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Why Portfolio Managers Often Want to Shoot the Messenger

Portfolio managers ought to welcome well informed analysts or other sources that warn them about potential pitfalls in their portfolio holdings so they can take timely and appropriate corrective action. Yet, they often do not Why is that? We can think of at least three reasons.

The first reason is that finding the negative story is usually harder than finding the positive ones. Which is to say that the naysayers are usually smarter than average. Many portfolio managers, particularly underperforming ones, don't want to deal with people that are smarter than them. This is particularly true if the negative case requires thorough analysis or the appreciation of a subtle point. Many people are intellectually lazy, and don't want to be made to work harder.

A second reason occurs when a manager has the uneasy  feeling that the negative analyst might be onto something; except that it would conflict with long-held and cherished beliefs: "Countries don't go bust." (Walter Wriston). "IBM will never lose money." (Mother). The resulting internal conflict is called "cognitive dissonance," and is very painful.

The third reason is that the portfolio manager knows well that one or more holding(s) has flaws, but chooses to retain them--in order to sell them to a greater fool. In this case, the last thing such a manager wants is a smart analyst who will scare the "fools" away.

This is not point the finger at anyone. At different times in our careers, we've been guilty of all three faults. A particularly bad mistake was investing in an internet company in the late 1990s, and thinking we could sell it to a greater fool.