Negotiating Your Investments Read online

  Contents

  Prologue

  Acknowledgments

  Introduction

  Part I: What the Best Negotiators Do Chapter 1: What Is a Good Outcome? Identify Truly Good Outcomes and Don’t Get Distracted

  What Makes for a Good Outcome?

  Chapter Summary

  Notes

  Chapter 2: Interests, Options, and Goals What Do You Really, Really Want?

  Shared Interests

  Dig Deep to Explore Underlying Interests

  Don’t Settle for Win-Win

  Options

  Structure the Deal to Meet Their Needs, Too

  Work with Them to Create More Value

  Chapter Summary

  Notes

  Chapter 3: Fairness What Is “Fair”?

  Move beyond Market Value to Measure Fairness

  Chapter Summary

  Notes

  Chapter 4: Communication to Build the Kind of Relationship You Want Set Relationship Goals

  Choose Communication Tools Carefully

  Work to Create the Atmosphere You Want

  Focus on What You Want to Tell Them—and How

  Use Active Listening Techniques

  Good Negotiating Process

  Be Aware of the Power Dynamics—and Consider Changing Them

  Plan a Process That Will Lead to Good Outcomes

  Chapter Summary

  Notes

  Chapter 5: Thinking about Commitments How Tight Are the Bindings?

  When Should We Be Bound?

  Degrees of Commitment

  Commitment Is Not Just about the Ending—Consider It throughout the Process

  Many Little Agreement Steps

  Chapter Summary

  Note

  Chapter 6: Best Alternative: Where Your Power Comes From Step 1—An Inventory of Your Possible Alternatives

  Step 2—Identify Your BATNA

  Step 3—Strengthen Your BATNA

  Step 4—Estimate What the Other Side’s BATNA Might Be

  Step 5—Consider Whether You Can Weaken the Other Side’s BATNA

  Work to Shape Their Perceptions

  Be Careful Not to Rely Too Much on BATNA, Especially Where Relationships Are Important

  Chapter Summary

  Notes

  Chapter 7: The Preparation Phase Where Do We Hope to End Up?

  Consider the Substantive Issues

  Then Consider the Relationship Issues

  You Want Good Substance and Good Relationships—But Don’t Trade One for the Other

  Set High, Achievable Goals

  Who Are These People Who Will Soon Be Sitting Across from Us?

  Chapter Summary

  Notes

  Chapter 8: The Exchanging Information Phase Ask Lots of Questions

  Strengthen Your Bonds with the Other Parties

  Gather Up All the Facts That They Are Willing to Share

  Managing the Danger That They May Lie to Us

  Chapter Summary

  Note

  Chapter 9: The Bargaining Phase Work to Increase the Pie—and to Claim a Fair Slice

  Use Conditional Language to Explore Trades That May Create Value

  Propose Terms Favorable to You—But Defensible as Fair

  Make Small Concessions Slowly and Deliberately—and Insist on Fairness

  Be Resolute about Claiming Your Fair Share

  Chapter Summary

  Notes

  Chapter 10: The Closing and Commitment Phase You Want Promises They Are Sure to Keep

  Create Scarcity to Enhance Their Enthusiasm for the Deal

  Prepare to Be Patient

  Chapter Summary

  Notes

  Chapter 11: The Problem with Agents Sometimes Employing an Agent Is Wise

  Often Employing an Agent Is Foolish

  Are the Agent’s Interests the Same as Yours?

  Chapter Summary

  Note

  Part II: Applying Negotiating Principles to Investing Chapter 12: Why Is Investing Really Just Another Type of Negotiation? Investing Is Similar to Other Big-Ticket Negotiations

  Do Not Be Fooled into Thinking It Is Something Other Than a Negotiation

  Different Types of Investing Negotiations

  Chapter Summary

  Chapter 13: What Is a Good Outcome Regarding Your Investments? The One Investment Goal That Almost Everyone Shares

  Your Investment Good Outcome Is Uniquely Your Own

  Should You Narrow Your Investment Goals?

