So there is plenty of talk about demographics, robotics, gene therapy and other compelling if sometimes alarming narratives. Mark Haefele, chief investment officer of UBS Global Wealth Management, suggested that a unifying long-term theme makes it far easier to keep with a strategy for the long term, and to maintain discipline. If people always have their eyes on one unfolding plot, it is also easier for them to make adjustments to their portfolio over time, without losing consistency.
Thematic investing sounds a little like a fad. But it might make sense as a way to frame all our investment decisions simply because it accords much better with the way we think. That insight might be worth more than an attempt to provide a guess of where the S&P 500 will be at the end of next year to two decimal places.
The Dangers Of An Extrovert CEO
One of America’s most famously dirty election campaigns took place in Florida in 1950. The winner in its Senate contest branded his opponent in sinister-sounding terms. “Are you aware that Claude Pepper is known all over Washington as a shameless extrovert? Not only that, but this man is reliably reported to practice nepotism with his sister-in-law, and he has a sister who was once a thespian in wicked New York.”
This anecdote found it way into all the obituaries of Pepper, who would live to mount a political comeback and spend many years as one of the most powerful men in Congress. I was disappointed therefore to discover today that it wasn’t true—a spoof piece in a magazine, meant to ridicule Florida voters, was taken at face value and found its way into the press cuttings.
I mention this because new academic research has crunched piles of numbers to show that we should all avoid companies if their CEO is a shameless extrovert. Based on 2,880 CEOs of S&P 1500 firms from 1993 to 2015, the research used data mining to examine CEOs’ Q&As with investors and analyzed them to see where they scored on three important personality traits—conscientiousness, neuroticism and extroversion. It then did lots of mathematics to isolate the effects on stock returns and risk. (The research is titled Perception Is Reality: How CEOs’ Observed Personality Influences Market Perceptions of Firm Risk and Shareholder Returns.)
A conscientious CEO reduces stock risk by a statistically significant amount. When a company faces risks from one standard deviation below the mean to one standard deviation above, they will lead to an improvement of 3.83 percentage points compared to the norm. The less conscientious CEOs will see their companies’ returns fall by 1.7 percentage points compared to the norm.
Neurotic CEOs, it should be no surprise, tend to increase the risk surrounding their companies. But the interesting results concern extroverts. Without naming names, there are a number of high-profile shameless extroverts running some very large companies at present, and there is no need to mine call transcripts to spot them.
The more extrovert the CEO, the more a stock’s price will tend to vary. This makes for a bumpier albeit more exciting ride. Most importantly, an extrovert CEO has a huge effect on returns once a company takes on high risks. The researchers looked at the effect of moving from one standard deviation below to one standard deviation above the norm for risk. All else equal, a very introverted CEO can help increase returns by 5.43 percentage points in such situations, while the same increase in risk will reduce returns by 3.3 percentage points under an extrovert.
There is a clear narrative for this. Boards should not mistake shameless extroverts for great leaders. And unlike the tale of the 1950 Florida election, this isn’t an urban myth.
This article was provided by Bloomberg News.