Talking Heads

The picture in this post is from an album cover that was reportedly prepared for the band, The Talking Heads.

The theme of the blog is based on their album, Speaking In Tongues, and its hit single Burning Down The House (for an 80s throw back moment consider clicking on the previous link).

Earlier this month, the following headline came in on my email:

“Delusional Fed Could Trigger 40% Emerging Market Equity Correction”

I will avoid pointing out the well known investment professional who is reported to have made this quote, but as I just wrote in my last blog titled Your Brain On The Market, headlines like this from Wall Street talking heads don’t help investors make constructive decisions.  Often, they only create unneeded emotion and fuel irrational behavior that harms long-term returns.

As we have written about many times before, at the very least prognostications like this tend to be inaccurate (consider clicking on the following If We Had A Chief Economist We Would Have To Pay Them).

At worst, they are self serving.

How?

When I was a Managing Director at a large asset management firm, I sat in on media training with our senior portfolio managers.  What was the most important message PMs were told to reinforce in interviews?

“While in front of the camera, be sure to use the opportunity to talk up positions that you just bought to get the herd interested in buying them.”

Potentially along the lines of today’s “Delusional” comment, PMs were also told to talk down positions that they did not hold, which were part of their index or were large holdings of their competitors.  I actually witnessed portfolio management teams watch CNBC interviews and then cheer as they saw large numbers of buy or sell trades come across the ticker based on their colleague’s comments.

Related to this, consider the following true stories:

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 index funds. After a little wine, he admitted that most of the pieces would likely not add any value and that some were quite risky. He then said,

“Keep in mind 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 could lose my job. I learned a long time ago that it pays to feed the Street.”

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 had a meeting with the ex-head of Global Alternative Asset Management for the firm that had created the hedge fund portfolio 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,

“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.”

I could go on and on about this, but reaching back again to our last post, don’t let your brain get flamed up by stock market commentators or marketing presentations.  Remember, market flames fueled by sensational quotes and headlines can burn down your investment portfolio.

Related Reading:

Falliable Forecasts – Maneesh Shanbhag, Greenline Partners – Research Roundtable