Episode 327: Why Your Brain Is Your Biggest Investment Risk

Welcome to the Grow Your Business and Grow Your Wealth podcast with Gary Helt. Gary is an expert in helping business owners put together a plan that will provide a better future for their businesses, themselves, and their families. On the podcast, Gary interviews other professionals who share his vision, and together they share secrets and strategies any business owner can use to build a better financial foundation for your business and your life. Hey, welcome back to the podcast.

This week, my guest is Jonathan Blau, and he is the founder and CEO of Fusion Family Wealth. It's a Long Island-based, fee-only, registered investment advisor firm overseeing about $1.1 billion in assets under advisement and management. that.

Jonathan is a thought leader in behavioral finance, and he helps investors identify the biases that drive poor decisions and replace reaction with a reputable plan and rational action under uncertainty. Welcome, Jonathan. Thank you, Gary. Great to be here with you.

I'm just going to make an edit because I guess we updated it for the podcast company a couple of years ago, We've gone from billion one to almost a billion seven. So there you go. We are good growth. Yeah.

Thank you. So what made you decide to get into advisory service like you have? So, yeah, it's a nice evolution. When I was a student in college, SUNY Buffalo Finance, I had an opportunity over the summer to work for Lehman Brothers.

and the person who gave me the opportunity was in those days what I'd call a stockbroker. And Lehman, this was about the summer of 87, Lehman Brothers was reputationally a venerable investment bank. But what I saw as a young person coming in as an intern there is they changed that model and the people at their main headquarter, 55 Water Street, were no longer people that they would hire from Wharton and Harvard and so forth, MBAs. These were top salespeople from what were then the top sales training program companies like Xerox and IBM and Lanier Products, which was a big competitor of Xerox.

And at the end of the day, these people were thrown in a room for four-month training program. What they were training to do was pass a Series 7 exam, which would take four hours to study, but they took four months. And then they came out and they became the most successful sales team in the history of the firm because they needed salespeople. They learned, not Harvard MBAs who didn't know how to sell their way out of a paper bag.

And so what I learned from that is they were calling on very wealthy people with what were called Dun & Bradstreet cards. So it's a Joe Jones, CEO of XYZ Company, approximate net worth, 10 million and you call them up and you try to give them a pitch on buying whatever you're trying to sell them to make a commission that day. And what I learned quickly there is there's no real advice. This is an area that needs a lot of help, heavy lifting to get to get to the right delivery of advice, advisory services.

And that was my first thought about it. And I was only 19, 20 years old. And when I graduated college, I decided to pursue that. And so I ultimately, I worked in the brokerage business for about a year and a half after college.

Then I went back to grad school, pursued my master's in tax and MBA in accounting with the thought of that's how I'll learn the technical aspects of what wealthy people need to deal with and then do advisory the right way. And then after four or five years with one of the big six and then big six accounting firms in their family wealth planning group, I joined what was then the largest privately owned wealth management firm in the country called Sanford C. Bernstein, which is now called Alliance Bernstein.

They merged with Alliance in 2000. And I was the youngest person they'd ever hired directly as an advisor at 29. They always hired usually third stop career people who had a big Rolodex because the way they managed money was the same. So they needed distribution.

So I was an unusual hire, but I spent three months in the interview and got myself in there, fortunately. And in the training program, which was six months long, they had one day on investor behavior and behavioral finance. And it wasn't even a full day. It was a couple hours.

And that stuck with me. And so the first part of my career at Bernstein, I was 29. I raised about $50 million in new assets, which back then was a very good first year. And then by 2000, because of the dot com bubble bursting, along with the terrorist attacks, I saw that $50 million turn to $25 million in the blink of an eye and a lot of panic clients and calls every day.

What's going to happen? When's this going to end? We're going to run out of money. Should we sell all our stocks and all that kind of stuff?

And so I found myself walking the same people off the same cliff today that I did a week ago, a month ago, and two months ago. And it was a very tough way to run a practice and hard to help people after the crisis happened. And so then I recovered. Business regrew.

