As a runner, I’ve had my fair share of calf/knee aches and pains, usually it seems pretty clear to me is that what is needed is a good sports massage to work out the tension. I book into see a good physio, but imagine my frustration when a short while later I am balancing on one leg on a beam while trying to touch my nose and bend my knee!
Why?
Well, physios are trained to ask one particular question every time:
What’s the root cause?
Sometimes, all that’s needed is a good massage. But more often than not – and physios know this well from experience – there’s a niggling underlying issue. Perhaps your tracking is off as you run, you may be over, or under pronating. A lack of flexibility is stiffening the stride or an imbalance with the glute muscles pulls things out of alignment.
So you need to fix the underlying issue if you’re ever going to get anywhere.
Fine, but what’s the relevance to investors?
I think we could all learn a thing or two from our physios.
I often see investors, whose portfolio performance is disappointing wrestling with whether to sack a manager or appoint a new one. They might be convinced they are missing out without an allocation to the latest popular strategy in the mix. Should they bail on that strategy that never seems to work -but what to replace it with, and who wants to bail out of an underperforming strategy into one that has done well?
Perhaps they are obsessing over potential risks and are getting very focused on putting in place particular hedges and protection on the portfolio. Is the problem that allocation to Emerging Markets?
Sometimes, these are all very valid questions to ask – and I wouldn’t want to underplay how tough some of those decisions are. But all too often the root cause hasn’t been identified fully. This might be that the objectives have been poorly specified, so it’s impossible to properly evaluate the portfolio (and so naturally we default to comparisons with others, or simple manager/benchmark comparisons). It could be that a set of investment principles have not been established by the decision-makers, so that principles-level conversations spill over into day-to-day decisions.
Perhaps the risk tolerance has been set too high, or too low, which is the main reason for unhappy outcomes, as we simply haven’t calibrated our own expectations correctly.
Without an overall sense of why, and what the portfolio is trying to achieve it’s easy to go round in circles on these questions – like the runner who keeps getting a massage that brings temporary relief but has a stride tracking issue that sure enough will throw them out again in a few weeks.
But once you’ve got clear objectives established a lot of this starts to fall into place – the reason why each manager and strategy is in the portfolio ought to become clear, and then you have a clearer basis for evaluating their performance. You are able to set better expectations to evaluate things against to avoid unproductive comparisons.
It might become immediately clear that certain funds and strategies simply aren’t required or don’t help get toward the objectives, which simplifies the decision making around it. Perhaps it now stands out clearly that the portfolio is over-concentrated in one particular sector or style.
Elephants in the treatment room
Quite often there’s an elephant in the room too which sits at the foot of the root cause (to mix metaphors horribly). Have we avoided a tough conversation on liability hedging? Or failed to reconcile conflicting viewpoints on core questions like our allocation to equities or active management.
Are you clear on your root causes? Is there an elephant in your board room?
Often these are areas were an external adviser can come in and add value as they won’t have the baggage of previous conversations and might be able to see the wood for the trees when others are stuck in the weeds. Too many metaphors here? Yep, thought so.
Human nature often makes it hard for us to honestly examine the root causes as our psychological make-up can deliberately hide them from us lest they reveal undesirable truths about us or show up an unpalatable level of culpability. Throughout history famous thinkers such as Thomas Hobbes and Francis Bacon have opined on the topic.
So sometimes, investors could learn a thing or two from physiotherapists. For a range of practical techniques for getting at root causes such as Socratic questioning or 5 Whys Shane Parrish has an excellent piece.
I reckon all sorts of other disciplines can help us ask better questions in our own domain, including designers, psychologists and military commanders. Check out my blog Think Like a …
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