Decision Making With Dan Gardner
David Scranton: Hello and welcome back to The Income Generation the show were we focus on financial topics and information relevant to today’s generation of retirees and near-retirees. Today we're going to be talking about decision making, which is an exceptionally important topic when it comes to retirement planning. In my nearly 30 years as a financial advisor, I've seen a lot of very intelligent people make poor decisions because they fail to recognize one important reality; that decision making isn't just about how smart or educated you are when it comes to financial matters. It's not just about your IQ. It also involves your EQ, or what we call your emotional intelligence, and a strong influence of emotion in every decision that we make. Naturally will have dozens maybe hundreds of decisions to make every single day. But in the course of a lifetime there are a handful of truly big ones. Where I go to college? Am I ready to get married? Do I take this job or that one? And when you get near retirement age virtually every financial decision you make is a big financial decision. After all you built up a lifetime of savings, you have a pool of money but then you have to decide where I should invest to generate income. How can I protect it? Should I make these decisions myself or should I work with a financial professional? That last question might be the biggest of all and sometimes you might actually feel like you're standing at a crossroads trying to decide which trail to take. Different people are telling you different things, some encouraging you to do it yourself saying you don't need help others encourage you not even dream about doing it yourself. Now perhaps you've done your own homework and you have really thought this through, you may even have a background in mathematics or finance and a good understanding of the investment world and how it works. Now that's a great start, but it's also why it's so important to talk about financial decision making and why I am devoting an entire show to this topic. The fact is, many people make decisions based almost entirely on emotion and then use their intellect to justify that decision. The Nobel Prize-winning psychologist Daniel Kahneman put it this way: “We think that we make our own decisions because we have good reasons to make them, even when it's the other way around. We believe in the reasons, because we've already made the decision.” Here's how I first realized this and my personal decision making process. As a young man back in 1990s I went through a period where I was thinking about buying a Jaguar it happen to be my dream car at the time. Now the problem is that I also knew Jaguars had a steep depreciation curve in the next few years, and I thought that I might feel be able to beat that curve of crunching some numbers and determining which year or how many years old will be the best bang for my buck when buying such a car. So I went to the show room in full analytical mode and financial nerd mode. I even had my HP 12c calculator with me, which every financial nerd knows that is essential for this kind of work. The salesman's name I’ll never forget, Chero, and I showed him my pen and my calculator and I told him that I want to look at his N.A.D.A before making a decision. If you don't know those are the books which give values of used cars based upon various years and models and mileage and so on so forth. So he listen politely even smiled, even though this was the situation that’s basically a salesman's worst nightmare. So he said: ‘Dave, in my experience, I've learned that people make decisions in an instant and they spend a lot of time trying to verify and justify them.’ He continued and said: ‘I can tell that you've already decided to buy a Jaguar and now you just need to justify it for yourself, so you can sit right here at my desk and you can use your calculator and crunch some numbers in the N.A.D.A book. I need to wait some other customers and when I come back I’ll you pick out the Jaguar that you already know you're going to buy’. I thought wow, wow this guy really got in my head. He was absolutely correct. When I really thought about it, I realized that I had made up my mind before walking through that door all of my calculating was just my attempt to square the decision with the more intellectual side of my brain. Since then I've seen this phenomenon again and again from Cheros’ perspective, incredibly smart people who simply aren't aware of how strongly, their own decisions and the financial markets as a whole are influenced by emotion. They mistakenly believe it's all a numbers game and external game. But the fact is, there's an inside game that's just as important. This is something that I talked about quite a bit in my new book that I've written that's coming out later this summer, Return on Principle, 7 guidelines to keep Your Money Safe in Good Times and Bad. Financial decision making isn't just about sitting down your statements and a calculator. They really start with looking inward and recognize the role of emotional intelligence- EQ. Its starts with being introspective in determining first whether you are the right person to do your own financial planning, or if not whether or not the advisor, you're considering or with whom you're currently working is the right person. That's just as important, because no two brokers or advisors are alike and there are plenty who may steer you towards a decisions that are strictly analytical in numbers based. They may completely and mistakenly ignore the strong influence that emotion has, not only on individuals, but on the financial markets overall. For me, recognizing that influence played a big role in helping me anticipate the bursting of the Tech Bubble and the stock market crash of 2000 as well as the financial crisis in the market crash of 2008 and it has served me well ever since, when it comes to helping my own clients make sound smart decisions. I guess I have Chero to thank for that.
