Negotiating Your Investments Read online

  You wouldn’t be willing to buy a car in the manner described in that scenario. Setting aside all the special fees and charges extracted by the “car advisors,” there are several reasons that this is a foolish idea. The conflicts of interest are as obvious as they are severe. There is a tremendous problem of asymmetric information; not only do they know far more about the cars, pricing, and industry standards but also they now know all about you, thanks to their car advisor process. Another problem is that you will be asked to foot the bill—directly or indirectly—for that elaborate car-advising procedure. Finally, you would refuse this whole business because it seems false and almost fraudulent. A great big system has been assembled to take advantage of you by diverting your gaze. When you realize this, you will decline to participate.

  Buying a car is a negotiation. So are most other buy-and-sell deals and, indeed, most of the transactions in our lives. Our financial dealings are no exception. This part of the book is going to apply our newly learned negotiation skills to investments. The methods and techniques from Part I are completely applicable since all investments are made through a process of negotiation.

  That many investors do not comprehend that these transactions are negotiations does not make them any less so.

  Different Types of Investing Negotiations

  While all investments can be considered negotiations, some are of a very different variety than others. In particular, investments made through properly functioning liquid markets (like the major stock exchanges) may seem dissimilar from investing through agents, middlemen, advisors, or brokers.

  They are, indeed, different types of negotiations. Each presents special challenges and may well call for different items from your negotiating toolbox. But they are both negotiations, and the habits and practices of good negotiators presented in Part I of this book will improve your outcomes in each type.

  You notice immediately that buying an investment on a stock market lacks some of the common attributes that make it feel like a negotiation. In particular, you cannot talk with the party on the other side of the trade. At first glance, it seems like a take-it-or-leave-it proposition. It appears that all you can do is buy at the ask price or walk away. Your gut may tell you that isn’t a negotiation.

  It really is a negotiation, though, and you can apply many of your negotiating skills to it. While true that you cannot talk with the other party, you do have a way of communicating with them. Financial markets use pricing as, among other things, a system of messages. Offering a bid price is a method to let the market know what you are willing to pay. It is really not so different from bargaining in the tourist bazaar where the crafty old trader starts out asking $20 for the cheap little trinket. You offer $3 and he drops his request to $16. You offer $4 and he comes down to $14—and so on until you end up buying the little piece for $6. Even if you could not talk to him directly, you could choreograph the dance. Imagine that he happens to be deaf. The two of you might not be speaking, but you are communicating.

  Of course, in a highly liquid market, there may be many participants. It is always possible that when the man in the bazaar comes down to $16, someone standing near you in the crowd yells out, “I’ll take it” and the little trinket is gone. (Don’t worry, he probably has some more in the back.) So, too, in the stock market, there are many buyers and your bid may be too low to achieve an execution. That does not mean, however, that the whole process was take it or leave it.

  Perhaps the highly structured configuration imposed by the exchange system and its government regulators leaves you feeling there is only one way for the process to happen. Without being able to manipulate it, you may conclude that it lacks the flexibility of a negotiation.

  This is an illusion, though, and one that benefits those who have created and enforced the rigid structure. You are, theoretically at least, free to buy a share of Apple stock directly from your next-door neighbor at a mutually agreed-on price. The convenience and low transaction costs associated with the stock exchange system drives everyone to it, though, and usually it is the cheapest and easiest way for parties to connect and negotiate the best possible price. That is probably better for you and surely ideal for those making a huge volume business in the buying and selling of stocks. You may feel this is analogous to shopping in a supermarket; the “fixed price” structure would appear to allow no room for any alteration of terms. It really isn’t so. Just as we teach that buying bread in the supermarket is actually a negotiation (they want your $2 more than the bread and you want the loaf of pumpernickel more than your $2), so, too, is the stock market transaction. The fact that other traders, and third parties structuring the marketplace, are trying hard to limit your flexibility does not eliminate the aspects of a negotiation. On the contrary, they are manipulating the process to maximize their advantage and minimize yours. Those parties are actually employing a negotiation tactic with you, and doing it rather well. As a good negotiator, your job is to figure out how to counter their move. This section of the book will help you do that.

  In contrast to conducting negotiations in highly structured marketplaces, you may frequently invest by engaging brokers, advisors, and other types of middlemen. Those are situations in which the negotiation aspects are clear. Even if the other parties try hard to disguise the bargaining process, this book will help you see it clearly and react to it appropriately.

  As discussed later at great length, a one-on-one interaction with a broker or advisor is clearly a negotiation. The more sharply you focus on that simple fact, the better you will do.

