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“Just remember that your own common sense is far more valuable than any investment analyst’s report.”

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Guy Penn is the founding principal of G. M. Penn Wealth Management, an independent, fee-only investment advisor firm based in O’Fallon, MO.

Guy specializes in providing independent investment advice, wealth management, and planning services to families and institutions. Prior to founding G. M. Penn Wealth Management, Guy spent over a decade in the financial services industry for such firms as Citigroup, Banc of America Investment Services (now Merrill Lynch), and L&F Group, Inc.

MO: How has your experience in corporate finance shaped the direction and vision of your own firm?

Guy: If corporate finance has taught me anything, it’s that those largest firms actually have the hardest time truly differentiating, no matter the size of their marketing budgets. While they all claim to be different than the next, they all invariably suffer from the same malady of sameness and it is not entirely their fault either. These publicly traded investment firms have found great success in building large organizations originally intended to serve the retail investor, but it is this expansiveness that is paradoxically their burden.

Let’s try to accept the notion that most knowledge driven industries rely on the expertise of the front person to engage and assist the client. CPAs, doctors, attorneys, therapists, teachers, etc. are all trained individuals in their respective field. Their expertise and training is routed directly into the end product.

This is not always the case in the investment world; in fact, it is very rarely the case. The larger an investment firm becomes, the larger the gap between the decision makers and the front line. This disconnect can be risky, with all these advisors running around, how do they keep them in line and adhering to the corporate mission? The answer is to create a scalable process. Within the organization you may find an intricate web of committees, subcommittees, product development committees, and birthday reminder committees. Yes I did say ‘product’ in there somewhere, the only way to create a replicable, fool proof process in an environment this large is to commoditize it, package it, and sell it on a large scale to anyone who will buy it. This is method is efficient, but not effective. Realizing this has had a profound impact on my vision of what wealth management should look and feel like. It is no longer about efficiency and scalability, but about long term personal connections.

MO: Can you share the basics of Complexity Theory and some of the advantages of its application?

Guy: Complexity Theory addresses the central methodology in which we view a system as a whole, emerging through the continuous interactions of its parts. Complex systems are not necessarily complicated, yet they are by nature unpredictable and do not lend themselves to traditional mathematical modeling. You see, the biggest problem with economics is its obsession with attaching numbers to things, including human behavior. Economic and quantitative models have historically been poor predictors of market events because of the fundamental flaw of not accounting for the nonlinear and adaptive nature of our economy and its agents. Increasing levels of global market noise, inappropriate risk assumptions, tailored statistics, and misaligned incentives saturate the market and distract attention from underlying realities. This complication increases exponentially when we add new and often unnecessary financial products to the mix. This kind of environment makes it increasingly more difficult for individual investors to make sound decisions. Acknowledgment of complexity allows us to establish the concept that relationships between parts of the system are nonlinear and the system cannot be quantified by the sum of these parts.

In other words, you cannot analyze subsets of the market or its agents and make inferences about the direction of the market as a whole. I look past market noise by recognizing our market as a Complex Adaptive System. In this context, the market emerges as self-organizing system made up of intermingling constituent parts, or agents which act without a central authority. These agents react in accordance with the actions of others, and consequently adapt. This is why economic and quantitative models only hold their value for a limited period of time.

Why is this so very important? Prior to the recent market collapse, Wall Street was absolutely sure its models were sound and that underlying human behavior could simply be accounted for mathematically. This will happen again, as mainstream investment banks refuse to see the market as a Complex Adaptive System, they will simply tweak their models as they have done in the past, update variables and move on. These models will continue to work, until they don’t.

MO: Why is the financial market harder to navigate than ever before and what are some tips for making the process easier?

