The two greatest enemies investors face

Posted by TEBI on February 23, 2022

The two greatest enemies investors face



Throughout his career in asset management, PATRICK GEDDES was fascinated by investing and how we can all achieve the best possible outcomes. But he also observed with frustration how skewed investing has become in favour of the industry rather than consumers. He saw from an insider’s perspective how much the industry pushes investments that serve their own interests rather than those of their customers. 

After working as the Research Director and CFO at Morningstar, and teaching graduate-level portfolio theory at UC Berkeley Extension, he left those roles to create a consumer-first, honesty-based company. the result was Aperio Group, an investment management firm which now manages $42 billion in assets.

After serving at Aperio for more than 20 years as Chief Investment Officer and then the firm’s CEO, Patrick left that role last year to enjoy retirement and work on a longstanding goal — writing a book to help ordinary investors to achieve their goals. It’s called Transparent Investing: How to Play the Stock Market Without Getting Played.

Patrick has been telling Robin Powell why, in his view, there are two big enemies that investors face — first, the investment industry, and, secondly, the way their own brains work.


RP: Patrick, you’ve been planning to write this book for a long time. What were you looking to achieve?

PG: I mainly wanted to provide investors with practical advice based on all of the behavioural finance research over the last 20 or 30 years, which has really shifted how we think about investing. We’re not anywhere near as rational as we used to pretend we were. I’ve combined that with a consumer advocacy angle: investors do need to be careful when dealing with the industry!

So the basic premise is that you have two strikes against you as an investor. One is the brain’s evolution and the way our brains are wired to make poor investment decisions; the second is that we have an industry that’s very aware of those gaps and flaws and likes to capitalise on them. I liken it to the food industry. Our brains are coded to crave sweet and fatty foods because that’s what helped us survive 200,000 years ago. But in today’s world that actually leads to some pretty unhealthy behaviour. The exact same thing applies in investing.


Yes, one of the analogies I particularly like in your book is the distinction between chocolate cake investing and broccoli investing.

Indeed! It’s so intuitively obvious. I’m a baker and I like baking chocolate cake. That’s the kind of food we crave. We know that eating broccoli is going to make us live for longer. Yet that doesn’t make you long for broccoli when you have a plate of broccoli and a plate of chocolate cake in front of you. It’s a great analogy for investing. We love those sexy, cool, beat-the-market strategies, but we know that boring strategies work best.


I recently read Spencer Jakab’s new book on the GameStop phenomenon. The young traders Spencer describes seem to carry all the hallmarks of chocolate cake investors.

I’m sure they do. The common interpretation of that story is that these traders were kind of sticking it to the man. But GameStop showed us something we’re seeing a lot of in financial advertising, and that’s what I would call the gamification of investing. The industry’s saying “let’s make it cool and fun, and “you need to be on your phone every day checking your portfolio”. I recommend people look at their portfolios maybe maybe every three years. But that’s not good clickbait. 

The GameStop phenomenon did put some of the short sellers and hedge funds on notice, to an extent, and that part had its appeal. But the really silly valuations at that time were like some of the manias we’ve seen over the centuries, like the Dutch tulip craze, the fixation on railroad stocks in Britain in the 1840s, or the dotcom boom in the United States in the late 1990s. Things like railroads or the internet really do change the economy, but then the brain basically presumes, because of that, every railroad or dotcom stock is a bargain. That’s completely false, and I think we saw that with GameStop. It was partly down to the illusion of control. The GameStop traders were saying, “We’re gonna seize control from Wall Street.” But they were playing right into the hands of the industry. 


You focus quite heavily on the illusion of control in your book. Why is that?

Because it’s a very destructive behavioural bias. It leads to decisions like trading too much or going and finding an active manager who’s going to beat the market. When you look at the data, the track record of active management over the long term is just terrible. The illusion of control makes you strive to do what sounds very natural…  Why wouldn’t I want to beat the market? Why would I settle for average? That’s the weird part of the math. You don’t want to settle for average,  but when you’re indexing versus active investing, you’re settling for something like the 90th percentile. That’s an extremely smart bet. But the problem is you have to give up your chocolate cake to index — the sexy, fun part of investing.

People criticise indexing for being really boring, and they’re right. It’s incredibly boring. In the book I talk about having a simple strategy, getting your risk profile and asset allocation right and then — the biggest step — just leaving it on autopilot. Sure, that’s no fun, but do you want investing to be fun or do you want to maximise your odds of having the highest level of wealth in 30 years?

