As you all know, I am an analogy person. In the investment business, we are charged with making complex topics simple, and analogies are the tool that I use to accomplish this task.
During a recent meeting, after failing to communicate effectively “what I do” for a client, a scenario popped into my head. Here is the conversation, word for word.
“Mr. Jones, are you a football fan?”
“Of course I am, this IS the South, right?”
“Ok good. Allow me to explain my role to you. The underlying investments that I end up choosing for you are the individual players on the field. We have a quarterback, running back, etc. They all play different roles on the field and have different jobs. Every player is necessary to try and win the game. The Panthers can’t win a game without an offensive line, no matter how great Cam Newton is, right?”
“Ok, so if the investments I choose are the players, I am the head coach. I call the shots. I decide who plays, when they play, and where they play. Furthermore, I decide who sits the bench, because I know my team better than any other person alive. The game plan is carefully structured by the coaches with a goal of winning the game. I am the coach.”
“Then where do I fit in?”
“You own the team. I work for you. Your only job is to honestly tell me how much or how little risk you will allow me to take. After that, I am responsible for picking the right players to play the correct positions to work toward winning your game.”
“That is all well and good, but what if my risk tolerance changes?”
“Then I need to know about it. If Jerry Richardson, the owner of the Carolina Panthers, decides that he wants to be more conservative, then the coach should put in his sure-handed QB that will execute perfect handoffs to the RB. Also, the bigger, fatter linemen will play because they can run block. Then, we run the ball. We have a chance of winning the game that way, but only if Jerry will let the coach manage the players. Conversely, if Jerry notices that the fans at the game are sleeping out of boredom, and he decides to be more aggressive, he tells the coach that. Then, the QB with the rifle arm will play behind the thinner, quicker linemen whose specialty is pass blocking. Also, we put in the frisbee catching WRs. This is another strategy to work toward winning the game.”
“So I am Jerry. I own the team. I decide on my risk tolerance, and you do the rest?”
“Exactly. But there is one more thing. You have to stay out of the way. The coach cannot do his job if he is constantly worried about when the owner might decide to interfere. That will create discord amongst the team, and we will lose games. Your job – answer the risk question, and then sit up in the owner’s box and watch your coach guide your team. Just like in football though, there is no guarantee that we will win every game. All we can do is try to accentuate our strengths, and to attack the other team where they are weak. Similarly, all I can do is to take your risk parameter, and structure your portfolio accordingly.”
“You’re hired, coach.”