By 2007, we had gone back to like almost 100 million. And then the great financial crisis hit, which was only six years after the 2002 crisis ended. And we didn't see a 50 percent decline. We saw 60 percent decline from the peak.

So 100 million turned to 40 million. So here I am in this treadmill. And again, confronting the same thing, talking to same people off the same cliff today as they did a month ago and two months ago. So it hit me like a ton of bricks.

We've got to find a better way to help clients succeed and stay with their plans and also to run a smoother practice than fielding these daily phone calls for two years of a crisis. And so that's when we decided we have to do the lifeboat drill long before the bow of the boat touches the water. You can't disembark the people on the Titanic after they hit the iceberg. You've got to have done that drill long before.

And so that's when we decided, let's really learn behavior. Let's teach people how to deal with uncertainty. Surprise is the mother of panic We don want our clients to be surprised So we started educating them to expect historically what happens if you going to invest in stocks equities you got to expect 15 a year of your equity money will appear to disappear. It temporarily declines an average of 15% every year, whether you like it or not for any or no reason.

And then twice that amount, about a one-third decline one year in five or six, that's the average down or bear market that's down at least 20% from recent high, but 33% down is the average one of those. And so we started learning how to teach people all of these things. And also we're programmed, and this is the key, we're programmed for survival, not to survive the vagaries of the capital markets and navigating financial decisions under uncertainty. We're programmed to survive the African savanna, the lion or the bear in the woods coming to kill us permanently.

And that's how our biases are, right? So we have this amygdala, this walnut-shaped organ, two of them at the base of our brain. And so if the bear in the woods is coming, without thinking, we're programmed to survive. Run.

Don't think. Don't think. Just run. And the problem is over the last 50,000 years, the amygdala and our bias system hasn't modernized to deal with the threats that we're really dealing with today, which is the threats of finances under uncertainty.

In this case, we talk about investing. So we've retaught anyone who interviews us how to think about what's happening in their brain when they're dealing with uncertainty in money and how to undo it, right? So they can stay with their plans. So we can talk more about that and what that means, but that's behavioral finance.

I mean, I'm going to say that sometimes that probably sounds easier than it really is. I mean, getting somebody to change their mindset isn't always the easiest thing to do. It's not easy at all. In fact, the way we start a conversation with a new potential investor is tell them everything we're going to tell you today is going to sound both counterintuitive and countercultural.

So open your mind because it's the opposite. So for example, one of the reasons there are many that people fail as investors is the way we're programmed to be more sensitive to losses than gains. It's called loss aversion bias. So we feel the pain of a loss two and a half times more than we feel the pleasure of an equivalent and gain to be pleasurable.

So what we look for is not strategies in money or otherwise in life that are going to maximize our long-term well-being. We don't. We look for strategies that are going to minimize our short-term chance of loss because that's how we're programmed. So when it comes to investing, what do we look for?

That's why people want to have more bonds, keep money in cash, let me wait and see until the dust settles. It's that loss aversion bias is kicking in. And the problem is when you're investing to protect your money from its biggest threat, which is not volatility, it's inflation. Volatility is the temporary fluctuation every month, the number of dollars I might see on the statement.

The industry has us all convinced that's my biggest threat. It's not even a threat. And by misdefining that as the biggest threat, the solution to the problem is wrong if you define the problem wrong. So the solution is more bonds.

And the older I get, the more bonds, the more bonds, the more bonds. And the problem is when you redefine risk and safety, not in terms of temporary fluctuation of your number of dollars periodically, but the permanent erosion of every one of those dollars value to inflation. And by putting bonds in there, which frees every dollar in the bond for the 10 year or 20 year maturity of it. So it can't grow past the dollar.

Right. When inflation in 30 years requires two and a half bucks, you're out of money. You've long since unwound the principle of those bonds to make up for the fact that you're not keeping up with the biggest threat, inflation. And so what we retrain our investors to do is to understand if your biggest threat needs to be defined in the inflation characteristic, the loss permanently of each dollar, than investments that lead to the protection and growth of your purchasing power, which is real estate, company ownership through stocks, which is what we talk about.

