Investing With a Narcissist Could Cost You

New research finds fund managers with an exaggerated sense of self-importance underperform their peers

Emma Rapaport 27 April, 2022 | 8:52AM
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If, like me, you watch a lot of Wall Street drama, you’d think narcissism is an essential trait of a successful businessperson. Think the iconic Gordon Gekko, Wolf of Wall Street's notorious bad boy Jordan Belfort, or ruthless media titan Logan Roy. But don’t believe everything you see on TV.

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

So how can you measure narcissism, we hear you ask? First, researchers examined transcripts of interviews with fund managers to see how often they used first single pronouns like "I" or "me", versus first person plurals like "we" or "us".

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

The upshot – narcissists make for poor fund managers.

Narcissism includes things like an exaggerated sense of self-importance, a lack of empathy, and a constant need for attention. In investing, this manifests in riskier decision making and an inability to judge the probability of failure. Would you hand that person money?

Researchers found narcissistic managers are 34% more likely to deviate from their advertised investment style. This means they’re more likely to stray from what they tell you they’re investing in, taking on higher risks for more lottery-like rewards. This can translate into portfolios featuring a higher proportion of growth and small-cap bets, researchers say.

But it gets worse. They also found highly narcissistic fund managers underperform their non-narcissistic peers by an average of 1% annually. That might not sound like a lot, but over time it can add up. For example, that’s a difference of almost $1,000 on a $10,000 initial investment over 30 years (where the market returns 5% annually).

Can good teams restrain an ego-tripper? Somewhat. Teams with at least one narcissist are "only 7% more likely to invest style-inconsistently", the research says. However, teamwork did not stop narcissism-induced underperformance "to a material extent".

So, what can we as investors take away from this? If you spot a narcissist fund manager, run. Easy to say, hard to do. Narcissists don’t advertise, and Morningstar is still working on including this as a data point. But the researchers have given us some clues.

Narcissistic fund managers favour "strategic dynamism" – engaging in highly visible actions that feed their need for self-display and attract attention. They say the trait also strongly correlates with what we perceive as "charismatic leadership" and "visionary boldness".

Here’s how the researchers put it:

“While non-narcissists may be content with following or refining an existing strategy, the evidence on narcissistic sensation-seeking suggests that such incrementalism is too ordinary for the highly narcissistic fund manager,” researchers Dominik Scheld, Oscar Anselm Stolper and Anna-Lena Bauer say.

“To obtain applause, the narcissist must regularly undertake challenging tasks that are highly visible and will earn admiration for their boldness.”

In short, the next time you watch a self-congratulatory display, pause. Charisma may be attractive but doesn’t necessarily lead to great returns. Look for signs of vanity. Does your fund manager accept their mistakes or blame it on chance and the actions of others?

But there’s a lesson in this for us lowly self-directed investors too. Whether we’re managing millions or our small pot, an inflated sense of self can lead to risky business. Say, betting on penny stocks hoping for the ten-bagger. While we sometimes win big, we’re also more likely to experience big losses. In the end, slow and steady wins the race.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Rapaport  is editorial manager for Morningstar Australia.

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