Empathy and Investment Management

A curious thing happened to me this morning. As I was walking through the hallway of my apartment building, I noticed that the door to a neighbour's apartment was open. I glanced into the apartment as I passed, and was struck by how different the apartment looked to mine. Despite having similar layouts, the two apartments were (unsurprisingly) furnished and arranged differently. None of this should have come as a surprise to me, but it was still jarring to see an apartment different from the model I had created in my head.

Later on, I was browsing the news and chanced upon a story about the pessimism shrouding Brazil's financial markets. Lamenting the state of Brazil's economy and equity markets, analyst Vitor Suzaki was quoted as saying, "We just can't imagine what kind of news would bring confidence back."

What do these two incidents have in common? In both instances, the people involved appeared to suffer from a distinct lack of imagination, or perhaps an overly narrow perspective. For investors, this flaw can be harmful. Renowned macro trader Bruce Kovner said, "I have the ability to imagine configurations of the world different from today and really believe it can happen." He believed this was an important element of his success.

Sanjay Bakshi refers to a similar concept, which he calls empathy. In a talk entitled "The Prejudices of Mr. Market", he touts empathy as a way for investors to better understand the customers, competitors and executives of businesses they own, as well as other financial market participants. 

This comes as a time when empathy, in its more traditional sense, is making a resurgence as a valued skill. Summarizing his new book, "Humans Are Underrated", Geoff Colvin writes, "The evidence is clear that the most effective groups are those whose members most strongly possess the most essentially, deeply human abilities - empathy above all, social sensitivity, storytelling, collaborating, solving problems together, building relationships."

Many fund managers deliberately avoid excessive contact with their underlying investors. There's no doubt that it can be detrimental to a manager's sang-froid (and a drain on scarce time) to be constantly reacting to investors' concerns about volatility in financial markets. Yet at the same time, it's worth remembering that fund managers serve not only to invest wisely, but to shepherd their investors through turbulent times. This involves understanding investors' concerns while effectively communicating a long-term strategy. It seems clear that investment managers who can harness technology - or "race with machines", to quote Brynjolfsson and McAfee, will outperform those who try in vain to race against machines. But the human element of investment management - empathy, communication and leadership - will remain every bit as important. Fund managers will do well to nurture these skills to become better analysts as well as more valuable guides on the treacherous path that is investing.