'Longterm-washing' in Active Investing
Active Investing has a ‘Why’, ‘What’ and ‘How.’
- Why, is about the investment philosophy.
- What, are the investment process definitions.
- How, is day-to-day Portfolio Manager (PM) behaviour.
This post is about the HOW?
Read the marketing material of active investment firms today and I estimate that one of the most popular terms used in their communication is ‘long-term’.
But here’s the thing, the industry as a whole, doesn’t seem to recognise the spectacularly obvious. Long-term isn’t just about the average holding period of assets. Critically, it is also about HOW the managers of portfolios behave!
In contrast, ‘short-termism’ (that isn’t often mentioned in much marketing literature) defined as, ‘the practice of only considering the immediate advantages of particular actions’, remains a predominant behaviour in asset management and not only shows up in an obsessive focus on near-term investment returns but also in a host of day-to-day behaviours.
“We are almost compelled to give our first attention to the urgent present rather than the important future” Dwight Eisenhower
Whilst urgent tangible deadlines can be important, urgent, non-important behaviours are pervasive and lead to short-termism.
Most PMs are obsessed, (often subconsciously, in the form of habits) with daily news headlines, short-term price action and sound bites in general. The financial media feeds them larger quantities of attention-seeking content that keeps them busy but less productive.
It works of course, as humans are hard-wired to worry about the short term. Our ancient ancestors survival was predicated on them reacting in the moment and running from an unexpected rustling in the vegetation!
Equally, modern society is ruled by instant gratification : Need a taxi? - Uber. What is happening in the markets? - stare at Bloomberg. I’m a bit bored - Instagram.
So let’s be clear….we are designed for survival/instant gratification and when it comes to professional investing, this is a pervasive behavioural bias that causes widespread value destruction.
We can’t control these natural human emotions BUT leaders can and must help PMs:
a) realise they have a problem (most are blissfully unaware)
b) transition to a more long-term mindset, one that better controls the reactions to these natural emotions
My role as an investment coach is to be an outsourced provider of this, if the leadership feels they need help. Long-termism is not innate, it is a learned skill but with few missionaries. Sadly, this means the industry is awash with what I will call ‘longterm-washing.’
What are examples of authentic long-term behaviour in PMs? I’ll share a few :
- avoiding news media (almost entirely). Acquiring permanent, not temporary knowledge is differentiating.
‘To be completely cured of newspapers, spend a year reading the previous weeks media’ Nassim Taleb
- every quarter practice how you communicate your investment philosophy. The goal is that the asset owner believes what you believe.
- have a stop-doing list you revisit monthly. Example, only check asset prices a maximum of twice a day.
- never confuse short-term returns with skill. Think how the industry incentivises this?
- at the start of every day, set a specific learning goal.
- systematically (have a written process) to learn about the link between decision quality and outcomes.
- systematically collect data on your patterns of decision making that link to your personality. This will highlight persistent personal biases (the last 2 link to having an investment journal)
- Access an explicit tool that regularly helps you analyse both ex-post and ex-ante, your portfolio construction skill. Portfolio construction is not just ex-post measurement and report generation.
- avoid having a market view.
Allow me to illustrate the final point.
A skilled, long term investor was asked last week as part of a panel …..’are you worried about hyperinflation ?’
He replied ….
“No….but let me expand. There are numerous worries out there…. China’s regulatory actions, high and rising fuel and food prices, labour shortages, inflation/stagflation, disrupted supply chains, central bank policy ….I don’t worry about the things I can’t control and making predictions on such matters isn’t the role of an investor.
I do however worry about whether I’ve done enough to seek out disconfirming evidence on my largest holdings, and how could better understand what’s currently baked into asset prices.
I am pretty confident that twelve months from now, at your 2022 conference, these worries will have been replaced by a new set of worries.”
Having worked with this PM in the past, his average holding period is over 4 years, but that’s not what makes him a long term investor.