Leonardo da Vinci, painter of the Mona Lisa, also invented the helicopter, parachute, submarine and extension ladder. He pioneered modern comparative anatomy and was the first to draw body parts in cross section. Forty years before Copernicus, he wrote, "IL sole no si move," the sun does not move.
Leonardo da Vinci was arguably the greatest of all geniuses, maintains Michael J. Gelb in his fascinating book, How to Think Like Leonardo da Vinci. The author convincingly proposes seven da Vincian principles, which, if pursued steadfastly, will empower ordinary mortals to think more creatively, understand more clearly, make better decisions and experience life more fully than they may have dreamed possible.
One of Gelb's seven principles he calls "Sfumato." The word means "going up in smoke." Gelb uses it to describe Leonardo's willingness to embrace ambiguity, paradox and uncertainty.
As he points out in this stimulating book, the medieval mind was unwilling to acknowledge the possibility of doubt or uncertainty. In effect, the influential people of Leonardo's time were know-it-alls. This prevailing attitude among the rich and powerful stifled human creativity and closed Western civilization to any sort of cultural, religious, political or scientific progress for hundreds of years. Leonardo's life exploded onto this intellectual tundra. His insatiable curiosity, his intellectual humility before the countless possibilities of life, even more than his native genius,
enabled this one man to shatter the hubris of his time and throw wide the doors of the Renaissance.
I have been wondering lately if perhaps a medieval sort of arrogance, a numbing fog of intellectual laziness, may have crept over the investment community during the "Easy Nineties." Is it possible that consistently high returns from the stock market and generous compensation to its cognoscenti may have allowed many of us to become smug, content with our understanding of the capital markets? Do we assume that tomorrow will look like yesterday? Is our advice too "pat"? Do we unthinkingly pass on to clients the hard-wired conclusions of electronic boxes? Are we afraid of uncertainty? Does our work lack Sfumato?
Or do we truly respect the unruly dynamism of free markets, their ability to adapt to changes in science and politics, their tendency to run to extremes, to correct financial imbalances, to reflect shifts in the emotional condition of a civilization? Do we realize that prices of goods, services and securities are the result of trillions of decisions by billions of human beings acting in their self-interest? Would we give a respectful and thoughtful hearing to the 21st century equivalent of Copernicus or Galileo? Or would we smugly refuse to re-examine our own comfortable opinions about the way things work?
For those of us who exchange advice for compensation, these would seem to be important questions. Clients come to us for counsel in matters that profoundly influence the course and quality of their personal lives and the lives of their families. They trust us to guide them in serious decisions outside their own sphere of competence. They rely on the expertise that we profess.
Among the obligations we owe our clients in return for their trust and the bread they put on our tables, perhaps the first is to do our very best to understand those matters in which they look to us for professional guidance.
Our role is not unlike that of a physician, to whom patients look for guidance in vital matters beyond their personal competence. We all expect of our doctors a serious commitment to study. We would be sorely disappointed if they were not diligent in keeping abreast of developments in their fields of specialization.
It is not my purpose to explore in this column whether the investment advisor community has become lax in its duty to be thoughtful and to remain informed. Rather, for those of us who aspire to professional excellence, I would like to suggest a range of publications that will stir our imaginations, expand our horizons, help us to understand investment markets more clearly and to
make better decisions on behalf of our clients. Sources of information that can help us develop the da Vincian quality of Sfumato.
A Matter Of Perspective
Leonardo da Vinci has been described as the most curious man who ever lived. "His intense desire to understand the essence of things led him to develop an investigative style equally noteworthy for its depth of study as for its range of topics," according to Gelb. His anatomical drawings typically included sketches from three points of view. Leonardo studied everything with the same discipline and rigor, believing that multiple perspectives yield deeper understanding.
Here's a recent example of two perspectives on the subject of stock market return expectations. Jeremy Siegel and many others have maintained that long-term real (inflation-adjusted) returns from stocks will average 8%, with a 5% risk premium over bonds. OK. Now consider the well-documented view of Peter L. Bernstein and Robert Arnott (a summary of their work appeared in the January 21, 2002, issue of Investment News. They propose that not only is the 8% real return not borne out by the historical record, but it is an entirely unrealistic expectation under today's conditions. "How is it possible," you ask, "that respected analysts come to such different conclusions from the same numbers?" Reading further, you realize that Bernstein gives new weight to the importance of the dividend portion of total stock returns and concludes that the "sensible real return for stocks is only about one to two percentage points above the dividend yield." You certainly don't have to agree, but if you've been in the 8% camp, doesn't that at least make you a little less certain of your position? If you can embrace this kind of uncertainty, you're gaining Sfumato!
Because securities markets reflect the consequences of millions of voluntary exchanges among humans, they are as complex as the emotional and rational life of our species. Anyone hoping to develop a reputation as a wily guide in this terrible bazaar would do well to study it from more than one perspective. And yet, in the world of investment advice, as in every other area of specialization, the reality is that few will excel, few will be diligent, few will distinguish themselves as truly wise.
In every profession, a certain amount of raw talent and native ability are indispensable to stardom. But whether it is in management, medicine or investment advice, sustainable success is seldom, if ever, achieved without diligent, even passionate, study and openness to the opinions and insights of others.