I'll talk more about that in today's market breakdown and later in the show, I'll talk about the do's and don'ts of decision making with our guest. I will also offer some helpful practical guidance on financial decision making, based in part on my new book, but first here's today's market breakdown.
So what's happening in the financial markets right now that make this such an important topic? The short answer is; a lot. Let me explain. As I mentioned, the lesson I got from Chero the Jaguar salesman about human nature, helped me prepare for the market crashes of 2000 and 2008. But before the 2000 crash I had another encounter that reinforced Cheros’ lesson. One day back in 1999 I walked into a grocery store on a Saturday, wearing a baseball cap with a well known mutual fund family logo right on the front of it. There's was a young man working there stocking shelves, he saw my cap and he asked whether or not I was a financial advisor. When I told him yes, he said, Sir, what do you think, should I buy Amazon stock or eBay stock which is better? Again, this is a young man in his teens, early 20s. So I asked him; do you have a car? He said yes. So I asked: do you have a car loan? He said, yes again. So as I pulled down the brim of my cap and started back down the aisle with my shopping cart, I told him; don't buy either pay off your car loan. But this whole counter really bothered me, why? Because that's when I knew that the markets were deep into a case of what Alan Greenspan once called; irrational exuberance, that's when the stock market mania gets so extreme that it seeps into every corner of society. College kids and teenagers and all kinds of people who really can't afford to take stock market risk were playing in the stock market. That's usually one clear sign, that the mania is going out of control and that the market is about to top out in turn for the worse. And remember the exuberance is irrational because it isn't based on economic fundamentals. It's purely emotional, that was certainly true back in 1999. As a practicing financial advisor, I already knew that the market was way overvalued. Analytically I knew the average price of stocks was overinflated relative to corporate profits and that therefore P/E ratios were too high. I knew that economically, a lot of warning signs were in place. Most importantly, I thought analytically from my studies, a stock market history that the timing is right for a big change in the upward trend to reverse itself into a downward trend. The long-term secular bull market cycle that started out 1982 was about to end and going to the next secular bear market cycle. And when I saw just how extreme irrational exuberance and gotten, the writing was on the wall that change was imminent. But at that time, others were trying to rationalize the warning signs, they were saying that price-earnings ratios of 30 or 40 or even 100 for that matter, were the new norm. In other words you're trying to justify their emotionally based decisions to stay in the markets. And this is actually very typical, you may recall I talked in a previous show about each generation seems destined to make their own mistakes when it comes to the financial markets. Specifically every generation has a tendency to create their own speculative stock market bubbles only to see them burst. And once again that reality is driven mostly by emotion. When the markets soaring greed kicks in. Everybody wants as much as they can from their investment portfolios. When things start to fall fear takes over and the fall gets steeper that's how these major market drops and rebounds occur so consistently in every secular bear market cycle throughout history. What's more history shows that there are typically at least three major drops within each long-term bear market cycle. But in the current cycle we've only had two major drops so far. And that is why I feel so strongly that all of this is so important for investors to understand right now. I've talked before about how a current secular bear market is different from previous cycles for one overriding reason and that is; quantitative easing. Before the Federal Reserve started printing money and manipulating interest rates during the 2007 to 2009 Market Crash this cycle seem to be playing out in classic form. We had the initial crash in 2000 then a recovery to just over the markets previous peak at the height of that recovery in 2007 we had the same kind of irrational exuberance and mania that I recognized in 1999. We saw this mania despite the fact that many people knew as far back as March of 2007 that the subprime mortgage crisis was about to hit. There were other warning signs of a coming recession yet the markets kept climbing until November, some eight more months and that was pure emotion. You can almost think of it like the second win runners get after broken in through the wall. Adrenaline kicks in they keep going against all odds. Once they finish the race, of course, the adrenalin wears off and then they crash. But here's the difference this time, since the market bottomed in March of 2009 it’s had a third win, and that third win hasn’t been based on natural factors like irrational exuberance or adrenaline. To a large extent, it's been artificially manufactured to quantitative easing or as I call economic steroids.
