I occasionally join a video discussion call with institutional investor friends in Europe at 3:30 am. Getting up in the middle of the night to talk about investments makes me either crazy or passionately committed, or a little of both.
By early June, one topic dominated these conversations: the death of George Floyd and the marches and protests that followed. COVID-19 had been almost driven off the front pages by what, according to one estimate, were the largest demonstrations in US history and a national conversation on race and racism had begun.
Naturally, my peers overseas wanted to know what it all meant: the unrest, the racial tension, the White House response, and the outlook for the 2020 elections this fall. Often I was the sole American on the call, and it sometimes felt as if I had to defend my country’s actions at one of its worst moments.
Nevertheless, I did my best to stay objective and concentrated on how events were affecting political polls and capital markets. That’s my job as a portfolio manager regardless of how I feel personally about the issues. And it isn’t easy, especially in times like these.
But the questions from Europe were a wake-up call. These investors have a different perspective on the markets and the United States and they helped correct one of my major biases.
Home Country Bias
Like many investors, I have a home country bias. I tend to favor the United States when making investment decisions. Investors often prefer their home country because it is familiar and comfortable. We tend to overlook the domestic risks even as we exaggerate those elsewhere.
My clients might put it this way:
“I live in the United States, I understand the country, and I’m going to retire here. Our stock market gives me great returns and the bonds are safe. Why should I invest my money in places that I don’t even know?”
This approach worked during the last 30 years, but that is no guarantee that it will work for the next 30. Overseas investors cannot ignore civil unrest and racial strife in the United States. All else being equal, it may make sense for them to put their money somewhere else. Investment capital is free to go where the risk and returns are most attractive, and that may not always include the United States. Money goes where it’s treated best.
That is not easy for Americans to hear. The United States has the largest stock market and many of the most successful companies in the world. The US dollar is the dominant reserve currency across the globe, and financial theory treats US Treasuries as risk-free. Many institutions buy US assets precisely because they have few other choices for large-scale capital flows.
But investors, US and otherwise, cannot assume that the United States will remain the center of the investment universe forever. Economic activity and investment opportunity is gradually moving east, and global capital will follow. How will it play out? I have no idea. But I do know that the tone has shifted among my institutional investor friends in Europe just as it has in the news coverage of the protests.
Controlling for Bias
At times like this, when the news is disturbing, the atmosphere charged and uncertain, it helps to have a framework for reading financial news. Like everyone else, my emotions and biases affect how I think, especially in this case, because for me the news has hit very close to home just as it did back in April amid the coronavirus crisis:
“As I write this, my wife Janet is working in a hospital where she treats patients with COVID-19. Janet is a nurse practitioner in the intensive care unit (ICU), and she is the key health care provider from 7:00 pm to 7:00 am.
“She has worked 84 hours during the last eight nights.”
This quote is from my last article, which described how to manage our biases and emotions while working in the shadow of COVID-19. It is not easy to be objective when your wife works on the front lines of a pandemic.
What I did not mention then is that my wife is Black. So in addition to the pressures she faces at work, she is no stranger to racism. And we have a three-year-old son, Joshua. Obviously, I worry how racism will impact his future.
It has been hard for me to read about the George Floyd protests day after day. And when investors overseas asked me what was going on in the United States, a whirlwind of emotions swirled through me, especially as I thought of my wife and son. I try to do my job and maintain a professional demeanor about issues that are hard to be dispassionate about. Reading the news is part of my job and when my emotions run high, it helps to remember that I have the same challenges and biases as anyone else. And home country bias is just one among many.
When I mow the lawn in the summer, I wear earmuffs to block the noise and a floppy hat to block the sun. I look just as goofy as you might imagine.
The earmuffs limit my hearing and the hat limits my peripheral vision. I am in my own little world, so I often stop and look around to make sure that I don’t bump into someone on the sidewalk. When my wife wants my attention, she waves her arms to flag me down.
In a sense, confirmation bias is like mowing the lawn with earplugs and a floppy hat: Our vision is limited and so is our hearing.
Indeed, home country bias is a form of confirmation bias: We filter out unwelcome news about where we live or the assets in our portfolio and seek out news that confirms what we already believe. We see what we want to see and we hear what we want to hear. We prefer flattery to reality. This can be dangerous and counterproductive.
Confirmation bias creates blind spots and one of these is racial bias.
My Blind Spots about Race
I do not have firsthand experience of what it’s like to be Black in the United States. My wife is Black and my younger son is mixed race, but that’s not the same.
What about the news I read? Does this reduce my blind spots about race or does it reinforce them? In the United States, the finance sector and the financial news media are not especially diverse. So that would seem to reinforce them.
But maybe financial news is colorblind. Finance is all about hard data, cold mathematics, and relentless computer algorithms. Prices and markets are indifferent to race.
Except they aren’t and colorblindness is still blindness. After all, we didn’t know that COVID-19 was disproportionately impacting certain demographics until we started collecting data about race.
If you can’t see race, you can’t see racism.
I suspect that many other investment professionals also have that blind spot when it comes to race just as they do when it comes to their home country. Confirmation bias is real. We all have it, and it can make our blind spots even bigger, since we refuse to consider new information that contradicts our long-held beliefs. We think that we know it all already.
Even after we recognize that we have confirmation bias, we still need to create a process to address it. Likewise, even after we recognize that we have racial blind spots, we still need to create a process that addresses racial bias and racism.
