Sitting at the Thanksgiving table yesterday, there was some joking about all the different turkey-related expressions we have: If you want to have a frank conversation with someone, you need to talk turkey. If you want to quit something in a hurry, you go cold turkey. If you’re a dancer, there’s the turkey trot. And, of course, if someone’s making no sense, they’re speaking gobbledygook.
My favorite, though, is the term “a real turkey.” That’s because, for investors, there is an important Turkey Principle that can help guide your financial decisions.
If you’ve spent some time out shopping today, you intuitively know how to employ the Turkey Principle to be a smart consumer. That is, you know to put your defenses up when faced with a salesperson who is a little too fast-talking or a little too loose with the facts or a little too aggressive in trying to make the sale.
When you’re shopping in a store — or a car dealership — it’s easy to judge the person on the other side of the transaction. But, when it comes to making investment decisions, it isn’t that easy. That’s, in part, because most investments aren’t face-to-face transactions. If you want to buy shares in Amazon, for example, Jeff Bezos isn’t going to call or visit to discuss it with you. Instead, you have to make your purchase through a broker and hope for the best.
Still, there are a few things you can do to better protect yourself. In the book Give and Take, psychologist Adam Grant provides one example. He cites a study titled “It’s All About Me,” which studied the performance of more than a hundred public companies to see whether subtle clues exist that might help investors sniff out turkeys in advance. It turns out that there are.
The authors of this study looked, for example, at Enron Corporation, where dishonest management resulted in the company’s descent into bankruptcy. What clues did the researchers find at Enron? First and most obvious was CEO Ken Lay’s outsized pay package relative to peers. More subtle clues included the oversized scale of the CEO’s photograph in the annual report and excessive use of the first-person pronoun “I” in press releases. In all, the researchers developed a six-point “narcissism index” and found that companies with more narcissistic leaders, such as Enron, had more unpredictable performance.
Of course, these kinds of hints are easier to see with the benefit of hindsight. Still, there is a useful lesson: If you’re considering making a financial decision, think hard about the people involved. Even if you can’t meet people personally, never judge any investment based solely on the numbers. Instead, do as much reading and research as you can. Listen to interviews and and see what other people say. In the age of the Internet, in fact, it’s much easier to get a sense of someone’s reputation. If the leader of a company strikes you as narcissistic or greedy or unpleasant in some other way, just move on. As Warren Buffett always says, when it comes to investments, there are no called strikes. Doing business with turkeys doesn’t guarantee a bad result, but if you aren’t 100 percent comfortable, there’s no harm in waiting.