Investment Iatrogenesis
How Naïve Intervention Can Ruin Your Investments
Introduction
Iatro: literally means “healer” in Greek.
Iatrogenesis: Harm caused by the healer.
The first rule I was taught when I began a career in investments was “Do No Harm.” It’s the same rule that applies to the medical profession. The benefit to the client (or patient) is uppermost.
Yet, how often do we see portfolios ruined by decisions that often amounted to nothing more than “naïve intervention” (Nassim Taleb, Anti-Fragile). Not “wrong” choices, pers se, but unnecessary choices. Choices that didn’t need to be made.
Why is that? No one purposefully decides to tank their investing plans (assuming they have a plan).
Each investor defines investing “success” in their own way: beating an index over long periods of time, generating xx% annualized rate of return (over long periods), becoming debt-free with sufficient sustainable income, achieving a specific goal (e.g., finding a Unicorn) or simply having X amount of $ by age YY.
However, because there are so many variables impacting investing “success”, it becomes next to impossible to know which are necessary and which are not. For example, deciding whether a market downturn is a correction or the start of a bear market could have large consequences on long-term investing success. A decision to go to cash can have large negative consequences.
How does an investor know what decisions are necessary or not? There is a simple solution. But first, we need to understand how unnecessary harm (iatrogenesis) occurs.
What causes unnecessary decisions to be made? Usually, one of two forms of Interventionism: naïve intervention and over-intervention. (I’ll cover “over-intervention” in the next article.)
Iatrogenic Interlopers
First, it needs to be stated that no one cares for your financial well-being as much as you. No one. So, know what is and isn’t your business. Second, very few will ever care for your financial well-being. If you find someone who does, hold onto them for dear life.
The reality is that most pundits (e.g., financial experts, asset managers, advisors, gurus, fin-fluencers, wunderkind, superheroes, etc.) in the investment world primarily care about gaining something for themselves; which usually, not always, means selling you something or gaining your support (e.g., Likes) to propel their focus on gaining more supporters (or clients) later.
There is nothing wrong with that. That is the “world” of investing in which many find themselves. But the truth is that pundits can become interlopers. When they do, they don’t belong in your investing domain.
Naïve intervention often occurs when interlopers trigger unnecessary decision-making.
Let me explain with an example.
Investment Iatrogenesis in Action
You have spent years building a portfolio that is well allocated and suitable to meet your long-term goals and financial situation. Great! You own Stock A in your portfolio and it has done pretty well. It satisfies a strategic place in a well diversified portfolio. Fantastic!
You read an article on a reputable investing blog by Mr. Super Legitimate. He is an “accomplished” investor, who had +xxx% returns in his portfolio after he made an incredible bet on the markets 10 years ago, and he used to run an established fund. He’s a player. This is someone worth paying attention to.
Except, in the article, Mr. Legitimate is suggesting Stock A is over-priced. Price-to-Earning ratios are way out of line. And he suspects their books aren’t squeaky clean. He shows some incredible charts (which are hard to decipher, but look impressive). Then he provides some statements from third parties which seem to corroborate his thesis.
Mr. Super Legitimate means no harm. He is just stating his proposition for why he thinks Stock A will crash and burn. (Oh, and he has shorted Stock A, which conveniently means if others agree with him it likely helps push the stock down. But let’s not confuse that with a “conflict of interest.”)
Now, you are left with a decision. Should you sell Stock A? (Cue the hand-wringing and nail-biting.)
Mr. Super Legitimate is well intentioned and is going about his business. He’s making a legitimate proposal that any investor could test.
So, what’s wrong his thesis? What harm could it do to your portfolio?
Everything! He is an investing interloper potentially practicing Investment Iatrogenesis (doing more harm than good).
Mr. Legitimate’s thesis is presumably intended for HIS portfolio, not yours. He knows NOTHING about your portfolio or why you hold Stock A. (He is indifferent about you!)
Pause and repeat that again: He knows NOTHING about you, your goals, your financial situation or your portfolio!
If this doesn’t ring true, try another example. If a doctor proposed that you take a pill that supposedly reduces the chance of heart problems in the future, and there was plenty of “buzz” about this pill; BUT, the doctor did not know you or your physical situation, would you follow his advice? Of course not. And, even if he did know your situation, is the pill necessary? Not necessarily!
With that said, I want to propose that financial pundits not only don’t care and will rarely, if ever, care for your financial wellbeing (apart from how it will benefit themselves), many, if not most, are doing you more harm than good.
It doesn’t matter that everyone is after their own wellbeing. We get that. They are responsible for themselves. You are responsible for you.
But, what does matter is when investing pundits are doing you more harm than good.
Who’s to Blame?
It is a common feature in our world to apply causes (reasons) to almost every claim or event. Naturally, when someone’s portfolio goes horribly bad, it’s time to find a cause.
Who is to blame for Investment Iatrogenesis? No one. And everyone. The “cause” of unnecessary harm can be just as much the interlopers (especially those whose business model is to routinely interfere with your investments), as it is the investors who actively seek out such information.
Ironically, the more “investment information” gathered, the more the risk of iatrogenesis occurring rises.
So, what does one do to avoid harm?
The natural tendency would be to create defenses against all potential interlopers. Maybe develop a black list of would-be iatrogenic pundits. Or, you could stop proactively seeking and ingesting “investment information.” And perhaps stopping making decisions altogether.
More likely, the answer is not in the decision making itself, but how we treat information.
The Iatrogenic Heuristic (Rule)
There is a simple solution that solves, or largely diminishes, the Iatrogenic dilemma.
When it comes to making decision about your portfolio, ask:
“In what way does this decision help me achieve my investment goal(s)?”
In other words, in what way does the decision make your portfolio healthier, based on how you define “success” (or investment health). If you cannot answer this question sufficiently and without bias, then the decision is most likely an act of naïve intervention. Unnecessary.
If you can sufficiently answer that question, then follow the answer. And live with your decision. That’s it.
Just for fun, let’s apply it to our previous example. Mr. Legitimate says Stock A is headed for a fall. Should you believe him and sell Stock A?
In what way does selling Stock A help you achieve your goals? Hmm. Let’s say your goals are long-term and you have decades remaining on them. How does selling Stock A, which Mr. Legit says is a dog, look 5 or 10 years from now? Will it be a dog 5 years later?
Wait! Mr. Legit didn’t comment on how this company would be doing in the distant future. That’s useful to consider.
But what if it goes down big in the short term? Do you have cash needs in the short-term? No? Could there be unrealized losses if Stock A tanks? Maybe, but it serves a strategic role in your portfolio. What about that?
Reset your perspective. What about the long-term? Do I believe in this company? Its management? Its products? Revenue? Profits? etc. If not, never mind what Mr. Legit says, you need to re-think holding Stock A.
But if you do believe, you can already begin to see that selling Stock A is not helping you achieve your long-term goals. (This doesn’t mean you will never sell it, just not now.)
Did you answer the question? Try it the next time you encounter pundits who claim they can “heal” your portfolio. Watch for interlopers. It doesn’t mean they are wrong or not well-meaning. Everybody is pitching something.
But it is your responsibility to own your decisions. And do no harm to yourself!
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