Blue Chip Issue 90

COLUMN
BLUE
CHIP
The power of incentives
The human side of investing.
Rob Macdonald, Head of Strategic
Advisory Services, Fundhouse
Rob Macdonald has held
several senior positions in
the investment industry.
At Fundhouse, he acts as
a consultant and coach
to financial advisors and
develops and facilitates training
programmes in behavioural
coaching and practice
management. Before joining
the financial services industry,
Macdonald was MBA director
at the UCT Graduate School
of Business. Business. He has
written the book The 7 Pillars
of Financial Health and is coauthor
of the book Rethinking
Leadership and has consulted,
written and spoken widely on a
range of topics. Macdonald has a
Master’s degree in Management
Studies from Oxford University
and is a CFP® Professional.
Late last year, the world lost one of its great
investment brains with the passing of
Charlie Munger, Warren Buffett’s long-time
investment partner. Perhaps distinctive to
Munger was his interest in the human side of
investing, the essence of which he first captured
in a speech entitled “The Psychology of Human
Misjudgement” in 1995 at Harvard University.
Central to this misjudgement are 25 cognitive
biases that he believed lead to poor decisions,
and consequently poor outcomes.
Neither Munger nor Buffett has ever shied
away from observing when investors are
exercising poor judgement. Most recently, Buffett
referred to Bitcoin as “rat poison squared” and at
the Berkshire Hathaway AGM in 2000, Munger
said of the late-1990 dot.com bubble that “if you
mix raisins with turds, they’re still turds”. Even
though two of the smartest investors ever offer
such insights, many investors don’t take note.
In March 2000, the dot.com bubble burst,
while investors still pursue Bitcoin with vigour,
some luckier than others.
South African investors recently suffered the
collapse of the BHI Trust run by Craig Warriner in
which up to R2.7-billion of investors’ money may
be lost. Despite being an unregulated investment,
licensed financial advisor Global & Local put
clients’ money into it. Ironically, the name “BHI”
refers to “Berkshire Hathaway Investments”,
Warriner clearly leveraging credibility off Buffett
and Munger’s legendary listed investment vehicle.
The first of Munger’s 25 biases is the “Reward/
Punishment Super Response Tendency”. Munger
believed that the power that incentives and
disincentives have on the actions of others cannot
be overstated. One assumes that there was an
incentive for Global & Local to put clients’ funds
into an unlicensed investment vehicle. And clients
were undoubtedly incentivised by the promise of
high returns.
The dust is yet to settle on the BHI debacle and
yet another one is already playing itself out. No
surprise it’s in the form of an unlicensed investment
vehicle. GSPartners promotes and distributes an
investment product called “MetaCertificates”
which promises returns to international investors
ranging from 2.5% to 4.15% per week, [1] while in
South Africa the promised returns are as high as
22% per week. [2]
To put that into perspective, the long-term
real return on South African equities is 7% per
year, significantly less than the weekly return
promised by GSPartners! The FSCA issued a
warning late last year for investors to be wary of
GSPartners, while cease and desist orders have
been issued against it by several jurisdictions in
the US and Canada.
Munger’s first bias suggests that these
schemes will repeatedly rear their ugly head;
after all, they always have incentives, both for
promoters and investors. Believing in unrealistic
returns is a cognitive error – not understanding
what’s realistic, and an emotional one – greed.
Both are great incentives, nevertheless. But
there is also the social incentive. GSPartners
has been actively promoted in South Africa by
well-known sports personalities such as Victor
Matfield, Herschelle Gibbs, Lucas Radebe and
Toks van der Linde. It’s not just about the money,
it’s about being part of this celebrity group.
When making decisions, investors repeatedly
fall foul of the three elements of what I call the
Bermuda Triangle of Investing: cognitive errors:
emotional responses and social influences. All
three play a role in Munger’s Reward/Punishment
Super Response Tendency. Central to a financial
planner’s value is helping clients to navigate these
three elements on an ongoing basis. Making this
job easier would be that whenever you get a sniff
of an investment that looks like “rat poison” or a
“turd”, don’t only keep your clients’ noses out of
it, alert the public and the regulator too. I believe
professional financial planners have a collective
incentive and responsibility in this regard. And no
doubt, Charlie Munger would approve.
[1]
BC Securities Commission, Temporary Order, 11/16/2023, Peter J. Brady,
Executive Director.
[2]
“Red flags over GSPartners highlight spread of dodgy crypto providers”
by Neesa Moodley, Daily Maverick, 3 December 2023.
www.bluechipdigital.co.za
17