I once asked a doctor: What’s the hardest part of your job?
It wasn’t the stress or responsibility. It was so basic. “Getting my patients to do what I ask of them,” she said.
I didn’t understand at first, but it made sense when she explained.
“You have an appointment with a patient and you say, ‘I need you to get this lab done, see this specialist, pick up this medicine.’ And they come back a month later and they haven’t done any of it.” They either couldn’t afford it, or it was too intimidating, or they didn’t have time.
She explained that becoming a better doctor meant spending more time managing her patients rather than managing those patients’ illnesses. There is a huge difference, she said, between an expert in medicine and an expert in healthcare.
An expert in medicine knows all the right answers out of the textbook. They can diagnose with precision and are up to date on all the latest treatments.
An expert in healthcare understands that medicine from the patient’s view is intimidating, confusing, expensive, and time-consuming. Nothing you diagnose or prescribe matters until you’ve addressed that reality with patients, because even a perfect solution makes no difference to the patient who doesn’t follow it.
I love parallels between investing and other industries, and this one may be the clearest.
There is a huge difference between being a great investor and running a great investment firm. The difference is the latter realizes that no amount of good advice or strong performance matters to the client who doesn’t follow it, or stick around long enough to benefit from it.
Josh Brown of Ritholtz Wealth Management put it this way:
Good advice is worth multiples of what a client pays for it. Mediocre advice is not worth a little less, it’s worth nothing because it won’t be adhered to.
Those who run great investment firms bridge this gap with a simple trick: Clear and honest communication that ensures clients know what you’re doing, what to expect, and addresses the psychological barriers that pushes them away from adhering to good advice.
Financial professionals as a whole don’t have a great reputation. Advisors have a reputation of being salespeople, and money managers have a reputation for being not very good at what they do, fixated on the short term and beholden to whacky strategies they profess will outperform.
But there’s a chicken-and-egg problem here. I’d argue the main reason so many financial professionals stray towards short-termism is because it’s the only way to run a viable business in an industry where customers flee at the first sign of trouble. But the reason customers flee at the first sign of trouble is often because the advisor has done such a poor job communicating how investing actually works, what their strategy is, what they should expect as an investor, and how they deal with inevitable bouts of volatility and cyclicality. The advisor will blame the client, who he sees as shifty and performance-chasing. But many clients are never educated by their advisors to behave differently.
Put yourself in the client’s shoes. They’re trying to pick a good advisor or investment manager from a sea of thousands of options. They don’t have that much information to judge you on. Sure, there’s past performance. But that can be driven by luck and broader market returns. When a client has something as important as their life savings on the line and limited information to judge you on, can you blame them for bailing at the first sign of trouble? Unless you’ve held their hand, told them your story, been utterly honest with them and explained what they should expect, it’s hard for them to distinguish between run-of-the-mill volatility and a manager who lacks skill. So they leave, unwilling to take a flyer on something that’s so important to them. Bailing out after a decline is self-destructive behavior. But if you’re a client who’s just thrown a prospectus and told, “Good luck, hang on tight!” I can’t blame you for doing it.
The most overlooked trait of investing success is communicating to your clients the softer and emotional side of investing. A knowledge of market history. An acceptance of volatility as a normal part of investing. That you can be wrong on half your investments and still do well over time.
On a recent podcast with Patrick O’Shaughnessy, Jason Zweig of the Wall Street Journal said:
We talk about investment management firms, but we don’t really talk about investor management firms. For anyone who’s in the portfolio management business, managing your investors is at least as important as managing your investments. There is a reason why value stocks tend to outperform over the long run … the whole reason they work in the long run is because they fail in the short run. And for any investor to be able to capture a premium return from any factor, you have to be there long enough to participate. There are a lot of active managers who have a great approach and philosophy and implementation, but I think the ones who are most admirable are the ones who think a lot about managing their investors as well as the investments.
Ben Carlson, an investor who’s also a brilliant communicator, wrote recently:
Investment people who deal with finance stuff on a daily basis take for granted the fact that the majority of the public doesn’t pay much attention to the markets, asset allocation strategies, investment products, the Fed, interest rates, valuations and such. Plenty of people go about their lives never giving these things a second thought. The ability to not only understand this stuff, but also effectively communicate it to clients or prospective clients is a skill that far too many financial firms and practitioners overlook.
Just as in medicine, making good decisions is not the same thing as convincing your clients to make good decisions. Hedge fund manager Kyle Bass summed this up well, saying: “It’s easy to maintain conviction. It’s harder to maintain investors.”
Look around at some of the best investors of all time and you’ll see a common denominator: They are excellent communicators.
Warren Buffett – amazing writer.
Charlie Munger – amazing writer.
Ben Graham – amazing writer.
Seth Klarman – amazing writer.
John Bogle – amazing writer.
Joel Greenblatt – amazing writer.
Howard Marks – amazing writer.
Jim O’Shaughnessy – amazing writer.
I don’t think this is a coincidence. These investors’ ability to write let them effectively tell their story, set expectations, and reassure investors. That made their investors more likely to stick around when times got rocky. And investors who stick around when times are rocky is exactly what you need to succeed over time as an investment firm. It’s what allows you to actually take long-term risks and exploit opportunities other firms can’t because they’re dealing with fleeing clients.
There is a reason no Berkshire Hathaway investor chides Buffett when the company has a bad quarter. It’s because Buffett has so thoroughly convinced his investors that it’s pointless to try to navigate around 90-day intervals. He’s done that by writing incredibly lucid letters to investors for the last 50 years, communicating in easy-to-understand language at annual meetings, and speaking on TV in ways that someone with no investing experience can grasp.
Yes, Buffett runs an amazing investment company. But he also runs an amazing investor company. One of the most underappreciated part of his success is realizing that the former couldn’t happen without the latter.