Investment Stockholm Syndrome: Why you defend the fees that are robbing you

Using the bizarre psychology of hostages who defend their captors — from the 1973 Stockholm bank robbery to Patricia Hearst's kidnapping — top asset manager Piet Viljoen argues investors fall into the same trap with their financial "helpers." Fees, closet indexing, and manufactured excitement around IPOs, M&A and story stocks quietly erode returns, while asset managers build the emotional trust needed to keep clients from noticing. For South African investors navigating unit trusts, JSE listings and sell-side research, the lesson is blunt: index more, trade less, avoid the hype, and recognise that intermediaries profit from activity — not from your actual returns..By Piet Viljoen* .It’s that time of year when we get a sports overdose: the Tour de France, Rugby Internationals and Wimbledon. On top of that, we also have the Football World Cup to deal with.Speaking of Wimbledon, one of the most iconic Wimbledon champions was a Swede, Björn Borg. Remember his epic battles with Connors and McEnroe? Borg was considered one of the greatest in the tournament’s history, winning 5 consecutive titles from 1976 to 1980.It just so happens that Borg was born in Stockholm, where, in August 1973, a convicted criminal named Jan-Erik Olsson took four employees hostage inside the Kreditbanken. During the six-day standoff, one hostage, Christine Enmar, famously called the Swedish Prime Minister to plead for their captor’s freedom. Following their release, the hostages even raised money for the robber’s defence and maintained they were far more afraid of the police's aggressive tactics than those of their captor.Stockholm syndrome is a psychological phenomenon in which victims of captivity or abuse develop emotional attachment and sympathy toward their captors or abusers, often defending them and resisting rescue efforts.In 1974, nineteen-year-old newspaper heiress Patricia Hearst was kidnapped by a radical militant group called the Symbionese Liberation Army (SLA). After weeks of confinement and coercion, Hearst shocked the nation by appearing in security footage actively participating in a bank robbery alongside her captors. She adopted the alias "Tanya," joined the group's revolutionary cause, and spent 19 months underground fighting for the very people who had violently abducted her..Stockholm syndrome is a real thing.Investors often suffer from a similar syndrome. Between them and the returns they should get for taking the risk of providing capital to a business, we find several significant obstacles. All of them represent a leakage to "helpers" who place none of their own capital at risk. Understanding these leaks and taking steps to avoid them can significantly increase investment returns. However, this is easier said than done, as these helpers are skilled at building strong emotional ties with their victims clients. Just like the Symbionese Liberation Army.The first step to reducing leakage in one’s financial system is to recognise where it occurs: fees. Most people employ an investment manager to manage their capital. These fees are mostly a necessary cost, as investing is a full-time job (of course, this is my unbiased opinion). But keeping them as low as possible can contribute to meaningfully higher returns. Indexing a significant part of your equity exposure is a step in the right direction.The institutional imperative. The investment management business is exactly that - a business, not a charity. As such, business imperatives drive corporate behaviour. These imperatives can drive the misallocation of capital in the following ways:Closet indexing. To run a successful investment management business, you can never afford to underperform by much. The marketing department capitalises on short bouts of outperformance, while the inevitable long-term underperformance is never mentioned. The way to give your marketing team the best shot at what they do well is to never stray too far from the index.Liquidity preferences. To run a successful investment management firm, you need to increase your AuM (Assets under Management) significantly. This means you focus only on large, liquid stocks. Small and mid-caps don't enter the picture, as even big positions in small companies won't move the needle. Such positions are, by their very nature, also illiquid, anathema to the "risk management" department of such an institution.Excitement. An important principle to understand is that intermediaries earn fees from activity, not direction. The greater the excitement around an investment, the greater the activity. It follows that the intermediaries are highly skilled at creating excitement. It was in the recognition of this that Buffett once said: "Investors should remember that excitement and expenses are their enemies". And in the spirit of Munger’s aphorism of "All I want to know is where I'm going to die, so I'll never go there", it's always good to know where excitement in markets is created:IPOs. The bankers that earn fees on helping a company list are highly proficient at creating excitement around the prospective listing. Some would even say that fermenting a frenzy out of a set of financial accounts is their core proficiency.Mergers and acquisitions. Companies that grow organically are boring. Acquisitions, on the other hand, create tremendous excitement. Who doesn't love a deal?Story stocks. When a stock has had a good run, the market loves creating a "story" around its success, implying that this success comes from some edge. This is sometimes true, but most often not..These are all situations that, following Munger’s advice, are best avoided.So, what to do?Use more indexing and less active investment management. Reduce the average fee you pay. Fewer trades are better than more.When using active management for specialist areas to which indices can't provide exposure, don't use large institutional managers. They are good at providing index-like exposure at a high fee - precisely what you don't need.Avoid IPOs and don't get caught up in M&A excitement. In investing, boring is good.Equally, avoid story stocks - by the time the story gets around to you, it’s probably reaching "The End".If you are stuck in a bad investment but can't face the CGT bill to get out, suck it up! Pay your tax and move on. Opportunity cost is a real thing.If you must read sell-side research, do it for information, not valuation. Do your own valuation work or leave it up to a professional - preferably one who has your interests at heart. When that 200-page report on a stock or sector hits your inbox, delete it. Immediately. Excess returns don’t hide in research bibles..A large part of investment success stems not from being proactive, but from actively not doing certain things..*Viljoen is the founder of Re:CM and manager of the Merchant West Value fund. This piece was drawn from his weekly newsletter - you can get your own copy by clicking here: subscribe..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.

Investment Stockholm Syndrome: Why you defend the fees that are robbing you

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