I sometimes lie awake at night worrying about 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 convertible arbitrage, lose its potential to make money as it becomes more widely applied?
But then I recall the principles of behavioral finance. Just as some investment firms outperform by exploiting certain persistent foibles of human behavior in the realm of investing, so too can they outperform by exploiting certain persistent human foibles in the realm of sales and marketing. We think of these persistent shortcomings as The Seven Deadly Sins — and they are sinful when one considers their negative impact on new business development and client retention:
#1 Arrogance. Arrogance manifests itself as a sense of entitlement. Arrogance is the hedge fund manager who can’t be bothered to explain clearly the source of his competitive edge. Arrogance is the institutional salesperson who tells you that her company has “the best risk model” without any solid basis for this comment other than a big-name firm and a galloping ego unfettered by the need for facts. During a presentation, Arrogance slouches back in its chair, arms crossed casually, as if to say, “We don’t need your stinking 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. Click here for a war story about the virtue of Humility.
#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 it’s $2 billion, then it’s $2.5 billion, then the cap rises yet again, performance starts to slip and the firm loses all credibility with the consultant community. Greed is the high-net-worth firm that wants to become a player in the institutional market, yet can’t quite suck it up to make the investment required in time, discipline, people 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 for years over the name of one of their quantitative models. In the end, no one really cared whether it was the “Multi-Factor Zippo Model” or the “Ultra-Quantitative Zappo Model.” What mattered was that these guys just didn’t get along well enough to pull their investment boat with the same set of oars. The more common manifestation of inconsistency, especially in large firms, is the inability of salespeople to tell the same story. Even when there is a cohesive story that has been communicated clearly across the organization, the desire to make an impact leads to reinventing the wheel every time the story is told — with the result that one cohesive, memorable story never emerges.
#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 phone calls and presentations) for lasting results (lots of thoughtful phone calls and meetings, reflecting a keen desire to work hard and enthusiasm for the work itself even before being hired). Sloth — a.k.a. 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 take the time (thanks to Sloth) to prepare specific examples of the investment process in action, no one in the audience really understands how the process works.
#7 Self-Absorption. Just as Narcissus is doomed to gaze longingly at his own reflection, Self-Absorption invariably opens every presentation with the same boring parade of self-referential facts (when the company was founded, assets under management and so forth). Self-Absorption closes every presentation with the ubiquitous exhibit, “Why Hire My Company?” Self-Absorption never makes any but the most perfunctory comments about why he is interested in winning the business. “We would really love to work with you,” he might say after the mind-numbing procession of facts is over. 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 Self-Absorption represents an investment firm that prides itself on in-depth, objective research about the companies it targets for investment. He doesn’t care what the market thinks of him, or he thinks that he already knows.
We have sat through hundreds of new business presentations and mock sales calls where the presenters tragically exemplify these deadly sins — even when they have been provided extensive educational resources and trained by professionals in the art of marketing and sales. Why haven’t they learned, we wonder? Why don’t they listen? Never mind. Human nature being what it is, not everyone will seek good counsel or act on it consistently — and isn’t that good news for professionals who do become exemplars of virtue over vice.