Joe Wiggins: Applying Behavioral Science to Make Better Investment Decisions

In this week’s episode, we’re chatting to Joe Wiggins. Joe is the CIO of Fundhouse, a provider of manager research, model portfolios, and ESG services to clients ranging from charities, pension funds, wealth managers, and select financial advisors. Joe is here today because he has written a rather useful book about fund investing, but he is also a decision-maker in his own right at Fundhouse. We’re excited to get his view on the world of investing, too.

Background

Bio

Fundhouse

The Intelligent Fund Investor, by Joe Wiggins

Behavioural Investment Blog

Financial Decision-Making

“Six Simple Steps to Improve Decision Making,” by Joe Wiggins, livewiremarkets.com, March 14, 2019.

“Three Questions to Answer Before Investing in an Active Fund,” by Joe Wiggins, behaviouralinvestment.com, Dec. 6, 2022.

“A Behavioural Finance Toolkit,” by Joe Wiggins, abrdn.com, March 5, 2019.

“Betting Against Warren Buffet,” by Joe Wiggins, behaviouralinvestment.com, Nov. 23, 2021.

“Learning How to Be a Good Investor Is Hard,” by Joe Wiggins, behaviouralinvestment.com, Sept. 20, 2022.

“The Behavioural of Gilt Market Turmoil,” by Joe Wiggins, behaviouralinvestment.com, Sept. 30, 2022.

“Why Can’t We Stop Making Short-Term Market Forecasts?” by Joe Wiggins, behaviouralinvestment.com, March 8, 2022.

“Why Do Fund Investors Neglect Base Rates?” by Joe Wiggins, behaviouralinvestment.com, May 6, 2021.

Star Fund Managers

“Neil Woodford: The Inside Story of his Rise and Dramatic Fall,” by Owen Walker and Peter Smith, ft.com, Oct. 18, 2019.

“What Is the Attraction of Star Fund Managers?” by Joe Wiggins, behaviouralinvestment.com, Oct. 27, 2020.

Risks

“How to Identify Behavioural Investment Opportunities and Risks,” by Joe Wiggins, behaviouralinvestment.com, July 19, 2022.

“Investors Are Still Scare of Funds,” by Sunniva Kolostyak, Morningstar.co.uk, Nov. 29, 2022.

Book Recommendations

Against the Gods: The Remarkable Story of Risk, by Peter Bernstein

War and Chance: Assessing Uncertainty in International Politics, by Jeffrey A. Friedman

Hi, everyone. It’s Jeff Ptak, co-host of The Long View. This week, Christine Benz and I are passing the microphone to two of our colleagues, Dan Kemp and Ollie Smith. Dan and Ollie have a great interview in store for you with investor and behavorial finance expert Joe Wiggins. Christine and I will resume our hosting duties next week, but in the meantime, we hope you enjoy Dan and Ollie’s conversation with Joe. See you next week.

Ollie Smith: Welcome to another episode of Morningstar’s The Long View podcast. This week you have two new guest hosts. I’m Ollie Smith, U.K. editor here at Morningstar.

Dan Kemp: And I’m Dan Kemp, Morningstar Investment Management’s global chief investment officer. I’m also here in London.

Smith: In this week’s episode, we’re chatting to Joe Wiggins. Joe is the CIO of Fundhouse, a provider of manager research, model portfolios, and ESG services to clients ranging from charities, pension funds, wealth managers and select financial advisors. Joe is here today because he has written a rather useful book about fund investing, but he is also a decision-maker in his own right at Fundhouse. We’re excited to get his view on the world of investing, too.

Hello to you, Joe.

Joe Wiggins: Hello. Thank you for having me.

Kemp: Joe, I’m just so excited about having you on the podcast. We’ve had conversations in the past, and I’ve always really valued getting your insights, particularly around decision-making and how people make decisions, some of the challenges that they have there. And so, really looking forward to what you have to say to us today. Just as we kick off, some of the folks listening to this won’t be as familiar with you as I am. Could you just start by telling us a bit about yourself, so we get an idea of your background and your career as well?

