indexing?

Seawright: That one is easy to answer. The answer is yes. I think, for me, the way I describe it to advisors and to clients is that indexing should always be your default. All you have to do is look at SPIVA every quarter. It proves it over and over again. And the client or the individual investor that doesn't include indexes in their portfolio is asking for trouble. What I suggest generally is default with indexes and use other kinds of investments, either because you have a well-founded reason to think there might be an edge there and that is far less frequent than is commonly assumed, or because you really like the markets and you're interested in it, and you have enough money that you can explore that for a while without damaging your financial future. So, the short answer is yes, most people would be better off indexing most of the time. Although I would caveat it to say the issue is less about indexing per se than cost per se. But as a default mechanism, indexes are the way to go.

Ptak: I wanted to follow up on that. We know that there are going to be those clients who feel deeply committed to actively investing. And so, for them, what are the telltales that they should look forward to determine whether a manager is sufficiently process-focused and properly diversifying their bets, which you had indicated are the two keys. In your experience, what best evidences that, and do you think it's observable to them without unusually good access?

Seawright: That's a great question. But I should back up a second to say I think we're all active investors. I don't think there is such a thing as a passive investor. We just go about making our active investment choices differently. Asset allocation is an inherently activist approach. The global market, so to speak, is roughly 50% stocks and 50% bonds, and it is very roughly 50% U.S.-focused and 50% globally focused, foreign-focused, and in bonds, it's even higher than that. Yet, I daresay not a single listener has a portfolio that looks something like that. So, I would emphasize up front that we're all active investors. It's a matter of how we exercise our activist tendencies. And, in fact, we all have to be active investors as a practical matter to get appropriate outcomes to meet our financial goals.

My children who are in their early 30s would be ill-served by the global portfolio because there's not enough equity exposure. Somebody close to retirement without significant guaranteed income should probably have more fixed-income exposure, or fixed-income alternative exposure, to avoid drawdown and sequence risk in a portfolio. So, we're all active. It's a matter of how we do it.

Now, to your specific question, I think we can all look at processes roughly to get an idea of whether we think that they make sense or not, but almost every slick makes sense. Every investment slick, the glossy sheets you get handed that say why this hedge fund or this investor or this mutual fund or this ETF is the greatest thing since sliced bread. My shorthand for that is twofold. Number one, I eliminate before I look at those whose fees are too high, because fees are always a drag on performance no matter what. It always goes straight to the bottom line of the fund. And so, I eliminate ahead of time that way. And then, my shorthand for process, and it's far from perfect, is skin in the game by the manager. The more skin the manager has in the game and eats his own cooking--pick your euphemism--that's a pretty good shorthand for it. The academic research has pretty well determined that those funds and investment vehicles that are managed by people who have significant portions of their net worth there, performed better. And that's my best shorthand example.

Benz: You've also written about the notion of slack and how it can usefully balance our lives by making it easier to remove unhelpful ideas or barriers from our lives. You wrote, "when we have less, we are more productive with what remains." So, that seems like an elusive concept at a time like now when so many of us are working remotely and our professional and personal lives kind of blur together. Where have you found the most success in building slack into your own life? And is that where other people should look too?

Seawright: Well, I'm blessed in this area too with a wife who is an anti-hoarder. If we haven't used something for a year, it's gone. And that's a simplistic example, but it works pretty well for us. It's easy, I think, for people to overcome, I call it the tyranny of the good. We do things that are good, because we've always done them or because we think they're good, without prioritizing them with respect to things that are better. And so, if we can create space in our lives to do that, it gives us a better chance to make the right call, not so much between good and bad things but between a group of good things.

One thing I've done in that regard, and I did this a number of years ago, like most people I have weekend to-do lists, things I'm supposed to get done around the house. And for a long time, I did those with the radio on. I'm kind of a music junkie, readers of TBL know, and listening to that but also listening to sports or just whatever I was interested in. Were it more recent, I'd listen to podcasts like this one. But what I've done with that is I have intentionally turned that off and forced myself to think about things when I'm doing some project that doesn't require intense mental concentration. And before too long, I realized I had more interesting ideas than I could remember, and I had to start carrying a pad with me to write them down. And some turned out to be stupid and some turned out to be pretty good and worthwhile that I could follow up on. Just because I had quieted my life down enough in that time and given myself space to think randomly. There's an interesting vein of daydream research that daydreaming within limits is a really good thing--and providing myself space to think about things was really helpful for me. And you have to carve that out intentionally because it's easy to get our lives full of stuff, both figuratively and literally.

Ptak: Well, Bob, this has been such an enlightening discussion. Thanks so much for sharing your insights and perspectives with us. We've really enjoyed talking to you.

Seawright: Thanks to both of you. It's been a pleasure for me to be here.

Benz: Thanks so much, Bob

Ptak: Thanks for joining us on The Long View. If you could, please take a minute to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: And @Christine_Benz.

Ptak: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)