The 1980 US Olympic Committee expected coach Herb Brooks to select players based on the traditional methods. Their plan was to invite a large group of the best college hockey talent in America (according to committee consensus) to a tryout. This routine is similar to testing individual investors with risk tolerance questionnaires. Both systems ignore the essential attributes needed to win at the Olympic level.
According to Dr. Phil Demuth, a clinical psychologist and investment advisor, “Even if risk tolerance existed and could be measured accurately, why would it be an important factor when considering how to invest?” More to the point, who would want their maximum risk tolerance imposed on them anyway? Yet, these questionnaires are part of the industry’s fiduciary standard.
Herb Brooks did not choose his offensive strategy or players with arbitrary tests, and neither do Advisors at Poetic Justice Capital Management. We recommend investment strategy based on the variables we know about and can control. This starts with an explicit definition of what it means to win — cash flow. It continues with the most efficient strategy — sequence of returns. It is implemented with the players that are proven winners for executing the strategy — correlation.
Our scoreboard is our client’s Funding Status — confidence. For us, dollars of future wealth are not the avoidance of poverty, they are the standard for measuring success. For Coach Brooks, winning is not the avoidance of losing, it is the primary achievement. However, in the world of sports there is a physical opponent, but for investors, the opponent is abstract — irrational thinking and methods, not ‘the market.’
For rational investors, risk capacity helps determine strategy, not risk tolerance. While those surveys are conducted in a psychological vacuum, risk capacity balances all essential factors into a coherent structure. The relevant tool is our Facts and Values Matrix, a conversation piece that integrates the facts of reality with our client’s unique values. This is radically different, and reliable, which is also radically different.
At Poetic Justice Capital, the investment strategy decision is the most conservative one we can afford. It is the asset allocation that gives investors a high probability of success while avoiding unnecessary sacrifice or risk. After all, risk capacity, like an investor’s assets and time, is the wealth we are entrusted to manage.
Like Coach Brooks changes players on the fly for tactical advantage rooted in strategy, we are flexible with strategy rooted in objective goals. If our client’s status becomes overfunded or underfunded, we adjust the cash flow benchmarks or risk exposure and rebalance to our desired confidence level.
While Brooks’ players are the talent on the ice, ours are America’s entrepreneurial capitalists — individuals whose companies our clients own in their investment accounts.
They are the ones who take risk, manage companies, and create wealth with their minds and energy. Value creators and profit earners are the essential producers in whom we invest. Also, their entrepreneurial mindset is how we make our investment strategy decisions — create the vision, take calculated risks, avoid mistakes, and measure success at the Olympic level.