Wiggins: Absolutely. I’ve been working in the investment industry since 2004, and I fell into this career. Like most things in life, it was much more due to luck and chance than any grand plans that I had. I left university and started working in a small fund brokerage firm and I found it interesting, and I found investment markets and interacting with fund managers interesting. So, I chose that as my career path and here I am today. The most significant part of my career in terms of length was at Aberdeen where I was head of portfolio management on the MyFolio range, so one of the larger fund-of-funds ranges in the U.K. And I worked there for seven years. And as Ollie mentioned, more recently, I joined Fundhouse, the U.K. investment consultant, as CIO.

My background is not classical economics. It’s much more psychology and sociology. I’ve always been fascinated by people, individuals, and groups of people, the choices they make and how they behave. And that behavioral angle has really been my passion and the reason I’ve been so interested in financial markets and investment decision-making. I took a master’s in behavioral science at the LSE a few years back, and I’ve been writing a blog called BehavioralInvestment.com for four or five years now. I’m really fascinated by decision-making, by choices, and about how markets work, and about how people operate within financial markets.

Kemp: Joe, just thinking about that link between decision-making and fund research, how do you think about it? Do you think about what the fund manager is thinking and how they’re thinking when you’re looking at funds or where you were looking at fund earlier in your career? Are you thinking about the psychology of the funds select themselves? Or is it all of that? Some of this will come out more in the conversation about the book later on, but we would love to get an idea of how you got into this and your angle when you think about this topic.

Wiggins: Great question. I think initially I was almost certainly focusing on the fund manager and how the fund manager or the team around the fund manager was making decisions. And then, I realized through time it was actually as much about me and how I was making decisions and how I was thinking about investing problems and how I was thinking about the fund manager and how I perceived and judged their own decision-making was just as important if not more so. And that’s what makes fund investing such a unique behavioral challenge is you’ve got these two layers of decision-making—you’re assessing someone else’s decision-making and also trying to make prudent rational decisions yourself. That makes it incredibly fascinating and also difficult to do well.

Smith: Joe, I’m intrigued to know then, if you’re in the business of making prudent and rational decisions, as a CIO, how has your year been then? Has it been punishing or rewarding? Or has it been somewhere in between or a mix?

Wiggins: A bit of both. With investing the punishment usually comes before the reward. I think there’s been a couple of really interesting phenomenon this year for me. One is the change in the cost of money, which I think is the overarching issue of what’s happened in financial markets over the last 12 months or so. When the price of money is pretty much zero, which it has been for a long time, I think bad things tend to happen and poor unproductive activities persist for far longer than they otherwise would, and some of that is coming home to roost at the moment. And the other related point is that the price of every asset in financial markets is relative to cash or some form of very short duration risk-free asset. So, when that changes materially, our willingness to pay certain prices for other assets changes dramatically. And I think that’s what everyone is trying to digest. If cash rates are zero, then what you might pay for an asset is very different compared with cash rates being 3% or 4% or maybe even higher for that.

There’s been a profound change in the regime and how people think about financial assets and how to value those assets. And we’ve seen some anomalies have unwound to an extent, some anomalies from an era of low interest rates. So, bonds are now much more interesting in expected return terms than they have been for a long while. We’ve seen some recovery in value against growth. But in other areas, some, what might be anomalies, persist. The dominance of U.S. equities in valuation terms to virtually every other market, whether it’s developed markets or emerging markets, and that continues. We’ve seen a significant unwind from an era of money being close to free and that changes the game significantly.

I think the other thing behaviorally that’s been really fascinating this year—and it’s been behaviorally difficult to navigate—is that we’ve seen investment strategies that have worked incredibly well for a prolonged period of time, like a simple 60/40, for example. And they struggled because we’ve seen a break in the correlation between equities and bonds that have served those portfolios so well for such a long time. And there’s been lots of questions and concerns from investors who’ve been very satisfied with those types of strategies for a long time asking is this the right thing to do anymore? Do we need to change to something else? And I find it fascinating that there’s probably a misapprehension that investors often hold, and everyone is guilty of this, as thinking that their investment strategy will work on all occasions and in all environments. Everything goes through difficult periods, and we just need to accept and understand that the investment strategy, the fund that we choose, will go through difficult periods and accept that that short-term discomfort for better long-term performance. I think the worst thing that we can do is lurch from strategy to strategy based on what has been working in the past six months.