Those investments that lead to the protection and growth of purchasing, those are safe. Stocks are safe. Investments that lead to the freezing and diminution of your purchasing power, bonds, those are risky. So I'm telling you something that's not different than everything you've ever heard.

It's the opposite. You've heard the opposite. So it starts there. And then we start to teach them why they believe those things.

Investors tend to equate smooth with safe. You know, if I'm not bouncing around, it's safe. And the problem is inflation is like a silent killer. So you think you're safe as you're not bouncing around.

And then you wake up in 15 years, you find you've got to switch to cat food because your million dollars is now only buying you about 600,000 worth of stuff. And there begins a downward spiral of your wealth. So that's really what it comes to. So at Fusion, we do a couple of things.

We help people redefine what risk is and what risk isn't. And then we help them build plans that they're not used to being told they need to build to fight that real threat. Not the one that they've been told to have to fight, volatility. Because you can come up with the exact wrong solutions.

so when you start working with someone um you know because lots of times you know i have found as business owners and investors and stuff like that we end up sabotaging ourselves because you know a various different thing what are some of the common things that you're seeing that people are doing to sabotage themselves so when you talk about entrepreneurs who are successful on whatever level they're successful, you know, it's all relative, they have what's called overconfidence bias.

So they believe that these behaviors that I'm talking about, which by the way, human nature is what causes all of these problems. And human nature is immutable, meaning whether we're a successful entrepreneur, we have a PhD in finance or never went to school and never practiced in business, right? We will react to fear and regret and loss aversion and all of those things the same way. It doesn't matter how smart we are or how successful we are.

But the more successful we are, the more we think those things don't apply to us. We don't need help with them. I can do this on my own. I look at this business I built.

That's one of the biggest reasons entrepreneurs fail. They need this help, usually more than us. I wrote an article in the middle of 2020 the pandemic that Barron published which highlighted the habits of what is arguably not just the countries but one of the world wealthiest investment clubs called Tiger 21 And it stands for the Investment Group for Enhanced Results in the 21st Century. Many of them are billionaires.

And they publish every quarter as a group, not as each individual member of the group, but what their allocation is doing. So this quarter, we might have gone from 9% cash to 13, from 10% hedge funds to 5% and so forth. And so what I was able to prove with their own publications is that they make the same mistakes as everyone else I've always worked with who aren't billionaires and successful entrepreneurs, but they do it with two major differences. They do it with a lot more confidence and a boatload more money.

So that's one of the biggest reasons. And the other thing is, you know, if people are running a business, they tend to look at their investment portfolios the same way they look at their divisions in their business. So if I'm running a business and I'm looking quarter to quarter and I say, gee, the last two quarters, this division has been sucking wind. I'm just going to jettison it.

I'm going to get what I can for it. I'm going to reinvest the money in this here division A that's been really not going to cover off the ball. And so they're juggling that way. And when you diversify investments appropriately, you have, let's say, eight different exposures, small company, U.

S., large company, international, developed markets, developed Europe and Japan, emerging Asia, India. And now you start looking at those as divisions. So in investments, when one of those components is not doing as well as the others, it means it's on sale.

It means I want to add money to it. I want to do the opposite thing I'd be doing as if I was treating it as a losing division in my business. But because I'm trained to do that, I'm actually going to treat it as a losing division. I'm going to sell it while it's cheap and put more money into the investment that's wildly overvalued because I'm thinking of that as a winning division.

Okay. So that's another reason a lot of entrepreneurs will make very poor decisions. And the other thing I'll highlight with entrepreneurs and successful business people is we tend to be, and I say we because I'm in that category, we tend to be without meaning to be selfish. So even if we believe we can and most of us can't manage our money under uncertainty without these biases tripping us up like they do everyone else.

Even if we think we can't, we become selfish. If we're able, if we're in a minority, maybe one in a hundred can do it. Warren Buffett can do it. He has a temperament to do it.

