Career risk is highly under-appreciated. I could come up with a laundry list of the reasons for poor market behavior from professional investors. Career risk would be at the top of that list. Incentives matter a great deal more in the decision-making process than most realize.
My friend Ben Carlson looks back on some stuff he’s learned after a decade in the investing business. The gem above deals with one of the least remarked-upon dimensions of how markets behave – the very real specter of career risk that dogs all of us.
The need to participate in gains or not be caught dead investing in yesterday’s losers has a lot to do with why and how markets move. This is why we pay attention to price (technicals) in addition to fundamentals – because of the human element that, in the short term, transcends what asset markets should or should not trade at.
I’ll give you two other quotes that work together with Ben’s on this topic. A match set if you will.
John Maynard Keynes said “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” Keynes compiled one of the best investment track records in world history by building an unconventionally concentrated portfolio. Thankfully, there wasn’t any obsession with benchmarks back then so he could be left alone to pursue high returns without the institution second-guessing him every month. Had he “behaved” in a more conventional manner, there’s no way he could’ve done it.
Here’s one more, an accidental beauty from the bubble-era CEO of Citigroup: “As long as the music is playing, you’ve got to get up and dance.” Famous last words. Ol’ Chuck was referring to his bank’s perceived responsibility to chase after the same returns as the other banks, despite the risks being incurred. In the pre-crisis period, career risk meant falling behind. The real career risk for Prince and his Wall Street contemporaries, however, reared its ugly head soon enough.
When we think about the things that drive markets, we typically mention interest rates, taxes, sentiment, earnings, economic growth, etc. But a need to fit in and the scrutiny of our clients and shareholders is often times every bit as powerful a motivator for our behavior.