Ben Bernanke: Against a macroeconomic backdrop that includes both high unemployment and subdued inflation. The FMC will maintain its highly accommodated policy. Today the committee took several steps. First, it decided to continue with purchases of agency mortgage-backed securities initiated at the September meeting at a pace of $40 billion per month.
David Scranton: Wall Street love quantitative easing because it created cheap money and forced everyday investors up the risk curve and into riskier investments like stocks and stock mutual funds. And every time the Fed launched a new round of QE or quantitative easing the natural course of our current market cycle was altered, so irrational exuberance that should have served as a warning sign, that a third major drop was coming soon, became completely irrelevant. The third drop probably should have started sometime in 2013 when the market surpassed its previous peak from 2007. That's when the mania and natural adrenaline that push the market so high, should theoretically have started to wear off and probably would have had it not been for quantitative easing. And now the quantitative easing is been out of a picture for more than a year. We've seen reality start to take hold. Early last year, it started to feel a lot like 1999 and 2007 all over again. But the markets managed to hold their high levels to most of 2015 due to the lingering effects of quantitative easing. Again I have likened QE to a drug and as everybody knows it takes time for drugs to get completely out of your system. But that time might now be very, very near as evidenced by the volatility that we've seen in the market since the start of 2016. In fact, the stock market has the worse January in history this year, as you probably know. Some central banks around the world had gone to negative interest rates and even the Federal Reserve has whispered about considering the possibility of negative interest rates after raising them just last December, why? Because they're trying to keep the artificial influence of QE going, but it might just be too little, too late. Forward motion hasn't kicked in yet but it's starting to, and the central banks are doing everything they can to fight it. And the overriding emotions at this point, seem to be fear and nervousness, not irrational exuberance. That tells me that we might already be past all the warning signs. It also tells me that this could very well be the start of something much bigger. The beginning of the third major drop that history tells us is likely to occur.
Welcome back to The Income Generation. I am here today with Dan Gardner Author of the books: Science of Fear and Future Babble and also an expert in the field of human psychology, Dan, welcome to the show.
Dan Gardner: Glad to be here.
David Scranton: Tell us what role does psychology play in the financial decisions of people?
Dan Gardner: Well it’s absolutely fundamental to every human decision, people think that when they if you ask them about their thinking. How did you make this decision? How did you decide to invest in this or not to invest in that, or whatever the situation may be, they think that their thoughts consist of what they can come up with consciously. It's the information that they thought about. And they thought about rationally and they came up with a rational decision, but that’s an illusion. There's so much more going on in our decision making than that and that's the role of psychology one of the central insights of psychology is that vast numbers of unconscious thought processes are at work all the time in our decision making and they are extremely influential in our decision making much more influential than they tend to think.
David Scranton: So I have a financial advisory practice and I still work with individual clients virtually every day, and you know, what would you say to my client that comes in, who is the engineer or the actuary or the accountant who denies this? Who says you know my decisions, I spreadsheet everything, I make very logical decisions, I do my Ben Franklin and then I act based upon what makes the most sense. What would you say to that person?
