Shame, Guilt, and Fund Management
On a British crime drama I was watching, a detective asked a serial killer, “Don’t you have shame for what you are, and guilt for what you’ve done?” While no TV cop is expected to approach issues of shame and guilt with the sophistication of a Heidegger or Kant, his phrasing posited a shorthand distinction that doesn’t hold up. The detective correctly used “guilt” in this context (not courtroom guilt) as internal, deriving from action that is personal. “What you’ve done,” or not done. A man feels guilty that he has committed murder (action) or hasn’t called his mother in two weeks (if he’s Jewish, one week) (inaction). The latter form of guilt can be remedied and really, how long does it take to pick up the phone?
As for “shame,” the detective described it as a state of being, one that results from failure to adhere to societal standards: e.g., a sex offender “lives in shame.” Shaming/shunning is a way society punishes and deters certain behaviors, including ones that aren’t illegal. Kant, whose philosophy was based on individual autonomy, nevertheless thought shaming was a great idea. When public figures are called “shameless,” it is because they refuse to adhere to unwritten societal codes. This can be cathartic, as when Larry David breaches the codes regarding petty matters on Curb Your Enthusiasm1, but it can be downright scary when it’s a political leader who violates the codes on matters large, like elections, and small, like lying about rally sizes. (Not to mention the written laws).
Shame need not relate to a societally set standard. We are all ashamed of things we have done, even if they are one-off and not indicative of a state of being. I am ashamed that once ten years ago I asked a favor of a famous person in an inappropriate way – but my general status is not “inappropriate favor seeker.” In fact, the degree of shame I carry over the incident indicates how opposite to my nature it was. (If it was a Curb episode, it would be called “The Favor.”) Conversely, shame can arise from a state of being that has never been acted upon, e.g., a closeted gay celibate living in a homophobic society. In both cases – action without state of being and state of being without action – fear of public exposure is integral to the private shame.
Which Is Worse?
Which is worse, shame or guilt? I think it depends on the situation. If the source of guilt remains capable of remedy, it can be torturous to live with. When my father was old and unhappy in a senior home, guilt gnawed at me almost every day that I didn’t see him. That I was at any time able to visit, and chose not to, sharpened the feeling – worse than shame. Now that he’s gone, the guilt lingers, but it fades.
If shame has arisen from action, it is past and no longer capable of remedy. Therefore, it doesn’t gnaw as remediable guilt does. On the other hand, past shame doesn’t fade away as easily as guilt. When I think of The Favor, I’m almost as ashamed now as I was five years ago. I worry, irrationally, that other people may know about it. In fact, many people wouldn’t see anything inappropriate about what I did. This is because it didn’t violate any societal standard, but just crossed my own personal pride threshold.
Public shaming would be awful. Cersei Lannister’s naked march through her hometown in Game of Thrones is the dramatic epitome, but think of cases like Bill Cosby and Harvey Weinstein in real life. It does seem though that celebrities whose behavior leads to that level of shaming are frequently sociopaths who don’t suffer from it, because they don’t accept that they did anything wrong.
Shame that derives from a state of being and not from voluntary action would seem to be the worst feeling of all. Think again of the secretly gay man in a virulently homophobic society. He either accepts the societal code and sees himself as aberrant and deserving of shunning or rejects it and lives in moral isolation. The agony of this choice can be seen in the high suicide rates among queer teens in intolerant environments.
Shame and Guilt for Fund Managers
The career of fund manager seems to be one especially at risk for shaming. Not only are managers entrusted with others’ savings, but they are also subject to scrutiny by the SEC and investors, as well as to general standards of behavior, often while being public figures. Besides that, they usually have performance benchmarks to show everyone in simple numbers how good a job they are doing. 70-80% of U.S. active equity managers continuously underperform the S&P Index, available for all to see on Bloomberg, Morningstar, etc.