But what happens when I'm not around anymore? Who's going to do it for my family. What's the continuity plan when I'm not the be all end all business person that I that I am. And now because of selfishness, I get hit by a truck.

My family's stuck running into some insurance person selling them annuities. And so there's lots of issues with entrepreneurs that are specific to them and successful business people. So because, again, this is this is a the sabotage is it's a habit that we've created over time yeah it's almost it's almost built into us right it's it's like reflexive you you you you have these biases we teach people you have them they're not even aware of them and then how to identify them and deal with them well and that's that was going to be my question how how do you help them deal with them because again it's great that i mean because like you said i mean we have these built into us and especially if it's somebody who is investing later in life and you know so they had all of this innately inside them they're going to keep falling back even though you get them started they're going to keep falling back how do you keep pulling them along so we look at ourselves behavioral investment councils like vitamin c vitamin c if you don't take it every day does you no good it's soluble it's the same thing if i teach you everything i taught you today and then i get on the phone with you the next month because you had because because the war in iran started you needed me to talk you off that cliff a little bit it's a new relationship and i start teaching you that all of these things don't matter these are noise the only thing that matters for you as a long-term investors is earnings of the companies you're invested in the smb the signal is the earnings that always grows population grows historically it's never never shrank over any period of time and that's what you need to finish all the other stuff you tune it out now to your point if i leave them on their own and never call them them, they're going to go back to default.

It's human nature. So they need a constant, I'm their vitamin C. You've got to buy the bottle of vitamin C. That's what we do.

So when someone says to me, well, you're using index funds, so can't I just do that myself? They're missing the point. Of course, the investments today are almost free. An index fund internally, like an S&P 500 index fund, which is one of the eight or so we use, is almost one or two basis points.

It's almost free. Literally, it's a hundredth of a percent to two hundredth of a percent. It's a commodity as it should be. Anyone can buy any investment, an index fund, a mutual fund, the money manager.

Today's available to anybody. The magic is not in finding the best investments. The magic is in finding investments that will give you exposure to global growth in a rational way so that you make it 8% to 10% a year. It's that kind of good return that you can maintain for the longest period, not the special one that you found for the Bitcoin went up 300% later.

So let me put it all in Bitcoin. That's not how you make money. You make money by compounding at repeatable, good, solid average returns. And that's a lot of things that people miss.

So they need the answer to your question. Is someone like us to be there continually through our newsletters, our behavioral newsletters, our podcasts? that's the constant vitamin c because they simply nine out of ten people cannot maintain that on their own they just can't how so i mean you're saying hey you know you have the the you know your newsletter you have your podcast you know you're talking with them how how often are you talking with a client i mean i obviously i know if they're calling in you're talking to them but Yeah, yeah, no, but formal protocol for client communication.

So when I started out in the industry, we did what the rest of the industry traditionally did, because the wealth management industry for individuals was born out of the pension or institutional wealth management. In other words, until the 70s, individual investors couldn't get what's called a professional money manager or a separately managed account, as they called it, an SMA, which was to say it was only available to very wealthy clients, people with millions of dollars of pensions And then in the 70s they opened it up to individuals as a potential to sell individuals on the idea and gather more money And so in those days, when you were an institutional client and you would hire five or six professional money managers, not index funds, to try and outperform their benchmark, that was the illusion that people had, that someone actually could consistently outperform a benchmark.

That's the worst possible goal. It's not a goal because it's not achievable. But in those days, that's what you did. And they said a lot of people still do it.

But the institutions in every quarter would meet with the six or seven managers they hired, one at a time. And what they do is say, how'd you do? How'd you do that? And they say, oh, how come you underperformed the S&P?

This guy outperformed it. And they'd constantly be buying high and selling low and repeating until broke. They'd be chasing the best every quarter. Well, you did better than that guy.

