Investments and relationships

This February, in the spirit of Valentine’s Day, we discuss how investments can be like relationships...except when you love your investments, they might not always love you back.

Investments are about rational calculations of risk and reward, while relationships are about feelings and connections. But in reality, things are not always so clear-cut. In this article, we explore some of the relationship-like behaviour that can influence investors.

You meet for drinks on a first date and instantly connect, so you get together for dinner on a second date a few days later. And for your third date, you go on vacation. Wait, that was a bit fast!

It can be similar when you invest in a new company — the feeling that you “get” the company and that you already have a good feeling about its potential. Maybe it reminds you of another investment that worked in the past or perhaps it holds unusual promise for the future. Whatever the case, moving fast with an investment can mean not giving yourself enough time before moving from one step to the next, or even skipping some steps entirely.

For example, a normal process would start with a review of your investment objectives and current portfolio, together with a scan of the economy and markets, before diving deeper into a new investment — learning about its market position and studying its financial performance. But sometimes investors skip to the end, because the CEO is so charismatic or the new products are so amazing. Moving fast is about a feeling of excitement and promise — and wanting more of that feeling sooner rather than later.

Imagine you’ve ended a relationship and a friend asks what you’re looking for in your next partner.

You: Well, I’d like someone who’s exciting and sociable.

Friend: I know what you mean — your ex was not exactly the life and soul of the party, was he?

You: Also, I’d like someone who’s steady and reliable.

Friend: Totally get that — your ex could never hold down a job for more than a year!

It can be similar with investing. For example, if you owned a company that was all about growth but never delivered, maybe now you want one that pays a healthy dividend. Or if you owned a company that went through a major financial scandal, maybe now you want one that’s very conservatively managed. Sometimes investors want the opposite of what they’ve recently experienced.

While this is a normal reaction, the risk is not just changing an investment but also changing your style of investing. While it’s fine to mix up your investments from time to time, it might be less desirable to change your investment style without careful consideration.

Your relationship was great to start with but over time your partner has become distracted and even a bit distant. When you discuss your concerns, your partner says I know, I know...but we’re going to renovate our home, or buy that cottage, or go on vacation next year and things will be fine again. This is living in the promise, where things don’t feel quite right but a future event will make them better.

It can be similar with investing. You buy into a technology company. Sales are growing rapidly, although the company has only recently become profitable. The CEO is excited about a new product launch that will put the company on the map...but the launch is delayed and then disappoints when it’s finally rolled out. Not to worry, the CEO says. We’re working on an even bigger idea that’s going to reshape the industry.

This can be a difficult balancing act for investors. While it’s important to look at the future potential of a business, it’s also important to see how current initiatives are being delivered. A key sign of a company living in the promise is when big initiatives fall flat, only to be replaced with even bigger and bolder initiatives for the future.

In relationships and investments, it’s normal that not everything goes well all the time. This is different from red flags, which are major warning signs that likely should not be ignored. For example, when a company restates earnings on multiple occasions, cuts its dividend payment unexpectedly or incurs significant penalties from regulators, investors may want to satisfy themselves that the investment is still worth holding. If any of the red flags are particularly glaring or several red flags appear at the same time, investors may want to switch their bias from holding to selling.

Red flags do not always mean breaking up with your investment, however. Just like in a relationship, listen carefully to whether the company admits its mistake, apologizes for what went wrong and takes action that truly fixes the problem. With red flags, there’s less room for living in the promise, so pay close attention to how diligently the company follows through on its commitments.

• Moving fast, wanting the opposite, living in the promise and ignoring red flags — these are all examples of how investors can be influenced by relationship-like behaviour.
• Ultimately, investments are “business, not personal.” A company can lose a key person and still succeed over the long term, whereas the same is not true in a relationship.
• An objective, business-like approach will likely be good for your investments. If you love your investments, they might not always love you back.