And yet, I have found that while underperforming managers express sheepishness when discussing their performance vs. the index, they never seem ashamed. I suspect that they know that few of their investors, deep down, expect them to beat the S&P, but keep money with them for other reasons, including that they may be taking less risk than an ETF, or maybe just like them. As long as the manager tries his best and delivers more or less what the investor expects, he need not feel shame.
Shame arises when a manager knowingly delivers something different than was promised, like ESG funds that invested in companies with fake credentials. The SEC has had to crack down on this Greenwashing, and it was reported earlier this year that 40% of the EU-based funds calling themselves ESG would have to change their names or sell assets. It was a running joke in my office to guess how much certain Russian companies with high ESG scores — in reality polluters with poor governance — must have paid to get their ratings.
A worse example in my view are hedge funds that promised high water marks for their performance fees (i.e., the fund must be at a new high NAV to collect them) and then, after big losses, liquidated to “spend time with their families,” reemerging in a year or so with new funds charging the fees from day one. Other funds, even “activists” that purport to judge companies’ governance, have after losses induced investors to lower their high water marks, usually arguing that they need the performance fees to retain good staff. To this my reply would be: “Pay them from your own pocket, motherf*cker.”
Private equity groups are not much better, as they can raise a fund and if it does poorly, shrug and move onto the next one until they hit the right vintage and portfolio of assets. One of the worst personal investments I’ve ever made was in a private equity fund that was number II, following the manager’s successful fund I. The capital in II was invested hastily and unwisely as the 2008 financial crisis unfolded, and within a year, with the fund already sitting on huge losses, the manager launched III, saying, “Now the timing is right.” I attended the III launch presentation just to view this degree of shamelessness – a.k.a. chutzpah – with my own eyes.2
A manager’s greed can also lead to shame, for example when he allows a winning position to grow well beyond any reasonable percentage of NAV and something goes wrong, as it almost invariably will. I wrote about this dilemma in another post.
https://harveysawikin.substack.com/p/position-sizing-for-value-managers
Gamblers’ ruin, e.g., doubling down on a losing short while ignoring any non-confirmatory evidence, shames the manager for his inability to control his compulsions and ego.
Another well-traveled route to shame is deviating wildly from a mandate. I knew of an emerging markets portfolio equity fund that invested a large chunk of its assets in an Eastern European private lingerie company, for inexplicable reasons (or maybe explicable ones). Or a brilliant debt manager acquaintance of mine who ruined his hedge fund (in which I was an LP) by ending up with much of it in an athletic complex. Mandate creep via getting too illiquid is something I’ve done myself, both in funds I manage and others I’ve backed. I paid a severe price, was ashamed, and never did it again. Now, in 30 years as a fund manager, I have made numerous big investment mistakes, which I think of with regret but not shame, given the circumstances in which they occurred and what I know about my own capabilities.
As for guilt, I can’t think of any aspect of investing (within the law) that should produce guilt. Guilt can arise out of the business of fund management, however, via poor treatment of investors or of employees, counterparties, and fellow managers. As I noted, guilt can often be remedied, though in fund management it’s not always so easy. For example, when investors have come into my funds after an overbought rally or at other wrong moments and then took a quick loss, I’ve felt bad. My guilt was usually mitigated by the prior cautions I had given them, but all I could do at that point was to try to get them back to even and into profit.
Conclusion
Regret and self-criticism are the lot of every fund manager, as even the best ones will be wrong much of the time. If making a bad trade causes you not just regret but shame, choose another line of work. If on the other hand you find that you are generally impervious to shame and guilt (e.g., you are Madoff), also choose another line of work, for everyone’s sake.
If you experience these emotions normally, you should be able to avoid them in your career as a fund manager by always acting ethically and according to investors’ realistic expectations.
So strong is Larry’s power that he can even be retained as a “social assassin” to break codes on behalf of others.
My rule, which may be right or wrong, is that I don’t invest in any fund ending with a roman numeral above II. Is there an Apollo XIII, by the way?