Before the early-1900s almost no one in the U.S. brushed their teeth. It took the genius of American businessman and advertising guru Claude Hopkins to change the landscape.
Hopkins boosted the sales of Schlitz beer by advertising that the company cleaned their bottles “with live steam” (every other company did the same). Coaxed millions of women into purchasing Palmolive soap (Cleopatra’s way to complexion beauty).
Goodyear tyres had 10% more air capacity because they were not ‘rim-cut.’ Hopkins reframed the ad campaign to ‘no rim-cut tires’ to make more sense to the customer. He emphasized great results for the consumer, rather than the manufacturing process of the producer or the technical details of the product.
So when approached by a friend with a new creation - a toothpaste named “Pepsodent”, Hopkins advertised it as a creator of beauty. After all, who doesn’t want a prettier smile?
This is not an advertising column. I seek to emphasize how a narrative can have a herculean impact on people’s behaviour.
Humans have been telling stories for thousands of years in various formats. It was how information was passed down to generations.
Cave paintings depicting dramatic scenes were probably accompanied by oral storytelling. Folk tales shared around the fire. Reading Aesops Fables as children. Watching Harry Potter as a teenager and graduating to Netflix dramas as adults.
Stories inform us about other people and races and cultures. They teach us empathy. They are concerned with moral decision making. They present us with social dilemmas to intellectually wrestle with. They give us hope and meaning in a world full of uncertainty. They help us make sense of chaos.
If you are told a story cautioning you about survival, you’ll be more likely to pay heed than if just presented with facts. For instance, if I were to say, “Don’t sit under the tree once it gets dark because of snakes,” would not be as effective as, “I know someone who was sitting under that tree enjoying the full moon and quietness, when a snake rapidly coiled around his neck and strangled him to death.”
- Control the narrative or it will control you.
Narratives are an intricate part of the human existence. And finances are not excluded.
Every sector or thematic fund will have a story. Venture capitalists have a story. All are selling a narrative to garner funds. Storytellers raise expectations. You can actually be talked into paying high fees because the storyteller sold you a dream.
Investing based solely on emotion is a recipe for a disaster. You need to invest with your mind, not just your heart. You need to combine data with the story. You need to look beyond the sales spiel or the latest darling of the market.
Investing is about probabilities. The outcome is not written in stone. If it is a stock look at the financial parameters. Look at the competition. Look at how the consumer is evolving. If it is a fund, look at the fund manager’s strategy and how he manages his portfolio. If it is a sector or thematic bet, look at the reasons you believe it will pick up. Once you begin to objectively ask questions, you control the narrative.
- Just because you believe the story does not make it real.
Good stories need not translate into good investments. Whether it is thematic ETFs, a pharma sector fund, cryptocurrency, or an IPO.
Good investment stories capitalise on well-publicized, long-term macro trends that transcend the business cycle. But often, a good narrative is all that is needed to pump up the momentum. Which means, the story can fizzle out rapidly. This certainly doesn’t make for a sound investment.
The trend may be completely true but may not play out as expected. For example, in the late 1990s, investors were enamoured with Internet stocks, convinced they would fundamentally transform the economy and allow e-retailers to take market share away from brick-and-mortar stores. The story was right, but the timing was wrong. It took longer than many expected for that transition to happen, which prevented many from profiting from it.
Test your hypothesis with numbers and data. Talk to people who have an opposing view. The market does not care about your exquisitely crafted story. And your aim is not to satiate your ego; your aim is to make money.
- Always act on a well thought out investment strategy.
Are you gravitating towards the flavour of the year? This means that the pull is the latest performance, which also means that you are already behind. Individuals who invest in today’s winners are “buying backward”. They enter the fund at its peak, leaving little leeway for the investments to run. And then they have a horrible investing experience.
Before you invest, you should be in a position to articulate your stance on why you believe that investment is likely to outperform. Ask yourself, what is the time frame you are comfortable with? And, if it does not pan out as expected, are you in a position to accept the losses?
Even if the story is real, it may not be forever (specially in the case of a thematic or sector or cyclical bet). Your investment strategy must include a buy and exit strategy. When will you sell? What must change for you to change your mind? Will you sell when you get a particular return? Then when you attain it, walk away. Don’t be upset about leaving potential gains on the table. You took a call and made money – don’t let greed mess it up.
- There is always the unconscious driving your decision.
The stories we buy into, affect everything. Our attitude towards debt. Our attitude towards credit cards. Our attitude towards spending and saving.
Let me ask you a question: Would you pay for your child’s wedding, even if it means dipping into your retirement kitty or taking on debt?
There is a narrative at play here. Those who believe that it is their duty and obligation to have a lavish wedding and follow the traditions will answer in the affirmative. Because they believe that that is what a good parent would do.
Our stories our shaped by nationality, religious beliefs, age, income, education, social status, and parental attitudes. Having said that, two people in the absolutely identical situation can have very different stories.
Two siblings may spin very different narratives despite being brought up in the same household with the same family. Because they each focused on different aspects and made a story out of their experiences. They assigned different meanings to identical economic stimuli. Each had their own unique set of experiences with rejection and opportunities and barriers. This is why you get one sibling who is a spendthrift but another who is not. One who is willing to take big risks, another who is not.
No one’s story is superior to the other. Each story is meaningful and unique and deeply embedded in our personal narrative. It begins in our childhood with how we see the economic world and our place in it.
Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.