Dan Gardner: I would suggest that there is an entire field of science that suggests you are wrong. And that could be difficult to accept, but if we are going to be as rational about as you claim to be, you have to recognize that when there is a veritable mountain of science, suggesting that human beings actually are influenced by as I say unconscious thought processes. That' they are not as rational decision makers that they tend to think that they are, that you have to actually respect that science. By the way one of the insights of psychology is something called quite memorably, bias - bias. Which is when you explain to people that there are physiological biases involved in decision making that can skew their decision making, they tend to understand that and except that in regards to other people, but in regard to me oh no, no I uniquely to the human species see things objectively and decide purely rationally. That’s bias - bias and it’s very it’s a very, very difficult thing to overcome. But the best decision makers do overcome it. One of my favorite examples of this is George Soros, of course, he is politically controversial now. But if you look at his record as an investor through the 60s and 70s and 1980s, he had this amazing record and the games to prove it. And when George Soros was asked as he was so often, George why are you so good? He always gave exactly the same answer. He said basically I know that I am fallible, I know that people make mistakes and I know that I will make mistakes and therefore I think more carefully about my decision making, and I’m more likely to catch and correct my mistakes than are others.
David Scranton: So to sum up what sounds like you are saying that just acknowledging this just, just someone understanding that their decisions are made emotionally and then justified logically is the first step toward helping them make better decisions. Is that correct?
Dan Gardner: Absolutely, I’m a big advocate of psychology one on one. Anybody who is making important decisions about their future and that's pretty much all of us really should understand the basics of human psychology, but there's a trick here. If you understand psychology one on one, you may conclude. That's it, I'm bulletproof. You know, I got it all down, I know about the psychological biases therefore; I will not be tripped up by them. That is a danger and it's a mistake. In fact, the great psychologist, the Nobel Prize-winning psychologist who is the giant in this field Daniel Kahneman he spent a lifetime studying these psychological biases and he frankly admits that he too gets tripped up by them from time to time. You cannot simply say I am aware of the problem. Therefore, the problem doesn't apply to me. It always applies to you and that's why you need to constantly examine your decision making, constantly monitor the mistakes.
David Scranton: Now I'm suffering from bias - bias right now because this entire show is about this very topic and I so far agree with 110% of everything that you said. In fact, I even gave a real life example in my own life of how that was a hard one lesson. For our viewers, though. Tell us what… Where do you think this has a greater effect, on decisions to buy certain investments, or on decisions to sell certain investments? If there's any difference at all.
Dan Gardner: I don't think there's necessarily a difference. One of the…One that… We can make mistakes in any field; we can make mistakes of any variety. But when it comes to buying and selling it depends upon the particular individual and the particular individual circumstances but people tend to be cognitive conservatives. Which is to say; that once they make a decision they tend not to adjust that decision in light of new evidence as much as they should. So if you decide I'm going to buy the stock. I think it's going to be a winner. And then you start to get new information which suggests. No, it's actually not a winner. People will tend to stick with the stock too long, which is to say you're not you're not adjusting you're not selling enough but there's a big, big caveat to that because there are other folks, particularly day traders and high volume traders. They actually get into the opposite mistake, which is basically that they're constantly churning and constantly changing the decision and buying and selling buying and selling buying and selling and they're doing that because they have no commitment to their decisions. And so they ended, you know, because, they are not actually, really believing that, you know this, this stock is a winner if I hang on to it long enough and so there's no commitment and so they're too free and easy when it comes to, when it comes to decision okay, I'm going to sell them and off it goes. So there are opposite problems there, generally, if we're talking generally about the species, the problem tends to be that we're too cognitively conservatively and we don't change your mind enough but we always have to be aware that there's also an opposite problem.
David Scranton: So for all the husbands watching the show right now as our wives already know. Yeah, I think what Dan is saying is, we absolutely just don't want to admit that we're wrong and made a mistake in the first place. So we've, we've got to take a quick commercial break right now but stay with us. We'll continue this very intriguing interview with Dan Gardner, as soon as we are back. We’ll be right back.
Welcome back. I'm here today with Dan Gardner. Dan, tell us about this brain science that you refer to in the Science of Fear.
