When trying to speak to my children in a way that they will remember (it is not easy), I regularly say to them in a funny, but somewhat serious way:
“Don’t Be A Sheep.”
Now that they are getting older, I don’t get as many smiles when I say it, but I hope they are getting the message. Don’t blindly follow and don’t be afraid to take the road less traveled.
Most anyone that I know tries to teach young ones this lesson. The “If someone runs off a cliff are you going to follow?” talk.
For some reason, however, many adults forget and act like herd animals when it comes to investing.
Almost every day you can see examples of appeals to this collective amnesia in what I call “don’t be left behind” headlines:
“XYZ Is The Top Performing Strategy for Q1…”
“ABC Investment Bank Projects that Growth Will Continue…”
“Flows Into HOT Asset Class Tops Past Records…”
Time and time again the evidence suggests it is a loser’s game to follow stories like this, but time and time again investors rush for the cliff and run right over.
It is even worse when the headlines present something as the next shiny, new, complex or “private” club-like strategy. These seem to attract investors like moths to a flame.
Just as good consumer product firms know the power of the herd when they use cartoons to market to kids or sexy models to adults, Wall Street also is a marketing and product development machine.
Investment product teams now include both quantitative analysts and marketing professionals, and they work closely with chief economists and strategists. New New Things are created and then research papers are written and published in nicely packaged weekly or monthly investment strategy pieces. The materials are sent to clients promoting the best thinking of the firm. Then, after a few days, the new product, designed to be sold based on the research that hopefully has been talked up on CNBC, etc., is released to the brokerage sales people (now often called Wealth Advisors). If all goes well, the thundering herd is off and running.
I could go on and on about this and cite many research studies by investment professionals and academics who have won awards such as the Nobel Prize for Behavioral Economics. I know that you have probably seen many of these reminders before though, so I will try to make my point using advice that I got early on in my investment career. An old battle worn manager told me, “Son, people remember stories, so get some.”
So here we go – two true stories:
#1 – The “Honest” Global Chief Investment Officer
Once, I was having dinner with a Global Chief Investment Officer. I was asking him why his monthly commentary and the first few sections of his team’s glossy monthly wealth management publication were becoming more and more short-term trade (consider the advantages of shorting currencies, etc.) and active manager oriented, especially based on the fact that he spoke to me often about how he had most of his personal money in index funds. After a little wine, he admitted that most of the pieces would likely not add any value and that some, such as hedging recommendations and currency calls, were quite risky.
He then said,“Preston, what you need to understand is that I get paid to publish ideas that we can sell for a profit. If I don’t, the brokers and management complain. I then lose my job. I learned a long time ago that it pays to feed the Street.”
#2 – The “Honest” CEO and Global Head of Alternative Asset Management
In the process of trying to get good insight into a competitor’s hedge fund portfolio for a prospect presentation, I went to the CEO of large asset manager that I knew well. Previously, he had been the Global Head of Alternative Asset Management for the firm that had created the hedge fund portfolio that I was analyzing. Perfect, I thought, he led the group that created all of the products. After I gave him a brief overview, he smiled and said,
“Preston, you’re thinking too much. You are correct, the performance of the portfolios has been bad. We had a great brand though, an even better Ivy League MBA sales team, and we knew it. So, we looked at products one way. If we could sell them, they were good.”
Are these stories more common that many would like to admit?
I’ll let others answer this or add their stories.
Bottom-line, I know it is not easy, but try to stay focused on your long-term plan (not the models of others), only invest in what you truly understand, and do not be sold.
Don’t Be A Sheep.