Smith: And that is one of the ideas that you put across the readers in your book, isn’t it? So, on that note, how did the idea for a book like this, The Intelligent Fund Investor, come about? Did you just get out of bed in one morning and think I want to write something? Was it a result of a mounting passion on your part about specific topics?

Wiggins: Yes, I was writing a lot on the blog, and I got approached by Craig Pearce, who’s a commissioning editor at Harriman House, and he had read some of my blog posts and thought there might be some mileage in writing a book. And I loved the idea of having a book and thought it would be more straightforward than it was, and I thought, well, I can write the blog post every couple of weeks, so how hard can a book be? The answer is very hard. I did a draft, initial chapter, which I sent to Craig and the publisher, which was pretty rubbish and he said so. So, I went back to the drawing board a few times. A couple of things I’ve realized through the writing process is that despite fund investing being ubiquitous and probably the way most people invest, there just aren’t that many books on fund investing, and much like both of you, I’m sure we’ve all read lots of investing books, but I haven’t actually read that many books on how to invest in funds or some of the unique challenges fund investors face. As I went through the process, it started out as much more of a behaviorally focused book and less explicit. Focus on fund investing, and as it evolved it became much more a combination of what are the unique behavioral challenges in fund investing and how do we deal with those? How can we make better decisions?

It started off quite theoretical and ended up much more practical and is much better for it I think.

Kemp: Joe, I think that’s what I love about the book and your approach because so many of the investment books you read, some of the fund-based books you read, are fund selectors toward the end of their career reflecting on what they did well. And I love the fact that you’re thinking about the process as you’re deep in the weeds thinking about how you’re thinking about fund investing, the lessons that we can all learn, and I just love that approach.

One of the things that strikes me with the book is that you address one of the key stories in fund investing head on, the story of Neil Woodford. And if you’re listening to this, and you’re not familiar with Neil Woodford—he made his name in the 1990s, was really the investors’ investor. He stepped aside from all of the craziness around the dot-com era, where he was literally getting hate mail from investors and then really during the 2000s built an extraordinary reputation, an extraordinary track record, running an income-focused U.K. equity fund and had a huge following in the retail market. And that all came to a crashing end relatively recently, and you pick that up in the book. Could you just recap some of the lessons for us that you pick out in the book as you think about Woodford?

Wiggins: Absolutely. I think the lessons from Woodford are general lessons about the dangers of what I call star fund managers, so very high-profile, successful star fund managers who lots of people are aware of and have got stellar track records. I think for most investors, certainly those who are limited on time, they are the default option for who you go to if you invest with an active fund. You know who they are. There’s name recognition. They’re probably being quoted in the financial press, and they’ve got a strong performance track record. So, people are inevitably drawn toward those types of investors. But I would say, it’s very dangerous to be drawn toward those types of investors, and it’s more about the general features rather than the specifics of any given case. And I think there’s a few common threads that we see.

One is large assets under management that impair the investment approach. What I mean by that is, star fund managers are popular, therefore they have very significant inflows and the size of the fund they run becomes incredibly large, and that restricts the types of companies that they invest into and often leads them to changing their investment approach. They might have cut their teeth or earned their reputation investing in small- or medium-sized businesses and then they run so much money that investing in those types of companies is just not feasible because of liquidity or ownership or flexibility concerns. The assets are too big, so you’re arriving too late to that particular party. They’ve also usually got strong performance as well. So, strong performance makes them the star. The valuations in their portfolio are often very high because of that strong performance. Strong performance and higher valuations is often in fund investing a prelude to weaker future returns because of mean reversion or change in the tailwinds or style dynamics of a particular market. So, those two factors are very prominent.

