Emotionally Intelligent Investing

Earlier in this book, I talked about Daniel Goleman's successful series of books on emotional intelligence. Hugh Massie, CEO of Financial DNA Resources, wrote an article about how savvy investors apply emotional intelligence to how they approach their investments. In essence, he suggests that most investors bring a primal fight or flight instinct into their investment relationships, which means that an investor can become overadrenalized with a flood of negative emotional surges due to fears that naturally arise from the unpredictable nature of investing.

Massie refers to an Australian TV show that staged an experiment of two drivers—one a professional and the other not—who were tasked with the responsibility of driving for a half-hour on the freeway during busy afternoon rush-hour traffic. The professional driver was asked to use his skills to dart in and out of traffic, while the other was asked to drive more patiently and stick to one-lane driving at a more moderate speed. The results were enlightening in a tortoise-and-hare kind of way. The professional driver made it to the destination 60 seconds sooner, but he used twice as much fuel and caused 150 percent more wear to his engine than the patient driver. The TV show couldn't measure the wear on the emotions of that professional driver—and possibly, more importantly, the emotions of all the other drivers on the road who had to deal with the guy—but I'm sure there were real costs, too.

Investors who take a short-term perspective on the market and are looking for a “quick killing” on a transaction are more like the aggressive driver: switching lanes whenever something that looks more profitable comes along. They are investing with their adrenal glands. Investors who seek relationship alignment aren't stupid. They won't be satisfied with poor long-term results, but they are more apt to be patient and less likely to be distracted by perhaps a more seductive yet riskier opportunity of the moment. These investors recognize that their vehicle (a metaphor for their relationship with an entrepreneur or company) will wear out more quickly if they drive it too hard or if they're constantly shifting gears.

As Bill Price, one of the cofounders of one of America's largest private equity companies, TPG, suggests, “Relationship investors don't judge the people they invest in on a moment by moment basis. That would be like judging a sailor by each tack he performs as he weaves his way across a windy bay. What these investors are looking for is the overall strategy for how you're crossing the bay.”

Too many investors and entrepreneurs fail to comprehend the costs associated with their maniacal journey on the financial freeway. You've probably heard of the ten-year Scottish study (which was confirmed by further results in France and the United States) that shows that the most likely time of the week for heart attacks is on Monday morning when most people are going back to the workplace. Is it possible that Monday “mourning” is the collateral damage that occurs when an organization takes on the stress of a misaligned, transactionally driven company–investor (which translates to employee–employer) relationship? In the past few years, I've come to appreciate the adage money follows, it doesn't lead. When money or ROI (return on investment) becomes the only language that glues a company and its investor together, it is likely this will be a short-lived relationship. But just as humans transcend their base needs when they trust they will be fed and sheltered, investors who move beyond the base of this Investor Pyramid start to live a better life where their social and esteem needs start to be addressed as they build confidence in the longer-term relationship they are making with a company or entrepreneur. Goleman has shown that the importance of emotional intelligence increases the higher you go within an organization. So, one could surmise this would apply to the highest reaches of a company: how an investor and the CEO or entrepreneur relate.

In Plain Talk, Ken Iverson sums up the importance of relationship alignment when he describes how he helped to turn around the steel company, Nucor, nearly a quarter century ago. He recites a ballsy speech he once made to a group of stock analysts: “Many of you, with your short-term view of corporations, remind me of a guy on drugs. You want that quick fix, that high you get from a big spike in earnings. So you push us to take on more debt, capitalize start-up costs and interest, and slow down depreciation and write-offs. All you're thinking about is the short-term. You don't want to think about the pain and withdrawal that our company will face later on if we do what you want.”²

Iverson also cites a speech he gave to his managers on the same subject: “We're not dogs on a leash, doing tricks to manage the stock price or maximize dividends quarter-by-quarter. We're eagles. We soar. If investors want to soar, too, they'll invest in us. The speculators, we don't need.”³ Now you understand why the name of his book is so appropriate. Iverson recognizes that having aligned investors helps create a healthier company.

From Transaction to Collaboration

When I've asked my friends and colleagues who invest for a living about the Investor Pyramid, many of them chuckle and say that the base level should be satisfactory returns, the middle level should be great returns, and the peak should be spectacular returns. While I can see the logic in that progression, it's not really a Maslow-inspired pyramid. It once again suggests that investors are just ROI robots with only one thing on their minds. Part of the challenge here is that there are all kinds of investors. How can you make blanket characterizations that apply to the wide variety of people and entities that range from venture capitalists to your Aunt Millie? Rather than dissect how Maslow applies to each of these investor classifications, let's look at what characteristics describe the investor who has transcended a purely transactional relationship.

