The cost of investing with a narcissist

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

A new study Behavioral researchers from the University of Marburg in Germany found that narcissists underperform and cost unitholders money.

How do you measure narcissism, you ask? First, the researchers looked at transcripts of interviews with fund managers to see how often they used simple pronouns like “I” or “me” versus first-person plurals like “we.” or U.S “.

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

The result – narcissists make poor money managers.

Narcissism includes things like an inflated sense of self-importance, a lack of empathy, and a constant need for attention. In the world of investing, this manifests as riskier decision-making behavior and an inability to gauge the likelihood of failure. Would you like to give your money to this person?

The researchers found that narcissistic managers are 34% more likely to deviate from their advertised investment style. That means they’re more likely to walk away from what they tell you they’re investing in, taking higher risks for more lottery-like rewards. Researchers say this can result in portfolios with a higher proportion of growth and small cap bets.

But it’s getting worse. The researchers also found that highly narcissistic fund managers underperform their non-narcissistic peers by an average of 1% per year. It may not seem like a lot, but over time it can add up. For example, this represents a difference of almost $1,000 on an initial investment of $10,000 over 30 years (where the market returns 5% per year).

Can good teams hold off an ego-tripper, I hear you ask? Somewhat. The researchers found that teams with at least one narcissist are “only 7% more likely to invest inconsistently.” However, teamwork made do not stop narcissism-induced underperformance “to a material extent”.

So what can we as investors take away from this? If you spot a narcissistic money manager, run. easy to say, hard to do. Narcissists do not advertise and Morningstar is still working to include this data point. But the researchers gave us some clues. Narcissistic money managers favor “strategic dynamism” – engaging in highly visible actions that feed their need to show off and attract attention. They say the trait is also strongly correlated with what we perceive as “charismatic leadership” and “visionary boldness.”

Here’s how the researchers put it:

“While nonnarcissists may simply follow or refine an existing strategy, evidence from narcissistic sensation seeking suggests that such incrementalism is all too ordinary for the highly narcissistic fund manager,” the researchers said. Dominik Scheld, Oscar Anselm Stolper and Anna-Lena Bauer. say.

“To get applause, the narcissist must regularly undertake difficult tasks that are highly visible and will earn admiration for their audacity.”

In short, the next time you watch a self-gratification show, take a break. Remember that charisma can be attractive but doesn’t necessarily lead to great returns. Look for signs of vanity. Does your fund manager accept his mistakes or blame chance and the actions of others?

But there is also a lesson for us small, self-directed investors. Whether we’re managing millions or our little pot, an inflated sense of self can lead to risky business. Say, bet on penny stocks hoping for the ten-bagger. Although we sometimes win big, we are also more likely to suffer big losses. In the end, slow and steady wins the race.

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