Dan Gardner: Yeah, well, that's basically the science of the psychology of decision making. Which is, which is to go back to Daniel Kahneman, system one and system two to use his, his terms. Which is basically, system one or rather system two is the system of thought, which we're consciously aware of and so when I say to you, how did you make this decision and you say well I thought about this fact and that fact and I came up with that conclusion. That system two, but system one is called system one because it actually comes it typically comes before system two in our decision making. It's all those thought processes that we're not aware of. And they happen quickly they deliver judgments in the form of intuitions hunches and they come to us instantaneously. And typically, at that point, our conscious mind sort of takes a look at what the unconscious mind has come up with and it can adjust it. It can say that's completely bonkers and overrule it but typically what happens is that the conscious mind does not get involved, to the extent that it should, and that's what makes the unconscious thought processes so influential. Basically, we’re a bit lazy we, you know conscious thought, really looking at our feelings. We have a strong sense that something is true, we tend not to bring conscious thought to bear and examine that feeling and ask ourselves if it will really make sense, we tend to be a little bit lazy in that regard. That's what makes system one so influential in our decision making.
David Scranton: So it sounds like, to some degree, its human nature. We look for the easy button. If we feel confident we don't look any further we accepted as being true when we move on.
Dan Gardner: That's exactly right and that’s very clear there is abundant evidence to indicate that we have a strong intuition we’ll likely just go with that and there are all sorts of other ways in which we tend to take cognitive shortcuts. So for example, something called attribute substitution. If I ask you a question that's important for a forecast or for an investment and the question is difficult, you will consciously or not you'll adjust it slightly to come to a related question that feels intuitively easy to answer and then you'll answer that intuitively easy question. And you'll feel that you answered the first question but you didn't really answer the first question you answered the second question, which isn't quite the same. And that happens all the time. And when we look at good makers, good ambassadors, what you find time and again, is that they're very precise, very careful and you can't they don't fool themselves, they don't get diverted in that way.
David Scranton: Now, Dan you talk about this a bit in your book Super Forecasting. Tell us more about how this psychology actually can help somebody looking forward in attempts to forecast things.
Dan Gardner: Yeah, well, super forecasting the title comes from an enormous research program undertaken by my co-author Phil Tetlock. He is a very eminent psychologist at Wharton and one of the leading researchers in the field of forecasting. And over the course of 4 years, in an intelligence community sponsored tournament, Phil had thousands of volunteers. In fact, over four years, over the course of four years, more than 20,000 volunteers were involved and they made forecasts about big important geopolitical and economic events. Like will Greece default? How Will China's GDP do in the fourth quarter, that sort of thing? Big difficult questions and at the end of the four years with so many people making so many forecast, they were able to figure out that there is a very small number of people who had excellent forecasting skill. And they were consistently excellent, which tells you you're looking mostly a skill, not luck. And so then the question is, well, what is it about them that make them so good? Well, after what I've just discussed about the importance of caching and correcting your psychologically and induce mistakes. You won't be surprised to hear that one of the very first things that are so important about these super forecasters is that they are slow, cautious, careful, rigorous thinkers. The people who sort of they have an immediate strong sense of what the answer is and they're, they're fixed, they're determined. Maybe they go out and get some new information to support that belief, but they stick with that and ultimately, that's their final answer that's what most people tend to do. That's what we that's what our psychology impels us to do these super forecasters do exactly the opposite. They basically set that initial intuitive response a side and then they look exactly at the forecasting question. They break it down very carefully they break it down and say how can I possibly answer this? How do I research the problem? What are the components, the information components that I need? And then the proceed step by methodical step. It's a very slow, painful, rigorous demanding process, but it works. And what's interesting is when you look at how super forecasters make their forecasts, which are demonstrably excellent. I mentioned George Soros earlier in the interview. If you know the writing of George Soros it's very, very similar, basically George Soros, I'm sure that if he competed in this tournament. He too would have been a super forecaster.