  Chapter Summary

  Notes

  Chapter 14: The Problem of Conflicts of Interest Incentives Matter

  Some Conflicts Other Than Money

  Chapter Summary

  Note

  Chapter 15: The Problem of Asymmetric Information They Know Much More Than You Do about the Tricks of the Trade

  Knowing More Creates Tremendous Opportunity to Take Advantage of Others

  Chapter Summary

  Notes

  Chapter 16: Whom Can You Trust? And Why? Be Extremely Careful about Whom You Trust—and How Much

  You Can Work Well with People without Trusting Them

  You Can Trust Those Whose Best Interests Make Them Trustworthy

  Chapter Summary

  Chapter 17: Professionalism: Who Is a True Professional and Why? The Traditional Professions’ Struggle with Society’s Need for Trustworthy Help

  The Traditional Professions Don’t Always Succeed—but They Must Always Try

  Reclaiming Professionalism

  Chapter Summary

  Chapter 18: Use the Power of Your Alternatives Alternatives When Making Direct Investments in Actively Traded Securities

  Alternatives When Investing Through Intermediaries

  With So Many to Choose from, You Can Demand What You Want with Confidence

  Chapter Summary

  Notes

  Chapter 19: Knowing Your Interests and Theirs Understanding Your Own Interests

  Thinking about Their Interests

  Interests That Can Lead You Astray

  Chapter Summary

  Chapter 20: Many Different Possible Options for How to Structure the Deal Trade Their Interests for Yours

  Work Together to Create Packages of Interests

  Find the Best Investment Deal among Many

  A Few Cautions

  Chapter Summary

  Chapter 21: Insist on Using Objective Standards of Fairness Gather Your Measures of Fairness

  Beware of What They Call Fair

  Keep Your Eyes on Profitability and Transparency

  Demand a Fair Division of All the Value That the Deal Creates

  Do the Math on Fees and Costs

  Pay Only for Services That Provide You with Value

  Chapter Summary

  Notes

  Chapter 22: Plan the Type and Tone of Communication You Want Communication to Enhance Your Understanding

  Communication to Make Things Clear to Them

  Create the Tone and Atmosphere You Want

  Chapter Summary

  Note

  Chapter 23: Think about Relationship Goals A Good Working Relationship Need Not Be Personal

  Pay Attention to Power Dynamics

  Special Concerns about Financial Advisors

  Chapter Summary

  Notes

  Chapter 24: When to Commit—and to What Avoid Getting Locked In

  Pay Attention to the “When” of Commitments

  Chapter Summary

  Chapter 25: The Four Phases of an Investment Negotiation The Preparation Phase of Investing

  Gather New Data Continuously

  The Exchanging Information Phase of Investing

  Plan
to Put Them at Ease

  The Bargaining Phase of Investing

  Propose Ways for Them to Meet Their Most Important Interests

  Let Them Know the Things on Which You Cannot Compromise

  Be Aware of Their Salesmanship Skills

  The Closing and Commitment Phase of Investing

  Build In Your Ability to Check on Them and to Get Out

  Get Everything in Writing

  Chapter Summary

  Notes

  Part III: The Economic Truths You Need to Know to Be an Effective Investor-Negotiator Chapter 26: Nobody Can Consistently Beat the Market The Markets Are, for the Most Part, Rational

  Don’t Confuse Random Chance with Skill

  Stock Research Offers Little Value

  Chapter Summary

  Notes

  Chapter 27: Past Performance Does Not Guarantee Future Results No One Can Predict the Future

  Chapter Summary

  Chapter 28: The Concept of Present Value What Is Tax Deferral Worth?

  Present Value and Life Insurance

  Present Value and Money-Back Guarantees

  Present Value and Comparing Investments

  Chapter Summary

  Chapter 29: There Is Really Only One Interest Rate Higher Rates Reflect Higher Levels of Risk

  Risky Investments Involve a Danger of Losing Much of Your Principal

  Chapter Summary

  Chapter 30: There Is No Such Thing as a Free Lunch—Except Diversification Why You Want to Diversify

  Chapter Summary

  Chapter 31: Diversify Across Every Asset Class Be Honest with Yourself about Your Risk Tolerance

  How to Achieve Diversification of an Investment Portfolio

  Diversifying Asset Classes beyond Stocks

  Use Time to Further Diversify

  The Efficient Markets Hypothesis

  Some Practical Advice on Choosing Specific Categories of Index Funds

  Chapter Summary

  Notes

  Chapter 32: We Know What Has Happened in the Past The Historical Average Return on Stock Investments Is a Very Good Result

  Seeking Higher Than Market Returns Is Called Gambling

  Chapter Summary

  Notes

  Chapter 33: Costs Are Important—They Reduce Your Returns Higher Costs Result in Lower Returns

  Many Investments Carry Expenses That Are Just Too High to Be a Good Deal

  Figure Out How Much You Are Paying to Those Who Lay Hands on Your Investments

  How You Can Minimize Costs

  Chapter Summary

  Notes

  Chapter 34: Investments to Avoid Variable Annuities

  Hedge Funds

  Derivatives

  Callable Bonds

  Convertible Securities

  High Costs, Complexity, and Creative Geniuses

  Chapter Summary

  Notes

  Chapter 35: How Much Is at Stake? The Impact of the Fees You Pay for Advice

  The Need for Action

  Chapter Summary

  Note

  Afterword: What Is a Good Outcome in Your Financial Life?

