One of the most important concepts in investing and in life is to remain on an even keel rather than "pushing the envelope" all the time. As you go through life, you will see how your levels of risk fluctuate according to the stage you have reached. To gauge your level of stability, you need to determine where your center of gravity is.
I interviewed Betty Shotton, author of Liftoff Leadership:Ten Principles for Exceptional Leadership, on The Goldstein on Gelt Show. As a former commercial pilot, she explained the concept of the center of gravity and how it applies to life very clearly.
Below is a transcript of this interview. You can listen to the interview on www.GoldsteinOnGelt.com.
Douglas Goldstein: You talk about flying, leadership, and finding your center of gravity. What's that all about?
Betty Shotton: I've been writing about the center of gravity as it relates to business, careers, and the way we run our lives. The center of gravity, in a plane or a boat, or I guess the best visual example is a seesaw, is a point where the mass around that point is equally distributed so that there is a balance. If you have the center of gravity at the right place in a plane or on a seesaw then you're not going to tip over. I use the analogy of center of gravity to remind leaders and investors and even in our personal lives that we need to be aware of imbalances and extremes. We should always come back to a center point where we're on an even keel.
Douglas Goldstein: How did you come up with this model or this metaphor?
Betty Shotton: I've been in aviation, I'm a commercial ATP pilot and I've had a couple of airlines. I had an experience one time where we had just bought a twin-engine airplane that we were putting on our certificate as the airline, and we had not taken it on a commercial flight with passengers. It was my job to calculate the center of gravity, which is really important in planes and in aviation because you've got passengers, luggage, and fuel and you need to load things and make sure that the plane is always stable. The center gravity is what will tell you that. I calculated the numbers, ran it by people, and it looked like it was good. We loaded the plane up with passengers and luggage and the tail hit the tarmac. I looked at this experienced guy and I asked, "What's up with this?" and he said, "I don't know. It's a new plane. It must be just the way the plane is." So I said, "Okay."
I got into the plane and rolled down, took off, and as soon as I took off, I was at the controls and I could feel that something was wrong. I don't know if you've ever been on a boat where you're going up and down with the waves and it makes you feel seasick. In a plane, it's even worse. If a plane is out of balance, you can feel it right away in your stomach, and it's just the lack of equilibrium. I knew something was wrong and so did my co-pilot, who was a long-term American Airlines pilot. We got up to altitude and trimmed the plane out and people started throwing up. Then I really knew something was wrong, so we had people moved forward, we took luggage out of the back and moved it forward. We re-adjusted everything and did what we could inflight to stabilize the plane. We landed safely and everybody got off, and they were thrilled to get through with that flight. We and the pilot all went and huddled and looked at the numbers. We looked to see what went wrong and found that I had used the wrong chart. It looked like the right chart, but it wasn't. The center of gravity was what they call "out of the envelope." So that really drove home to me the potential consequences of things being out of balance, and I know that that same situation happens in investment markets. It happens in business, in our personal careers, and in our own personal lives. We often get to where we're out on edges and it's dangerous, and we need to come back and balance in the center.
Douglas Goldstein: People sometimes like to live outside the envelope a little bit, or they're not even willing to admit that it exists until such times, when they might actually crash and burn. How do you teach people this concept?
Betty Shotton: From my standpoint, I've experienced a lot of risks and failures, and I'm out there now sharing what I've learned so that others don't have to go through it. You know when your advisory capacity is one that can be trusted to advise people when they're too far out and give them the benefit of your experience that they're hitting a tipping point. But in the end, people sometimes have to crash and burn, so to speak, on their own.
Douglas Goldstein: One of the things in portfolio design is understanding that different people have a different center of gravity, or a different balance in terms of their stock and bond allocation in the portfolio. Is there a way that you would suggest for people to begin examining themselves or their portfolio by using your perspective as an expert in flying, or in other things as well?
Betty Shotton: From a portfolio standpoint, I would start with a conversation with my advisor and make sure that I understand the risk associated with the different parts of my portfolio, whether it's cash, bonds, stocks, or derivatives, or even real estate. One thing that I focus on when I talk about these balances for businesses and leaders is what I call the counting side, or the numerical financial, intellectual side of business. You need to understand what your portfolio is about from an academic, intellectual, financial side.
It's the same with business. People go into business, and I always say that you can't just have a good idea or think something. You need to structure, design, and pat it down. From a portfolio standpoint, once you have that knowledge then you need to have an understanding of your own personal situation and where you're going. For me at 61, I don't want to be loaded with high-risk types of investments. My appetite for risk at this point is probably medium. I need to be aware of that and bring that into the equation. You need to look at your own life, your own goals, your own objectives, where you're headed, and what you're willing to handle. I think that people intuitively know when they're pushing the envelope.
I have a very quick practical tip. When you're in a relationship, when there are two people who are trying to balance their different interests or desires, the question would be is what would the relationship vote for? Introduce a third party into that twosome, and make it a triumvirate. Most just say it is husband-wife. But it's the husband-wife and then the marriage, or the relationship, itself, so you get three votes in.
Douglas Goldstein: Could you just explain it a little bit practically? How would we apply that?
Betty Shotton: You've got a husband and wife who are looking at their portfolio with you. She wants a lot more money for whatever reason, and he says, "I want to quit working soon, and I want to be more conservative and build this thing." So then you say, "Okay, what would your relationship want? What would the relationship vote for?" It's looking beyond each other and our individual needs to what's the best thing for our family, our relationship, our future. Let's put a third thing into the equation.
Douglas Goldstein: How can people continue to follow your work?
Betty Shotton: I have a website called Liftoff Leadership and I really focus on that as a resource for leaders, for executives, and for investors to give them practical tools, to give them insights from the research that I do. If you go to that website, there will be a lot of information to help you as you navigate your own investments, your own business, your own career, and that's what it's there for.