On Transparency

Being transparent and sharing information about yourself is almost always beneficial. For one, you can’t lie when all of your thoughts are out for the world to see; too many holes would show if dubious people were publicly forthcoming about their goals and actions.

My thoughts on transparency have been strengthened recently by the stonewalling tactics of others. When I witness failure (in this case, the policy of not being forthcoming), I’m often motivated to question and change the offender.

On Wednesday night, I met with a group of portfolio managers from a local investment advisory firm that manages ~$1.5 billion. They were telling me about their methods for investment, how their operation differs from the brokerage houses:

In the brokerage model, industry-specific research analysts in New York and San Francisco keep their eyes on individual industries with extreme depth and pass along their research to the brokers, who interpret the research to their clients and make investment decisions. In this model, the brokers are pretty much clueless. They just do what they’re told, recommending whatever their research department is recommending that week or month. At the firm I was meeting with, each broker is a research analyst, responsible for covering 11-26 stocks from various industries. They’ve combined the researcher and broker into one: there is no research specialization by industry.

Their approach sounds different, even novel, so one would think that their innovative model would reward clients with above-average returns, and that they would tout this fact to the public. Not so. When asked about their performance, they were silent.

I’m guessing that their lack of transparency is due to the fact that they match or underperform the returns of the broader market. They don’t want to compare themselves to others, because that’s not where they excel. They excel in other things, like taking their clients out to lunch once every three months and keeping them happy. Surely, their client retention has nothing to do with exceptional performance and everything to do with a planned propaganda campaign they call “relationship management” whose aim is to keep clients complacent with mediocre performance.

If someone isn’t being forthcoming, they’re probably hiding something.

Stonewalling is a pretty common tactic in the investment world. Nowhere is it more common than at Venture Capital funds. Michael Arrington recently posted the story of one venture capitalist, Union Square Ventures’ Fred Wilson, who does tout his performance publicly. In the last 17 years, through 32 investments in ventures, 20% of those investments completely failed. 40% of his deals (11/32) ended with a 5x or more return on investment. Clearly, Mr. Wilson has reason to be transparent, as his performance speaks for itself. Does this mean that only the successful should be forthcoming about their performance? Hardly. I believe that anyone and everyone should be forthcoming, because it’s in this fashion that we as humans can best choose those who provide services to us. If you can’t easily compare service providers, it’s not as easy to choose the most suitable candidate. Being transparent benefits everyone, with more resources going to those who can use them most effectively, and less to those who are less suited. Those less suited – those who fail – will be reminded by their failure that they ought to go out and find something that they are good at. In this way, we each can find our niche in life.

I often tell people that if I knew that I was the best man at mowing lawns, I wouldn’t be in the asset management business. I’d be out there mowing lawns, building a business in something that I knew myself to be the best at. And I’d be happy doing it.

The rest of the world needs to do the same, find out what they’re best at, and do it. The world would surely be a much better place.

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