Many personal financial advisors have little interest in the securities markets, preferring to concentrate their professional energies on the noninvestment aspects of financial planning. I applaud their focus and believe it may ultimately benefit their clients. Yet I believe that one of the major challenges for financial advisors who eschew the investment markets is deciding how and to whom to delegate responsibility for their clients' investment needs. Perhaps a certain amount of ongoing study of the investment mysteries will help such specialists to better integrate theirown work with the unavoidable need for appropriate investment counsel.
Other personal financial advisors, and you have probably met them, are cavalier with respect to the investment aspects of clients' lives. They assign client assets to the celebrated gurus of the moment via either mutual funds or separately managed accounts, often hitching a ride on a shooting star late in its arc. Or they blithely make asset-allocation decisions for their clients and implement them with indexes or exchange-traded funds, scarcely understanding either the chosen vehicles or the possible consequences of their decisions.
Whether you are an investment specialist, a noninvestment personal financial advisory specialist or one of those brave souls who prefers to integrate the whole process, if you aspire to excellence, I believe you will find among the following recommendations some that will inspire the genius within you.
Recommended Readings
Outstanding Investor Digest (www.OID.com): If you believe that studying success makes sense, you may find as I have that OID is your most highly anticipated and thoroughly read investment subscription. Henry Emerson, the editor and publisher, mails an issue whenever he has accumulated 32 pages of valuable information, so you never know when to expect it. When it does arrive, you get to spend the evening visiting with several of the masters-John Templeton, Warren Buffett, Jeremy Grantham, Mason Hawkins (Longleaf), Bill Nygren (Oakmark), Marty Whitman (Third Avenue)-well, you get the idea. OID includes long, detailed, no-holds-barred interviews with the managers, as well as excerpts from their letters to shareholders and limited partners, annual meetings and lectures they have given. I can't recall an issue that didn't alter my outlook in some way and result in my taking some action. The subscription price is $495 for 10 issues, but you can get terms as low as $295 at the Web site.
Grant's Interest Rate Observer (www.Grantspub.com): James Grant serves up mischievous insights packaged in delightful prose. I look forward to the twice-monthly issue as much for the fun of reading it as for the provocative analysis. Grant's describes itself as "an independent, skeptical and literate voice on the subjects of credit, interest rates, the bond markets, commodities, real estate and monetary trends." I have found that it delivers on its promise. You may think it a little pricey at $750 a year, but it's return has been greater than 100 shares of any $7 stock I've ever owned. Nonsubscribers may request a complimentary trial issue at the Web site, and you can always buy a single issue for $50.
Bank Credit Analyst (www.bankcreditanalyst.com): For years, I ignored this publication because the name sounded like a journal pounded out on a mechanical typewriter in the basement of an old stone building with bars on the window. How wrong I was. This is a very professional compendium of data and insights on the fundamentals behind the credit markets worldwide. I appreciate the timesaving charts that quickly explain aspects of consumer behavior, monetary policy shifts, trade deficits and the like. I can't tell you how often I have quoted this publication to clients and seen that smile of understanding that accompanies minor epiphanies.
The Economist (www.economist.com): Talk about being open to different points of view; many American advisors will find in this weekly magazine ideas and takes on U.S. political policy that will make them bristle! But in this age of global trade, international terrorism and Internet-aided cultural exchange, doesn't it behoove us to understand the other fellow's point of view? Articles are extremely well-written, often insightful and cover the interplay of such disparate forces as business, finance, current affairs, science, technology, and the arts. A year's subscription to both print and online versions costs $125.
I have found The Wall Street Journal and Barron's (print and online) indispensable for keeping informed and having prices, ratios and data at my fingertips. But I know I could become frozen in my opinions by limiting my intake to these two eminent sources. The magazine you are reading at this moment provides unique insights into our profession. The worthies I have cited above are not alone in the universe of valuable journals that can provide multiple perspectives. You probably have your own list.
Some of those I've recommended are not inexpensive, which can be a consideration for a small business. One of my habits over the years has been to drop one rather expensive service a year and replace it with another that I have not tried. By doing this, you can keep your subscription spending within your budget constraints and still maintain an eclectic reading list.
The same thing goes for time constraints. We just cannot read everything we'd like to read. So cycling some of your favorite subscriptions can allow you to remain intellectually agile without accumulating piles of unread periodicals in the corner of your office.
Finally, I'd like to put in a kind word for books. A good book allows the author to explore and explain an idea or concept in a depth that is not possible in a periodical. I am not a fast reader, so I choose my titles carefully. I have even cut way back on mystery novels and, instead, I keep several more serious tomes on my nightstand for late-night enjoyment. I say enjoyment because the older I get, the more I appreciate the incredible mystery and wonder of human nature as expressed in the marketplace.
My advice definitely matures as I read more widely. Titles on my library shelf include Against The Gods by Peter Bernstein; Money of the Mind by James Grant; Capitalism by George Reisman; Atlas Shrugged by Ayn Rand; The Lexus and the Olive Tree by Thomas Friedman; and Human Action by Ludwig Von Mises. There are many "Aha!" experiences between these covers, as well as some infuriating ideas that make me want to write a steamy letter of protest. But it's all part of valuing different perspectives in our pursuit of truth.
All part of being comfortable with uncertainty, because that is the world where we advisors reside. I wish you Sfumato.
J. Michael Martin, JD, CFP, is president of Financial Advantage in Columbia, Md.