Cut through the drama, follow the data

The brain takes refuge in easy stories.

Why is it that almost all fund managers are more lyricists, less intelligent investors?

“Human beings aren’t rational animals; we’re rationalising animals who want to appear reasonable to ourselves,” said the famous social scientist, Elliot Aronson, author of The Social Animal. The word around us is a bewildering medley of pure noise. In such a chaotic daily environment, the brain’s protective mechanisms kick in, and takes resort in under-analysed, oversimplified, lazy opinions. The brain takes refuge in easy stories. Data and facts are given the short shrift, because the world always wants a “story”.

Professional investment managers aren’t robots (yet). They are human and love stories. And stories sell. With greater amounts of data being available, the need to “storify” has increased even more. When a fund manager paints a superficial yet magnificent vision of why a particular management has a Midas touch, it is almost always a ‘story’, that has been airbrushed so perfectly that no other room for interpretation, or no other future trajectory can even be mentioned, for fear of attracting contempt. Remember how one could never question IBM, as a stock, at a distant point in history?

So why is a strategy based on ‘storification’ so risky for investors?

Because when a fund manager gives their holdings a golden future, they ignore discordant, inconvenient, conflicting elements (industry cycle, favourable policy, plain luck). In other words, they ignore the risks inherent in every single company or industry on this planet.

Storification is dangerous because it paints a risk-free world; unfortunately, there is no such thing as a risk-free world. True investment greatness is knowing deeply all risks present in a given investment, and then deciding what is acceptable risk and what is unacceptable risk. Storification, on the other hand, increases attachment to that story. Once an investor or fund manager becomes emotionally invested to a particular stock (eg, ARK Investment to Tesla), they find it impossible to detach themselves from their attachment, even when the facts change.

Love in investing is dangerous. This is exactly what happened with Warren Buffett and his Coca-Cola investment. He should have sold this stock several years before he actually did. The data is brutal: Coke has been a rabid underperformer since 1993. Buffett should have bought Pepsi instead of Coke. He couldn’t sell because he had storified this stock and its management massively.