Employ the Wisdom of Cover Bands

It’s normal to feel vulnerable when hiring an investment advisor. You may get a nagging feeling you’re not getting good advice. This pain is easy to avoid; hire someone who acts like a cover band and borrows heavily from the masters.

To explore this suggestion I trudged out to see my buddy Clarkey’s band, The Section 8’s. Frankly, I’m surprised that Clarkey has a band at all since he was one of the principal disruptors of Mr. Binney’s seventh grade music class. But I give Clarkey credit since the last time I sang karaoke the audience was actually throwing wet cocktail napkins at me.

When I enter Clarkey’s venue du jour, I get a much better reception. “Christopher sit over here,” he calls from the stage and I dutifully study his showmanship with a Would Be Wamp style of affection. My OFD buddy’s act is an amalgamation of rock legends; he’s got some of Aerosmith’s Steven Tyler’s goofy moves, a harmonica sound like J. Geil’s Magic Dick, and the musical breadth of The Car’s Ben Orr. I don’t know what explains the Engelbert Humperdinck haircut but to each their own. When he finishes the set with Tom Jones’ “She’s a Lady” I chuckle. Clarkey thinks he’s just as smooth with the ladies as Tom - ain’t that a joke. What isn’t a joke is the skilled musicians are well rehearsed and their deep song repertoire doesn’t disappoint. Seeing a Section 8 show is a great night out.

Clarkey’s show is entertaining because he doesn’t try to reinvent the rock and roll wheel. He imitates legends that have sold millions of records and scored huge hits. The crowd loves it. If your advisor adopts the same approach and mimics the maestros of investing you’ll likely improve your results.

So, who are these financial whiz kids and why are they so wonderful? They are researchers that you probably never heard of because they work for think tanks and universities, not some out of tune brokerage firm with a huge advertising budget. Please bear with me as I have to use some highfalutin language as I detail some of their works. There is Harry Markowitz, who developed the Modern Portfolio Theory, a framework for building a portfolio. His colleague William Sharpe developed a tool for risk adjusted investment performance analysis, the Sharpe Ratio. Also adhering to the evidence-based investing school of thought is Eugene Fama. He is credited with the Efficient-Market Hypothesis. What makes this research so valuable is it has no inherent bias, proven results and a long track record. All of these eggheads have won Nobel Prizes for their work.

If you have the patience to review this peer reviewed research, it is real good stuff. I must warn you: it’s very dry to most people. But the essence of the research is giving it to you straight like Clarke would. He just delivers the facts in a far less polished, far more hot headed manner. (Sorry Bro)

If your advisor adheres to the philosophy of evidence based investing, it should be music to your ears. Your investment choices aren’t based on a hunch or an opinion but on actual science. There is no room for last year’s star money manager as he is probably a One Hit Wonder. Sticking with this approach will likely give you more good years than bad.

I could go on about Clarkey but I am bound by a somewhat sacred agreement among us local celebrities. Besides, The Wicked Smart Investor isn’t giving it up for free. I’ll wait until VH1’s “Behind the Music” comes knocking with checkbook in hand.

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