A couple of softer factors as well. One is hubris. And it must be difficult for star fund managers because you’re incredibly successful, incredibly wealthy. You’ve got a great track record. Everyone is telling you how fantastic you are. The risk of someone’s ego burgeoning out of our control is quite high. And that leads to a couple of problems. One is the desire to do things well outside of your circle of competence. I’d say, most investors even if they are skillful, have quite a narrow circle of competence. There’s a few specific things that they do well. When you’re incredibly successful, you think you can do everything. We see bottom-up, value-orientated stock-pickers start to pontificate on the latest Chinese GDP figure, what the Fed might do in six months’ time—well outside of their circle of competence—launching funds in areas where they don’t have any particular expertise. So, the risk of doing something they shouldn’t is incredibly higher.

And the other part of that, the other danger of that, is these managers become so important to the firms that they’re part of—they dominate the revenue generated by the firms—are so powerful that they don’t have appropriate controls around them because the fund manager at the firm, the asset manager isn’t going to say this person who is making all the money for our firm, “Actually, you can’t do that,” because they’re too afraid that they might walk out the door. So, you have star fund managers often creeping outside or lurching outside of their circle of competence with no appropriate controls around them. I think there’s lots of warning signs around star fund managers. And there are so many active funds out there, there is no need to get embroiled in star fund managers, and almost certainly if the manager was already a star, then you’re investing too late, and you’ve missed it.

Kemp: Yes, absolutely. It’s very, very wise lessons for all fund investors. Here at Morningstar, Ollie’s team has just published a piece on investors’ fear of funds that not everyone embraces funds and that collective form of investment. In your book, of course, you take quite a sympathetic approach to the investor confusion around funds. What do you think is the central reason for investors’ fear? Is it, as you just said, the sheer number of funds and choice available? Or there are other things that are leading to people’s fear of fund investing?

Wiggins: The sheer number is certainly one problem. I think if you were going to design a difficult decision-making situation, fund investing would be a great candidate for it, because we’ve got a huge array of choice, literally thousands of options, but we don’t really know what the important criteria is. There’s no general agreement about what the criteria is. So, difficult for us to tell what’s high quality and what’s just luck and lucky outcomes. And often we use the wrong criteria. We obsess about past performance, not realizing or accepting this often incredibly misleading as it pertains to future performance. We don’t really know what the important criteria is. We’ve got a huge range of options.

We’re also bombarded by noise. We’re just distracted by stuff that is really interesting and diverting, but it doesn’t provide us with useful information about the decision on the fund that we might be considering investing in. So, if we have a simple choice, what we want is a relatively narrow range of options. We want to understand clearly what the important criteria is and be able to observe that easily and we want to be focused on that decision. Fund investing can really be the opposite of all of those things, so it’s an incredibly difficult decision-making problem. That doesn’t mean that we shouldn’t invest in funds or that fund investing is worse than direct investing, for example, in stocks or bonds—far from it, but we just need to appreciate that there is a unique set of decision-making problems with fund investing, and we need to have a plan for how we deal with those difficulties.

Smith: Joe, you mentioned in your remarks about Woodford, about perhaps the hubris or some of the egotistical characteristics of that decision-making at a funhouse level. I rather had the impression from the book at times that there was a quietly simmering frustration with the way that some funds are run. So, on that note, what do you think fund managers get wrong on a day-to-day basis?

Wiggins: Good question. I think, generally speaking, I would say that active funds are too expensive and that they’ve been too slow to reduce fees. The reason that the majority of active funds in most equity markets underperform through time is not because market-cap investing is some sort of magic formula that’s better than every other allocation approach. It’s just that costs are too high and performance fees and things like that just do not go anywhere near solving that problem. I think more generally there’s an alignment problem as well, particularly for listed asset managers, whereby they’re inevitably worried about and incentivized by short-term flows. So, they need to meet the next quarterly or six-monthly forecast from the sell-side about EPS and about asset growth. I’m worried about 10-year-plus returns, and they’re worried about in the next quarter. And that’s a major problem. It’s a major incentive alignment problem, which leads to contrasting and conflicting behaviors.

