By: Joshua Finley

Hindsight is a wonderful thing. It allows pundits the luxury of a 20/20 retrospective vision, and nowhere is this more true than in the field of institutional investing.

In the professional investment ecosystem, Bulls, Bears, and Whales thrive. In this asset-hungry menagerie, Whales, large institutional investors have the potential to influence the market through their substantial transactions.

Whales seem to have an uncanny ability to gauge the direction the market and company share prices are heading, but even with the assistance of some extremely advanced algorithms and years of experience, these investors often get it wrong.

There are numerous examples of calls that not only lost institutions vast sums but had a tremendously negative impact on the reputations of experienced money managers and the organizations they represented. 

The Dot-com Bubble (1999–2000) is one of the most famous examples, where investors overvalued internet companies without viable business models, leading to a market crash. 

Others include the Japanese Asset Bubble in the 1990s, when investors ignored warnings of overvaluation in Japan’s real estate and stock markets, causing decades of stagnation. The WeWork IPO failure in 2019 saw institutional investors overvalue WeWork despite governance issues, resulting in drastic pre-IPO losses. In 2021,  the China Evergrande Crisis occurred as investors underestimated the developer’s excessive debt, leading to a liquidity and solvency crisis in the Chinese home builders sector.

One man with some sound advice for institutional investors who seek to avoid the mistakes of the past is global investing thought leader, Juan C. Espinoza.

Espinoza, a value investor with over 20 years of global experience selecting equity and credit securities, believes that curiosity, a knack for research and forecasting, a passion for accounting and business, and financial analysis are table stakes in the high-pressure world of institutional fund management.

Power Habits

Investing on behalf of institutional clients requires strict adherence to a well-designed strategy, extensive research, trading resources, and additional infrastructure to meet the fiduciary demands of sophisticated clients. 

According to Espinoza, successful investors often go further by adopting behaviors that seek to avoid big mistakes and mitigate smaller ones. These behaviors, which he refers to as Power Habits, are methodical and integral to the process of financial analysis and forecasting.

More importantly, these habits acknowledge that even the most sophisticated professionals are susceptible to fears and biases. 

“During the course of my career, I’ve found that successful investors cultivate seven habits that function as barriers to keep their human brains from acting “humanly” at the worst possible times. These mechanisms prevent individuals from acting impulsively or irrationally during critical moments. As I’ve seen time and again, the human mind is subject to fears and biases, and even highly experienced professionals are not immune .”

The Seven Habits of Highly Effective Advisors

1. Recruit a sounding board: Every investor, especially those managing vast assets, needs a rational external voice. This person, detached from the investment process, can offer cold, logical advice. At times, they may need to “talk you off the ledge” when emotions cloud judgment. 
2. Accept that the truth may not be absolute: Market events can trigger different interpretations, with both positive and negative truths co-existing. Interest rate changes or global conflicts, for example, may have contradictory impacts. Investors must accept that contradictory market truths often occur simultaneously. 
3. Study history and appreciate market cycles: Historical market responses to events like wars or revolutions offer valuable lessons. While rare “black swans” exist, most crises follow historical patterns. Knowledge of past events provides perspective and helps investors avoid panic during turbulent times. 
4. Maintain personal life balance: An investor’s judgment can be compromised if personal issues arise during a market crisis. High personal debt, overspending, or neglecting health can be as harmful as poor financial advice when clear-headed decisions are needed. 
5. Always plan for the long term: Even in short-term trading, investment operations require a long-term vision to ensure stability. Keeping finances in order, maintaining emergency funds, and exercising internal controls help the business endure in good and bad times. 
6. Prepare for opportunistic events: Crises can present rare opportunities, such as buying undervalued stocks or acquiring new clients. Tough times allow proactive investors to play offense when others are focused on defense. 
7. Practice meditation: Meditation offers mental and physical health benefits, helping investors process information calmly. In uncertain times, a focused mind is crucial, and finding a form of meditation that fits your routine can provide long-term resilience.

Mitigating Personality Traits

Successful advisors tend to share some well-known personality traits. These include empathy, allowing them to understand client needs and goals deeply; focus on goals, ensuring they keep long-term objectives in sight despite market volatility; a work ethic, showing relentless dedication to research and preparation; and an entrepreneurial mindset, which drives them to innovate, adapt, and seek new opportunities. 

Personality counts in creating trust and credibility with clients, but taken to the extremes some personality traits can overshadow logic and strategy. It’s all very well to be empathetic, but walking a mile in an institutional investor’s shoes is going to be an uncomfortable experience if you’re leading them toward a bad decision. 

Espinoza’s Seven Habits framework provides a scaffolding for providing sound investment advice. It mitigates the effects of being human and making human errors. 

However, according to Espinoza, this doesn’t mean that an investor should be an automaton.

Says Espinoza, “I consider these seven habits as the cornerstone for any institutional investor who plans to stay in business for the long haul. In my over two decades in the industry, working with several world-class teams and some of the best minds in the industry, I can confirm that the most successful ones are habituated to a version of these seven foundational practices that prepare them to turn difficult times into opportunities for further growth and success.

“Empathy is admirable, it makes us better people, but money managers need to balance empathy with emotional discipline, helping clients avoid impulsive decisions in stressful market conditions.”

To learn more about what separates great institutional money managers from the merely good, visit Juan Espinoza’s LinkedIn page.

Published by: Holy Minoza