Negotiate No-Brainers
The Investing team had a pleasant conversation at lunch the other day about how much we enjoy investing and our jobs, but then turned to the topic of how many of our fellow investors seem stressed out by and even adversarial with their chosen profession. We wondered how anyone can not enjoy doing this for a living?
Now, I don’t think any investor starts off hating his or her job. After all, it’s a white collar affair with upside and glamor if you do it well. But it can become challenging if there’s underperformance as self-doubt creeps in and customers start asking hard questions or even for their money back. But every investor will experience periods of underperformance, so how might that happen without that person hating it or calling it quits?
I think the secret comes down to two factors: 1) Who do you invest with and (2) How do you define success?
As we’ve talked about in the past, other people’s money (OPM) can come with lots of baggage that can make life less fun. So choose partners wisely and only be in business with people whose names you’ll be excited to see pop up on your cell phone when things aren’t going well (which is a great litmus test).
As for success, defining it needs to happen along several vectors: magnitude, frequency, timeline, and measurability. Further, you need to be on the same page with your customers about that definition before ever deploying a dollar.
That said, a wrinkle here is that good partners aren’t people who don’t hold you accountable and success isn’t something that can only be measured after a 30-year period. As I’ve said before, one of the best things someone can do for you is tell you you’re wrong and be right and also that the long-term is a series of short-terms. In other words, to love investing you need to be able to have hard conversations about things that aren’t working right now.
But then what?
This is where terms come into play i.e., the rules of engagement between an investor and his or her capital. For example, if you manage a typical public company mutual fund or ETF and you have a bad day, all of your investors could ask for their money back. That’s stressful! And it’s also why that industry suffers from sleights of hand like window dressing and closet indexing.
Yet while the best investing strategies should only get better with time, an investor also can’t lock up capital forever because if you’re doing a bad job, there needs to be redress. But it’s also true that investing outcomes aren’t always controllable. So the question is how can you be held accountable for results that aren’t linear or predictable?
One approach to negotiation is that a good agreement has been reached when both sides feel a little aggrieved. In other words, no one got exactly what they wanted, so the compromise was probably fair. That doesn’t work in investing because being able to take back some of your money when performance is meh really isn’t great for anyone.
So this is where a different approach to negotiation comes into play: to only agree to no-brainers. In other words, terms that are so obvious that if the other side exercises one, it’s exactly what you would have done had you been in their shoes.
At Permanent Equity, one way that takes shape is that if our performance isn’t good, our investors pay no fees. Another is that if we take fees we end up not being entitled to, we give them back.
If either one of those scenarios happens (and we hope it doesn’t), the consequences are both predictable and reasonable. And that, I think, is among the reasons why we love our jobs. We have great partners, understand what success looks like, and know that no matter what happens, we will be treated fairly and treat others fairly along the way.