Jonathan Hirtle is CEO of the investment consulting firm Hirtle, Callaghan. In this article, he points out that investment policy committees made all of the same errors as individual investors over the last 18 months. He has five policy prescriptions to solve the problem, but a couple of them really resonated with me.
First, he says, “decide on a fact-based decision process and stick to it.” I think this very strongly favors managers that have done extensive research and can demonstrate that they have an edge over time. So much of what we “know” in the investment business amount to unsupported assertions. It’s important to quantify your work. He adds, “unless the macro-decision process has been measured and proven to add value, the rest becomes little more than a social exercise.” If the process becomes an exercise in group think, little good will come of it. And it’s difficult to improve a process until you measure it. Once again, quantification is very important.
One of his prescriptions seems a little off the wall, but I think may have a great deal of value. He suggests that investors and advisors form support groups. That might sound unusual, but he explains, “it has been widely demonstrated that we humans act destructively around money. When we encounter destructive behavior in other aspects of our lives, we form a support group. We encourage our client investment committees to think of their outside advisers and themselves as a support group whose aim is to help each other stay on the wagon of enlightened investing.” We’ve written many times on this blog that most investment errors turn out to be, at their core, behavioral errors. So I think his suggestion has a lot of merit. Clients and advisors need to stick together and help one another out.
One of the things we hope to encourage with this blog, besides being able to explain our thought process and investment discipline, is interaction among our readers. We love questions that might spur research on a new idea or comments that could get a lively discussion going on a topic that is relevant to client portfolios in a turbulent time like this. We hope that you enjoy the content, but we also encourage you to contribute your voice to the discussion.
—-this article originally appeared 8/4/2009. It’s especially applicable when markets are very turbulent, like now, since that’s when clients are most likely to act destructively.