Telling Tales

Adam M. Grossman

WHEN I WAS IN SCHOOL, corporate executives often visited for guest lectures. Two of these presentations still stand out in my mind.

The first was the CEO of a company then called Flextronics—now simply Flex. It’s a contract manufacturer that assembles products for other companies. Apple, for example, doesn’t have factories of its own and instead relies on outsourcers like Flex to build its products, usually in Asia.

You might wonder why a presentation like this would be memorable. After all, Flex manufactures mostly mundane products—things like laptop chargers. It was memorable, though, because Flex’s CEO was as entertaining a speaker as I’d ever seen—so entertaining that, when I left the presentation, my first thought was to buy Flextronics stock.

The second speaker was then the CEO of Hewlett-Packard. Because it’s such a well-known company, she was more of a public figure than the Flextronics CEO. A few years later, in fact, she was a contender in the presidential primaries. But I found her presentation stultifying, and thus HP stock seemed less interesting.

Because I was a student, I didn’t buy either stock. But it’s worth looking back to see how an investor would have done with each. Both Flextronics and HP have significantly underperformed the overall market, and Flextronics—the company with the more entertaining CEO—has fared worse.

Adam Grant is a professor at the University of Pennsylvania’s Wharton School. In his book Think Again, Grant describes three approaches to communication. He calls them the preacher, the prosecutor and the politician. Depending on the situation, people can shift in and out of these three modes.

Here’s how Grant describes each one: We use preacher mode “when our sacred beliefs are in jeopardy; we deliver sermons to protect and promote our ideals.” We employ prosecutor mode when we want to prove someone wrong and “win our case.” And we switch into politician mode “when we’re seeking to win over an audience.”

When I read these descriptions, it occurred to me that these two CEOs’ presentations provided a microcosm of a challenge regularly faced by investors: We hear a lot of stories, told by talented storytellers, and need to make sense of them.

In the past, I’ve referenced Nobel Prize-winning economist Robert Shiller’s book Narrative Economics. The thesis: Stories can move markets. Because a good story is easy to tell and easy to understand, it can be much more convincing than a chart or a graph. If a story is compelling enough, people will overlook the details. One consequence: Narratives can have outsized results—potentially to investors’ detriment.

Grant’s preacher-prosecutor-politician framework helps further explain how stories can spread. Skilled storytellers don’t just tell stories. They know when to employ each of these three modes to bend people to their point of view. That was my experience in the Flextronics presentation: The story was told so convincingly that I almost bought the company’s stock.

Sometimes, it’s easier to see through a story. I recall another presentation, in the fall of 2008. An investment manager visiting my firm was defending BlackBerry, then called Research in Motion. The iPhone had been introduced about a year earlier and was quickly gaining share.

BlackBerry looked like it was in trouble, and the company’s stock was falling. As a result, my colleagues expressed skepticism. The investment manager, though, shifted into preacher mode. Raising his voice, he let us know, “I play tons of golf with Jim Balsillie,” then the co-CEO of BlackBerry, and assured us, “these guys didn’t suddenly become stupid.”

In this case, the situation for BlackBerry was clear enough that even skilled preachers had a hard time painting an optimistic picture. Most investment situations, though, aren’t as clear. Virtually every investment carries a mix of potential positives and negatives. That makes these investments susceptible to storytellers and their compelling tales.

What’s the solution? Grant suggests that the right response when we encounter a preacher, a prosecutor or a politician is to adopt the mindset of a scientist. Seek facts and data before accepting any narrative.

In general, I agree with that. Still, when it comes to investment decisions, even the most scientific approach faces an Achilles’ heel: Financial markets are complex systems, and no one knows exactly how things will turn out. Being a scientist isn’t enough. Here are some additional strategies to help navigate this challenge:

Consider the source of the story. Is it coming from a journalist or another source that should be unbiased? Or is it coming from a source that might have an agenda? In March 2020, for example, a well-known hedge fund manager declared “hell is coming.” It turned out that he had a short position in the market—betting that stocks would fall further. To one extent or another, many people have agendas. That’s not necessarily a problem; you just need to be aware of it.

Ask yourself whether the source might be suffering from cognitive dissonance. That’s the unsettled state that arises from holding conflicting information, and was likely the reason BlackBerry’s managers refused for so long to believe that consumers would want the features the iPhone offered, such as a web browser and text messaging.

Don’t be too impressed by an expert’s track record. As I’ve noted before, stock market prognosticators are notorious for being right one time in a row. I know someone, in fact, who predicted the name of her future husband in her high school yearbook. That kind of thing is remarkable—but probably not repeatable.

Consider the methodology. Investment people love pithy sayings. It doesn’t mean they’re always wrong, but it does mean you want to maintain a critical eye. When you hear a story, ask about the data behind it.

Diversify. Grant highlights Bernie Madoff’s Ponzi case as one in which preachers, prosecutors and politicians all conspired to dupe investors. Madoff’s crimes would have been far less damaging, though, if his investors hadn’t handed over their entire life’s savings, as many did. When you diversify, no single investment can cause you too much harm.

Remember that trends don’t move in one direction only. Consider the trend toward globalization. Using firms like Flex, American companies have benefited by moving production to lower-cost regions. The entire U.S. economy benefited. As we moved more product assembly overseas, it helped keep costs—and thus inflation—low. Recently, this trend has unexpectedly started to reverse. More firms are bringing production back to the U.S. Flex, for example, is helping Apple with manufacturing in Tennessee and Texas. The recently-passed CHIPS Act also will boost “de-globalization” by providing incentives for domestic semiconductor production. The lesson: Never bet too heavily on any particular version of the future.

Recognize that things can happen that we’ve never seen before and that we might not think possible. Adam Grant references Albert Einstein, who had a hard time accepting a new theory, quantum mechanics. I asked a physics professor to help me understand this, and he related this exchange between Einstein and his rival, Danish physicist Niels Bohr.

In arguing that quantum mechanics defied the laws of physics, Einstein told Bohr, “God does not play dice with the universe.”

Bohr retorted, “Don’t tell God what to do.”

In other words, Bohr was cautioning Einstein to be careful of preconceived notions. The laws of physics might be different from what Einstein assumed them to be. In the years since, this argument has been settled, and it turns out Bohr was right.

The lesson: Accepting new ideas is often difficult, but it can be especially hard when there’s no precedent. In managing our personal finances, we can’t plan for everything, but it’s important not to dismiss possibilities just because they seem improbable.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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