David Scranton: So what you're saying. In a word is just say no to data mining we fight the urge to data mine and look for data that supports what you hope is true. Dan, we have to wrap up today, but it's been a real pleasure. I thank you so much for adding value today on the show.
Dan Gardner: Thank you so much.
David Scranton: And for our viewers. Stay with us. We're going to go with Morgan a one on one with myself and Morgan as soon as we get back, and we're talking more about psychology of investing and the things that you need to be aware of in order to make the best financial decisions for your own personal situation. We'll be right back.
Morgan: Dave this is a fascinating topic. I've really learned a lot about myself and how and why I make decisions.
David Scranton: And what I'm hoping our Income Generation members get out of the show today is that's really what's more important when it comes to investing your money is about the inner game, not the outer game.
Morgan: And you focus on this and your new book, as you've mentioned.
David Scranton: That's right. The new book is entitled as you're well aware Return on Principle the 7 Core Values that Keep Your Money Safe in Good Times and Bad.
Morgan: Well, with that in mind, why don't we take the segment to talk about those principles one by one?
David Scranton: Sure absolutely.
Morgan: Okay. Well, the first one is protecting your assets must be your first priority. I mean, I think this seems kind of like a no-brainer, right?
David Scranton: Well, you think so, but the problem. If you think about most of The Income Generation Members, they got serious about your investments in the best bull market US History during the 80s and 90s. So everyone turned into an offensive coordinator to make a football analogy, but they forgot that having a defensive coordinator can be even more important and although they have been reminded that the last 16 years, it's still difficult to make that transition once you get your mindset into investing under a certain paradigm.
Morgan: So how did you as a financial advisor really make your focus about protecting us and not so much trying to get a massive amount of wealth?
David Scranton: It wasn't always that way. We started back in the late 1990s when I looked at where the stock market was going and I determine that most likely we're going to go into a long-term bear market cycle. Which was going to have several significant drops within it, and I had to do something that most other advisors weren't willing to do. I had to have the courage to change my business model off from the, away from the offensive side into the defensive side. When I knew that, that offensive coordinator role really wasn't going to be in the best interest of my clients any longer.
Morgan: Okay. And that brings us to core value number two, which is investing is all in the details. Can we talk a little bit more about that?
David Scranton: Sure, detail orientation, you know, if somebody’s picking mutual funds, for example, and they look at the report and they say: Oh, this a five star fund or four-star fund looks good, I'm going to choose it then they're probably not best suited to manage their own money. Because then you have to have a detail orientation to look much further beyond that. There is five star rated funds that are very aggressive and they're five star rated funds that are very conservative. At the end of the day you have to realize if you want to be conservative the star ratings alone, for example, aren't enough, you had to look back on that and look into the details, absolutely.
Morgan: Which is maybe why managing your own money is not always the best course of action. But let’s go into principle number three.
David Scranton: Unless you hold these 7 core values, exactly.
Morgan: Okay, so you can learn, principle number three is hard work and diligence pay off and I know we all want to believe that's true in every facet of life. But how does it apply to saving and investing?
David Scranton: It applies in every way possible. For example, our company Sound Income Strategies, when we invest in fixed income for example bonds and bond like instruments we do something that most advisors don't. Most advisors when you're looking at bonds, they simply look at the ratings to Moody's ratings. The Standard and Poor's ratings and so on, but we learned back in 2008 during the financial crisis that you can't always trust the rating services to have the level of scrutiny as high as ours is. So we actually look beyond that we look at the balance sheet income statements, the cash flow statements. And it's that level of really detail orientation that somebody should have in order to be a successful investor.
Morgan: All in the details and principle number four is be coachable. What does that mean exactly?