The first step to reducing our biases and blind spots is to acknowledge them. The second step is to read a variety of perspectives.
A Systematic Process
I use the steps outlined below to form my opinion about financial news and to limit my biases and blind spots. I have covered these in painstaking detail for Enterprising Investor where I have devoted an absurd amount of time to describing my process. This approach works for me. Yours may differ based on your job, your clients, and your goals.
Seven Steps for Reading Financial News
The following chart shows how I apply this framework when reading media coverage of the recent protests. For simplicity, I use The New York Times as the more liberal news source and the Wall Street Journal as the more conservative.
Applying the Process to the George Floyd
|Steps in the Process||Questions||Initial Observations|
|Be Practical||How does this issue affect my clients? How much time can I spend on it? Will reading help me make better decisions? Or is it just a feel-good exercise?||Clients react to the 2020 protests based mainly on their political views. So define the terms clearly and keep the discussion focused.|
|Understand Consensus||How is the issue covered by reliable media sources, both conservative and liberal?||Coverage has shifted from the specifics of the case to broader social issues. On 3 June, Epsilon Theory described how the narratives rapidly evolved during the first week.|
|Study Story Framing and Frequency||Are events described as riots or protests? Are the issues framed as justice or “law and order”? How frequently are these issues covered?||The Wall Street Journal and New York Times have both given sustained front-page coverage to the protests, and the framing of events is becoming broader.|
|Separate the Narratives from the Noise||How will these events influence society, markets, and the 2020 election?||Some stories show a shift in the usual editorial bias. This may signal an important change.|
|Ask Open-Ended Questions||Why did the death of George Floyd trigger such a massive, prolonged response?||The video is graphic. The recession and lockdowns created anxiety. COVID-19 has impacted certain demographics more than others.|
|Go Deep||Which topics matter most to investors? Which books and sources should I read? What ideas should I explore in depth?||Does racial unrest make the United States less attractive for investors? Should the investment process include more information about race?|
|Avoid Memory Contamination||How do I listen to alternative views without exposing my mind to nonsense?||Start with credible sources. Form an independent opinion. Stress-test ideas with peers.|
The Framing and Frequency of Stories
In covering the protests, conservative media tend to place the emphasis on law and order. Their liberal counterparts often focus more on police brutality. Same protest, different narratives.
Beyond framing the narrative, editors also choose which stories to cover. What angles will engage their readers? (Or, more cynically, appeal to their confirmation biases?) What stories will conservatives want to read? And liberals? What stories will go viral on social media? (Hint: Usually those that trigger fear, anger, and outrage. Sorry about that.)
As I read about the George Floyd protests, I expected liberal and conservative media to cover stories in a manner that fit their established political views. Historically this means:
- Conservative sources tend to cover positive stories about police, and favor narratives that show how the criminal justice system protects society.
- Liberal sources lean toward stories that challenge the actions of police, and favor narratives that show how the criminal justice system produces racist outcomes.
As an investor, I am particularly interested in change, and I am looking for inflection points. I don’t really consider it “news” when trends continue, since this would not necessarily affect my investment outlook. But if there is change in the narratives, it may be worthy of attention.
Therefore, I am particularly interested when media sources deviate from their usual editorial bias, regardless of whether the source is liberal or conservative. When conservative sources frame a story in a liberal manner, or vice versa, something important may be happening. This is one reason why reading multiple viewpoints and drawing our own conclusions is critical. (When it comes to media bias, I rely on the expertise of Vanessa Otero, founder of Ad Fontes Media and the creator of the Media Bias Chart®.)
In June, I noticed that the Wall Street Journal was covering aspects of the protests that I would not expect from a conservative source. Here are some examples where its coverage seemed to deviate from its usual ideological frame:
- “The Problem with Police Union”
- “Black Lives Matter Protests Spread Quickly to White, Rural Areas”
- “Clout of Minneapolis Police Union Boss Reflects National Trend”
At the same time, I noticed sympathetic coverage of the police and the pressures they face from The New York Times. These are tough times to be a cop, and The New York Times reported on it.
- “How Black NYPD Officers Really Feel About the Floyd Protesters”
- “For Police Officers, Demonstrations Take a Toll”
- “4 Officer Suicides in 3 Week”
This coverage may represent a reshuffling of the deck, just as the shift in perspective among my European colleagues may forecast a realignment of investment capital. Time will tell.
But how well we see and how well we prepare our clients for what’s to come is a function of how well we absorb and process information and how well we address our biases. And that includes our racial blind spots.
In 2020, we need to be able to discuss racial and political issues candidly and professionally, without feeling a need to shut down the conversation when it gets uncomfortable (and it will).
We all have biases and blind spots, and it helps to listen to people who see things differently. Regardless of whether we agree, we may discover insights that help us do our jobs and better serve our clients.
I do not expect to win the war against my emotions or my biases, whether it is confirmation bias or racial bias. Winning is not the point. Fighting bias is like fighting disease: We may never win, but we never give up.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: ©Getty Images / golero
Robert J. Martorana, CFA, has worked on the buy-side since 1985 as a stock analyst, portfolio manager, research director, financial advisor, and editor of a hedge-fund website. In 2009, Martorana founded Right Blend Investing, a fee-based RIA that manages individual portfolios and does consulting for the asset management industry. RBI has one unique claim to fame in that it supports an orphanage in Andhra Pradesh, India.
Since 2011, Martorana has published over 1,000 pages of contract research, and he is co-author of Alts Democratized by Wiley Finance.