What I’d like to see from asset managers? I’d like to see them reduce fees. I’d like to see them capacity constrained funds much more frequently and much earlier than they tend to. I’d like to see something like a maximum dollar-fee revenue limit on a fund. So, when a fund is launched, we’ll earn no more than X million dollars on this fund in fees, and when we reach that level, we will cap fees, and any other ways to try and incentivize long-term investing. Can you reward investors who have stuck with the fund for the long term? Can you reduce fees or incentivize them in some way for them taking a long-term approach? I think what we tend to get instead of that is asset management groups promoting the latest flavor of the month, manager, theme or a fund, or a story and lurching between those stories as they change because markets fluctuate fairly randomly. And that’s not as if there’s poor behavior from fund managers and doing this is not some malignant plot to make it difficult for investors. It’s just the incentives are aligned in the wrong way. So, if you want to understand how someone behaves or a company behaves, look at their incentives. We need to bring much more closely aligned incentives between asset managers, fund managers, and the underlying investors.

Smith: At this point, I was going to ask you about perhaps any other frustrations you had with active management, but I think you’ve outlined at an almost manifesto-quality list of proposals there. Are there any other things that you would add to the pile?

Wiggins: Just to take it from a slightly different angle, I think from the investor perspective, there’s a couple of important points as well about how everyone can do this better. So, I think, there are two really important points about if you were going to invest in active funds or even if you’re going to invest in passive funds but do it in an active fashion and how you make allocation decisions. I think active and passive is just not binary. It’s a spectrum in terms of the types of decisions that you make.

One is that you need to have a long time horizon. And I’m always talked back from this when people ask me what a long time horizon is and I want to say 10 years plus, and then everyone says, that’s ridiculous. So, you end up getting talked back to three years, because everyone’s incredibly myopic. But really, 10 years is a long time horizon. And the longer your horizon, the better. But you have to have a long horizon. Otherwise, being active is pointless, and you’re going to be fruitless or very painful.

The second point is you have to be willing to bear underperformance for years. Now, if you cannot do that because it happens to every fund, it happens to Warren Buffett, it happens to every active investor irrespective of whether they are skillful or not. If you can’t bear that underperformance, and it’s perfectly reasonable if you can’t; just don’t do it. You don’t have to invest in active funds, just invest in passive. I think the worst thing that active investors can do is go into active investment and expect consistent short-term performance. I don’t make any— well, there might be very few forecasts—but I’m 100% certain that that will end badly and that will not be delivered. So, that’s what I would say from an investment perspective.

If you think about fund managers specifically in terms of how they manage their funds, I would say two quick things: One is fund managers need to get much better at talking about their beliefs, so away from generic claims about what an investment philosophy is and toward a clear idea of what you actually believe about markets and how you apply it in your investment process. And also, I think fund managers need to be much clearer about what they are good at. So, active investors are paying fees for skill. Active managers need to provide evidence that they have skill and that is not showing that we’ve outperformed over the last three or five years. It’s about linking a process to an outcome. These are the types of stocks or situations we want to invest in, and this is the evidence that we do it and over time that works on a 55%, 60% basis. Those things I think would be making much easier for fund selectors to work with active managers when trying to identify those that are skillful relative to those that are lucky.

Kemp: Joe, we’ve talked just already about so many different types of decisions, so the decision of when and how to invest, the decision of buying different funds, the decision of dealing with these challenging market conditions. You’re in the business of making decisions and working with teams that make decisions. What are the most challenging decisions that you’re facing at the moment? And possibly, even more importantly, how are you approaching those decisions to get the best outcome?

Wiggins: Good question. It can really feel like a new world for many investors at the moment, because we’ve been through a significant period where the financial markets seem to work in a certain way, and none of that’s changed because of the specter of the realization of high inflation and the change in cash rates and government-bond yields. It feels like our go-to reference points or response functions that we’ve learned over our careers are broken or have certainly changed significantly. So, that can be quite disconcerting.

