Perception Versus Reality

When asset valuations are extended well beyond historical norms, as they are today, some investment managers elect to take a more defensive and cautious posture than the consensus. In “ Bubbles and Elevators ”, we discussed how behavioral instincts to follow the herd dominate human nature, but fighting those instincts is necessary to limit exposure to, or avoid entirely, market situations that pose abnormally high risks. Rational judgement, not emotion, should guide investment decisions, and investment professionals need to effectively impart this rationale to clients. As if this task is not hard enough, it is frequently made more challenging when their client’s perspective on market returns is not supported by the facts. At such times, it is incumbent upon the manager to help clients understand reality.