David Scranton: Well, we talk about being coachable I think the most important thing is that you're open minded, see if you're working with an advisor, you have to be coachable but that advisor also has to be coachable if you're with a… If you're doing it yourself you also need to be coachable you need to able to read things and change when there's times when your paradigm may start off one way, as I mentioned before, especially for those of us who have invested beginning began investing in the great school market in US history in the 80s and 90s. But then you have to look out what's around and be coachable until for we are in a different world now maybe, just maybe we need to learn a different skill set that's going to help us in this world.
Morgan: So it's almost being open-minded, if you will.
David Scranton: That's right.
Morgan: Okay and principle number five is leadership is more important and giving orders. Now, why is that important to remember?
David Scranton: Well when I talk about leadership, it's more or less leadership about yourself internal leadership, the ability to say, you know, I've got to be able to move away from the pack. When I know that what the pack or the herd is doing is no longer applicable and some people don't have that ability you know a lot of people just our natural born followers. They're not leaders. If they don't see a whole bunch of other people that are doing something differently they just don't feel comfortable. And that's were leadership comes in. It really becomes more of an internal leadership story and in my opinion.
Morgan: And if you are more of a follower type personality. That's okay. You just need a good leader.
David Scranton: That's true. And that's the most important thing here, too, is to realize that these, these 7 Core Values are applicable to you whether you're doing it yourself or whether you have an advisor, because you can't automatically assume that your financial advisor holds these 7 core values near or near and dear to his or her heart also. So for the do it yourselfers watching the show, it's so important that you make sure that you have the 7 core values, and if not, it's important to ask questions about you’re…To your financial advisor is, do you have these core values. In fact, in the book, we actually have questions for the do it yourself or to ask him or herself. As well as questions that she uses interview questions for your own financial advisor.
Morgan: Okay. Well, I can't wait to get to the last two but we got to take a quick commercial break first.
David Scranton: That's right. We do I get so excited about this topic I forget about commercial break so stay with us. We'll be right back. We'll talk about the last two core values and then how to better determine whether or not you have what it takes to do it yourself. We’ll be right back.
Morgan: Welcome back to The Income Generation. I'm Morgan Thompson here with David Scranton, and we're talking about the 7 Core values to keep your money safe and good times and bad. And we're on to number six which is honesty is essential. You say it's not important. It is essential. What does this mean?
David Scranton: We're talking here about self-honesty. You see there, there. It's really being honest about whether or not you possess all the other core values you know, are you overprotective of your own money? Are you detail oriented? Are you diligent? Are you coachable? Do you have leadership qualities? Again are you willing to stray from the pack? When you know it's in the best interest of your own money. So honesty has to do with being honest to yourself, you know, it's funny sometimes how we envision ourselves as people is different from how we really are. So it's important that you don't fall into the trap of doing what I call blowing smoke up your own bum. You know.
Morgan: We are all guilty.
David Scranton: We are all guilty of that at one time or another right? I, I tell myself every day that I've got a full head of hair and it's brown when really I have half a head of hair and its half a gray. So that's what honesty is really about being brutally honest with yourself and in the case of an advisor having an advisor, who's been able to be brutally honest with him or herself about changes in his or her business model that perhaps he should have made or she should have made but didn't, when looking backward. If that person finds that they've made mistakes but yet still tends to back up and defend their business model and to me, that's, that's a clue that you have an advisor that may not be honest with him or herself.
Morgan: Okay. And as an advisor and as an investment professional you have some stories about this. Can you share them with us?
