Don’t Fall For Investment Narratives That Could Put You In Trouble

Way back in 1948, investors in the US were presented with the television fund, which sought to profit from the burgeoning television industry. Then there was The atomic development fund; the science and nuclear fund; nucleonics, chemistry & electronics shares; the missiles-rockets-jets & automation fund; and Steadman Oceanographic & growth fund. More recently, we saw the ARK Funds serve a platter of thematic investments—innovation, genomic revolution, next generation internet, 3D printing, autonomous tech and robotics, and space, exploration and innovation.

In India, we have numerous themes, too: media, energy, infrastructure, consumption, banking, financial services, defence, innovation, exports, services, momentum strategy, and so forth.

Across geographies and asset management companies (AMCs), the compelling narrative is the recurring motif—the story that is woven. To get a share of your wallet, it must first capture your imagination and fuel expectations of outsized returns. Thematic investing appeals to the worst investor instinct: the desire to get rich quickly by discovering something others don’t know—a horrid cocktail of avarice and self-confidence. A story is spun. The investor falls for it and bites the bullet.

I constantly hark back to what philosopher Jean-Paul Sartre so profoundly said: “Man is always a teller of tales, he lives surrounded by his stories and the stories of others, he sees everything that happens to him through them.” Politicians, companies, marketers and AMCs know this.

The Storytelling Of Apple

Money manager Vitaliy Katsenelson adapts this thought to elucidate how Apple has made a mark. Born in Russia and an immigrant to the US, Katsenelson is now the chief executive officer and chief investment officer at Investment Management Associates.

Here’s what he articulated in a recent note. When it introduces a product, Apple doesn’t just spend the time telling you what it will do for you; it directs as much effort to telling a detailed story about how it has made the product.

Read this on the introduction of the Apple Watch, “Our engineers have custom-designed a new alloy that is 60 per cent stronger than standard alloys but just as light. This requires precision alloying. Raw aluminium of exceptional purity is first heated to a molten state, and tightly controlled amounts of magnesium and zinc are then added. Next, a finely tuned extrusion process creates a uniform surface free of defects. After being meticulously formed, each case is machined, buffed and then textured with microscopic zirconia beads to achieve a consistent satin finish.”

It is a tiny excerpt where Apple tells a story about how passionately they get involved in making each little component of their product. Sure, you may not understand a word, but the tech-speak combined with the liberal sprinkling of adjectives will have you believe that only Apple cares so much about creating such incredible products.

It even names the components. Its display is Retina. Do you know the name of the display on your Dell laptop? Is Apple’s display better than Dell’s? Is it identical to Dell’s? Its keyboard is called Magic. The software, which only Apple users can use to call each other, is called Facetime, a verb now.

In its storytelling, Apple wants you to fall in love. When you love a story, you get emotionally invested in it and develop a connection with its product. It gives meaning and is aligned with your identity. And so, you are hooked!

Apple is the best storytelling company on the planet, a very critical element of its success. Little wonder that Apple CEO is called the brand’s storyteller-in-chief.

The Force Of The Narrative

When you force detail into an image, it becomes larger than life. Let us say that I have to warn you about survival in a rural area. I could say: “Please don’t sit under a tree once it gets dark as snakes may appear.”

Now I share the same cautionary note with much more drama and flair: “There used to be this young man who would love to sit under that tree watching the moon and enjoying the quietness. One day, a snake rapidly coiled around his neck, strangled him to death, and slithered away.”

The second one evokes fear and awe and brings emotions into play. You are more likely to pay heed to the trees in the dark after listening to this one.

The same applies to investing. The magic bullet that a particular fund offers. The scientific way the fund manager looks at data. The superb research on focused stocks. The brilliant processes. The untapped potential of a sector. The promise of a sunrise industry.

Nobel laureate Robert Shiller is known for his work on the importance of narratives in economics and the financial markets. Years ago, economist Brendan Markey-Towler discussed how these stories affect expectations. Then the story becomes the expectation. And expectations shape behaviour.

Don’t Let Anyone Sell You A Dream

Narratives are an intrinsic part of human existence. And finances are not excluded. So don’t be naïve in assuming that stories do not have a huge impact on your investing behaviour. It drives us in directions that may not be the most optimal at best and dangerous at worst. You can blame fate and destiny, but it is the lure of the storyline that has a large influence on our decisions.

Be Humble: Just because you believe the story does not make it real. Admit that there is a chance you are getting played. Bounce the idea off someone else and welcome a contrarian view.

Keep Your Ego Aside: Remember, the market does not care about the beautifully crafted story. The market doesn’t care about your ego and your money. And your aim is not to satiate your ego but to make money.

Articulate Your Stance: Why do you believe the investment will likely outperform? Don’t just repeat what was told to you. Dig deeper. Look at the data. Look at how other funds in the same category have performed. Look at the track record of the fund house and asset manager. Look at economic data; does it support the theme of the fund?

The Timing Factor: Ask yourself, what is the timeframe you are comfortable with? With thematic funds investment, you need to figure out your exit strategy.

The Risk Factor: If this investment does not pan out as expected, can you accept the losses?

In 1994, Jeff Bezos held 60 meetings with individuals who he felt were potential investors to persuade them to each invest $50,000 to create an online bookshop. He failed to convince 38 of them. His parents were part of the 22 who decided to go along for the ride. He warned them there was a 70 per cent chance that they would never see that money again. Apparently, he told them, “I want to come home at dinner for Thanksgiving, and I don’t want you to be mad at me.”

Don’t expect such honesty from the industry. So do your homework, err on caution, and don’t be easily parted with your money.

By Larissa Fernand,  Investment Specialist, Morningstar India