Patrick Geddes of the Aperio Group: The Five Essentials of Smart Investing

Start with picking the right balance of risky versus safer investments. That one decision remains more important than any other. It’s not all that easy to figure out the right balance, but there are some good guidelines available. For example, if you’ve got a time horizon of thirty years and you can tolerate market ups and downs without panic, then you’d tend to want to be heavily weighted toward risky assets like stocks or real estate. If you’ve got a short horizon or can’t take the fluctuations, then stick with a bigger allocation to be safer.

As a part of my series about the The 5 Essentials of Smart Investing, I had the pleasure of interviewing Patrick Geddes.

Patrick Geddes is the co-founder and former CEO of the Aperio Group, a $44 billion investment manager that works primarily with ultra-high-net-worth and institutional investors. Prior to co-founding Aperio, Patrick was the Research Director and CFO at the financial services firm, Morningstar, and also taught graduate-level portfolio theory at UC Berkeley Extension. He is also the author of the upcoming book, Transparent Investing, which teaches you how to rewire your brain and unlearn what you know about investing to help you to create a brighter financial future.

Thank you for doing this with us! Our readers would like to learn a bit more about you. Can you tell us the “backstory” about what brought you to the finance industry?

I started working in finance about forty years ago, as I was drawn to the analytic and intellectual challenges.

Can you share with our readers the most interesting or amusing story that occured to you in your career so far? Can you share the lesson or take away you took out of that story?

I co-founded an investment firm called Aperio Group in 1999 just because I wanted to make sure I would have a job where I could tell the truth about what the investment industry can and can’t offer. We weren’t an instant success, and after three years, we were still floundering a bit, too much of a success to be called a failure, but too much a failure to be called a success. Then our idea to provide a kind of customized tax-focused version of indexing caught on, and we ended up with over $40 billion under management and a staff of over 100 people. I ended up becoming our CEO, not a career path I would have predicted for myself. The lesson learned was that you really can’t tell where your career will go. Perseverance happened to pay off in my case, but that may have just been luck.

Are you working on any exciting new projects now? How do you think that will help people?

I’ve written a book with the title Transparent Investing, a guide that combines three themes: 1) how the brain is wired to lead us to make poor investment choices, 2) how the industry can prey on our poor judgment, and 3) how to decide whether to hire an advisor or try to build a portfolio yourself. The book emphasizes that investors should learn how to navigate the offerings of the investment industry as savvy consumers first and learn to tell the difference between the large quantity of garbage getting sold and the valid services investment experts can provide.

Ok. Thanks for all that. Let’s now jump to the main core of our interview. According to this report in Fortune, nearly two-thirds of Americans can’t pass a basic test of financial literacy. In your opinion or experience what is the cause of these unfortunate numbers?

People don’t have time to learn all the details of every specialized field in which they have to operate. The investment industry tends to prefer confused consumers since it makes it easier to sell products. There are some great, simple portfolios that can be put together with just a couple of index funds, but investment experts don’t tend to make as much money from such simple yet elegant solutions.

If you had the power to make a change, what 3 things would you recommend to improve these numbers?

I’d recommend that investors 1) realize that simple portfolios can be terrific, 2) learn how fees are more important than historical returns, and 3) understand which parts of investment outcomes can be controlled and which cannot.

Ok, thank you! Now to the main question of our interview: You are a “finance insider”. If you had to advise your adult child about 5 non intuitive essentials for smart investing what would you say? Can you please give a story or an example for each.

Essential #1: Start with picking the right balance of risky versus safer investments. That one decision remains more important than any other. It’s not all that easy to figure out the right balance, but there are some good guidelines available. For example, if you’ve got a time horizon of thirty years and you can tolerate market ups and downs without panic, then you’d tend to want to be heavily weighted toward risky assets like stocks or real estate. If you’ve got a short horizon or can’t take the fluctuations, then stick with a bigger allocation to be safer.

Essential #2: Index funds remain a great default since they’ve got such a terrific track record compared to active management. They also keep your investment life really simple. For example, having just two funds, one for global stocks and one for bonds may sound like a simpleton’s portfolio, but it can actually be a wise investment.

Essential #3: Don’t try to outsmart the market. Not only are index funds the way to go for stock investing but sticking with your allocation also provides enormous benefit. In other words, realize that stocks will perform horribly every once in a while, as that’s the nature of the beast. Thinking you can tweak your portfolio when you’re in a panic is all about your emotions, not any sort of analysis. For example, betting on a hot new industry has generally not proven to be a great approach. The trick is not to tell which industries will become more important in the future, the trick is telling which ones are going to be more important than the combined perception of all investors, a very difficult prediction to get right.

Essential #4: Understand how much your investment decisions are driven by emotions rather than analysis. We love to pretend that we’re masters of the universe who make careful choices, but in fact, we’re highly irrational beings. It’s very helpful to understand upfront that we’re wired for some bad behaviors, just like we reach for chocolate cake even when we know broccoli will keep us alive longer. Mastering our emotions is hard to do, though. For example, every time there’s a market collapse like the meltdown of 2008–2009, the press is filled with lament from an investor who complains that 50% market drops just aren’t supposed to happen. Well, they are supposed to happen, just not very often.

Essential #5: Remain humble. Great investing often means acknowledging that neither we nor our hired advisors have all the answers. Humility sounds like a wimpy attitude to bring to a competitive game, but the research data overwhelmingly show how bad both professionals and amateurs are at predicting either individual stocks or the stock market as a whole.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?

The co-founder of the firm where I worked for many years brought a completely different set of strengths to the part, and then we added some additional partners, all of whom brought their own unique value. I could never have achieved anything close to what we did had I been doing things on my own.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

Self-awareness and humility can provide much better decisions, but unfortunately, we aren’t very good judges of our abilities on either, so we need to listen to the assessments of others on those traits.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be? You never know what your idea can trigger. :-)

I believe that the truth is something sacred, not a very popular concept right now. I’d love it if not only just in the investment industry, but also across many fields that there were less self-serving lying. I’ve seen how telling the truth doesn’t have to mean you end up with less, although in my case it of course has been hard on my ego to acknowledge the full truth. I’d love to start a truth movement.

Thank you for the interview. We wish you continued success!