If you’re in a room with 100 people, particularly men, there is an element of competitive bragging rights. If you want to beat every other person in that room, indexing is a terrible strategy. You will never be Number 1 out of 100 with indexing, ever. 

If you want to maximise the probability of coming in the top ten or 15, indexing is the way to go. But that’s not quite as much fun. You don’t have bragging rights over people at the gym.

The financial media plays a part as well — both the traditional media and certainly the online variety. Indexing is atrocious clickbait. It’s a really, really great strategy but it’s as boring as dishwater. If you ask me in five years, “What portfolios do you recommend?” I would say, “The same ones I recommended five years ago.” And if you ask, “What are you going to recommend in a rough market?” I would say, “The same as I recommend in a rising market: do nothing and stick with your asset allocation.” Advice like that is disappointing when your view of investing is that it should be exciting and competitive. 

So what I’m talking about is just a very very different mindset, and I try to be sympathetic to investors in the book, because this is hard stuff. I’ve always disliked self-help books that tell you all you have to do is be incredibly disciplined about your exercise, your diet or your career ambitions and you’ll get what you want. Those are hard things. Good investing is actually very simple in theory, but it’s not in practice because of how our brains are wired.


Something else you emphasise in the book is the danger of overconfidence and thinking we know more than we really do.

That’s right. It’s very well documented that investors overestimate their skills. Again, we’re all wired for this, and it doesn’t just apply to investing. We’re wired to think that the good things that happen were our responsibility and the bad things were random. That’s basically the ego at work. It might seem a harsh way to put it, but it’s a kind of self-deception. 

The reason overconfidence is so harmful is it leads you to make bad trading decisions. There’s a lot of evidence for that. One of the academic findings that I find fascinating is that women are actually slightly better investors than men. The reason is not that they’re smarter; women are terrible at making financial forecasts. The problem is that men are equally terrible at making those forecasts, but we think we’re really good at it. We assume we’re smarter than the average bear.

Humility can make you a lot richer. It’s usually associated with poverty, whether it’s Buddhist monks or the Sisters of Mercy. It sounds so crazy and counterintuitive that humility makes you richer, but it does. 

So before you think of yourself as an investor, think of yourself first as a biological organism subject to some quirky motivations as a result of evolution. Secondly, think of yourself as a consumer before you think of yourself as an investor. That may sound a foreign concept; people think of themselves as investors first. But no, you should think of yourself as a consumer and do what consumers do: pay attention to pricing, the motivations of sellers and how you might get played.

The traditional approach to investing is that you make a killing by having smart and savvy insights. The problem is, the data shows that not only are individual investors unsuccessful at beating the market, but people pay a lot of money to investment professionals who are also pretty awful at it. The evidence is just overwhelming. 

I don’t want to throw the whole industry under a bus. Wealth advisers in particular can do a lot of great things around financial planning and around hand-holding when people are panicking during market meltdowns. That’s a very valid example of added value. But advisers are certainly not wizards with crystal balls.


So what’s the answer, Patrick? You’re not going to change fund managers overnight because they make a fortune from perpetuating the idea that they CAN read the future.

I don’t ask the industry to change its ways. It’s just the world of business. There are ethical firms and unethical firms, and it’s not some grand moral failure. There are a lot of industries where shady stuff happens. I think it all has to happen on the consumer side. 

One of the biggest things that needs to change is educating consumers around the actual data and how compelling they are, and how handling your own brain is actually very important. I have a section in the book called “Your brain is hazardous to your wealth”. It’s very much like a breakthrough in biology or in health, where things that we always thought were really healthy we now realise are unhealthy. You only make those changes over time.

So  I think it’s greater consumer awareness that will start shifting the industry, as people start demanding a different wealth management model. The traditional model was, “OK, you’re going to bring me a million dollars, I’m going to charge you 1% as my fee and buy a bunch of active funds that are charging you another 1%.” But that no longer works. You could be investing in index funds for a tenth or even a 20th of that. It’s going to take a lot of time for people to understand. 

We also need to realise that not all investors can handle all financial situations by themselves. That’s why I try and emphasise the valuable services offered by the wealth managers versus the suspect (or let’s be blunt, bogus) services provided by those who try to beat or time the market. 

So I do think investors will be better served in future as the industry is pulled towards healthier practices.


The original interview has been slightly edited for brevity and clarity.
You can find out more about PATRICK GEDDES and his new book by visiting his website.



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