Want people to trust and admire you, maybe even fall in love with you? Never pull your punches.
It’s a contrarian approach to life, and possibly the hardest thing to do when it comes to money and investing, but owning up to what’s going wrong is crucial, say an expert who studies the investing style of iconic billionaire Warren Buffett.
For instance, Buffett starts his latest letter to shareholders with the simple admission that his holding company, Berkshire Hathaway, didn’t beat the stock market benchmark.
In fact, his investments as a group failed for the ninth time in 48 years, Buffett told shareholders. No squirming, no dressing it up, no excuses.
You can call this a trick if you want. Psychology professor Robert Cialdini, who researches marketing and human behavior, calls it “pre-suasion.”
Buffett is setting up his shareholders, Cialdini says, to listen more intently to the next part of his letter, in which he explains why the company fell short.
Cialdini’s conclusion is that using this approach can help ordinary people manage their relationships, even their romantic lives, better. Go ahead and ’fess up to what’s going wrong, and you get the other person on your side for the solution stage.
It’s an interesting take, but Buffett has always done this. Going back to his early years running Berkshire, he would tell his managers at GEICO and the other insurance units to always bring him the bad news first.
Buffett knows that most people will try to lead with good news. The problem is, they often use the upside of the situation to paper over the risk of having to share bad news at all.
Think about how often corporate managers do this, particularly with earnings reports. It’s anybody’s guess which number they will put in the headline in a given reporting period.
Profits are great! Oh, but revenues are in the tank. Operating income is awesome! Hmm, but there’s a giant tax levy waiting in the wings.
Earnings reports are practically the Warren Buffett “bad news” rule in reverse: Bury the problems, and quick!
Ignoring the bad
Similar things happen in the investment industry. Fund managers buy and sell stocks all year, touting their big wins while burying their bad choices in the footnotes. It all comes out in the wash when you look at multiple years of performance.
The basic fact of the matter is that, every year, eight out of 10 investment fund managers don’t beat their own benchmark. Then the whole industry buries the bad news by allowing lagging funds to close up and roll into sister funds at the same firm.
They lead with the good news, ignore the bad and everyone moves on. Meanwhile, investors pay those hefty fees regardless of outcome, virtually assuring a less-than-market return year after year.
You might argue, “Well, even Buffett failed nine times at beating the market.” Sure, out of 48 tries, a very good ratio.
If you think you can best Buffett at his own game, or just want to buy Berkshire Hathaway, that’s one approach. Another, simply enough, is to own the market through an index fund and get that benchmark return at a very low price, year after year.
