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Donald Trump’s longtime pastor Norman Vincent Peale was the author of the perennial best-seller “The Power of Positive Thinking.” The book and Peale’s sermons convinced the now-former president that enough confidence would inevitably yield prosperity, regardless of Trump’s inherent intellectual or moral limitations.That belief boosted Trump in his unlikely run to the White House and is part of the reason he may be the only person who really believes he won the 2020 election. “To get anywhere,” counseled pastor Peale, “pray big prayers.”
It is now a commonplace to say that truth was a casualty of the Trump era. Fake news and alternative facts have gone mainstream. But investors often seem to have taken a particular page from Trump’s Peale-influenced playbook when it comes to embracing untruths – they actually believe the stories they spin.
Whatever the possible virtues of this life philosophy in other contexts, suspending disbelief and dreaming big is not a great investing discipline. Yet increasingly investors seem to prefer the approach n over other, more traditional ways of allocating money, such as making investment decisions based on business fundamentals. One example of the embrace of fact-free investing is the SPAC boom, which has dominated equity market offerings in recent years. The resurgence of interest in these once-obscure vehicles (now being used by Trump himself) reflects an apparent heightened demand to invest in companies whose actual historic results would not support a traditional initial public offering. By merging with a blank-check SPAC to go public, these companies are now able to avoid the regular regulatory scrutiny and market themselves to investors based solely on their own optimistic projections.
Among sexy tech investments in particular, promoters have exploited the opportunity created by this new willingness not to sweat the details as I describe in my latest book “The Platform Delusion.” Not just startups and tech SPACs but more traditional IPO candidates liberally sprinkle buzzwords like “platform” “big data,” “disruption” and “artificial intelligence” into presentations while avoiding such pedestrian considerations as cash flow. By emphasizing these characteristics, these tech companies are trying to convince investors that they represent a new breed of all-powerful “platforms” — set up for global domination and impervious to competitive attack. The reality in many instances, however, is that in purely digital environments entry barriers are low, customer loyalty is scarce and profitability always seems to be a year or so in the future.
One enterprising asset manager even established an ETF called the Modern Tech Platforms Fund that exclusively tracks “companies leveraging platform-based business models.” It has consistently lagged the overall Nasdaq index.
“The Platform Delusion” also details how even established tech giants see value in encouraging such simplistic beliefs both to keep their stock prices high and discourage potential rivals. The trove of private internal emails obtained by Congress from top executives reveals their awareness both of the businesses’ inherent vulnerabilities and the value of using the “platform” narrative to conceal these weaknesses. The more recently leaked Facebook documents shocked the public about the company’s cavalier approach to misinformation and customer safety. But maybe more surprising was how it revealed, as the New York Times’ Kevin Roose argued, “a company worried that it is losing power and influence, not gaining it, with its own research showing that many of its products aren’t thriving.”
The unrealistic but intense desires of investors are not simply limited to easy money. There is also increasing interest in finding ways to do well by doing good. Any serious philanthropist will tell you, however, that doing good is as hard as doing well, and doing both at the same time multiplies the challenges involved.
Delusions are often beliefs based on wish fulfillment. “The secret of their strength,” Freud said in explaining the power of such irrational beliefs, “is the strength of these wishes.” That might explain how a blue chip list of CEOs and billionaire investors in fallen-from-grace media company Ozy fell for “a company that every social media intern in America had questions about.” Investors poured millions of dollars into a little-read media company because of n the promise not only of profits, but the chance to help bridge the racial and economic divide in digital media. On a larger scale, it is likely that analogous good intentions were behind the willingness of foundations, governments, pension funds and corporations to invest billions for years in the Abraaj Group, one of the world’s leading social impact investors, until it collapsed after the charismatic founder’s fraud was revealed in 2018.
Marketers can be forgiven a certain amount of hyperbole, but when selling shares, the securities laws place some real constraints on how far one can legally go in selling the dream. That said, a successful fraud claim must show fraudulent intent, which may not be possible if you are dealing with this new wave of true believers: after all, it is often said that the best salespeople believe their own pitch. Whether a jury is likely to buy a “delusion defense,” however, particularly if the defendant has pocketed significant spoils, seems questionable.
The bigger point is that even the well-intentioned have trouble not telling people what they want to hear. And increasingly what they want to hear has little to do with business fundamentals, industry structure and nuanced distinctions. The desire for a simple story with a happy ending can be overwhelming. Unfortunately, when you want something in the worst way, that is often how you get it.
Trump’s ability to become leader of the free world despite modest apparent talents may suggest that I am shortchanging the power of positive thinking even in the investing domain. But a recent analysis by Forbes confirms what had long been suspected: Trump would have been better off putting his inheritance in a Vanguard ETF than whatever else he has been doing with it since Fred Trump passed in 1999. Hopefully this will convince even Trumpers to base their investing decisions less on big prayers and bigger dreams and more on the actual qualities of the underlying enterprises involved.
Jonathan A. Knee is the Michael T. Fries Professor of Professional Practice at Columbia Business School and a senior advisor at Evercore. His latest book is “The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans.”
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