It is often stated that the key to strong long-term investment performance is the ability to compound good short-term results. Although avoiding near-term disasters (such as severe permanent losses or extreme volatility) is imperative for all investors; the idea that an acute focus on the immediate future when managing our investments will lead to positive outcomes over long-run horizons is deeply flawed. There is a paradox at the heart of our investment behaviour whereby the more we care about what happens in the short-term, the worse our long-term performance is likely to be.

Although the precise definition of long and short-term investing horizons is somewhat hazy, let’s assume that short-term is under three years and long-term is over ten years (we can ignore the piece in the middle for now).

For most investors the core tenet of successful long-term investing is about making sensible, evidence-based decisions that put the odds on our side and then letting it play out. Although this sounds easy, it is far from it.

Whichever investment strategy we adopt, whichever funds or assets we hold, they won’t work every quarter, every year or even every three years. They will all go through spells of poor performance where negative narratives abound and our concerns will be pronounced. The temptation to change course will often prove overwhelming.

This is not about active versus passive investing. All approaches will come under scrutiny. We need only look at the number of obituaries being written for the 60/40 portfolio following an unusually difficult 2022. Investors of all churches will have to withstand periods of scrutiny and doubt in order to meet their long-run objectives.

The underlying problem is one of continually unhelpful feedback. Long-term investors receive constant feedback on their choices in terms of short-term performance and the narratives that accompany it. We perceive this to be meaningful information but it is nothing more than distracting noise.

Smart long-term investment decisions will often spend plenty of time looking like stupid ones. If we cannot endure this reality, we are likely to be drawn toward the dangerous allure of short-term performance chasing.

Trying to manage short-term performance is both exciting and exhausting. Exciting because we feel good about latching onto the latest fad or trend; exhausting because markets are fickle and unpredictable.

Caring about how we compare to others over the next quarter or next year will inevitably lead to poor outcomes. As we constantly chase our tail, predict the unpredictable, pursue grossly overplayed themes, buy at the peak, and sell at the trough.  

If such myopia is a sure route to poor results, why is it so prevalent? There are three primary factors at play:

1) It relieves stress and anxiety: Doing nothing for lengthy periods as a long-term investor is tough, particularly when we are receiving negative near-term feedback (our performance is disappointing). Making changes based on what is working right now makes us feel so much better.

2) We mistake short-term market noise for information: We are overwhelmed by a constant stream of data releases, opinions and, of course, fluctuating returns. The functioning of financial markets makes us believe that things are changing and that our portfolios must change as a consequence.

3) Our incentives are aligned with taking a short-term view: For professional investors, in particular, our incentives are almost inevitably aligned with adopting a short-term perspective. It is the safest way to build a career, stay busy and not lose our job / assets. People are happy with the short-term decisions we make as they will be pro-cyclical (buy the winners / sell the laggards) and we will have a story to tell. We won’t see the long-term costs because by the time they come to fruition we will most likely be in another job.

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Aside from a select few who wish to dabble in short-term market timing (best of luck), the vast majority of investors would be better off in focusing on the long-term. Unfortunately, that is far easier said than done. Both our behavioural wiring and the febrile nature of financial markets makes short-termism our default setting. If we are going to be long-term investors, we need to have a plan for how we are going to do it.

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My first book has just been published! The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).

If you are a staunch advocate of index funds then the answer to the question of whether meeting active fund managers before investing with them is a waste of time is unequivocally yes. So, to avoid another active versus passive debate, let’s assume we have to invest in an active fund – is meeting with the fund manager necessary and does it improve the odds of success? During my all too long career fund manager meetings have been something of a sacred cow – of course you must see the ‘whites of their eyes’ before handing a fund manager your money, it would be madness not to. But is this true?

The received wisdom around the value of meeting fund managers is so pervasive that I have rarely seen any alternatives proposed – aside from the occasional and dreadful performance (chasing) fund screen. Of course, different people have different approaches to such meetings – some are happy to simply be presented to, while others prefer to grill a junior analyst on their forecast for operating margins in the smallest stock in the portfolio – but most seem to miss a critical factor. Whenever we enter into an interaction with another individual the decision we make will often be overwhelmed by a range of unconscious behavioural factors. We ignore these at our peril.

What are the main behavioural problems we are likely to encounter when meeting with a fund manager?

Halo effect – Perhaps the most challenging behavioural issue of fund manager meetings is the halo effect. This is where we allow a positive view of one aspect of an individual to impact our assessment of an unrelated trait. A fund manager is a compelling, articulate presenter – surely, they must also be a good investor?