  Sometimes you will encounter investment situations that are dressed up to disguise the plain fact that they are negotiations. For example, when the representative of an insurance company suggests that you invest in an annuity, he is trying to sell you a specific financial product offered by his company. The proposed deal is that you hand over money and they enter into a contract with you. That contract makes certain promises. The salesman may argue mightily that no changes or alternative terms could ever be possible. He may insist on the take-it-or-leave-it nature of the contract on offer. But this is not an investment instrument that trades in a liquid marketplace like a stock or a bond. This is just an agreement between you and the company. The only reason they won’t discuss changing the terms is that they don’t want to. The situation is as pure a negotiation as you are likely to find. And, like other situations discussed in this book, your failure to act like a strong negotiator in such a situation will cost you dearly.

  Whether an investment situation looks like a “classic” bargaining opportunity or exactly the opposite, you are facing what this book and any good college course on the subject would consider a negotiation. Start your preparation with that understanding. Take it on faith, if you must. But follow the outline laid out in Part I and applied in Part II. In most cases, it will be worth a great deal of money for you to do so.

  Chapter Summary

  Investing is a negotiation like any other.

  You are already practiced at negotiating over other big-ticket items.

  Those who would fool you want you to think it is something other than a negotiation.

  It is a terrible mistake to think that investing is a place where you do what you are told.

  Apply the negotiation lessons to your investing and you will do dramatically better.

  Different investing situations call for different negotiating tools.

  While buying investments on a stock market may not feel like a negotiation, it really is.

  Investing through an advisor, broker or intermediary is clearly a negotiation.

  Financial firms benefit when customers think negotiation is inappropriate, so they sometimes encourage that misapprehension.

  Chapter 13

  What Is a Good Outcome Regarding Your Investments?

  The best negotiators begin by thinking about what would constitute a good outcome of the negotiation they are working on. Once clear on that, they begin envisioning improvem
ent. What would an even better outcome look like?

  In Part I of this book, we explored many different kinds of good outcomes. Some involved maximizing money or financial well-being. Others did not. There was an emphasis on good outcomes reaching far beyond gaining economic advantage. Indeed, Part I stressed that sometimes achieving financial gain is a Pyrrhic victory while the path of less money leads to the truly better result.

  The first step in successfully negotiating your investments involves some fruitful thinking about what a good outcome looks like for you. What are you really trying to achieve? What would be the attributes of true success in this area of your life? Let yourself imagine where you are trying to go with your investments. In your own mind, try to move beyond simple phrases to get at the deeper meanings of accomplishment and satisfaction in this regard. What is your financial good outcome truly all about?

  You will recall that two big obstacles to achieving best outcomes are failing to pursue the path that leads to the real good outcome and getting distracted by irrelevant (or worse) detours that lead away from—rather than toward—the deeper and true goals. Essential to actually attaining good outcomes is a process of sifting through those things that are actually irrelevant to your genuine success. These are distractions that must be eliminated or, at least, put out of mind. The world generally, and the financial services industry in particular, is forever suggesting paths that lead somewhere other than to your maximum success. As any good negotiator must, you have got to find ways to sidestep these diversions.

  A good outcome is about the authentic attainment of what you are actually trying to do. It requires taking the actions necessary to really get where you want to go. That, in turn, can be very different for different people.

  The One Investment Goal That Almost Everyone Shares

  Investing involves at least one goal that is shared by almost everyone: capturing the best possible returns. In other words, most people invest to make money. This shared objective is a key theme of Parts II and III of this book. Before delving into that topic, though, let’s examine other reasons you may be investing and how they might influence your actions and shape your notion of good outcomes.

  Over many years of working with families, I have found something distinctive in each person’s investment ambitions. This surprised me as, early in my career, I believed that almost everyone was single-mindedly trying to make as much money as possible. Over time, though, I have found that people invest for varied reasons.

  Your Investment Good Outcome Is Uniquely Your Own

  Over years of practice and study, I have learned that people invest for many different reasons. Their fondest hopes and ultimate goals reflect a multitude of potential results. Of course, there is a shared element of wanting to achieve financial gains and we will talk about that further. For the moment, though, let’s focus on some of the goals that people bring to their investment lives.

  People invest for many different reasons and their goals reflect this. Most of the motivations driving investor behavior can be divided into the following categories: to be safe, to be clever, to be wise, and to feel connected to a peer group, as well as to make money. These different kinds of goals can be useful in examining your own desired outcomes. Consider which of these groupings may play a part in your own goals, hopes, and targets.

  Investing to Be Safe

  Many people feel insecure about their money. For some, this manifests itself as a strong aversion to risk. Lots of folks are terrified of losing money.1 It may seem a paradox that one who is scared of financial loss would seek to invest what they desperately wish to keep safe. There is, however, a method to that madness. Some readily available investments are considered extremely safe. Indeed, lending money to the United States is presumably far safer than “noninvestment” alternatives such as keeping money in the mattress. Sometimes a program of investment is designed less to gain wealth than to avoid losing it.

