Rational Investing

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4 September 2017

“Maggie the Cat" the Telephone Stock, Part II


We pick up about three months after Maggie the Cat left my office at the bank, me shaking my head as she departed, wondering if I would ever get her to diversify her portfolio. For the umpteenth time she had thwarted my efforts, the last having been her escape from my Grand Trap of Logic.

The singsong voice from my secretary alerted me while trying to stifle a snicker, "Guess who's on the phone?"

I knew. It was Maggie the Cat, and I was unprepared. (For this next part close your eyes for just a minute and picture an English teacher wearing a black dress with a white collar, graying hair in a bun, looking over the top of wire-rimmed glasses calling on you with that tone that is not life-threatening, but has a thin iciness that commands your attention and demands respect, communicating that you had better know the answer to the question that is about to be asked.)

MISTER Davis," she asked, "why have you not told me about mutual funds?" I was caught completely off guard, so the best I could do was, "Huh? I mean what do you mean?" "Mrs. Lundstrom and I were talking at the Retired Teachers Association meeting this past week and she told me about her mutual fund that has appreciated so much over this past year or so, much more than my stocks have," Maggie informed me in authoritarian tones

Mrs. Hunter, I didn't think you would be interested in mutual funds in that you would have to sell some of your-" "Mrs. Lundstrom's mutual fund owns AT&T, Mister Davis, and it has gone up more than my stock!" My brain was cranking at that point, trying to figure out how to best use what she was telling me. I wanted to say, "Na Na Na Na Na Na, I told you so-I told you so," but instead settled for, "What would you like me to do?" "I want you to explain two matters; how that can happen, and what I should do about it." "My homework," I thought, as I replied that I thought it best if we sat down and discussed it person to person.

It was not the first time I had encountered the emotional side of investing. It's something that happens far too often when making investment decisions. No, I was bothered most by the fact that I had not recognized how to deal with it in her case, but had insisted on trying to use logic.

A few days later we met and talked about how a mutual fund spreads the risk by owning assets, bonds as well as stocks, across a broad spectrum of industries. She listened patiently, the pupil, not the teacher this time, affirmatively nodding her head and saying she understood. When the subject of performance came up, in this case the out-performance of the mutual fund versus her telephone stock, I had just begun to explain it when she interrupted.

"I want a mutual fund that will do better than the one Mrs. Lundstrom has." The light finally went on in my brain. The emotional reaction to Mrs. Lundstrom's success was stronger than the emotional attachment to the stock her husband had left her. She wanted to beat her friend, to have something better to discuss at future Retired Teachers Association meetings, something that would one-up Mrs. Lundstrom.

It was not the first time I had encountered the emotional side of investing. It's something that happens far too often when making investment decisions. No, I was bothered most by the fact that I had not recognized how to deal with it in her case, but had insisted on trying to use logic. Maggie the Cat finally did the right thing, even if for the wrong reason. Because she had substantial assets, rather than use a mutual fund we designed a diversified portfolio for her which she came to call Her Mutual Fund, one that she took pride in because it was designed especially for her.

A year or so later, Maggie the Cat invited me to speak to the Retired Teachers Association, an occasion that gave her the opportunity to introduce me to the group as "my personal money manager" and to her friend, Mrs. Lundstrom, as the "young man" (I like the sound of that more now than I did when she said it twenty-five years ago) who designed something better than a mutual fund.

When Maggie the Cat moved to Florida to be close to her daughter, the personal meetings ended. We talked on the phone from time to time, usually when I called her before making major portfolio adjustments, and she continued to grade and return my letters. But I never heard any more about Mrs. Lundstrom or how their investment performance compared

She was a delightful, although challenging client. With her I had to be on my toes in defending my investment rationale. But more important was the lesson she gave me in listening and understanding-in recognizing that ultimately investment decisions must satisfy not just the logic of facts and figures, but also some element of emotion that rests in all of us.

Previous column: Maggie the Cat and the Telephone Stock, Pt. 1
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