I sometimes wonder whether our work with investment managers will lose its impact as our strategies for building assets become more widely known. How can we get results if all investment companies start implementing our advice on a consistent basis? Will the Alpha factor, like some form of arbitrage, lose its potential to make money as it becomes widely applied? But then I recall the principles of behavioral finance. Just as some investment firms outperform by exploiting certain persistent behavioral shortcomings in the realm of investing, so too can they outperform by exploiting certain persistent behavioral shortcomings in the realm of marketing. We think of these persistent shortcomings as The Seven Deadly Sins:
#1 Arrogance. Arrogance manifests itself as a sense of entitlement. Arrogance is the hedge fund manager who can’t be bothered to explain clearly his firm’s source of alpha. During a presentation, Arrogance slouches back in his chair, arms crossed casually, as if to say, “We don’t need your money. Take us or leave us.” The opposite of arrogance is Humility, which, investors often tell us, is one of the primary attributes driving their decision to choose one investment manager over another. Here’s a war story about Humility versus Arrogance.
#2 Greed. Greed is quantity over quality. Greed is the small-cap manager with the ever-ascending cap on assets under management. First it’s $1.5 billion, then $2 billion, then $2.5 billion. As the cap rises, performance starts to slip and the firm loses credibility. Greed is the high-net-worth firm that wants to become a player in the institutional market, yet can’t quite manage to make the investment required in time, discipline and resources.
#3 Inconsistency. Does an inconsistent investment process description signal inconsistent process implementation? You bet. We know of a firm where the two founders argued constantly over the name of one of their quantitative models. In the end, no one really cared what the model was called. They cared about disciplined process implementation and these guys clearly weren’t pulling their investment boat with the same set of oars.
#4 Sloth. Sloth just shows up and does a brain dump. Sloth never studies the consultant’s website or researches the goals for the investment mandate. Sloth mistakes near-term activity (lots of self-referential phone calls and presentations) for the kind of activity that gets results. Sloth—aka Lack of Preparedness—is the root cause of many other deadly sins, such as Verbosity, Ambiguity and Self-Absorption.
#5 Verbosity. Verbosity mistakes volume for depth. Because she has not prepared what to say, she says too much about too little. Verbosity likes the sound of her own voice. She never slows down to see if the audience is following or if anyone has a question.
#6 Ambiguity. Ambiguity creates a generalized, ill-defined sense of dissatisfaction every time he presents. Because he does not make the time to prepare specific examples of the investment process, no one in the audience really understands how the process works.
#7 Self-Absorption. Self-Absorption invariably opens every presentation with the same boring parade of self-referential facts and closes every presentation with the ubiquitous exhibit, “Why Hire My Company?” Even in client presentations, Self-Absorption spends more time on news about his company than on a detailed explanation of portfolio performance. Self-Absorption never conducts any market research—even when he represents an investment firm that prides itself on in-depth research about the companies it targets for investment.
We have sat through hundreds of new business presentations where the presenters tragically exemplify these behavioral shortcomings. Why haven’t they learned, we wonder? Never mind. Human nature being what it is, many investment marketers will continue to exemplify the deadly sins—and that’s good news for those who practice virtue over vice.