Outcome bias – Even though past performance is a poor guide to future returns and the presence of skill; we are likely to find the answers of an outperforming fund manager persuasive and an underperforming manager weak. In this sense, fund manager meetings can serve to perpetuate destructive performance chasing behaviour.

Selection bias – Successful fund managers who raise assets are likely to be good presenters and confident communicators. It will have helped them through every stage of their career. The bad presenters are probably more interesting propositions – they have had the odds stacked against them in getting to where they are.

Reading people – Part of the appeal of meeting fund managers is to gauge whether they are trustworthy and credible. Yet most of us hugely overstate our ability to ‘read people’, understand their motives and separate fact from fiction.

Perpetuating tropes – We inevitably hold a range of misguided archetypes and tropes about what characteristics individuals in certain roles should possess. One of the reasons why so many fund managers are men (aside from deeply-ingrained societal issues) is that we are beguiled by gendered traits such as overconfidence and charisma – despite them being unrelated to being a successful investor. These traits are often well in evidence in traditional fund manager meetings.

People we like – Although it is difficult to accept, we will hold more favourable views of investors that we like as people.

Reciprocity – Another issue that we struggle to believe would influence us is the power of reciprocity. If someone does something for us, we feel compelled to return the favour, often in ways that are entirely incommensurate. Small gestures can have a huge impact and is a spectre that looms over relationships fund investors may have with asset managers.  

Charisma – Charisma hides a huge number of ills and a fund manager meeting is the perfect forum to mask a lack of competence with personality. There is nothing more dangerous to an investor than a lucky fund manager with charisma.

Information / confidence – There is often a conflation between the depth of research undertaken on a fund manager (“we have had 15 meetings with them”) and the quality of the resulting decision. There are two problems here. First, we can easily lose sight of what variables matter because we are subsumed by irrelevant detail. Second, past a certain point, more knowledge simply leads us to hold more confidence in our view without it becoming any more accurate. In this situation, increased information reduces decision quality.  

Information asymmetry – Inherent in the interaction in a fund manager meeting is an information asymmetry. The fund manager should know more about the securities they invest in than we do. Yet I have attended countless meetings where a view on a fund manager is formed based on how well they ‘know their stocks’. Unfortunately, rote knowledge of securities is not a necessary or sufficient condition for being a successful investor.    

Storytelling – An effective fund manager meeting (from the perspective of a fund manager) is an exercise in storytelling. It is designed to make us focus on the inside view at the expense of the outside view – that is to concentrate on the specifics of the fund manager in question, not the general probabilities attached to successfully finding a skilful active fund manager. “Who cares if the odds are 1 in a 100, that was a great meeting”.

Sunk costs – In a fund manager due diligence process, we must always be aware of the impact of sunk costs. Turning back or changing our minds after so many hours spent in meetings is a difficult thing to justify to ourselves and others.

Front stage / back stage – One approach some fund selectors take when assessing a fund manager is to observe team meetings to see how interactions take place and decisions are made first hand. This is viewed with scepticism by many who argue that if a team are being watched then it is not a genuine interaction. Yet these same critics are often happy to sit in a standard fund manager meeting, which is surely more artificial. The simple fact is that – as sociologist Erving Goffman noted – we all have a front stage and a backstage self. The waiter in a restaurant behaves differently when they are serving us to when they are in the kitchen. All fund manager meetings are performative, and we will never know the true functioning of a team unless we work at the organisation.

Management of self – It is not just the fund manager that performs in a meeting, it is the fund selector also. They might be in awe of the fund manager, who will often have more money and power than they do. They might even be in the meeting alongside their own boss or client. The temptation is often strong to ask questions that might reflect well on them, rather than those that help make a good decision. ‘Intelligent’ but empty questions are easily favoured over ‘simple’ but searching ones.  

A problem for other people – There is one overarching factor that amplifies the damage caused by behavioural issues and that is our ingrained belief that they don’t affect us: “Other people? Maybe. But they have never influenced my decisions.” Until we accept that they do, it will continue to undermine the effectiveness of fund manager meetings.

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The regard in which fund manager meetings are held is such that I have never heard any reasonable alternatives proposed, indeed suggesting such things might be regarded as heresy. But let’s try.

How about instead of a face-to-face meeting with a fund manager, we reserve time with them and ask them to respond to a set of bespoke questions by hand. They have to do it themselves and on their own. If we were assessing a group of fund managers, we could even blind the responses.

