Portfolio managers face conflict every day as their ideas and levels of conviction are constantly tested. But as we all continue to adapt to remote working, finding a level of detachment from the office environment seems to be helping PMs re-affirm their edge and listen with greater clarity to their intuition. Could the home office now become a semi-permanent arrangement in pursuit of improved portfolio performance?
Portfolio managers face conflict every day as their ideas and levels of conviction are constantly tested. But as we all continue to adapt to remote working, finding a level of detachment from the office environment seems to be helping PMs re-affirm their edge and listen with greater clarity to their intuition. Could the home office now become a semi-permanent arrangement in pursuit of improved portfolio performance?
The hustle and bustle of a trading floor and free flow of ideas inside hedge funds can be energising but for even the best portfolio managers, it can also stoke the flames of sub-conscious doubts and fears. It is all too easy to become swayed by an analyst’s counter-argument, or lose conviction on a trade because the chief economist throws a curveball.
Such is life in the high-pressure world of fund management, where maintaining one’s conviction – or one’s investment edge – comes under constant bombardment. And while we human beings will never shed our cognitive biases, changing one’s environment can make a difference. In the strangest of years, remote working in 2020 is helping portfolio managers maintain their edge, away from the day-to-day distractions of the office.
“One thing I’ve heard and seen is that portfolio managers and CIOs have been happier, and actually traded better, by virtue of being at home,” comments Denise Shull (pictured), one of America’s leading performance coaches and founder of the ReThink Group.
“The reason for this, for one particular CIO, is that during the middle of the day in the office he gets influenced by his analysts and economists, imposing their views, but remote working has imposed some distance on that. They’re not influencing him as much as they would ordinarily.”
Shull uses neuroeconomics and modern psychoanalysis to help traders work through the mental blocks that arise because their fears and intuition come into conflict. By training the mind to trust its intuition, rather than allow cognitive bias to ride roughshod, it gives people the ability to take better risks.
According to the ReThink Group, more sophisticated thinkers rely on the gist or essence of a situation rather than the literal, verbatim recounting of the factors to make choices. In trading parlance, it is less about analysing every factor involved in price move, and more about learning to trust one’s intuition, honed over years of experience trading the markets.
“At another fund I work with, the CIO worries about people in terms of whether they are happy,” continues Shull. “If an analyst really likes a stock and he’s ‘so so’ on it, he’ll default to the analyst because he wants to keep them motivated and feel like they have a name in the book. But as I like to tell him, the number one reason you should buy a stock is because you expect it to go up.
“That’s his personality, he’s always aware of how his analysts and the other portfolio managers are going to feel. He does really well, in terms of performance, but he’d do even better if he worried less about other people. Being in a separate space i.e. at home, has helped him do that.” As the well-known proverb goes, ‘out of sight, out of mind’.
These are just two examples of the way the mind creates internal conflict, and intuition interferes with intellect; one PM gets distracted worrying about his analysts, the other gets distracted by office banter and potentially conflicting ideas/views that throw him off his game.
The lockdown has led to portfolio managers who are clients of Shull’s to commit more time to their coaching sessions and find clarity of thought. “The more they do this, the clearer things get. It’s that process of having the time to really reflect on conviction; are you sure about a trade and if you’re not, what is causing the confusion and let’s solve it,” says Shull.
This is not to suggest that suddenly PMs will stop going to the office but it does highlight, perhaps unexpectedly, the benefit of distancing oneself from distraction and using the home environment (in this example) to sharpen one’s investment edge.
Clearly the home environment is no Shangri-La. There are plenty of different distractions one must contend with.
Emotional fortress/physical fortress
David Hobart is a Brisbane-based performance coach to investment professionals. He says that the biggest problems right now are where people are not managing agreements well.
As he explains: “If you’re trading from a home office, have you renegotiated your agreements, in terms of expectations, with your colleagues? And have you renegotiated them with your spouse?
“That is what often causes psychological drag, if you don’t manage those agreements well.”
