The Intellectual Void
A Memo to Stakeholders: Technology itself is not our enemy.
As Founder and Executive Chairman of CitrinGroup, I reach out relative to the recent and ballooning behavior of many in our world. As always, I am very appreciative of your continuous support of our firm, including the trust you instill in myself, CEO Tim Mrock, and the entire staff. Without your reverent backing, our formidable journey as an institution for the betterment of both portfolio performance and market behavior would be significantly more daunting. Plainly, the financial industry in under attack. In fact, it has been for many years and the battle continues in earnest as we now combat the exacerbation of matters due to the additive of technology (i.e. smartphones and social media.)
To be clear, technology itself is not our enemy. It has, and increasingly still does, contribute to the chaos of markets. But, technology may also be our ironic ally as it profoundly reveals the dire yearning of clientele for something more satisfying, more brainy from investment professionals. There clearly exists a deep desire in market participants for logic, leadership, and direction in some form. And in the absence of anything remotely close, we cannot solely blame clients for filling this intellectual gap with easily available information and assumptions.
Portfolio management, at its best, is an extremely cerebral undertaking — requiring skills similar to the intense specialization of a practiced brain surgeon, the intellectual undertaking of a talented academic, the creativity of a first-class chef, and the gifted coordination of a successful theatre director. However, and altogether damaging, the business of portfolio management has historically been populated by salesmen and fortune-tellers who benefit from the public’s misconceptions insofar as both service and performance. I witnessed, within moments of entering the industry many years ago, harmful behavior by advisors across the board; now years of interaction with both professionals and clients yielding a similar disdain in me for an improper focus and a lack of leadership among my contemporaries.
Today, with fingertip access via the aforementioned rise of technological tools, clients — filling the academic emptiness provided by investment professionals — have become experts of their own accord; they have succumb to the void of true cognitive thought created by the industry's product pushing, "timely" pontifications, and apple-polishing. To importantly clarify with no ambiguity, it is precisely this condition — the false sense of market knowledge and investment aptitude on the part of clients, necessitated by inexpert advisers and worsened by technology's facade of abundant information — that threatens to dismantle more wealth than happened in the most recent market downturn known as the Great Recession.
In 2008, a systemic asset collapse cost global investors dearly as trillions of dollars in capitalization disappeared. Prior to this downturn — which bankrupt the likes of Lehman Brothers and brought the financial world to its knees — investors of all sizes and prowess were permitted to affect asset allocation changes that bordered on criminal. Retirees were allowed to take on additional risk, fiduciaries poured money into illiquid alternatives including private and venture equity, and everyone chose stocks over bonds as both greed and paper fortunes became abundant. When the bears finally had their way, investors large and small were caught with their pants down. The onslaught stays vivid in this financial theorist's mind: universities and other institutions helplessly watched enormous sums disappear, pensions and endowments froze with liquidity fears, many self-endorsed aficionados desperately struggled to uncoil now penniless decisions, the U.S. Treasury Secretary warned about the almost crash of our financial system, and our baby boomers, near retirement, lost nest eggs which took entire careers to build.
Investors worldwide were forced to swiftly curb utilization and distributions, hurting individuals and institutions to depths not seen since the Great Depression of 1929. Even Harvard University, due to losses incurred by the famed Harvard Management Co. and its once leader Mohamed A. El-Erian (even still a favorite of the media from his now perch at PIMCO investment company), was forced into cost reductions and the deletion of capital projects. It was an unprecedented downturn with a list of those culpable including banks, politicians, and consumers. Unfortunately, the guiltiest party continued to be unidentified — the main offender in creating large market ebbs and flows such as the Great Recession working tirelessly, and covertly.
The Client Expertise Factor is my name given to this phenomena: the subculture of novice investors pushed into self-education and decision-making by the void of intellectual thought on the part of advisers. And, it is killing markets as well as the integrity of the industry. Clients, after years of exposure to and the practice of CEF, have learned a sense of entitlement toward performance and service that is unhealthy in all respects. It is entirely not their fault. Without professionals that are true students of the market and theoretical thought, there is a severe void of true wisdom in finance. Further, without this comprehension and expertise, almost no professionals are confident or knowledgeable enough to say no when it truly matters. I have worked with, employed, and eventually made advisers redundant for their inability (or unwillingness) to learn, implement, and lead.
I have seen countless decisions sidestepped by professionals whose very job entails making tough calls. I have, undesirably, fostered CEF early on in my own practice, and seen many times over the carryover impact of CEF on new clients of our firm. And I am not alone. Many who give themselves to the profession in a learned capacity feel the same. As understood by legendary investor Roy Neuberger and expressed in a comment by Les Pollack, one of his portfolio managers: "Roy Neuberger, Pollack recounts, decided he didn't want to spend 90 percent of his day on the phone talking to clients. He wanted to spend 10 percent of his time with clients and 90 percent thinking and checking on investments. It worked out well, Pollack admits. ‘I have to say that when I was able to work in that kind of a mode, my results improved tremendously. I'm much better at my business when I don't have to call people…' "
We, as an industry, must find it within ourselves to say no when necessary. We, as an industry, must give up the short-sided mindset of coddling and replace it with the brave and necessary shift toward more “thinking and checking on investments.” And we, as a firm, must continue to advocate for process over product, learning over reacting, leadership and direction over currying favor. It is imperative that professional investors do more than acquiesce to the every demand of our clientele. We must recognize CEF and what it truly means. Clients need leadership, need an intellectual stouthearted enough to focus on the content rather than the packaging. We must pour ourselves into knowledge and learning, rather than golf, Christmas gifts, and a bend-over-backward attitude. If we are to calm markets and reduce the escalating boom-bust cycles seen around the world, professionals must commit themselves to combating CEF — to filling “The Void” with knowledge and aptitude rather than chasing returns and a default yes-man, bootlicker behavior seen so often. It is, simply said, our duty, and a cause I will further pursue with my partner, our staff, and you. Together, if we stay focused, we can continue bring about a positive impact on people, portfolios, and ultimately the unfortunate default practices in our industry.