Drew Banks is a business author, entrepreneur, and one of my most trusted advisors. He has been involved with a number of Silicon Valley tech firms and believes that what takes an investor from the transactional alignment level to the next level is having motivational alignment. Drew shared his views with me, saying,

First, it behooves the entrepreneur or company to determine the social or esteem drivers for each of their investors. Venture capitalists [VCs] want to find the “new new” thing as they thrive on the ego or esteem benefits of spotting some disruptive innovation before the other VCs discover it. Some invest with a “serial entrepreneur” because they know that it will give them the right to be involved in future deals with this guy who's a success magnet. They may also make a bet on a company because it allows them to collaborate in a particular niche they know well or want to learn more about. Private equity and angel investors (affluent individuals who make early stage investments) will often invest for the “thrill of entrepreneurialism” and the opportunity to get their hands dirty in the nuts and bolts of a start-up. For family and friends who invest, there's clearly a social element as is true for investors in sexy businesses or in businesses where the investors build some kind of relationship with each other. So, there are many varieties of motivation when an investor moves beyond just the ROI focus.

Jack Crawford Jr., general partner of Velocity Venture Capital, suggests that many wealthy investors are looking for community on this middle level of the Investor Pyramid. He says, “It seems the more wealth investors accumulate, the smaller and more elite their social circles become. With that said, they clearly want to remain active in projects, make a contribution and be ‘in the know.’ My experience is that investments allow them to travel outside of their typical social circles into other ‘communities’ for collaboration.”

Collaborating with your investors such that they truly feel a part of the enterprise is at the heart of what happens on this middle level of the Investor Pyramid. Studies overseen by William McEwen, global practice leader of the Gallup Organization, suggest that confidence is an essential part of what allows a company to transcend the promiscuous base of the pyramid where investors are just seeking out the hottest-looking deal. Gallup has found that both customer and investor relationships are susceptible to the confidence the company inspires. Some of that confidence is rational (based on performance), but much of it is emotional.

Mike Meldman is the founder and CEO of Discovery Land Company, a developer of golf and recreational residential communities. Discovery has developed extremely high-end projects in bucolic locations all over the United States as well as some exotic foreign spots. Forbes magazine featured a story on Meldman and talked about how Hall of Fame quarterback Terry Bradshaw and other celebrities have been buying whatever Discovery serves up. The article suggests, “Meldman has attracted a swarm of investment groupies who will buy lots just about anywhere he builds—and Terry Bradshaw is one of his biggest fans. ‘I am investing in Mike's projects because he has a proven track record.’”⁴

Meldman told me that when institutions or individual investors initially place money with Discovery, they're likely just focusing on the transaction. But as they build confidence in what his company does, these investors want to create a long- term relationship with him. There's clearly a social element to his repeat investors' rationale because the individual investors in these high-end developments (approximately 375 homes in each project) can ultimately use their investment for their family by building a dream home on the land they've invested in and connecting with a rather utopian recreational community. It also helps that Meldman and his partners are extremely personable. Many of his investors have said not only do they have confidence in Meldman; they also just like spending time with him and his top execs.

To sum up, Warren Buffett has said something that most of us have felt, especially if we've had challenging investors: “We would rather achieve a return of X while associating with people whom we strongly like and admire than realize 110 percent of X by exchanging these relationships for uninteresting or unpleasant ones.”⁵

Creating an Emotional Connection with Investors

When you name your company Joie de Vivre, you have clearly defined joy to be an integral part of the work experience with employees, customers, and investors. Although our mission statement as a company is “creating opportunities to celebrate the joy of life,” in the downturn it was really hard to hold onto this mission with our investors and owners. I believe we did a yeoman's job of creating trust and confidence during this time. But frankly, it was a really sobering experience. There were moments during the downturn when I asked myself, “Is this all there is to life?”

Fortunately, our former president Jack Kenny has a wicked sense of humor and an impeccable sense of priorities. Jack's positive spirit was often the icebreaker that would help our regular meetings with owners and investors get off to a harmonious start, even when we had to talk about troubling financial details. Jack helped us ensure that our relationships with our bosses—the owners and investors—were joyfully collaborative, no matter how bleak the economy looked.