I can hear the howls of protest about the loss inherent in such a method. There has, however, been such little progress in this area nor acknowledgement of the behavioural pitfalls of the current approach that fresh ideas are needed.

One less controversial method to help enhance the value of fund manager meetings is simply for fund investors to be clear about what it is they care about. It is so easy to become lost in a sea of noise. The most effective way to alight on this is to ask ourselves – if I could only know ten things about a fund manager before investing with them, what would they be?

It is not simple to define, but can lead to a much sharper focus. Having an agenda is not enough, we need to be trained on what matters and why.

Would I want to invest money without meeting a manager? Probably not, but perhaps it is just because I have been conditioned to believe it is essential. What is critical is that fund manager meetings are based on evidence pertaining to the factors that we believe are important. We should also always be underweighting what is said and overweighting what is done.

Are fund manager meetings a waste of time? No. Is it a waste of time or worse if we don’t acknowledge or deal with the behavioural biases that we carry with us into those meetings? Almost certainly.

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My first book has just been published! The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).

I started my investment career in 2004. Although equity markets had begun their recovery from the damage wrought by the dot-com bubble, the scars were still evident. All too regularly I saw client portfolios with tiny, residual holdings in once-celebrated technology funds – stark reminders of costly past decisions.  With the wonderful clarity and confidence that only hindsight can bring, I remember thinking how I would never be swept up by such lunacy and, in any case, it was unlikely to happen again – investors will have learnt their lessons. One look at the all too recent obsession with ape JPEGs, made up currencies, (empty) shell companies and, once again, stratospherically valued technology businesses would tell you quite how naïve I was.

Why is it that we can have such vivid and painful investing experiences but go on to repeat the same mistakes?

The central problem for investors is about behaviour and stories. One of them changes and the other doesn’t.

Lessons Not Learnt

GMO’s Jeremy Grantham was once asked what lessons investors would learn from the 2008 Global Financial Crisis, he replied: “In the short-term a lot, in the medium-term a little, in the long-term, nothing at all. That would be the historical precedent.” 

Part of this phenomenon is down to the half-life of painful investment episodes. Memories fade and scars heal. There is also always a new set of younger investors, unburdened by the baggage carried by the previous generation – ready to learn the same lessons anew.   

Yet this is not sufficient to explain the unerring cycle of mistakes. Most investors live through multiple spells of mania, greed, panic and despair. And, even if they haven’t, there is plenty to read about it. Despite the evidence, our behaviour doesn’t change.

Something Really Is Different This Time

The reason that it is so easy to discard the lessons of history is that the story is always fresh. We can reject the behavioural failings of the past as an irrelevance – this is a new situation and the old rules do not apply. Our focus is always on the persuasiveness of the narrative of the moment – it is how we interpret the world – rather than our behaviour.

Sir John Templeton’s famous comment about the danger to investors of the four words “this time it’s different” is absolutely true as it pertains to the nature of investor behaviour – that doesn’t alter. Yet our willingness and ability to repeat those poor behaviours arises only because the story is different each time.

The story changing allows our behaviour to remain the same.

Incentives (Always) Matter

No discussion of investor behaviour can be complete without a consideration of incentives. New stories allow and compel us to ignore behavioural lessons, and incentives act to leverage this effect, exacerbating the disconnect.

Investment narratives are wrapped up in a virtuous / vicious circle alongside performance and social proof. A captivating story, strong (or weak) performance and the behaviour of other investors creates a self-reinforcing loop, where one element validates the next. High (or low) returns seem to further corroborate the story and persuade more investors. And so it continues.

At some point most people get captured by the gravitational pull of this interaction. Whether it is the pain of poor performance, our neighbour making more money than us or the threat of losing our job. We become incentivised to behave poorly.

We don’t need everyone to believe in a story for it to overwhelm sensible investment behaviour, just enough so it becomes in almost everybody’s interest to go along for the ride.   

Is Our Behaviour Getting Worse?

Although our behavioural characteristics don’t change, there is a risk that the impact is becoming more severe. Why? Because there is more stimulus and more opportunity.

Financial markets are narrative generating machines. Not only does modern technology mean that we have more stories being created than ever, but they are effortlessly disseminated and amplified. Add to this the ability trade in an instant and we truly have a toxic behavioural concoction.  

There are no easy solutions here. It is not simply that we do not learn from our investing mistakes, but that we are likely to make more of them.

It is undoubtedly harder than ever for investors to behave well.

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My first book has just been published! The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here.