Mass Movements in Money Management

Wouldn’t it be great to create a mass movement that improved lives and/or created a successful business? Like so many phenomena which recur through history, mass movements have a sort of formula. This formula is a great tool for sales, for innovation, for creating communities, and for building new categories within an existing business. There are several perfect examples in money management and finance today—the move towards passive indexing and smart beta being two of the most prominent. Each fits cleanly into the formula for a mass movement.

So what is the secret recipe that can catalyze a population to adopt some new set of beliefs, use new products and services, and make collective changes for the better or for the worse?

Our guide is the fantastic book The True Believer: Thoughts on the Nature of Mass Movements by Eric Hoffer. Hoffer outlines all of the key components for a mass movement to take hold: what kind of social environments they require, what kinds of people join a movement, and what kinds of leaders are the most effective at leading and sustaining a new mass movement. Let’s explore his findings and how they are reflected in today’s world of money management.

The Seeds of Discontent

Step one, find the fuel of mass movements: widespread frustration. Frustration is the middle ground between comfort and complacency on one end, and hopelessness and destitution on the other end. People at the extremes do not like change. But those in the middle—who want something more—can precipitate mass movements. In all of our businesses, we can ask: where are people frustrated? They should be the target audience.

Through history, mass movements have tended to be religious or nationalistic, but the structure is the same.

In the past, religious movements were the conspicuous vehicles of change. The conservatism of a religion—its orthodoxy—is the inert coagulum of a once highly reactive sap. [Note from Patrick: how great is this line?!] A rising religious movement is all change and experiment—open to new views and techniques from all quarters. Islam when it emerged was an organizing and modernizing medium. Christianity was a civilizing and modernizing influence among the savage tribes of Europe. The Crusades and the Reformation both were crucial factors in shaking the Western world from the stagnation of the Middle Ages.

If frustration is the fuel, then hope is the flame that ignites a mass movement.

Those who would transform a nation or the world cannot do so by breeding and captaining discontent or by demonstrating the reasonableness and desirability of the intended changes or by coercing people into a new way of life. They must know how to kindle and fan an extravagant hope. It matters not whether it be hope of a heavenly kingdom, of heaven on earth, of plunder and untold riches, of fabulous achievement or world dominion. If the Communists win Europe and a large part of the world, it will not be because they know how to stir up discontent or how to infect people with hatred, but because they know how to preach hope.

Hope orients us towards the future. Selling hope works because it takes advantage of our brain chemistry. Surges of dopamine—the stuff in our brains that makes us feel great—peak during stages of anticipation, not during stages of reward. We feel better when a reward is about to come than when we actually receive the reward. This makes hope a powerful motivator. One key, however, is that the reward which is being dangled is not one which will be granted in the distant future, but soon.

There is a hope that acts as an explosive, and a hope that disciplines and infuses patience. The difference is between the immediate hope and the distant hope. A rising mass movement preaches the immediate hope. It is intent on stirring its followers to action, and it is the around-the-corner brand of hope that prompts people to act…The intensity of discontent seems to be in inverse proportion to the distance from the object fervently desired.

The powerful can be as timid as the weak. What seems to count more than possession of instruments of power is faith in the future. Where power is not joined with faith in the future, it is used mainly to ward off the new and preserve the status quo. On the other hand, extravagant hope, even when not backed by actual power, is likely to generate a most reckless daring. For the hopeful can draw strength from the most ridiculous sources of power—a slogan, a word, a button. No faith is potent unless it is also faith in the future; unless it has a millennial component.

Some examples from history:

Rising Christianity preached the immediate end of the world and the kingdom of heaven around the corner; Mohammed dangled loot before the faithful; the Jacobins promised immediate liberty and equality; the early Bolsheviki promised bread and land; Hitler promised an immediate end to Versailles’ bondage and work and action for all. Later, as the movement comes into possession of power, the emphasis is shifted to the distant hope—the dream and the vision.

