Thursday, August 7th, 2014

We all develop a language of our own.  As individuals we have our favorite phrases, which we use again and again, creating a pattern of communication that a linguist could recognize as having unique word-prints which identify us.

When working with investment organizations, I find myself returning to certain phrases and concepts repeatedly.  Many find their way into my writing (and some originate there), including “analysis plus communication,”the research puzzle | The posting with that title was part of a series on equity research. my simple formula for thinking about the two main components of any investment job.  It is the communication part that messes most people up.

Being able to communicate — to translate, if you will — is incredibly important.  Here are some widely-disparate examples I have seen of the need for such translations in the investment world:

~ Practitioners and academics have so much to teach each other, yet in most cases there is no meeting of the minds.Gumroad | The two camps were the subject of the “of theory and practice” chapter of Letters to a Young Analyst, which is for sale via this link.  Somehow, academics persist in writing interesting pieces in uninteresting and often inscrutable fashion.  And practitioners ignore a treasure trove of fascinating research.  (This divide continues inside many firms, with fundamental and quantitative analysts being on different planes.)  Acting as the translator between them can be very powerful.

~ At some organizations where I have provided consulting services, they have had their own shared language and unique concepts that are foreign to an outsider.  (In essence, they have their own institutional word-prints, which identify them, just as individuals have.)  I may be eager to share my thoughts and conclusions with them, but if I don’t take time to truly understand their world, I will probably fail.  You can’t translate if you don’t understand.

~ Imagine yourself as an analyst at a very large, multi-product investment firm.  You have responsibility for covering an industry group and dealing with a variety of portfolio managers, each of whom has a different mandate (from small growth to large value and many other styles as well).  How do you convey to each manager your views on the industry, your best ideas, your concerns, etc.?  Each speaks a different language and each has a different model of the world.

~ A common shortcoming in investment organizations is a lack of information systems that truly support decision making in a robust fashion.  The technology developer and the investment professional often see the problems in different ways (while sharing a tendency to underestimate the degree to which the entire conceptual structure might need to change in the future).  Those that can bridge the gaps between them add organizational value.

~ Advisory firms (the hottest area of the industry the last decade) are often dominated by relationship managers with some investment expertise rather than investment specialists per se.  Yet, as the firms have grown, they have found the need to bolster their investment resources.  A divide can easily develop between the client-facing and market-facing parts of the firm, complicating the ultimate goal of meeting the needs of clients.  (That highlights the ever-present need for clarity regarding investment beliefs and organizational intent.)

~ Entities like pension plans, foundations, and endowments have investment committees that are responsible for deciding how to invest their assets.  Their first task is communicating with each other.  Those without much investment background often defer by rote to those that have it, which sounds logical until you realize that all have the same fiduciary responsibility.  It’s common for those with investment expertise to inject too much certainty into an uncertain endeavor — and to focus on individual investment questions rather than a framework for decision making.  A good committee member is translating (always with integrity, as a good translator does) in order to advance the debate, not dominate it.

~ For an investment professional, the bottom line is meeting the needs of the client.  Today, when the principal (whose money it is) can be far removed from the agent (who makes decisions on the principal’s behalf), it’s easy to lose sight of the real bogey and to replace it with the faux bogey of beating some index.  But many professionals on the front lines — such as investment advisors and institutional portfolio managers — meet directly with clients in addition to making investment decisions for them.  Unfortunately, they often lace their communications with jargon, use historical statistics in questionable ways, focus on predictions of the unpredictable, and never lift the marketing overlay long enough for real dialogue to take place.

In all of these cases, there are gaps to be closed, translations to be made.  Those investment professionals that possess the skills to do so in an honest and clear fashion can add value in unexpected ways — and typically can adapt to changing circumstances more readily because of their interpretive abilities.  In a business built on investment stars, it is easy to overlook the importance of the translators among us.  Don’t.