Jason Zweig, investing columnist for the Wall Street Journal, was one of the panelists on a recent webinar for financial advisors. He said that when giving presentations to advisors in the past, he had been booed when he told them that at times they should just say to their clients, “I don’t know.”
When to say those three little words is actually an important consideration for investment professionals of all kinds. Consider a recent posting by Jan Schultink: “When pitching VCs it is better to say ‘I don’t know’ if you do not know the answer to a question than making something up that turns out to be wrong later. Management integrity is a more important investment criterion than having all facts readily accessible in your head.”Idea Transplant | Schultink writes a great blog about “slides that stick” and other considerations for those giving presentations.
The gap between that recommendation and the standard approach used by many investment experts is wide indeed. Pundits are expected to command all those facts, to project confidence, and to be precise in their predictions — on television, in print, and in their meetings with clients. An acquaintance who had the chance to hear a portfolio manager in front of an audience related to me how every question was answered with authority (even the one he had expected would be a stumper), with specific forecasts rather than indications of the range of outcomes that were possible. He admitted to being impressed by the portfolio manager but not knowing how sensible the predictions were.
That air of authority sells from the rooms where investment committees dole out billions to the offices where advisors work with individual investors. In a phone conversation, Zweig told me that an advisor approached him after a speech one time and said, “My clients hire me to tell them what they should think, not to tell them, ‘I don’t know.’” He recalled that the advisor then said something like, “The only way I can do that is by knowing the answer or pretending to.”
Zweig has counseled advisors to have a client fill out a forecast of key market indicators for the year ahead, at the same time the advisor does too — then to have each look at the other’s predictions, whereupon the client sees that the advisor has filled in each blank with a question mark. If the client is one that’s looking for predictions, it’s a risky marketing strategy, although the clients that stay are likely to be better grounded in the realities of the investment challenge.Zweig’s other suggestion, to save the client’s predictions (and to bring them out in response to second-guessing after the fact), sounds even more explosive, although the ensuing imbroglio would probably serve to “deselect” a client that has unrealistic expectations.
So the investment professional is caught between two realities: Clients want answers and markets are unpredictable. No matter whether you are a sell-side analyst pitching a stock, a portfolio manager hoping to manage a large portion of a pension plan, a strategist responding to a reporter’s questions, or a financial advisor working with a bricklayer, how you deal with that dissonance will set the stage for the nature of the relationship going forward. Greater understanding of the task at hand and increased long-term trust result from honestly conveying the uncertainty, but there is a short-term cost, and if the business is lost because of that openness, it’s a high cost to pay.
Zweig reminded me what Peter Bernstein said was the major lesson that he had learned during his long career. Simply, it was that “we don’t know what the future holds.”NABE | This PDF by Bernstein elaborates upon that phrase, which appears in various ways throughout his works. We forget that first principle all too frequently on our own, and by its nature the investment business encourages that amnesia.
Say it after me, “I don’t know.”