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Aha!
We’ve found why the people running your mutual funds seem to be doing a worse job of fattening your retirement account than a blindfolded monkey with a bunch of darts.
It’s not just because they are probably answerable to quarterly investment reviews that mean they can’t take the long view.
And it’s not just because big fund companies, like many big companies, tend to promote based on office politics rather than ability—because in any bureaucracy, if you want to get along you need to go along.
And it’s not just because the fees that your fund manager charges probably soak up any gains anyway.
Turns out, it’s also because there’s a good chance your mutual-fund manager is a raging narcissist who is absolutely in love with themselves and their own opinions.
Don’t believe me? Check out a new study by behavioral finance researchers Dominik Scheld, Oscar Anselm Stolper and Anna-Lena Bauer at the University of Marburg in Germany, who have just conducted one of the most brilliantly creative bits of economic research I can recall.
First they looked at the performance of more than 400 U.S.-based mutual funds, compared against their various benchmarks (large U.S. growth stocks, and so on), over a 6 year period from 2012 to 2018.
Then they looked at independent data to see how high the manager was likely to rate on the psychological measure known as narcissistic personality, as measured by the Narcissistic Personality Inventory. This is a thing in clinical psychology.
Narcissistic personality types are prone to things like overconfidence, high-risk bets, and attention seeking—all poison for sensible investing.
Naturally, few if any, fund managers are willing to sit down and submit to a personality test. But this is where the economists got clever.
They trawled through fund manager interviews as reported by the news service The Wall Street Transcript, and looked at how often the manager in question used first person singular words—“I,” “me” and so on—compared with how often they used first person plurals, such as “we” and “us.”
“For each TWST interview, we extract the fund manager’s words and obtain the proportion of first-person singular pronouns (I, me, mine, my, myself) to the total of first-person singular pronouns and first-person plural pronouns (we, us, our, ours, ourselves) that the fund manager employs,” they write. “Straightforwardly, a proportion of 100% denotes the maximum attainable level of narcissism.” That would be when he or she never says “we,” but only ever says “I.”
Turns out, previous research by psychologists have found that this I-to-we ratio is a pretty good proxy for narcissism.
They ended up with 196 interviews with 90 fund managers who oversaw 425 mutual funds.
The researchers didn’t stop there. They also combed through fund manager biographies on LinkedIn. The longer the bio, the more narcissistic the manager is likely to be.
Then, once they’d got measures of fund performance, and of manager narcissism, they compared the two.
Cue the usual statistical alchemy.
Bottom line? Narcissistic fund managers end up doing worse, on average, than their peers. A lot worse.
“Narcissism indeed has a negative impact on a fund’s risk-adjusted performance,” the researchers find. “The annualized underperformance of highly narcissistic fund managers amounts to as much as 1% compared with their peers with low to moderate narcissism scores.”
To put that in context, the stock market’s average return has been about 10% a year (including inflation). Losing 1% every year, compounded over an investment horizon of 30 years, will cost you about a quarter of your total retirement portfolio.
Actually, the findings were even more remarkable than that.
The researchers found that “the average level of narcissism among mutual-fund managers is almost twice as high as the narcissism scores obtained for CEOs in prior research.”
Yikes!
Given that prior research showed high levels of narcissism among CEOs, as you would expect, this is quite something.
The researchers also found that narcissistic fund managers are much more likely to wander out of their lanes, buying stocks that aren’t in their advertised sphere. They report, “narcissistic fund managers are 34% more likely to deviate from the officially advertised investment focus” than others.
I can’t say it surprises me. The most talented investment manager I’ve ever met, Allan Mecham of Arlington Value, was astonishingly unassuming and modest. Even while crushing the market. Warren Buffett and Charlie Munger (Mecham’s heroes, as it happens) are much the same. Like Socrates and Albert Einstein, the truly great minds are acutely aware of what they don’t know.
Certainly all this is another argument in favor of low-cost index funds, where you don’t pay extra for someone to make the wrong investments on your behalf.
But it’s also an argument for avoiding narcissistic fund managers. Marburg’s Stolper tells me there are two giveaways that a fund manager is among the 20% most narcissistic. The first: Out of all their first person references, more than 70% are first person singular. (Put another way, “I” outweighs “we” by 2.3 to 1). The second: Their personal bio in their LinkedIn summary runs to 7 lines or more.
Meanwhile my good friend Larry says you can always tell when a star money manager, after years of outperformance, is about to jump the shark. It’s when they start giving TV interviews from their yacht club in Florida. That’s when it’s all gone to their head.
Bottom line: Probably best to avoid mutual funds run by people who talk about themselves too much — especially on their conference calls — or who have long, boastful bios on LinkedIn.
