Dispatch from the Middle of Nowhere
I recently found myself right where I like to be…standing in the middle of a river waving a stick. More specifically, my brother and I were fly-fishing the N. Tongue River in the Bighorn National Forest, just a few Wyoming miles east of Yellowstone National Park. It was a boys’ trip and despite a series of character building exercises including cancelled flights and missed connections, we made it.
Fly-fishing became a passion of mine while I was in graduate school in Washington, D.C. I would spend the weekends roaming the Virginia countryside, hiking, and fishing. It was a welcome relief to the constant hustle and bustle of the city. Since then, fly-fishing has taken me to some very special places in the country.
The more I learned, practiced and researched, the more I realized the sport was ripe with over-production and over-consumption. Ultimately, even though the sport can be as simple or complex as you want it to be, the human tendency towards complication seemed impervious. You had to have a thousand different pieces of gear and a thousand different flies to “match the hatch” as well as a degree in entomology to tell the difference between them all. All of this was very ironic to me since fly-fishing was created eons ago as a cost and time saving measure. All it took was some thread and a feather. A fisherman didn’t have to rebait his hook every time he caught a fish. Since then, it has turned into a frustrating pastime for those with high disposable incomes. Complexity does two things. It takes your attention away from things that really matter and it makes things more fallible. More moving parts means more things that can go wrong.
As you can probably gather, a financial planner in grad school for economics probably isn’t willing to empty his wallet for things he doesn’t need just to catch a few fish. So, just as I was rejecting the over-consumption and complexity of the sport, I discovered a new type of fly-fishing. Actually, the method is nothing new and harkens back to the original method of fly-fishing hundreds of years ago.
It’s called Tenkara, the simple method professional fishermen in Japan used long ago. It’s just a telescoping rod, line, and fly. No reel, no endless gear list. And for the flies, it’s preferred to only use one. I can tie my own in a minute or two and they don’t look like anything in particular. The simplicity of it is liberating. It’s also significantly cheaper…and thus naturally frowned upon by the established fly-fishing industry. The premise is that fish are not as smart as you are and that you don’t need 21st century technology to catch fish that haven’t changed in the past 10,000 years. The focus is more on technique and controlling the factors that you can control: figuring out where the fish are and getting the fly to them without spooking them. This forced simplicity allows you to focus on the experience instead of changing lines and flies all day. It also has the strange effect of making you a more effective fisherman or fisherwoman.
“Simplicity is the ultimate sophistication”
-Leonardo Da Vinci
Investing is much like fly-fishing in many ways. In relation to the over-proliferation of gear or strategies, investing is much worse because it is literally where the money is. Many fund companies research countless strategies and bring to market the ones that have done the best over the recent past (only to find out that it doesn’t work in the current environment). This has led to the creation of more mutual funds than stocks traded in the U.S. There are over 7,000 funds available in the U.S. while there are less than 4,000 companies. About 7% of these funds close every year but are quickly replaced with the next best thing. And investors don’t need 90% of these funds.
We’ve seen some portfolios that have upwards of 30 or more funds or other securities. And without question, many of those funds hold the same stocks or take on the same risks. This creates inefficiencies (tax and trading) and gives a false impression of diversification. Most importantly, the vast amount of options prevents investors from making good decisions. If you have 7,000 funds to pick from, how do you know you made a good decision or actually have a diversified and effective strategy? This is even harder to discern when you consider the role of chance and all the other variables that affect investments. Complexity ultimately obscures investment strategies and confuses investors. Constant doubt, anxiety and performance-chasing naturally follow. And the performance of markets is not something we can control.
Just as the simplicity of Tenkara has allowed me to focus on things I can control in the river, simplifying portfolios frees us to focus on the things we can control as investors:
Creating an investment plan to fit your needs and risk tolerance
Reducing expenses and turnover
Financial planning strategies
Cash Flow and savings rates
Reinforcing the all-important discipline to stick with a plan
Don’t get me wrong. Innovation is a great thing. Both fly-fishing and mutual funds were innovations at some point. And picking good funds still takes much thought and research. However, the proliferation of strategies that some investors think they need but don’t is counterproductive. It only increases the chance that something will fail in the portfolio.
Over the years we have stuck with a fairly simple and straight-forward strategy. However, we are working on paring down the number of funds where it is practical. We won’t sacrifice performance or diversification. And while there is still a lot going on under the hood, in the end we’ll have simpler, more efficient portfolios.
Now back to Wyoming. As I said earlier I was fishing with my brother, who is by all accounts an excellent fisherman. He is however, somewhat of a gear junky. He once called my Tenkara rod a “glorified cane pole,” and he was right. However, using his plethora of gear and a variety of flies, he proceeded to not catch any fish. He stood as tall as he could at the front of every pool looking at the fish wondering why they weren’t biting what the guide at the shop had recommended.
Meanwhile, I was fishing behind him focusing on not spooking fish and getting my one fly in the right spot. Every few minutes I would call him over to take a look at the lunker Yellowstone Cutthroat Trout I just brought in. I hate to brag, but it was a good day to be a younger brother. After out-fishing him 40 to 10 he grabbed my simple Tenkara rod. A few minutes later he said, “I gotta get me one of these!” Consider him deprogrammed. After all, you can either be a good fisherman or a good liar, but not both. It’s amazing how only a handful of simple flies, or funds, can be so brilliant.
Tight lines and happy returns.
Myles B. Brandt, M.S., CFP®