Where Are Your Investors’ Eyes?
Control where they look and you’ll see results
Nature has done her usual efficient job of aligning structure with function. In the animal kingdom that means the location of an animal's eyes is very closely related to how it gets its food (and how it tries to avoid becoming someone else's food).
Monkeys, cats, hawks, dogs, people, and tigers have their eyes on the front of their head - giving them great forward vision and depth perception. They tend to be good hunters and have the ability to not only select their prey but to figure out where it's going and intercept it. Being able to process all that visual input means they also have bigger brains, which generally means higher intelligence (I had to qualify that with "generally"; we all know at least one person who is the exception to the rule). Though they may live in small groups, they're able to exist on their own if necessary.
Sparrows, minnows and sheep are examples of animals whose eyes are on the sides of their head. Their forward vision isn't very good, they don't have much depth perception, but they can see sideways very well. And so it's not surprising that they tend to live in flocks, schools, and herds, and eat things that don't move much (like seeds or algae or grass). It's also not surprising that they look to each other for defence, reacting to danger by moving together as one big unit. It's a workable strategy at the species level - individual members are expendable as long as the species survives - but not so good for the individual who gets eaten while the rest of the group is zigging and zagging to get away from the threat.
All very interesting - but what does it have to do with investors?
When there's a large redemption in a fund, many investors go into 'fish' mode. Their vision shifts to the side; they watch what others in that fund are doing, with thoughts of mimicking their movements. It's the schooling instinct at work - and since it's instinctive it often overrides a more thoughtful approach.
Of course, following the moves of the fish or sheep - or investor - next to you only makes sense if
- He knows where he's going and...
- You want to go to the same place.
Schooling / flocking is a good initial response to a threat - but it doesn't usually provide the best long-term answer.
And some members of the group get eaten anyway...
If you're a fund manager facing an event that could result in some schooling and flocking behaviors among your investors, the key is to get them to maintain their forward vision. Communicate with them proactively. Provide information they need to identify and process the threat. Remember, eyes in front means good depth perception - they have the ability to gauge what's right in front of them as well as things that might be further away. And their large brain allows them to place the current threat against the background of past and potential outcomes in order to judge its severity. So they don't have to jump to the wrong conclusion - but they will, in the absence of any solid information.
People, tigers, mice, and orangutans (all with eyes in front) also dip into their memories when presented with new and potentially threatening situations. Your fund's brand - a combination of reputation and positioning - can be enormously powerful in bridging over a period of poor performance or an unexpected redemption. But brands don't happen by themselves. They must be strategically designed, carefully nurtured, and continually honed. Be sure to devote some resources to brand development and market positioning when you think you don't need them - so that they're strong and available when you do.
Our industry is one of bulls and bears locked in a battle for control which won't ever have a winner. They're equally matched opponents with complementary skills, and your investors are likely a healthy mix of both. While they are formidable creatures, they’re predictable – and far easier to deal with than herds, schools and flocks. And it’s all because of where their eyes are.