In the summer of 2002, when Joie de Vivre introduced our first owner's survey (which I discussed in the previous chapter), we also needed to deliver some unhappy news to our investors (defined as those we were in partnership with in a particular hotel, as opposed to third-party owners whose hotels we only managed). After years of consistently receiving quarterly or annual investor cash distributions, most of our hotels were going to have to do investor capital calls (writing those aforementioned checks) during the upcoming slow winter season. For most investors, this wasn't a big surprise, but it was the kind of thing they wanted to ignore. I figured that I needed a way to deliver this news in a manner that would get their attention. Warning: What I'm about to tell you should not be attempted without first developing the trust and confidence of your investors.

With our third-quarter investor report of 2002, we sent out the usual market report from me, as well as the specific details that related to each hotel. We also included a T-shirt. On the front of the T-shirt was a graph showing the San Francisco hotel market's revenue growth from 1980 to 2002. The line showed consistent revenue growth in the first 15 years, with spiked-up growth during the last half of the 1990s. Starting from 1995 to 2002, we also showed a dashed line forecasting where revenue growth would be if the 1980 to 1995 trend had continued into the future. By the summer of 2002, that dashed line, which had been way below the actual revenue line during the late 1990s, was 20 percent higher than where the market had fallen to a year after 9/11. There was a headline on the front of the shirt that read, “San Francisco Hotels 2002. The Sky Is Falling.” On the back of the shirt was another headline: “Joie de Vivre Hospitality. Strong Enough to Restore the Sky!” along with a little 1950s-style cartoon businessman with a bubble coming out of his head saying, “I bought a hotel in San Francisco and all I got was this lousy T-shirt?!”

There was a great risk in sending this out to our nearly 150 investors. Would they have a sense of humor about what we were going through? Would this bring us together or tear us apart? Would they mind receiving this at the same time as I was asking them to write checks to cover negative cash flows? Did they truly trust us and have confidence in Joie de Vivre's leadership? I was very nervous when these went out. But I felt it was worth the risk because I wanted something to raise our investors' spirits—and ours, too.

Within a day, I was receiving dozens of phone calls and e-mails from investors who said things like “you did a phenomenal job of sugar-coating this bad news” or “I'm getting lots of capital call memos these days; most of them I try to ignore as it's like reading a funeral announcement, but you have my assurance, when you call me on the phone, I'll take your call because I know, as bad as things are, I'll have an enjoyable and respectful phone call with you, and that's worth something.”

One of our investors was so moved that he sent the T-shirt to the San Francisco Business Times, which printed a picture of the T-shirt in the newspaper. Ultimately, we gave each of our general managers one of these T-shirts, and it helped lift their spirits, too.

A year later, when the market had tanked even further (but fortunately, we were growing market share), I sent a first anniversary gift of a double-strength Excedrin pill to each of our investors because it was time to do another round of capital calls going into the winter. We had to do more than 20 capital calls during the three-year downturn, but not once did we hit a roadblock in being able to raise the money from our existing pool of investors.

A couple of years later, once it was clear the travel industry recovery was in full swing, one of our investors returned the favor with a surprise T-shirt for me. It read “Joie de Vivre Hospitality…No Bankruptcies, No Defaults, No Salary,” in tribute to the fact that we survived the downturn unblemished while our two biggest competitors had either bankruptcies or lender deficiencies that plagued them in San Francisco. The CEO (me) not taking a salary for three years helped us to hang in there, and thankfully, by the time this investor expressed his karmic thank you, I began to receive some compensation from Joie de Vivre again.

The moral of this story: our investors were investing in a relationship, not just a specific asset or the timing of the market. While the T-shirt may have given them a chuckle, it reaffirmed their gut feeling about Joie de Vivre as a partner. One investor's phone call summed it up for me. He said, “You've given me even greater confidence, as you're showing me that your company hasn't been beaten down and is still creative—even in how you deliver bad news.”

In Good to Great, Collins writes about how executives in these role model companies found not just mutual respect in their work relationships but also lasting comradeship. He suggests that considering “first who” you want to surround yourself with in a company will truly “be the closest line between a great company and a great life…the people we interviewed from good-to-great companies clearly loved what they did, largely because they loved who they did it with.”⁶ Those sentiments also completely describe the nature of an engaged collaboration with your investors.

So, on we go to the peak of the Investor Pyramid, where an investor has the opportunity to really experience the power of transformation through his or her investment choices.