Fear, Investors, and Marketing

The most powerful selling approaches go with the flow.

Let us compare “selling” investment opinions with the positions of politicians seeking the Presidency.  Both topics hit our sweet spot.  We have also been talking with many individual investors and also many voters.  It is interesting.

The Election

A reader who wants to understand candidate behavior should imagine that he/she was hired as an advisor.  Many voters have strongly-held beliefs, often based on scanty information.  For candidates many issues have a clear choice:  Educate voters to change opinions or go with the flow.

The astute political strategist knows the answer to this one.  It is the easy explanation for the Democratic candidates’ positions on NAFTA, capital gains taxation, health policy, payroll taxes, ethanol, and social security.  There is little that a candidate can say to change the viewpoints of voters, especially in the sound-bite era.

The result:  Candidates take positions that will win the day to gain electoral success.  What they actually propose and what they deliver may be quite different.  Readers who are old enough may recall the senior Bush promise to “read my lips, no new taxes.”  The reality of governing is quite different from campaigning.

If a Democratic candidate wins the election, we expect the eventual  positions to be more moderate, but that is not that market expectations.

Selling Investment Strategies

We received in our email an appeal from a very famous investment manager.  It was all about fear, the recession, and danger to stock portfolios.  The  oft-quoted manager  had the answer to this — proven success in the last recession.

This is a message that resonates with the average investor, so it is a good campaign — not  unlike what  political leaders are doing.

Voters and investors have opinions.  Catering to those opinions is good marketing, regardless of the underlying wisdom.

The email approach described investment returns that were pretty good, although less than we have accomplished.  The proposed strategy is also not much different from what we are doing.  His recession performance in 2000 was not as good as ours.  The sales technique is much better.  The author points to success in the 2000 era and asserts that he will do as well in the coming challenges.

There is no effort to analyze the economy, earnings expectations, or what is already “baked in.”  It is just a play on fear.  He is (wisely) going with the flow.  We are (perhaps unwisely) trying to educate investors.  Hmm.

Investor Reaction

Our conversations with individual investors have revealed several significant reactions.

  • Some investors bought pre-1847 gold, to be placed with retirement trustees.  They soon learned that they could not sell these positions for anything like the prices they paid.  Big commissions were already deducted.
  • Some investors bought variable annuities that guaranteed a rate of return, but with a cap.  The cap was not carefully explained in the expensive and colorful brochure.  These were sold to elderly people, with a high surrender value, and included upfront commissions of 10% or so.  The valuation of the portfolio is done in a way that shows an investment account value quite different from what can actually be withdrawn.  There are assorted provisions allowing investors to withdraw funds on a schedule.  Existing clients are happy with what they see.  None of them understand the function of the cap, how the biggest years are lost in their program, or how the big years contribute to overall returns.
  • Most baby-boom investors, looking to retirement, are very heavily in real estate, bonds, and cash.

The Climate of Fear

Many investors took these retirement actions based upon their Internet research.  They are consumers of a climate of fear.  These consumers, encouraged by television advertising to manage their own accounts, read about the “fundamentals” of the economy and the stock market.  They use the same skills that helped them to success in their businesses — reading, research, and logic.

The problem is that the value of information depends upon the analytic method.

Unless one knows how to interpret data about the economy and forward earnings expectations, the raw data is useless.

A Summary Anecdote

One of our investors, perhaps the wisest man we have ever encountered, likes to make his own calls and argue about ours.  He read a news article about a stock — something that had been widely known in the market for months — and wanted to buy it.  When asked whether others might have this same information, and he was a bit chagrined.  He often questions our contrarian picks — but he stays with us.

The ability to discern what is “in the market” on a specific stock is well beyond what  most investors can do.  They do not think in those terms.  Not at all.  Information alone is not enough.

And by the way — some of the investors making bad decisions on gold and annuities got their information from big-time Internet blogs with advertising or other ties to these products.

A little knowledge — too little knowledge — can be a dangerous thing.

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  • VennData April 29, 2008  

    Forget all this analytical mumbo jumbo.
    Change the name of the site to “No Investor Left Behind,” spruce up the home page with Annie Leibovitz celebrity semi-nudes, and give away ‘OldProf’ ball caps to the first fifty commenters eschewing polysyllables.

  • SI April 29, 2008  

    “He is (wisely) going with the flow. We are (perhaps unwisely) trying to educate investors. Hmm.”
    His goal is to dramatically increase Assets Under Management through inflows (not returns).
    What is yours?

  • Bill aka NO DooDahs! April 29, 2008  

    One has to try and be true to themselves and their character (or lack of same). Every manager desires to maximize their benefit from AUM, and usually this involves INCREASING AUM.
    Those who promote shamelessly (and possibly counter to their actual trading style) and through fearmongering probably value the AUM more than they value intellectual honesty, educating consumers, and providing high returns on capital.
    Those who value intellectual honesty, high returns on capital, and education of their consumers will probably not be very good at fearmongering or whoring themselves out to every press opportunity possible, and will therefore probably never get on Kudlow, TechTicker, etc., and will probably have less AUM as a result.
    It’s not that both groups don’t value maximizing the benefit of AUM – they DO – it’s just that some are willing to do what others aren’t willing to do, and that speaks either to character (from a normative view) or to relative value assigned to competing goals (from a positive view).
    Hope that clarifies!

  • Tim Plaehn April 29, 2008  

    Many years ago I sold investment products. It is a hard way to make an honest living. The products with the highest commissions are usually the least appropriate for many customers. But which way do you think many financial advisors go to make their incomes?