Shrink Rap: Baby, It's Cold Outside

Steven Hendlin

Given the sharp losses that tech-laden growth funds have sustained over the last year and three-quarters (with the Nasdaq Composite down over 30% for the third quarter and over 39% for the year), it's no suprise to learn that many money managers are grappling with the fallout. I'd like to share the thoughts of two professional money managers who wrote into the Shrink Rap forum.

Deer in the Headlights

Dr. Hendlin, I have discretion over my accounts. My portfolios are well diversified, and are beating the market over any time period. I sold substantial amounts of technology stocks in August of 2000 for huge gains. However, I have ridden the remainder of my technology positions to where they are today. I have known since mid-February that I should lighten up further, but have mostly acted like a deer in the headlights. This is due entirely to what I fear to be the client's reaction to the sales.

No matter how poorly the stocks do in the short term, if I take the loss and never buy the same stock back, if it goes appreciably higher (which I believe probable), they will never forgive it. Therefore, my question is really about dealing with the psychology of the client.

From Hero to Haunted

Dr. Hendlin, I manage money for numerous clients -- including friends and relatives -- and have been in the business for 20 years. I was a hero two years ago, as my clients were far ahead of schedule for meeting their retirement goals. Now all that $$ is gone and then some. How do I respond to these friends, who like most investors, are feeling unjustly singled out, who miss the feelings that accompanied those higher account balances, and are plain scared. Their money would now have been better in a passport account the last three years.

Clients have said in frustration that I am the only one that has made money from the fees I am paid. At social functions, clients/friends make sidebar comments about "real estate is the only good investment." How do I deal with all of the guilt, the stress and the passive-aggressive comments? Everyone seems to need someone to blame.

Shrink Rap: The first money manager says her investors will "never forgive" her taking a loss, should she sell the losing tech positions only to watch them go back up again without her. She is concerned about how to handle clients who, she believes, have no tolerance whatsoever for loss, despite the fact that her portfolios are "well-diversified and are beating the market over any time period."

Perhaps her assessment that they would "never forgive" her is an overly harsh appraisal of her clients' inability to understand bear market conditions. It could, instead, reflect the manager's own unrealistic expectation for performance, as well as an unduly critical self-judgment.

Let me address the manager herself: Are your expectations for performance so high that they allow no room for loss in a segment of your portfolio, given your record? Let's say you decide to sell your losing positions. In doing so, you admit that the bright headlights of the go-go years blinded you so that you held too long. Let's also say you accept the regret that goes with it, as well as any guilt that you might feel. Who says you can't then buy back tech stocks when they return to favor without being subjected to your investors' wrath?

How do you know for sure your clients will not be understanding, given that you have kept them ahead of the game? Especially when they look around and see how their friends are complaining of steep losses over the same period? Need I mention the broadened perspective investors are shocked into adopting about the relative value of their diminished capital when their security is threatened by terrorism? You may find them to be more understanding of their losses than you imagine.

Money manager No. 2 has the added burden of having to listen to "passive-aggressive" remarks at social functions with his clients. In addition, he admits that passbook accounts would have topped his performance over the last three years, despite his 20 years of experience. He wants to know how to deal with the stress and the guilt he feels. And, of course, he is correct in saying that "everyone seems to need someone to blame."

Here's my prescription: Remember when you were way ahead, riding the crest of the wave two years ago and they were calling you their hero? Take the blame for your poor performance now in equal measure to the credit you took then -- no more and no less. To the degree you allowed them to believe it was your own skill as a stock-picker that took their returns to the crest of the wave, take the same blame for your wiping out their assets now. As a seasoned professional who is old enough to have been through tough times before, you should let them put the burden on you. It comes with the role of money manager, doesn't it?

But do not accept one iota more responsibility for the present losses than you accepted for the previous gains!

You will handle this downturn and your clients' resentment and come through to the other side. Stay emotionally and mentally firm, resting in the knowledge of your own experience and skill. This will help you tolerate your clients' snide remarks, their disappointment and your own guilt. At worst, you may lose a few clients who are unable to comprehend that bad years are part of the risk that comes with investing in stocks.

The whole episode will have the advantage of making you more thick-skinned, able to realize that there are times when you have to put on a wetsuit to protect yourself from the emotional chill of managing money. This can only lead to better surfing in future market swells and troughs.

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Topics for future "Shrink Rap" forums may include dealing with the pressures of trading; obsessive thinking; trading addiction; dealing with losses; perfectionist thinking; trader's block; improving concentration; neutralizing fear and greed; balancing isolation and information overload; and anything else that may be of concern to you. "Shrink Rap" appears on RealMoney.com every Wednesday. Be sure to send your queries to Dr. Hendlin at Steven.Hendlin@TheStreet.com.

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