Do you find that you don’t always do quite as well as you know you could? It’s a common experience, many investment professionals feel this way. Of course, a part of the unpleasant gap between possible and actual is outside your control, it’s baked into the very fabric of the investment industry. But not all of it. There is another part of the gap that you absolutely can close, without spending heroic amounts of energy, time or money. You can take a decisive step towards realising your ambitions.

If you’re an active fund manager, something you’ll have in common with virtually every other active manager is an ambition to win the game, or at least be on the podium. Another thing you’re likely to have in common with those other fund managers is your ability to subvert your ambition.

Subversive Processes

At some point in your career you might have articulated your ambition, consciously set your intention for what you aim to achieve. You might have said to yourself and your stakeholders something like, “I aim to achieve first quartile investment returns.” 

That’s all well and good, but this intention does not remain static through time, even if market and competitor conditions are favourable. Your intention is subject to corrosive psychological processes that occur outside of your immediate awareness. I call these processes distortion and escalation.

The first process is where your intention gets distorted into something subtly different to the original. Some time after having articulated your intention, you might say to yourself something like, “To deliver first quartile performance, I need to be right more often than not.” That doesn’t sound dramatically different to your original intention, and may even be accurate, but it is a slip that precedes the slide.

The second process is usually a subconscious one, an automatic update of your personal belief system that takes place without your knowledge or permission. In this process your distorted intention can get radically escalated to the point where it becomes an existential imperative. In this form it would sound something like, “If I am not right, then I am worthless.” 

You now have two competing commitments, one conscious and the other subconscious. You’re consciously committed to delivering first quartile performance, and you’re subconsciously committed to being right. If you have sufficient experience as a fund manager, you will know that generating outperformance and being right are by no means identical, and they can be dangerously antithetical. You can pursue your need to be right all the way into the fourth quartile and out of the game. 

Danger Ahead

When your noise levels become elevated, as they might be during a volatile period in the markets, your subconscious commitment will overwhelm your conscious intention. Your subconscious commitment is deeply held because your very worth as a human being depends on it. Your existential imperative is far more muscular than your professional intention. 

Under these conditions you might fight the markets when you should flee, or you might abstain when you should participate. Either way, your subconscious commitment to being right (or whatever the particular flavour of your unique existential imperative) is highly likely to result in the destruction of alpha. This, ironically, is the exact opposite of your conscious intention.

And it can get worse. While your subconscious commitment is dominant, the actions that you take will perplex you and they will disturb your stakeholders, because your actions will be dissonant with your stated intention. As a result, the elevated levels of noise that initially triggered the subconscious commitment will trigger additional noise from your stakeholders, and all of it will become significantly amplified. These are perfect conditions for a systemic cascade that can end in disaster.

Good News 

Whether you experience a mild undershoot of your innate capabilities or a dramatic meltdown of your once-wonderful career, you can address the root cause of the problem, before it’s a problem. You can do so by bringing to the surface the subconscious commitment, your existential imperative. 

Of course, anything that is subconscious is, by definition, impossible to recognise in yourself by yourself. In my work with investment professionals, I use a simple dialectic framework – a 30-minute conversation – to help make conscious what has been a subconscious inhibitor.

Then you can examine the previously-subconscious commitment and consciously reframe it so that it no longer subverts your conscious commitment, your professional intention. And then actual starts to more closely track possible. And that’ll feel a whole lot better.

Reflection

  • What are your key professional intentions?
  • In what ways are these intentions being subverted?
  • What might you do about this, if anything?

Reference

Justin Newdigate: Noise (2019)