Craig Gradidge: What makes a good investment client?

Investors are often quick to criticise financial intermediaries when investment returns look wobbly. But there’s much more to the success of your investment portfolio than the expertise of the adviser. As independent financial planner Craig Gradidge of Gradidge Mahura Investments in Johannesburg highlights here: the most successful investors are also the ones with the right temperament for investing. If you find you can’t keep calm amid a market storm, find an adviser who can help you keep your head – and money. – JC

What makes a good investment client?

Last year I wrote an article sharing my opinion on what makes a good financial adviser. I put forward an argument for what I thought was the single most important characteristic of a good financial adviser: maths competency. I argued that many advisers were financially literate, but not necessarily mathematically capable. Financial literacy can be taught while being mathematically competent meant that the adviser could apply this critical skill in different scenarios.

A client of mine read that article and dropped me a line shortly afterwards. While the conversation was about nothing specific, he had me stumped when he asked ‘so, what makes a good client then?’ My immediate answer was ‘one with lots of money to invest…’ but it was a question I would grapple with for a while still.

I recently read a book entitled The Outsiders by William Thorndike which got me thinking that I may finally have an answer for my client. The book is about eight CEOs who achieved phenomenal results for investors over an extended period. It looks closely at the capital allocation decisions made by these CEOs and the impact on subsequent share price performance. These CEOs often made decisions that baffled market commentators, as they contradicted market trends and conventional thinking in many instances. When I bought the book I had my businessman cap on, and I thought this was the sort of book that would contribute to better decision making on my part in terms of my business.

Over the years I have learnt to read with an open mind, so while the book offered plenty food for thought in terms of business strategy, it was a sentence on page 209 that really got me thinking. That sentence read as follows: “Although the outsider CEOs were an extraordinarily talented group, their advantage relative to their peers was one of temperament, not intellect.”  I paused for while after reading that paragraph to reflect on that one sentence.

So, what makes for a good investment client then?

I read The Outsiders late September, early October 2014. This happened to also be a volatile period for local and international equity markets. The JSE was down almost 10% over this time. Despite having over 400 investment clients in our practice, we had received a handful of queries from clients wanting to know why their portfolios were losing money. In each instance clients were down by less than 3-4% over the same period that the market was down 10%.

It was one particularly panicky client that helped me make the connection between Thorndike’s observation of successful CEOs and what makes for good clients. The client observed a 2% drop in portfolio value (between September and mid October) and wanted to meet as a matter of urgency.

He was a retired client with a fairly large sum of money that we were advising on so I cleared my diary to see him. After he vented for about 30 minutes I showed him that his portfolio had outperformed cash by over 5% after costs since inception.

I showed him that there were two periods of market weakness since he invested with us. In both instances his portfolio was down much less than the market. So there was good capital protection without sacrificing too much upside potential.

However, without the exposure to risky assets I would not be able to achieve the returns we had achieved. After almost three hours of graphs, analysis and debating, he relented and agreed to leave to portfolio untouched. Surprisingly though, he invested an additional lump sum with us on the same mandate about a week later.

It was not the clients that queried that had me thinking, but rather those that did not. For them the volatility of September/October 2014 was not a thing to worry about. It was par for the course when it comes to growing wealth over time.

What is temperament?

Dictionary.com offers a definition of temperament: an individual’s character, disposition, and tendencies as revealed in his reactions.  Temperament has to do with clarity of thought: To what extent do emotions influence decision making?

Money is a particularly emotive issue, so the  temperament of the investor is especially important and relevant. Investors that are able to keep their emotions in check and base their decisions on facts are likely to do well over time.



Are you a good investment client? Aim for crocodile-like behaviour, says independent investment expert Craig Gradidge – be slow to react to small movements and save your energy for the big decisions.


I must acknowledge that it is probably easier for the CEOs to exhibit better temperament than investors. CEOs are often allocating other people’s capital, while investors are allocating their own hard earned cash. It is more difficult keep calm and rational when it is your own financial security potentially at risk. However, the principle applies nevertheless. We have other clients with larger sums of cash invested with us.

In some instances the 3-4% movement meant that they were down almost R1m. However, there were no panicky calls or urgent meetings or portfolio reviews. I had a conversation with one of these clients soon after the meeting with the panicky client. There was little discussion about his portfolio; he seemed more interested in understanding what was driving markets weaker. That was a conversation focused on facts. Is the market too expensive, are earnings keeping up with share prices, what was the catalyst for market weakness then?

Other definitions of temperament suggest that it is those aspects of someone’s personality regarded as innate and not something that can be learned. If this really is the case then the role of the adviser becomes more critical in keeping those emotions in check. An adviser with a calm disposition (in addition to math competency) could prove to be a valuable foil for an emotionally charged investor.

Conclusion

There is a popular meme that resurfaces every now and again on the internet and social media in particular. It goes something like ‘keep calm and _______’ with the blank filled in with humorous depending on the context. Perhaps there should be a keep calm poster for investors, perhaps ‘keep calm and talk your adviser’ or ‘keep calm and get the facts first’.

Thorndike noted that one of the characteristics that made the Outsider CEOs successful was ‘a crocodile-like temperament’. Investors would do well to develop this characteristic over time.

* Craig Gradidge holds a BCom (Wits), BCom Honours (UNISA), post-graduate Diploma in Financial Planning (UFS) and an MBA (UCT). He has worked in the investment and financial services industry since 1996 at an operational, management and executive level.
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