  Selected Bibliography

  About the Author

  Index

  End User License Agreement

  List of Tables

  Table 35.1 Percentage of Savings and Resulting Increases in Portfolio Holdings, Starting with $1,000,000

  Table 35.2 Percentage of Savings and Resulting Increases in Portfolio Holdings, Starting with $100,000a

  Negotiating Your Investments

  USE PROVEN NEGOTIATION METHODS TO ENRICH YOUR FINANCIAL LIFE

  Steven G. Blum

  Cover design: Wiley

  Copyright © 2014 by Steven G. Blum. All rights reserved.

  Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

  Published simultaneously in Canada.

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  Library of Congress Cataloging-in-Publication Data:

  ISBN 978-1-118-58307-4 (Hardcover)

  ISBN 978-1-118-58316-6 (ePDF)

  ISBN 978-1-118-58315-9 (ePub)

  For my beloved Adam, Libby, and Suzie.

  To honor my parents, Harold Blum and Jean Blum.

  And in memory of my grandparents, Adam Spiro, Tonia Spiro, Murray Blum, and Betty Reichler Blum.

  Prologue

  I have been negotiating all of my life. So have you. Negotiation is what happens when we want something from someone else or they want something from us. Thus, from our earliest moments to our dying day, we are negotiators.

  Of course, we may not think of it that way. In my case, I had already become a lawyer and was busy trying to settle cases for my clients before I first had the chance to give much thought to the process. The young lawyer just did what many people do: shouted and threatened and waved his arms. (Of course, many other unskilled negotiators just accede to the other side’s demands, make every effort to avoid the conflict, or just propose to split the difference.) There is a world of difference between being someone who negotiates and being a skilled negotiator.

  Several years into my career as a lawyer, I got lucky. My supervising attorney handed me a copy of the book Getting to Yes. I found it amazingly helpful and, even more, deeply satisfying. There really were ways to think about, organize, plan for, and execute negotiations so as to do much better in them. My luck was a lot greater than just the book, though. I had already been admitted to a graduate program at Harvard, and, when I arrived on campus, I headed straight over to the Program on Negotiation at Harvard Law School to find out what other wonderful things they might have to offer me. As it happened, they invited me to take a series of courses culminating in what they called the Specialization in Negotiation and Dispute Resolution. By jumping at this offer, I had the opportunity to study with some of the greatest thinkers and teachers of negotiation in the world.

  As I worked my way through classes taught by Roger Fisher, Bill Ury, Bruce Patton, Lawr
ence Susskind, Frank Sander, and David Kuechle, my understanding and skills got palpably better. Almost every teacher there was extraordinary. About one course, though, I cannot help boasting. The instructor in Conflict, Cooperation and Strategy never failed to amaze. His insights were astonishing, and his far-reaching mind took us to places we would never have been and understandings we would never have accomplished. That course was taught by then professor, now Nobel laureate, Thomas Schelling.

  As an academic exercise, studying negotiation at Harvard was sublime. I loved the topic and got to think and write about it with some of the greatest teachers at a pinnacle of academic thought.

  To my amazement and delight, though, the real-life part of the exercise was also bearing remarkable fruit. I was getting better as a negotiator. A lot better. My entire life started looking up as I built healthier relationships, planned more effective communication, worked to meet my own underlying interests as well as those of the people around me, and began to focus on and strengthen my BATNA. I was also introduced to the question that has come to be something of a guiding light in my life: What is a good outcome? I had become a genuine expert in what the world calls “the Harvard method” of negotiation.

  It was a little bit like finding a magic genie in a bottle. “This stuff really works,” I remember telling a friend. I began to have stronger friendships, better alliances, greater satisfactions, and more money. Perhaps of even greater importance, I learned to focus on what I really wanted and on how to guide other people toward providing it to me. Of course, they tended to offer it in exchange for what they really wanted, but I began to see that not as a problem but as a huge new set of opportunities. Everybody wants something, and I can help them get it. In the process, I can get a great deal of what I want. It felt a bit like a new life.