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This was originally published in September 2022, in the Research Puzzle category.
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The disciplines of sociology and anthropology are helpful guides for investment professionals. Social influences are an important driver of asset prices — and of the structures and strategies of investment organizations.
To examine all of the social vectors involved is an impossibly broad topic for one posting, so this is just a narrow look at two ideas represented by quite-similar words, one of them fairly common and the other quite uncommon.
Cliques
The OED defines clique as “a small and exclusive party or set, a narrow coterie or circle,” while noting that the word often gets used as “a term of reproach or contempt.” If there wasn’t a cool kids table or hang-out area at your school, you’ve certainly seen one in a movie or television show. Everyone knows who’s in and who’s out.
A less negative view of the term reflects our tendency toward social groupings. Cliques in that sense form naturally around shared backgrounds and interests, without the sort of us/them boundaries and loyalty tests that lead to more adverse group behavior. And work units at different levels of aggregation in organizations often have distinct subcultures and identities.
But groups that isolate themselves from others and favor competition rather than cooperation within their organization often cause problems over time. (Incentives usually play a role, with the clique-versus-organization reward splits being a constant irritant in one way or another.)
In A Demon of Our Own Design, Rick Bookstaber wrote about the band of traders that subsequently went off to form Long-Term Capital Management:
They had proprietary chic. Even sitting in the middle of the Salomon trading floor, they maintained an aura of celebrity, a clique with its own culture of inside jokes and secret nomenclature to describe the yield curve and the strategies they employed.
The isolation doesn’t have to be physical in nature, even though it often is; culture and language and attitude can build barriers, just as they do among kids who happen to go to the same school.
What are the tradeoffs between the esprit de corps that is easier to rouse in a group focused narrowly on a common purpose versus the negatives that come along with it? After all, the best ideas often discovered at the intersection of different social or organizational groups. (The LTCM story was multidimensional, but the insularity of the team was an important factor in its undoing.)
Some examples
A few disparate angles on this topic from around the ecosystem:
Multi-team asset management firms. There are big differences among organizations in terms of how information flows (or doesn’t flow). In some, there are robust exchanges of ideas between teams, even across asset classes, in ways that foster performance. At others, because of size or geographic distance or culture, there is almost none of that. Some firms even prohibit the sharing of information from one team to another. Those differences matter, but are rarely highlighted by outsiders trying to evaluate the organizations.
Combinations. Many asset managers and other kinds of providers are the products of mergers and team lift-outs and combinations of one sort or another. The disparate parts can linger for years, the groups never really integrating as you would want them to.
Decision making. There are org charts and then there are hidden org charts, the way things are actually done. Someone in an apparent position of importance might not be very involved in decision making, while others who aren’t as prominent (or perhaps not even shown in the chart) have significant influence. (To use a political construct, a “kitchen cabinet” may hold the real power, despite official appearances.)
Governing bodies. Boards and committees can have factions that make coordinated governance challenging. An obvious situation is a jointly-trusteed corporate pension plan, where management and labor can be at odds over policy. Public plans may mix elected officials (sometimes from opposite sides of the aisle; another potential dividing line), employees, and outsiders, each with much different perspectives. But while those distinctions are fairly easy to see, all groups (especially large ones) have the potential for cliques to form. Consider an investment committee made up of some who strongly favor the use of alternative strategies and others who are equally opposed.
Diversity. The investment industry has struggled to improve diversity overall, and there are still lots of firms where the talent pool is “pale and male” (even if there’s enough younger people given responsibility so that the “stale” part of the cliché doesn’t really apply). Hiring and promotion practices are a reflection of culture, and the cliquishness reinforces itself over time to the point that the stated goal of rewarding merit gets obscured.
The cool kids table
You will sometimes hear that phrase, “the cool kids table,” used to refer to an inner circle of asset owners, chiefly made up of those from influential endowments. The perception is that they have access to the best deals and if they are “in” on one, then others should follow. Their opinions matter in investment selection processes far beyond their own organizations, and being seen as a member of the club is a huge career asset for the individuals involved. (Another sign of the power of the clique: many of the organizations use the same recruiter, who, according to an Institutional Investor article, “filters out superb investors based on pedigree.”)
It can be helpful for asset owners to cooperate, especially given the overall shortage of resources to do original due diligence — and the access that some have but others don’t. The tradeoff is that a lack of independent analysis can bite you when the work doesn’t live up to the reputation.
That happened at another cool kids table during the last year, when the performance of many of the Tiger Cubs has been trashed as their one-way stocks (and presumably venture investments, although they haven’t really been marked down yet) reversed direction in a significant way. Some followers likely missed much of the runup but got there in time for the fall.
Another kind of clique
An unusual usage of “clique” these days was quite prominent in the investment business at one time. In the 1870s, Men and Idioms of Wall Street defined it this way: “A Clique is a combination of prominent operators, or their brokers, to carry a stock up, each bidding higher and higher so as to get control of it.” Published a century ago, the famous book Reminiscences of a Stock Operator has many references to “bull cliques,” “speculative cliques,” and “inside cliques.”
Market manipulation is a hard thing to prove, but no doubt there are plenty of cheerleaders in the markets, forming cliques of sorts. In extreme situations, they can resemble cults, often with narrowing definitions of what constitutes a true believer in a security or a strategy.
Claques
Which brings us back to the OED, for a definition of claque: “An organized body of hired applauders in a theatre.” That seems a bit removed from the investment realm until you see that the original notion has been extended to apply to “a body of subservient followers always ready to applaud their leader.” Immediately you flash to any number of past and current claques for company CEOs, for guru investors, or (moving from the individual to the conceptual) for particular investment approaches. “True believers” are always ready to applaud the latest pronouncement or development, while objective observers judge ideas and actions based upon their worth.
Since the selling of ideas is layered throughout the ecosystem, it is often hard to determine the mix of analysis, faith, and salesmanship inherent in any recommendation. And, as Michael Kitces noted in a 2011 posting, social proof drives many points of view (it’s always easiest to do what others are doing), and hired (or volunteer) “claquers” can have an outsized effect on behavior:
Have your investment or other decisions even been impacted by social proof? Would you even notice if they were? Do you look to what your peers are doing with their client portfolios to make decisions about what you should do? Is that a proper form of due diligence itself, or an abdication of due diligence responsibilities?
The questions apply in the investment advisory world that Kitces writes about, and in every other corner of the business too.
Cliques and claques are foundational elements of the practice, if not the theory, of investing, which is dominated by social proof and pressure. The investment textbooks don’t get into that, but the sociology and anthropology ones do.
Published: February 21, 2023
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