Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

The cost of investing with a narcissist: Editor's note

Emma Rapaport  |  23 Apr 2022Text size  Decrease  Increase  |  
Email to Friend

If like me you watch a lot of Wall Street drama, you’d think narcissism is an essential trait of a successful businessperson. Think the iconic Gordon Gekko, Wolf of Wall Street's notorious bad boy Jordan Belfort, or ruthless media titan Logan Roy. But don’t believe everything you see on TV.

A new study from behavioural researchers at the University of Marburg in Germany found narcissists underperformed and cost unitholders money.

How does one measure narcissism, you ask? First, researchers examined transcripts of interviews with fund managers to see how often they used first single pronouns like ‘I’ or ‘me’ versus first person plurals like ‘we’ or ‘us’.

Then, they merged this with data from Morningstar showing the manager’s professional career, performance over a six-year period, and track record of sticking to their stated style (both in terms of value-growth and size dimensions).

The upshot – narcissists make for poor fund managers.

Narcissism includes things like an exaggerated sense of self-importance, a lack of empathy and a constant need for attention. In the investment world, this manifests in riskier decision behaviour and an inability to judge the probability of failure. Would you hand this person your money?

Researchers found narcissistic managers are 34% more likely to deviate from their advertised investment style. This means that they’re more likely to stray beyond what they tell you they’re investing in, taking on higher risks for more lottery-like rewards. Researchers say this can translate into portfolios featuring a higher proportion of growth and small-cap bets.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

But it gets worse. Researchers also found that highly narcissistic fund managers underperform their non-narcissistic peers by an average of 1% annually. That might not sound like a lot but over time it can add up. For example, that’s a difference of almost $1,000 on a $10,000 initial investment over 30 years (where the market returns 5% annually).

Can good teams restrain an ego-tripper, I hear you ask? Somewhat. Researchers found teams with at least one narcissist are “only 7% more likely to invest style-inconsistently”. However, teamwork did not stop narcissism-induced underperformance “to a material extent”.

So, what can we as investors take away from this? If you spot a narcissist fund manager, run. Easy to say, hard to do. Narcissists don’t advertise and Morningstar is still working on including this data point. But the researchers have given us some clues. Narcissistic fund managers favour ‘strategic dynamism’ - engaging in highly visible actions that feed their need for self-display and attract attention. They say the trait also strongly correlates with what we perceive as ‘charismatic leadership’ and ‘visionary boldness’.

Here’s how the researchers put it:

“While non-narcissists may be content with following or refining an existing strategy, the evidence on narcissistic sensation-seeking suggests that such incrementalism is too ordinary for the highly narcissistic fund manager,” researchers Dominik Scheld, Oscar Anselm Stolper and Anna-Lena Bauer say.

“To obtain applause, the narcissist must regularly undertake challenging tasks that are highly visible and will earn admiration for their boldness.”

In short, the next time you watch a self-congratulatory display, pause. Remember charisma may be attractive but doesn’t necessarily lead to great returns. Look for signs of vanity. Does your fund manager accept their mistakes or blame it on chance and the actions of others?

Another tip – style deviation is something Morningstar analysts keep an eye on and highlight in their research reports. Two years ago, I wrote about the fiasco at UK fund manager Woodford and how the income equity manager had dramatically shifted in style between 2016 and 2019, taking on more and more small-cap and mid-cap stocks. When the fund closed, many investors were unable to liquidate their holdings.  

But there’s a lesson in this for us lowly self-directed investors too. Whether we’re managing millions or our small pot, an inflated sense of self can lead to risky business. Say, betting on penny stocks hoping for the ten-bagger. While we sometimes win big, we’re also more likely to experience big losses. In the end, slow and steady wins the race.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend