{"id":5310,"date":"2013-03-05T06:35:15","date_gmt":"2013-03-05T11:35:15","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5310"},"modified":"2018-09-21T02:04:12","modified_gmt":"2018-09-21T06:04:12","slug":"an-emotional-finance-approach-to-fund-management-telling-the-right-investment-story","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2013\/03\/05\/an-emotional-finance-approach-to-fund-management-telling-the-right-investment-story\/","title":{"rendered":"An Emotional Finance Approach to Fund Management: Telling the Right Investment “Story”"},"content":{"rendered":"

In a previous post<\/a>, I distilled some of the valuable information about investment manager stress-coping mechanisms detailed in the Research Foundation of CFA Institute\u2019s recent monograph, Fund Management: An Emotional Finance Perspective<\/a><\/i>, authored by David Tuckett and Richard J. Taffler. This first-of-its-kind publication contains many previously unexplored emotional aspects of fund management worthy of highlighting.<\/span><\/p>\n

In this post, I’ll review the authors’ analysis of how stories are used by investment managers to gain conviction in an investment idea \u2014 all too often with deleterious consequences.\u00a0 I say deleterious because, as a former fund manager, I know that there is a constant danger of being married to my “story” and the contextualization\/mental framework it provides rather than orienting my mind to the facts themselves.<\/span><\/p>\n

The authors define storytelling as the narrative that investment professionals weave around the disparate facts of a business that serve as a way of understanding a prospective investment. One example of storytelling helps illustrate (bear in mind that both the names of the interview subjects and the company in question have been changed by the authors):<\/span><\/p>\n

\u201c[George] related that he had some initial interest [in Fast Foods] but \u2018didn\u2019t know enough as to what was going on with the name.’ It was not, he thought, \u2018an easy company to see\u2019 through. So, he went to a company meeting to learn more: \u2018They had a meeting at their headquarters.\u2019 And when he met the management, he quickly formed the impression that \u2018they really try to focus on managing their business\u2019, and he was impressed. \u2018I said, \u201cOh my goodness, I think I like what I\u2019m hearing.\u2019<\/span><\/p>\n

Back in his office the next day, he began \u2018pushing the numbers . . . I came up with a number that was 10% higher than consensus street estimates\u2019, he said, and he believed \u2018it could go even more . . . if this new product line . . . then it\u2019s even better\u2019.\u00a0 On top of these beliefs was an \u2018international kicker\u2019\u00a0\u2014 in other words, they were expanding globally. Also, George Monroe was delighted that \u2018they really kept talking about monitoring risk and measuring risk and getting risk out of the business model\u2019. This approach made him feel secure: \u2018Now, other people don\u2019t get so excited about that, but I say, \u201cOh, they\u2019re taking risk away.\u201d Your chance of success is so much higher.\u2019 Monroe bought the shares. \u2018It was great\u2019, he said, \u2018all of those things sort of played out in spades, like way beyond what I had imagined. . . . It\u2019s really gone up a lot, probably 50%, and they are continuing to execute just incredibly well. I think this next quarter is going to be humungous.\u201d<\/span><\/p>\n

Tuckett and Taffler contend that these stories are one of the principle ways that investment managers arrive at a conviction in the face of overwhelming tides of information and uncertain futures. In other words, stories allow managers to feel as if the chaotic nature of the world can be managed and that there are underlying and understandable patterns that make sense.<\/span><\/p>\n

Crucially, their findings about \u201cstories\u201d also demonstrate that arriving at conviction is not just a simple matter of overconfidence<\/a>, as is typically suggested by the behavioral finance literature. Both Tuckett and Taffler are psychiatrists, and they say that most of the investment managers they interviewed were “rather thoughtful and modest.”<\/span><\/p>\n

One fellow story researcher quoted by the authors is “Gabriel,” who defines stories as \u201cnarratives with plots and characters, generating emotion in narrator and audience through a poetic elaboration of symbolic<\/i> material . . . [entailing] conflicts, predicaments, trials, coincidences, and crises that call for choices, decisions, [and] actions.\u201d\u00a0 These stories tend to create a sense of purpose and meaning into a chain of seemingly unrelated events, and therefore help calm the anxiety of fund managers. While Gabriel identified many story types, Tuckett and Taffler focus on the two that fund managers seem to engage in the most: the “epic” and the “tragedy.”<\/span><\/p>\n

In epic stories, the plot revolves around an important success in the face of stringent competition. Epic stories are designed to elicit pride in the narrator and admiration for the hero on the part of the listener. The epic always has a happy ending. Tragic stories, by contrast, are virtually the opposite of the epic: \u00a0Their plots involve misfortune and villainy, and they are designed to evince feelings of pity or sorrow for the undeserving victim\/protagonist.<\/span><\/p>\n

Here is a summary table taken from Fund Management: An Emotional Finance Perspective<\/i>:<\/span>
\n\"Characteristics<\/a><\/span><\/p>\n

 <\/p>\n

Intimately related to storytelling are meta-narratives. These are the narratives used at investment banks and companies that distill the essence of the firms\u2019 investment philosophies. In other words, this is the raison d\u2019\u00eatre<\/em> or alpha argument about how the firm adds value for investors. For investment managers, meta-narratives allow them to perform their work.<\/span><\/p>\n

How you may ask?\u00a0When the performance of individual investments or markets does not move in favor of the investment manager, he or she is able to use the meta-narrative to remain vigilant throughout the fluctuations. An example would be the story, \u201cWe are value investors and right now the valuations are too rich,\u201d which is offered when an investment portfolio is underperforming relative to an advancing benchmark.<\/span><\/p>\n

So meta-narratives serve a useful function in helping investment professionals manage disappointment. Said otherwise: When markets disabuse portfolio performance, meta-narratives are not questioned because they are treated as sacrosanct. Instead, stories make sense of the bewildering array of facts and the disappointment of an investment idea gone awry.<\/span><\/p>\n

Tuckett and Taffler find that both stories and meta-narratives are rather flexible, meaning that they are only compelling if they are not probed too deeply. Perhaps, then, the ultimate reason for stories and meta-narratives is a need to bring organization to a deeply felt need for how investment decisions are properly made<\/i>, or ought to be made<\/i>. In other words, investment managers want to believe that there is logic and reason underlying their work.<\/span><\/p>\n

\n

Photo credit: \u00a9iStockphoto.com\/MHJ<\/span><\/p>\n

 <\/p>\n

Originally published on CFA Institute\u2019s \u00a0Enterprising Investor<\/a>.<\/em><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

In a previous post, I distilled some of the valuable information about investment manager stress-coping mechanisms detailed in the Research Foundation of CFA Institute\u2019s recent monograph, Fund Management: An Emotional Finance Perspective, authored by David Tuckett and Richard J. Taffler. This first-of-its-kind publication contains many previously unexplored emotional aspects of fund management worthy of highlighting. […]<\/p>\n","protected":false},"author":2,"featured_media":5311,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[22,160,171],"class_list":["post-5310","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-the-blog","tag-behavioral-finance","tag-emotional-finance","tag-metanarratives"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5310","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=5310"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5310\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media\/5311"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=5310"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=5310"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=5310"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}