David Scranton: Oh, absolutely. One story, in particular, is kind of interesting. I was somewhat horrified about the response that I've gotten from a realtor when I had done something that I thought was a no-brainer. I thought was the absolute only thing to do. I was looking for my house right down here in Florida, and I had called in a particular real estate broker and I said to her. Look, I'm going to put you through a lot of work and so this is during the financial crisis in 2008 when values were starting to drop. I said: put you through a lot of work I’m going to come down on Saturday and Sunday. I want to see 10 homes on Saturday 10 homes on Sunday and I'm going to go back and I might do this several weekends in a row. And eventually, you know, I’ll make a decision as to what I want in my promise is if you're willing to have the patience to go through this process with me. I will buy a house through you. Well, wouldn't you know it after she showed me to 30, 40 homes house that I fell in love with happen to be a, for sale by owner home. So I had a real dilemma, but I love the house. So I made an offer. They accepted it, and I bought this beautiful for sale by owner home, which is really my dream home. So I called up the real estate broker after and I said: what's your address, I need to send you a check and what I did was I basically calculate how much her commissions would have been had I bought that same price house through her. And I actually wrote her a check and much to my dismay, she said to me, she was surprised she says I nobody's ever done this before. And I said, really, it's only the fair thing to do. I give you my word, but I guess honesty is a value is not as common places we all might help.
Morgan: Well, I really should be. And that brings us to principle number seven fearless investing means peace of mind and a secure future. Well, the word fearless certainly seems relevant today's show about the role of emotions and financial decision making. So how would you summarize this principle because being fearless that's a really big statement?
David Scranton: Oh, of course, and it's not so much about being a fearless investor because fear is good. If you're standing at the edge of a cliff and you have no hardest nothing to support you having a little bit of fear is actually a good thing it protects you. Well, the same is true with the financial markets. You know, I always say, you know, if you're out on a boat, you have to have a healthy respect for the water if you get too, too arrogant when you're when you're running a boat, you could very easily end up getting into trouble. So, fear, sometimes protect us and that’s good. Having a healthy respect for the financial markets, but what I'm referring to mostly is having a fearless retirement. Having the ability to paint the retirement that you've always dreamt of and not falling back into something that's a subpar retirement, given your goals. But the key to doing this is having your investment portfolio in a conservative enough way so that you can plan a fearless retirement. You can have the confidence that you've got the repetitive income coming in, day after day to be able to live that fearless retirement. You know, the days of just baby boomers retiring The Income Generation members retiring and playing golf and then taking a nap and sitting home watching TV, those days are over. And that's what fearless retirement is really truly about and that's the 7th principle.
Morgan: So been really able to enjoy it and travel and live your life, not just like you said take a nap.
David Scranton: That's right. But in order to be able to do that, you know, you can’t be arrogant about it. Having that confidence is one thing, but if you're invested totally in the stock market. Then at the end of the day, you probably shouldn't have that confidence or peace of mind. So the secret I believe is being in things when you retire that can be constant, repeatable, predictable, income. So decisions, decisions, you know, as I said at the top of the show. We're all faced with dozens if not hundreds of them every single day. But in the course of a lifetime, there were a small handful of decisions that seem to stand out. Those are the really big decisions and as you get closer to retirement age, pretty much all of your financial decisions become big ones. That's why I wanted to focus on this topic today. It's always important but given where we are right now with our economy and the financial markets is even more important than ever before. If we have in fact already entered the third major drop of this current long-term secular bear market cycle, the one that I speak about on the show every single week or for about two phases into it. Then good decision making right now is vital. Choosing the right path is vital. That's why I say that good decision making starts with looking inward and recognizing all of the influences at work. Knowing the importance of not just your IQ, but also your EQ your emotional intelligence and when it comes to decision making around financial planning. It starts with first deciding whether or not you really are the right person for the job. If not, then the next step is to determine whether or not the advisor, with whom you're working or with whom about you're considering is the right person. Actually, I have a list of questions to help you with that decision in my new book return on principle because the reality is financial advisors as groups are wired the same as everybody else. In each of them is where differently from the other. Some are naturally wired to be good advisors from an EQ standpoint and others simply are not. Just like individual do it yourselfers, some recognize the important role of emotion and decision making in the financial markets, while others ignore it. For me developing my personal EQ and my understanding of this subject played a big part in my own decision to become a specialist in what I call the universe of non stock market income generating strategies. To this day I really appreciate the emotions that these strategies instill in me as well as in my clients emotions like, Security, peace of mind and confidence in the future. Thanks for watching.