  Not all who seek safety are risk averse, however, and the desire for safety doesn’t always lead to a conservative investment program. Sometimes an aggressive portfolio, aimed at achieving high returns, can help you feel that you are advancing the overall level of security in your life. Whether it is to advance a particular goal, such as a comfortable retirement, or for a more generalized sense of well-being, investing can produce a feeling of taking action to create a safer future.

  Needless to say, some types of investments may actually make you safer while others only create an illusion. In finance, as in other areas of life, increased security may be real or a chimera. Either way, though, trying to satisfy the need can be a powerful driving force behind investment decisions.

  Investing to Be Clever

  Many investors seek to somehow get ahead. They want to gain advantage through their investments. People who view life as a kind of contest are often obsessed with winning it. This attitude is often playfully summed up as “the one with the most toys at death is the winner.” If you are open to such a view, the investment markets make for an almost perfect game within the game. Hence the television commercial for a brokerage house in which an investor declares that he is in the markets “to win.” Actually, making money can take a back seat to a feeling of “emerging triumphant.”

  Although it can be minimized through science or prudence, there is always some part of investing that is akin to gambling. For those who find games of chance to their liking, or are addicted to them, the investment markets are a perfect match. Furthermore, most gamblers don’t see it as “chance” at all. Rather, they are almost obsessed with gaining an advantage in the game. If you are clever enough, the belief goes, you will win. Thus an imagined meritocracy can grow out of even games of pure randomness.2

  There is much in our social structure to suggest that those who invest successfully are the ultimate winners. When high-profile mutual fund managers are treated as rock stars and hedge fund guys live better than kings, it is hard to escape the message that investing well is among the highest of human achievements. Heck, the United States even has a special tax break to reward such endeavors.3

  If you are someone who invests, at least in part, either to “win the game” or gain an advantage over other people, great caution is appropriate. As suggested in later chapters, these motivations leave an investor extremely vulnerable to several types of manipulation. A great deal of care, study, and insight is necessary for you to emerge as a “winner” in the world of competitive investing. Furthermore, as this book will argue in Part III, even diligent study will not suffice. As much as you may not want to hear it, economic science suggests that you will also need luck.

  Investing to Be Wise

  Many people invest out of a desire to do “the right thing.” They seek to act sagaciously and responsibly both to achieve life’s legitimate rewards and as an end in itself.

  The history of financial markets in the twentieth century shows that investing is not only an industrious act but a prudent one, as well. It is sensible to save some of your money. The smartest thing to do with those savings is investing in the various stock and bond markets made readily available by the financial services industry. There is every reason for you to participate.

  A concern with stewardship can also be viewed as an attempt to act wisely. Some seek to continue caring for loved ones after their own death. Others want to shepherd certain people or causes into the future as, for example, when a grandparent finances her grandchildren’s college educations. Many investors are trying to further their estate planning goals; they wish to leave something and are concerned not only with who will receive it, but also with how much it will be worth.

  People who have successfully delegated authority in other areas of their lives often find wisdom in selecting just the right person for the job. A gerontologist whom I admire has long cared for his elderly patients by identifying medical problems and then selecting the perfect specialist to deal with each one. He views his role as an investor the same way: find the right man or
woman and put the matter into those capable hands. For this good doctor, taking care and selecting wisely are essentially the same thing.

  Almost everyone wants to feel that they have made the right choices, or at least that they have avoided the most egregious mistakes. To the extent that investing represents steering the ship of your financial life, you may find ultimate success in having avoided the jagged rocks and navigating to the safe harbor.

  If you sleep better at night knowing that you have acted judiciously in looking after your financial assets, you are in good company. Many investors place great importance on having done the very best they could with what they have. Both comfort and satisfaction can come from knowing that you have done the wise, smart, or prudent thing regarding those elements of life that have great monetary value.

  Investing to Feel Connected to Your Group

  Almost everyone wants to belong. For some, that means feeling attachment to the groups we naturally fit into. For others, the desire is to be part of not just any group but, rather, to connect with a group that we admire or look up to. Groucho Marx famously said that he would not want to join any club that would have someone like himself for a member. Investing can play a significant role in how you see yourself and your place in the community.

  The particulars of an investment program can be a way to feel that you are doing as well as others. Many of us want to keep up with the Joneses, or at least not to feel we are somehow inferior. We want to be able to hold our head up in the group. A sense of successful investing can play a significant role in this desire to fit in with our chosen group.