Martin Pelletier: Ego, envy and anger are among investors’ worst enemies
Actors Damian Lewis and Paul Giamatti of the financial-sector TV drama Billions. They are bad actors in the investing behaviour department, writes FP columnist Martin Pelletier. Photo by Handout /Showtime I finally got around to watching the infamous television series Billions, making it as far as season three, though I will probably plow through the remainder of the series along with some classic Christmas binging between trips to the ski hill.
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For the most part, I try to watch such shows for purely entertainment purposes, but I couldn’t help but pick up on some glaring character flaws that provide lessons for all market participants, but especially those of us tasked with managing client portfolios and investment funds.
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Ego and envy The premise of Billions is the never-ending clash of egos between the two main characters: hedge-fund billionaire Bobby Axelrod (played by Damian Lewis) and New York district attorney Chuck Rhoades (Paul Giamatti). Their epic back-and-forth battles leave a trail of carnage around them as they put everything and everyone at risk, including those most dear to them, in their desire to come out on top, though they both end up losing.
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Article content In Axelrod’s case, his need for an immediate win breeds overconfidence, which then leads to some big mistakes. This is something we often see among top quartile-ranked investment managers until a year such as 2022 happens and all their superior performance gets wiped away.
Worse, ego can lead to excessive risk-taking such as investing in the latest and hottest trends such as cryptocurrency exchanges and then making excuses when they come crashing down.
Article content Then you have the I’m-right-and-you’re-wrong archetype in Rhoades, which simply underlies a hidden inferiority complex with his actions driven solely by envy. American investor Charlie Munger recently nailed it when he said today’s bad behaviour is not driven by greed, but by envy.
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Article content Envy leads to things such as performance chasing or, the opposite, avoiding good trades simply because others who you dislike are benefiting from it. In Billions, Rhoades loses more US$27 million and is actually happy about it simply because he was able to ensnare Axelrod.
Reacting out of anger Both Axelrod and Rhoades often let their anger take over when things go astray and, as a result, react without first thinking things through.
I see plenty of market strategists and portfolio managers battling with those who happen to have a different outlook than them, seemingly taking it personally. As a result, they keep plowing ahead with a flawed thesis, almost with a fighting-back attitude, not realizing they could be doubling down on a bad decision.
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Article content Separating oneself from an unexpected outcome is an essential first step, then you can revisit with a calmer demeanour and figure out where things went wrong, which can be difficult things to do, but are essential to right the ship.
I find that not taking it personally and disassociating myself from the situation really helps. Start by realizing you have a choice between allowing yourself to react out of anger — thinking “poor me” and blaming others — or focusing on what you should do about it.
Trying to control the uncontrollable It is interesting to see the compulsiveness kick in when Axelrod can’t handle relinquishing his trading authority within his firm for only a few months, or when his wife tries to take a break from him for just one day. He spends the entire day driving around searching for her and leaving more than 20 voicemail messages.
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Article content On his first day of having his authority revoked, he visits the office, pacing back and forth, and then attempts backroom deals with outside managers as a way of trying to secretly regain trading control. Not surprisingly, these actions all end up with very poor outcomes.
The lesson here is that there are things we can control in life and things we can’t, and the sooner we realize this, the better. The same can be said about the market, because plenty of unexpected things always happen, but it’s how we react to them that matters. Axelrod should have known this.
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I’ve learned that during such times it helps to get out of the way and let these unexpected and impactful events run their course before coming back in. For example, getting out of energy stocks in late 2014 and long-duration treasuries and technology stocks in late 2021 were among the best investment decisions we’ve made.
There are billions of ways things can go wrong when investing. Keeping a calm head in such times and having a good dose of humility may not make for an exciting plot line, but it also won’t blow up your portfolio.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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