He says that being placed in a stressful lockdown environment has amplified some pre-existing biases for a number of clients. When we get stressed, it creates a fortress effect and we go into shell but as Hobart points out: “Being in a lockdown environment creates a physical fortress as well as a psychological one. If you’re a global macro trader, for example, and the markets rally hard against you, the more dogmatic you become in your view and the more it creates a threat to self. Your natural response is not to engage with people when you’re more under stress. By being in a lockdown environment, you’re even less inclined to engage.”
A dictionary of your ‘self’
At the ReThink Group, the work Shull does is based on the neuroscience of decision-making and the role of confidence.
“Confidence is a subjective field,” says Shull. “What we do is help people be able to work with a data set of their confidence, their conviction, their intuition and sort through the subjective feelings and emotions to figure out what the information is.
“In short, we help people build a dictionary of theirselves.
“One of the most common remarks my clients make is, ‘I’m in a slump’. Our work focuses on solving that problem but it always comes back to determining what it is the person has an intuition about, and what is the noise. You have to learn how to listen to yourself.”
This underlines Hobart’s earlier point about getting agreements in place in this current environment. If not, the ‘noise’ of the office simply shifts to the home and one can quickly find stress levels getting amplified because the kids are playing up, the markets are moving against you, and soon enough, the portcullis rises and we go into ‘fortress mode’.
“There are some simple physical considerations to deal with this,” says Hobart. “Make sure you have ‘x’ number of contact engagements with your peers on a given day, even if you feel like you’re being beaten up by the markets. Do physical exercise. The more stressed you are, and the greater the fortress mindset is, the more important it is to stick to some routines.
“My role is to help portfolio managers find a place of emotional detachment, and being able to get to a place where they can hit the emotional re-set button.”
By training the mind to achieve this detachment, PMs are better positioned to reaffirm their edge. It is, says Hobart, a case of getting them to remember what it is they are doing that is repeatable. “Psychologically, this acts as a form of self-affirmation. That’s what you need to hold on to when the markets are moving against you,” says Hobart.
“Sometimes that process might not work, in which case the individual needs to re-assess their edge. What is it I need to do in terms of process improvement that is going to sharpen my edge and give me an advantage?”
Overriding your intuition
When PMs find themselves in a slump, oftentimes it is because they’ve over-ridden their intuition; it turns into a big positional loss and they get mad at themselves.
They then talk themselves out of being angry or annoyed by putting it in the past, but their feelings of being disappointed or afraid are still driving what they do. This might result in overcompensation, where the intellect (rather than one’s intuition) tries to correct the mistake by over-trading a particular stock, or not trading at all depending on one’s personality type.
As part of Shull’s coaching work, the aim is to help clients sort through these feelings and emotions that lead to cognitive bias.
“Confirmation bias is a fear of what will happen if you’re wrong, so people are afraid to face the consequences of something if they are wrong. They default to searching for data that proves they are right. However, if they face their fears of being wrong, they can avert that confirmation bias; we help managers develop the courage to face their fears of being wrong,” she says.
Behavioural finance assumes that one’s cognition is the key to changing one’s behaviour but from Shull’s perspective, the really interesting stuff is rooted in one’s emotions and feelings, as opposed to thoughts. The aim of her work is to help portfolio managers listen to their intuition and learn how to recognise conviction.
“We help managers really learn how to interpret their intuition more effectively and efficiently over time. This works better than using the intellect to, say, ‘think positively,’ she explains.
Remote working has given some portfolio managers an unexpected opportunity to double down on listening to their intuition, away from the distractions of the office. Arguably, some will look to make this a semi-permanent arrangement going into 2021; especially if they are seeing better performance results.
As a concluding thought on ensuring one gets the right agreements in place at home, Hobart offers the final words of advice:
“Create a safe space, where you can get all of your work anxiety out in one go, while your partner listens. It is a process that enables you to remove the emotional charge out of the situation. When you’re in lockdown, that’s really important.”