I’ve encountered this first hand. My book preaches a focus on the long term and the power of compounding. The potential reward? Huge investment returns (and comfortable retirement) for young people. The problem? Everyone agrees with the argument, and then does nothing. It is very difficult to ACT NOW to achieve a reward so distant and intangible. “When we ‘hope for that we see not, then do we with patience wait for it.’” Wait, as in, do nothing.

So, the first part of the formula is find frustrated people and dangle a hope that will quell their frustration, and make it something imminent.

Members of Mass Movements

Next, find people who are most likely to join and advance the movement. Here is a profile of the people who can be most easily persuaded. This is where things get interesting.

Though the disaffected are found in all walks of life, they are most frequent in the following categories: (a) the poor, (b) misfits, (c) outcasts, (d) minorities, (e) adolescent youth, (f) the ambitious (whether facing insurmountable obstacles or unlimited opportunities), (g) those in the grip of some vice or obsession, (h) the impotent (in body or mind), (i) the inordinately selfish, (j) the bored, (k) the sinners…The discarded and rejected are often the raw material of a nation’s future.

The funny thing is that true freedom of choice (and the responsibility that comes with it) is unappealing to many.

Unless a man has the talents to make something of himself, freedom is an irksome burden.

We join a mass movement to escape individual responsibility, or, … “to be free from freedom.”

Read those quotes again and then think about asset flows into passive index funds and Smart Beta. First a note: I am not saying these are bad moves, I suggest these types of products to lots of investors! One of the brilliant aspects of these two products is that they offload the responsibility from the investor or advisor onto the mass movement (strategy) itself, and onto the leaders of that movement. Messrs. Arnott and Bogle owe their success not only to good products but also to the fact that they are shouldering the responsibility for the masses. Keep thinking about indexing and Smart Beta:

A rising mass movement attracts and holds a following not by its doctrine and promises but by the refuge it offers from the anxieties, barrenness and meaninglessness of an individual existence. It cures the poignantly frustrated not by conferring on them an absolute truth or by remedying the difficulties and abuses which made their lives miserable, but by freeing them from their ineffectual selves—and it does this by enfolding and absorbing them into a closely knit and exultant corporate whole.

Most people were/are terrible at picking stocks. It is hard work, it loads risk onto the investor/broker/advisor, it is stressful, and it usually didn’t pan out.

Faith in a holy cause is to a considerable extent a substitute for the lost faith in ourselves.

Enter these popular options which undo those problems. Indexing and Smart Beta represent simple concepts. They simplify as much as possible, not trying to get every detail right but instead communicate a core, essential idea. This works because:

The facts on which the true believer bases his conclusions must not be derived from his experience or observation but from holy writ…“To illustrate a principle,” says Bagehot, “you must exaggerate much and you must omit much.”

How simple and amazing does this sound: “market cap indexes are flawed because they overweight expensive stocks. We remove that bias but keep everything else great about an index. We weight by strong results like sales and cash flow instead of by market opinion. Doing so adds 2% per year.” Genius! Nevermind that I could write an entire book as to why this strategy is just half-assed value investing, those are boring details! This headline idea—combining strong elements of both active and passive—is what matters and creates a legion of advocates.

Furthering the Cause—Movements are Defined in Opposition to Their Devils

Given what we know about loss aversion—that we are doubly sensitive to the bad as we are to the good—it also makes sense that many mass movements unite their followers by introducing a common enemy. In this case, think of active management as the devil.

Mass movements can rise and spread without belief in a God, but never without belief in a devil. Usually the strength of a mass movement is proportionate to the vividness and tangibility of its devil… It is perhaps true that the insight and shrewdness of the men who know how to set a mass movement in motion, or how to keep one going, manifest themselves as much in knowing how to pick a worthy enemy as in knowing what doctrine to embrace and what program to adopt.

Again, like an ideal deity, the ideal devil is omnipotent and omnipresent. When Hitler was asked whether he was not attributing rather too much importance to the Jews, he exclaimed: “No, no, no! … It is impossible to exaggerate the formidable quality of the Jew as an enemy.” Every difficulty and failure within the movement is the work of the devil, and every success is a triumph over his evil plotting.