Guy: I blame the Experts! Let me explain. Though I tend to use the term loosely, I am generally referring to those self-proclaimed television prophets whose lifestyles are either directly or indirectly funded by the active trading habits of individual investors. Never assume a television stock guru is giving you appropriate guidance. Don’t get me wrong, there are a lot of highly educated and capable people reaching out and giving valuable insight. But how are you supposed to tell? Motives. If you can understand someone’s underlying motives, you have already taken the upper hand. Let’s say you’re watching an investment related show and nearly every commercial is sponsored by some trading software program or commission based investment firm, I would be very confident the show itself is geared toward getting you excited about trading the markets. In fact, anyone trying to get you excited about trading the markets is almost guaranteed not to have your best interest in mind. If, however, you see or read a commentary from an advisor or economist who is advocating “keeping the course,” they probably have little or nothing to gain from telling you that. In general, those who make the most radical and emotionally charged commentaries are regularly the least qualified to do so. By understanding motives, you will be more likely to connect with someone who shares your own, and this is the most important first step.

MO: Have you had any mentors during the course of your career?

Guy: As cliché as it may sound, my parents have had the most impact on my career path in that they instilled a certain perseverance in me. They taught me to question everything. I often find myself questioning some of most dearly held assumptions that every B-school touts as gospel, especially when it comes to workplace change. Knowing that such change is occurring all around us, we are inherently drawn to take one of two perspectives. We can be quick to observe the change as it occurs, quantify, and consequently adapt. This is typically the gold standard in business practice. An alternative perspective is to see ourselves from within the whole, our purpose within the system. When we are able to do this, and suspend our assumptions as to what the business “should” look like, we can then awaken to the whole and therefore help the emerging future realize itself through our own behaviors.

This is important to me because I believe there is a need for a fundamental shift in the way the investment advisory world does business. This field is currently based on a mechanistic approach to problem solving. Just as a mechanic is paid to fix a car, advisors are paid to ‘fix’ an investment allocation or budget disparity. This is a transactional approach and leaves neither side with a deeper level of understanding. Rarely does the client fully understand the investment rationale, and the advisor has done little to understand the underlying behavior of the client. Unlike the car, the individual investor needs a deeper level of understanding, not one that can be scalable, replicable, or published in a manual. Every day I try to bring this idea to life and turn it into a new way of doing business.

MO: What are some of the basics of putting together a good investment strategy? Can you share some good resources for people who are interested in starting to invest but uncertain of how or where to begin?

Guy: The first step is sometimes the hardest, and that is sitting down and evaluating your relationship with money. If the primary mission for investing is to take one pot of money and make it into a larger pot of money, you will be left without a sense of direction. Money should only be a means by which we fund our goals; money should not be the end goal. When you can clearly articulate your relationship with money, you will be better able to translate that into an action plan. At this stage, it can be beneficial to sit down with a professional to help you flush out these ideas and put a plan into place. Again, be very careful when vetting a quality advisor. Understand his or her motivations, how do they get paid? Keep asking questions, keep digging. Remember, bad advice is often more damaging than no advice at all. For the do-it-yourselfers, the number one key is that you don’t get what you pay for. Look for the lowest cost indexing strategy and stick with a long term plan. Hidden fees can destroy investment gains over time. Just remember that your own common sense is far more valuable than any investment analyst’s report.

MO: Congratulations on expecting your newest addition in December! How and when will you start thinking about a college fund?

Guy: Thank you! My wife Jaime Lee and I cannot wait to meet our little girl. Much in the same way we approached college savings with our son, we will set up a 529 plan as soon as that social security number comes in the mail. You can’t ever start too soon. I am a big fan of Missouri’s plan, the MOST 529. Within this plan I have access to very low cost Vanguard index funds and can link the account to our personal checking, so contributions are as easy as a click of the button. While I am an advocate for college savings, I do need to stress the fact that it is OK to be a little selfish. What I mean by that is your own retirement savings plan should come first and foremost. There will always be a way for your children to get through college, either by scholarship, student loans, working while in school, or a combination thereof. But you cannot get a loan to cover your retirement shortfall. If you really want to help your kids, you will make sure you are going to be self-sufficient during retirement and not have to rely on your adult children down the road. They will appreciate that when the time comes.

 

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