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Financial advisers often get a raw deal in the media, thanks largely to the bad apples in the industry and a system that has been built on sales commissions instead of adding value for investors. But whenever I read the columns penned by financial planner Craig Gradidge I am reminded that there are some real gems in the investment advice sector. In his latest piece, Craig likens investing to building a business: there’s inevitably some pain before the gain. And, if there isn’t, you must ask yourself why. Marketing pitches that are designed to make you feel comfortable about an investment vehicle are likely to give you discomfort in the long run, is his cautionary tale. – JC
By Craig Gradidge*
I have learnt numerous lessons over the past few years since my business partner and I decided to start our own business. We were fortunate enough to have had good academic grounding as well as solid experience in our chosen sector. We were fairly confident of our ability to build and grow a new business in what was, and remains, a very competitive space. Six years later we sometimes still look back and wonder what hit us.
While we have learnt many, varied lessons from starting and running a business, the one thing we agree on is the fact that the entire experience can be a very uncomfortable one. We have many successful businesspeople as clients, and make a point of asking them to tell us their story. How did they find being an entrepreneur? Why did they go this route? How easy or difficult was it? The one recurring theme that runs through many of their experiences is the high level of discomfort associated with running your own business, particular in the early years.
That discomfort can take on various forms; a significant salary cut, a drop in lifestyle, sacrificing family and leisure time, giving up one’s luxuries, doing menial work that is significantly below one’s pay grade, and taking on more debt than one would ordinarily be comfortable with. In some extreme instances those discomfort levels entail losing one’s home, or selling off assets just to survive.
I was recently reminded that the discomfort of success is not only limited to people running their own business. A client recently relayed her story of how she reached the top echelons of corporate South Africa by going back to university despite being over the age of 40 and having young children. She spoke of birthdays and family functions missed, of studying late at night with her kids, going to work in the morning, off to lectures after work, and then back home to spend more time studying with the kids. Repeat for five years. Today she serves on boards of JSE top 40 companies and is a success by any definition.
Pushing through the discomfort
The video of Angela Lee Duckworth’s presentation at TED Talks in April 2013 entitled The Key to Success: Grit was a global sensation with over 5 million views. It is certainly highly recommended viewing on the issue of success.
Wikipedia describes grit as “Grit in psychology is a positive, non-cognitive trait based on an individual’s passion for a particular long-term goal or endstate coupled with a powerful motivation to achieve their respective objective. This perseverance of effort promotes the overcoming of obstacles or challenges that lie within a gritty individual’s path to accomplishment and serves as a driving force in achievement realization…”
Grit is that thing that causes one to push through the elevated levels of discomfort, and ultimately towards success. But very often it is that discomfort that causes one to give up, or not to start in the first place.
The discomfort of investment success
As in business and in life, success in investing often entails high levels of discomfort. That discomfort takes the form of capital losses, relative underperformance or less income. It means investing in a fund that everyone seems to be selling out of, it means diversifying into an asset class that is not exciting or has few prospects for short term outperformance. For the income investor, consider the scenario below:
With over R22bn in assets, the Coronation Strategic Income (CSI) fund is the largest flexible income fund in the country. However an equity fund, the Old Mutual’s High Yield Opportunity (OMH) fund with only R3.3bn assets has delivered 36% more income since the launch of Coronation’s fund.
While the CSI fund is the largest in its category on the back of solid peer-beating performance, the reality is that it was not the place for an investor seeking income. They would certainly have done much better, especially after tax, by investing in OMH. However, the reason that CSI will continue to take more money from income investors in the years ahead is because of the graph below:
The OMH fund experienced a capital loss of more than 40% during the financial crisis. Even the most hardened growth investor would have had difficulty experiencing such a loss, never mind a usually conservative income seeking investor.
For the income investor there were two sources of discomfort choosing the OMH fund over the CSI fund; initially earning a lower income for a long period of time (look at the first graph again), and the ever present potential for significant capital losses over the short to medium term. However, successful income investing is choosing the fund that gives the best income over time, and that protects the investor against inflation. The OMH fund was always better placed to do this compared to CSI, but CSI was always better placed to attract investment flows because the discomfort levels associated with OMH were too high for many investors.
Insurance-based investment products
The insurance industry understands that investors do not deal well with discomfort levels. They understand that money is a highly emotive issue and that investors are often not willing to leave their comfort zones when it comes to investing their money. This is the reason why many insurance based investment products continue to be so popular. They are all very good at removing the discomfort, and giving the investor the ‘peace of mind’ they often seek.
Listen out for the advertisement of Liberty’s Evolve product. Hear the reassurance in the voice over as they promise not to take fees from your daughter’s wedding fund before she even has a wedding fund. Or listen to voice of comfort at around 9pm on DSTV channel 410 as Discovery Invest gives you a 26% boost on your investment, and tells you how you can invest in funds that will not fall below 80% of the highest value achieved. I could go on with many other examples.
The reality is that the costs associated with such products are prohibitively expensive, and the advertisements hide a lot more than they disclose. Often these, and other structured products, do not pay any dividends to investors for the duration of the investment. That is effectively a 3% plus annual fee which grows every year! Ultimately they are designed to reduce discomfort levels significantly at the point of sale.
Developing investor grit
A reminder of Wikipedia’s description of grit “Grit in psychology is a positive, non-cognitive trait based on an individual’s passion for a particular long-term goal or endstate…” It seems that the old adage of taking a long term views persists as a key requirement for investment success. The tough thing to do is for the income investor not to sell out of OMH when capital losses mount, and rather look at the income growth which continues to come from the fund. The focus on the long term is what will stop investors from paying away high fees for a product to take away discomfort levels.
It was Harvard’s Professor Banfield that found in the 1960’s that the one reason some middle class American families achieved financial independence in their lifetimes was because they took a long time perspective when making decisions. But taking a long term view has long been the standard message from financial product providers. It seems that we need Duckworth’s grit to accompany Banfield’s long term view in order for investors to experience investment success on a sustainable basis.
* Craig Gradidge holds a BCom (Wits), BCom Honours (UNISA), Post Graduate Diploma in Financial Planning (UFS), and an MBA (UCT). He has worked in the investment and financial services industry since 1996 at an operational, management and executive level.
Also by Craig Gradidge:
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.