This “us-versus-them” mentality has always been a powerful driving force behind human action.

We do not usually look for allies when we love. Indeed, we often look on those who love with us as rivals and trespassers. But we always look for allies when we hate.

Active management is an enemy with great credentials. It takes more from the investor in the form of higher fees (which hurts more during lean years like those between 2000-2009). It has a poor history of relative performance versus benchmarks (even though this is just a mathematical necessity due to the tyranny of compounding costs). Rich portfolio managers in Greenwich, CT make fine devils.

 

Leadership

Hoffer writes, “A movement is pioneered by men of words, materialized by fanatics and consolidated by men of action.”

Given that financial technology companies are on fire, and are operating in an area of frustration, the characteristics of a good leader are very relevant today.

Exceptional intelligence, noble character and originality seem neither indispensable nor perhaps desirable. The main requirements seem to be: audacity and a joy in defiance; an iron will; a fanatical conviction that he is in possession of the one and only truth; faith in his destiny and luck; a capacity for passionate hatred; contempt for the present; a cunning estimate of human nature; a delight in symbols (spectacles and ceremonials); unbounded brazenness which finds expression in a disregard of consistency and fairness; a recognition that the innermost craving of a following is for communion and that there can never be too much of it; a capacity for winning and holding the utmost loyalty of a group of able lieutenants…The leader has to be practical and a realist, yet must talk the language of the visionary and the idealist.

Does this describe the CEO of your favorite Fintech company?

Conclusion

The most fascinating characteristic of mass movement adherents is that they are not seeking self-improvement, but are instead seeking to purge or deny the aspects of themselves with which they are unhappy (again, in this case maybe for failing to pick stocks or managers effectively in the past).

For men to plunge headlong into an undertaking of vast change, they must be intensely discontented yet not destitute, and they must have the feeling that by the possession of some potent doctrine, infallible leader or some new technique they have access to a source of irresistible power. They must also have an extravagant conception of the prospects and potentialities of the future. Finally, they must be wholly ignorant of the difficulties involved in their vast undertaking. Experience is a handicap.

This formula seems applicable everywhere. When used for good it can be powerful. Indexing and Smart Beta are a huge improvement over stock-picking for the vast majority of people. Their popularity is a net positive for investors.

Our key lessons:

  1. Find people who are frustrated. Advisors and investors since 2000 qualify.
  2. Create a hope which can be achieved by joining a movement/using a product. Indexing, Smart Beta
  3. Create unity by finding the perfect enemy. Active Management.
  4. Focus on simply ideas. Exaggeration, simplification (i.e. the omission of too many details) are powerful tools when framing the idea behind the movement. “Indexes beat 80% of active managers, low cost, best net after tax return.” “Same stream of market returns, smarter weighting strategy, 2% more per year.”

So what is the next mass movement? In asset management specifically, I believe it is rules-based strategies that are truly active, not merely tilts towards value and momentum. Many firms do this already, and I believe you will see more of it in the future. The question remains, can these truly active strategies generate a mass counter-movement against the prevailing trends towards passive investing. What might start this movement? Well, indexing and smart beta are boring, and:

There is perhaps no more reliable indicator of a society’s ripeness for a mass movement than the prevalence of unrelieved boredom. In almost all the descriptions of the periods preceding the rise of mass movements there is reference to vast ennui; and in their earliest stages mass movements are more likely to find sympathizers and support among the bored than among the exploited and oppressed.

I will leave you with what is perhaps the most perfect distillation of these many concepts in the poem “The New Colossus” by Emma Lazarus, which is inscribed on the Statue of Liberty.

Not like the brazen giant of Greek fame,
With conquering limbs astride from land to land;
Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles. From her beacon-hand
Glows world-wide welcome
; her mild eyes command
The air-bridged harbor that twin cities frame.

“Keep, ancient lands, your storied pomp!” cries she
With silent lips. “Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!”