So we're going to give more money to him now, okay? Or her. And so when it was rolled out to individuals, that became the protocol. You met with your clients every quarter.

and went on the destructive process of encouraging them to chase performance by doing that, right? Looking at all the wrong things way too often. So what we did when we went into strict behavior about 14 years ago, we changed it from four times a year to once or twice a year. Because what studies have showed, and my experience shows, the more often someone looks at their portfolios, the worse they do.

Why? Because they're reacting more. And every time you react, the studies have shown, If you're replacing one investment with another, not only did you make a mistake, but the investment you sold did better than the one you replaced it with. And you incur taxes, as you know, right, and doing and everything else.

So that's what's happened. So because of it, our formal protocol that we encourage the first year, twice a year, and after that, once a year. We tell people you shouldn't be looking three to four times a year to make sure your three-decade plan is still on target in an environment that fluctuates, you know, on average, 15% a year. right um and our clients typically don't need that once we do the behavioral we do the lifeboat drill at the beginning and onboarding and then they read a couple of newsletters get through one or two crises they're good you know they they don't they don't need as much in person and as you say i'm always available but they generally don't need it you know we had during the last the iran war and the oil spikes of 400 relationships maybe got three phone calls yeah yeah i mean I mean, you're going to have those nervous Nellies no matter what.

It's usually the newer people, right? So, but that's it. Other than that, yeah, we're relative, like my compliance officer said, when I came from my old firm to you guys 10 years ago, with comm markets, we used to get, with half the client base, you know, 20 times, 40, 30 times the phone calls. Here, like in a major crisis, you get three phone calls.

Right, right. So we covered a lot of stuff. And I mean, we could go on forever with this because like you're saying, so much of it is behavioral and everybody's a little bit different than that. What question, if I not asked you, you wish I had?

What question, if I wish you had asked me? Well, I'm going to, you know, the, why is behavioral investment counseling so much more effective than traditional, right? And one of the things, that's an important question. So the big firms with big names that I've worked for many of them, from Morgan Stanley to Smith Barney to UBS, is they're advising investors on variables like our economists forecast of the economy and when the recession is coming, which, of course, nobody knows.

our equity analysts view of which sector technology or energy is going to be doing better next year versus this year so we should reposition those we call timing and selection variables and they can't be predicted or controlled so the industry is advising on variables that can't be predicted or controlled you can imagine why the outcomes generally are not consistent and generally not satisfying. At the end of every investment offering memorandum, there's something that's, I'm paraphrasing, past performance is no indication of future performance or guarantee.

So the interesting thing is we advise on behavior. One is, it's generally what we've learned is the biggest determinant of success or failure is how you behave. It's not what your investments were in 08. It's did you sell out of equities or did you keep them?

It's always your behavior that determines success or failure. So the nice thing is if that's the biggest variable that determines success or failure, the beautiful thing about it is unlike past performance not being indicative of future performance, what I've learned is past behaviors are almost always indicative of future behaviors. So they're both predictable and controllable. So you're taking the investor's biggest impediment potentially, and you're addressing it head on to identify it and help them control in a way that's going to allow them to succeed.

Great. So, John, if people like what they hear today on here and they want to reach out to you, how can they reach you? Where can they find you? Well, if anyone's interested in investment advice from us, it's important for me to always say because otherwise it's misleading.

Our minimum is $5 million. So that's the first thing. Just to let it, because when people call us sometimes and they're not up to that profile, we can't take on clients for obvious reasons, too many. But we're happy to entertain any questions anyone has from your podcast, just as a service to you as coming up as a guest.

So they can reach us at our website, fusionfamilywealth.com. Our podcast is also on there, which is called Crazy Wealthy Podcast. and they can reach us by phone at 516-206-1320.

And that's the best way. Our information is all on our website, fusionfamilywealth.com. Great.

Jonathan, I really appreciate your time today, and I think our listeners got a lot out of this. I hope so, and I appreciate you having me, Gary. I enjoyed getting to know you. Great.

All right. This week's guest was Jonathan Blau, and he is the founder and CEO of Fusion Family Wealth. And I'll see you guys next week.