I think a couple of things that have been on my mind and on our team’s mind with regards to asset-allocation decisions—one is about bonds. So, are they attractive? Yields are significantly higher now, but so is inflation, and we might be heading into a recession. The other part is U.S. equity markets relative to other developed equity markets and emerging markets as well, there’s a major valuation gap that persists between those things, and that’s something that hasn’t really come out in the wash as the value growth dynamic changing has over more recent months. And I think I try and approach these decisions in the same way.

And I think there’s three elements I’ll try and think of at top level, or three principles, should we say. One is: don’t make aggressive macro forecasts. I don’t want to be predicting macro events. There’s very, very high chance that I will be wrong and a chance I’ll be wrong twice, so I’ll be wrong about the macro forecast and wrong about how markets will react to that macro environment. So, avoid making aggressive macro forecasts. Second is: whatever decision you make, don’t bet the whole farm. The reason that we diversify is because the future is uncertain. If we were certain about what was going to happen in the future, we only own one security, because we would know and be right about the outcome of that investing and that security. Diversification is a reflection of the fact that we are uncertain. No matter how high conviction my view is, there’s still a decent chance that I’ll be incorrect. I need to make sure that that is part of any investment decision I make.

And the other part, I think, which is really important, particularly when there are very persuasive and all-encompassing narratives in markets at a particular point in time, that is to try and focus on the base rates around decisions. So, what I mean by that is try to think less about the inside view. By the inside view, I mean the specifics of the particular story of the moment, a particular situation in market. Will the Fed pivot, for example? Try and move away from those types of decisions and predictions. It’s a complex adaptive system. That means it’s incredibly difficult to predict. Don’t do it. And think more about what history and the general weight of evidence tells us about a situation. Rather than saying how I think U.S. equities will perform against other developed market equities over the next six months, I have no idea. Think about the whole historical incidence of large regional valuation gaps, do they matter and why, over what time horizons do they matter and try and base your decision on that. So, what I’m trying to do, generally speaking, is think about probabilities and trying to get the odds on my side. If I get the odds on my side and minimize the risk of disaster, that’s probably where I want to be rather than making bets on certain outcomes.

Kemp: And so, by implication there, it’s that when you’re making macro decisions, then the odds aren’t in your favor. When you overinvest, then that’s when you open yourself up to disaster. Is that the idea there? Because I know that some people would say in response, well, how can you make an investment decision if you don’t have a view on the macro? But it’d be great if you could just unpack that a little bit.

Wiggins: I think, it’s being clear about what your view is. I think the shorter your time horizon, the more you’re making some kind of macro prediction. So, be clear about what your time horizon is when you’re making that decision. And I would say for the decisions around corporate bonds whether they’re attractive at the moment or developed market non-U.S. equities versus U.S. equities, I think you can focus on the valuations, the long-term returns, if you’ve got the right type of time horizons. The shorter your time horizon, the more you’re likely to be making macro-orientated or sentiment-driven forecasts. Building in a time horizon to the types of decisions you’re taking is really important to me. I don’t want you to be making one-year macro views. I want to be talking about valuations and how they might impact returns over five, seven, 10 years.

Smith: Joe, I was intrigued by what you said about narratives, and really how tempting they can be. I think just focusing on the U.K. for a second, one narrative that’s been bubbling away for a long time is just how attractive the U.K. is as a place to invest and particularly, U.K. equities. I wonder—I do have to ask you this—as a former employee of Aberdeen, how does it feel to see that company go through such turbulence? And I think the time of recording, the company has been re-admitted to the FTSE 100. But it’s looking like a sorry story at the moment. What’s your view on that?

Wiggins: I think there’s a few things I would say. There’s probably general comments about certain types of asset-management firms. First, it’s hard being a midsized asset manager. The largest firms have the advantage of scale. Smaller firms have the advantage of more flexibility, putting more distinctiveness and more agency in how they behave. Being stuck in the middle is tough. And that’s why we’d like to see even more M&A activity in that space. It’s difficult being a midsized asset manager in an incredibly competitive environment where there’s huge pressure on margins.

