Investment Management: The Obesity Correlative

Well. That isn’t a very politically correct thing to say. It is in essence discriminatory. it is also unkind. My intention is not to hurt any feelings, so allow me to establish some premises before we get to the nitty-gritty where I explain why a slim person is statistically more likely to be a better custodian of your investments than a fat person. Three pre-conditions, if you please:

1) You, adviser, get a free pass if you have a physical condition which inadvertently results in, or is otherwise contributory to your resulting obesity

2) The older you get, the lower your metabolic rate. Fat goes on quicker, and is harder to get off. If you are ‘senior’, you can also collect your free pass at the door

3) Nobody chooses to be fat. Nobody wants to be fat. There are no benefits. The negative health implications of obesity are severe and sometimes ultimately fatal.

So, then. To the pudding.

Managing money is labor intensive. Back-breaking work? No. Physically exhausting? No. Mentally intensive? Yes. Any investment manager will have a regimen or methodology to their work. This will vary widely, but there is always a process; from the beginning fact-finding exercise where the adviser looks to qualify and quantify client needs, to risk-profiling, to asset selection, portfolio construction, modeling/optimisation and ongoing management. Not to mention any time spent addressing changes to liquidity needs, tax, and individual behavioral bias.

Lets take one small part of the cake as an example. Portfolio drift. This is the ‘drift’ in asset allocation that occurs in a period of time where, owing to positive performance in some assets, and negative performance in others, the percentage allocations in the portfolio (e.g 60% equity and 40% fixed interest) will become unbalanced (e.g 62% equity and 38% fixed interest). The advisor should intermittently re-balance the portfolio so that the portfolio corresponds to the portfolio design. If it drifts away from this design (which should be the resulting product of careful planning and evaluation), the clients money is potentially exposed to excess risk, or underexposed, and running the risk of under-performance.

If the client portfolio contains x20 instruments, that means re-calculating the weighting, 20 times. It then requires x20 transactions (and the corresponding administrative work to support the transaction). Unlike when a client wishes to make a withdrawl from their account, I have never been chased by a client to perform this task, despite its importance. This is essentially one of the core tasks performed in the background and away from watch. How many advisors do not check drift frequently enough? How many advisors do not check drift whatsoever? How many advisors have to attend the parent-teacher meeting after work on the 28th this month, so are unable to re-balance until the 29th despite the task being scheduled for the 28th? How many clients would even know to check?

The point is, there are hundreds of corners in financial planning which can be cut. Most often, to the complete unawareness of the client. Such is the nature of professional knowledge. I would have no idea if the doctor performing surgery upon my body was using the correct number of stitches when sewing me up. Us long as there is no blood thereafter, I assume him to have performed his professional obligation satisfactorily.

So now to the obese man. Overeating is the triumph of the short-term over the long term. Short-term? The food tastes divine. Long-term? You’ll get fat. Overeating is indulgence. The product of over-eating, obesity, is the final result of a long, ongoing process of over-indulgence. An advisor intelligent enough to manage assets for a fee is  intelligent enough to understand that over-indulgence has no benefits outside of short term, temporary gratification. I put it to you; how can this person who cuts corners with their own body, with their own health, their own mortality, be expected not to cut any corners in their professional life where the stakes could be perceived to be infinitesimally small? The world will not catch fire if you eat one more cake. Nor will the investment portfolio run to zero if you fail to re-weight the holdings once a year. However, investment is binary. It is plus or minus. The man who receives +2% has outperformed by 100%, the man who receives +1%. Everything counts. Process counts.

This is not to say that the correlation works in reverse; skinny people are not necessarily fantastic asset managers. I would simply suggest that obesity is indicative, or is a symptom of, a lack of discipline; and money management is about discipline.