Second is that for any asset-management firm distribution is so important, I think particularly for midsized asset managers. If you have in-built distribution, and that might be attachments to pension scheme or a life insurance business or a wealth management advisory firm—if you have in-built distribution, then you’re not fighting as much with 50 other asset managers for the same business, which is incredibly difficult to do and tends to be beholden to who has the best short-term, medium-term performance. So, distribution is critical, increasingly critical.

And finally, I think companies need to be better generally at defining their purpose. And I think when you talk about purpose with businesses, sometimes you can easily get involved in flummel and BS about meaningless purpose. But actually, at the underlying, it’s really important that companies to need to define exactly what it is they want to be, and then design a plan or a strategy of how they’re going to execute that. And too often you see companies where you can’t really tell what their purpose is as a business. And I think that’s problematic because if you don’t have a purpose, it’s really hard to design the right strategy to meet your goals or objectives.

Kemp: That’s brilliant. Thanks, Joe. We’re running out of time—and before we go, I do have one other question for you. I’m told by Jeff and Christine that we have a really engaged audience here on The Long View, and one of the things that this audience loves to do is read. And I’m sure there’s lots of investment books on everyone’s nightstands and bookshelves. But do you have any recommendations? I know you’re a voracious reader. What are the books that you would recommend that we read, aside from your own, of course, to try and gen up on some of these issues that you’ve been talking about?

Wiggins: Well, I’ve got a good recommendation. I’ve got a couple for you and they’re both linked. I’m fascinated by the ideas of uncertainty and risk and probabilistic thinking and how it pertains to our investment decision-making. One I’d recommend everyone working in the investment industry should read is Against the Gods: The Remarkable Story of Risk by Peter Bernstein, which is in essence a history of risk and uncertainty, which sounds on the face of it very dry, but it’s an incredible piece of work, an incredible piece of writing, detailing how we’ve come to think about risk and uncertainty in the way that we have. And clearly, every investment decision we make is about understanding odds and understanding uncertainty and trying to deal with that and making good decisions. It’s an incredible book. If you haven’t read it, I’d recommend heartly reading that book.

The other one, which is a bit more niche on a similar theme is called War and Chance by Jeffrey A. Friedman, who’s a foreign policy expert and professor. This is looking at decision-making under extreme uncertainty from a foreign policy situation, so looking at historic examples of foreign policy decisions made under high stress, high uncertainty with unknown probabilities or estimated probabilities, and thinking about how we communicate probabilities, how we deal with uncertainty, how we deal with situations where different people have very different views on the probabilities of different outcomes. It talks about things like the Cuban Missile Crisis or the decision to storm the compound where they felt that Osama bin Laden was hiding out and those types of high stakes, high uncertainty decisions and how we can build a framework for making those types of decisions and again, trying to get the odds on our side when we’re making those types of decisions. It’s a relatively short and really fascinating read. That’s not finance or an investment book, but there’s a huge amount of read across the types of decisions that the investors have to make every day.

Smith: Joe, thank you so much for those. I was smiling.

Kemp: Yeah, that’s so true. It’s so true that so often we see that read across from foreign policy to investments, it’s that idea that, of course, we have to stare into the future and deal with genuine uncertainty. The first book there you mentioned, I could also recommend that. Brilliant. It’s on our Book Club List here for all of our analysts in the Investment Management team. But I haven’t read the other one. So, that’s going on the list this evening. Thank you so much for that. And of course, for everyone listening to this, don’t miss Joe’s book The Intelligent Fund Investor, which will be available to all good book shops or wherever you buy your books online, do make sure that you get a copy of that. It’s a really brilliant look into the subject of mutual fund investment. You get so much of Joe’s thinking on that. Thank you so much.

Wiggins: Thank you. It’s been a pleasure.

Smith: And with that, it’s time to say goodbye. A big thank you for tuning into The Long View podcast, which is brought to you by Morningstar. Until next time, a big thanks to Joe. It’s goodbye from me, Ollie Smith.

Kemp: And it’s goodbye from me, Dan Kemp. Goodbye.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)