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Investment Archetypes

Article  in  Journal of Behavioral Finance · January 2013

DOI: 10.1080/15427560.2013.761631

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Investment Archetypes
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Jason A. Voss
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CFA Institute Content Director of Behavioral Finance and Asoapovo Productions, Inc.

To cite this article: Jason A. Voss (2013): Investment Archetypes, Journal of Behavioral Finance, 14:1, 79-81

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 THE JOURNAL OF BEHAVIORAL FINANCE, 14: 79–81, 2013
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ISSN: 1542-7560 / 1542-7579 online
DOI: 10.1080/15427560.2013.761631

COMMENTARY

Investment Archetypes
Jason A. Voss
CFA Institute Content Director of Behavioral Finance and Asoapovo Productions, Inc.

Priming is a well-researched phenomenon in behavioral finance. A form of priming is the

susceptibility of the mind to archetypes, or generalizations of businesses and individuals.
Downloaded by [. Jason A. Voss] at 12:06 27 February 2013

Investment archetypes can lead to faulty financial decision making.

Keywords: Archetypes, Priming, Behavioral finance, Investment archetypes

Archetypes are generic, idealized models of persons or of
concepts. They are patterns of behavior and appearance that
serve as molds for personalities and for understanding.
Let us discuss an example of an archetype. In most action
films, who is the protagonist? It is the loner hero who is an ex-
special forces soldier who is treated badly by his government,
but nonetheless remains a patriot and is reliably called upon
to do the right thing in a time of crisis. This is a classic
archetype and we all recognize him. There are many other
archetypes.
The benefit of archetypes in life is that they aid in com-
municating much information quickly about a subject with-
out having to do much analysis. The brain seems hard-wired
when meeting new people to quickly assess the person and to
determine with which archetype the new acquaintance most
resonates. For example, when talking about a friend, you
might say, “I have a friend Bob who is a perpetual bachelor
. . .” As soon as your listener hears you say “perpetual bach-
elor,” he or she pretty much knows Bob. One probably does
not need to hear any more stories about Bob to determine how
he will react in certain situations either. So archetypes aid in
the speedy conveyance of information and sometimes they
aid in understanding. But the problem is that archetypes are
generalities and obscure as much as they reveal. Archetypes
are not a substitute for real analysis. For example, what if
Bob is not a perpetual bachelor but is instead impotent? In
this situation the assessment of Bob is obviously incorrect.
Address correspondence to Jason A. Voss, CFA, Content Director, CFA
Institute–Product Solutions, 477 Madison Avenue, 21st Floor, New York,
NY 10022. E-mail: jason.voss@cfainstitute.org
Most people identify with an archetype and modify their
behavior and appearance to conform to one. Someone might
choose to be the guy who buys a Harley Davidson motorcycle
in his late 30s or early 40s and now goes riding on the week-
ends. Or someone might be the suburban yogini who rarely
misses a chance to roll out the yoga mat. Someone might
now be the straight gal and guy who never do the things that
got them into trouble as a sorority sister/fraternity brother.
Whatever archetype is chosen, most people adopt the per-
missible behaviors and appearance of their chosen archetype
fully.
Trusting in archetypes is not usually costly when you
choose how you present yourself to the world, or assess a
new acquaintance or watch a movie. But in investing trust-
ing archetypes is deadly to your investment returns. It is
essential to conduct analysis of reality not psychological
phantoms. Here are the main investment archetypes to steer
clear of:
• The Rocket Ship
• The Immortal One
• Old Ironsides
• The Plague Company
• A Stranger Comes to Town
• The Boy Genius
You probably recognize some of these archetypes from the
colorful names I gave them, but let us explore them in depth.
Pay close attention to whether or not you personally identify
with one of the archetypal businesses and have invested in
one.
 80 VOSS
THE ROCKET SHIP
The Rocket Ship is the hot growth company that has a new
product that serves a new and quickly growing market. It is
primarily characterized by the word EXCITEMENT. These
businesses receive lots of attention from investors in the
form of an ever-increasing stock price. Price fluctuations are
extremely sensitive to news—any news—as well as attention
in the form of gossip. You know these companies well, don’t
you? If there is positive news, then there is liftoff in the share
prices. If there is negative news, then there is meltdown in
the share prices.
Often Rocket Ship businesses occupy a disproportionate
share of the evening business shows’ news flow. You hear the
names of these companies and of their executives, as well
as the companies’ stories talked-up in coffee houses, in taxi
cabs, and by your friends and relatives. For a business to be
widely gossiped about, it is a good sign that the business is a
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Rocket Ship.
There is a mythic quality to the story of the Rocket Ship
that is similar to the fascination people have with this season’s
“great sports team” or this season’s “hot celebrity.”
The problem is that rocket ships almost always disinte-
grate in the atmosphere on their ascent to the heavens or fall
back to earth. The excitement surrounding the Rocket Ships
causes investors to ignore obvious and pertinent data about
the business that otherwise would cause them to not invest.
For example, the “hot market” whose product the Rocket
Ship manufactures for is not really growing as fast as peo-
ple anticipated. Or the “hot market” has many new Rockets
launching simultaneously. Or the astronaut-executives do not
know how to stabilize the flight of the Rocket company and
they themselves prepare to abandon the ship and its passen-
gers. Or the Rocket company is not built that well and the
higher it flies the more strain is put on it.
The company you are examining may fit the archetype of
the Rocket Ship well, but like most generalities, the com-
pany fails at the margins. That is, archetypes fail to describe
issues unique to a business, ones that determine whether the
business turns out to be a good investment or not.
THE IMMORTAL ONE
A close corollary to the Rocket Ship business is the Immortal
One (also known as the Perfect One). This is the company
that walks on water and can do no wrong. It is the company
with which most others, typically the Rocket Ship compa-
nies, are compared. The Immortal One’s earnings are said
to be “predictable,” or that “they always make their earnings
estimates,” or “they always exceed their earnings estimate by
at least $0.02.” It is usually the case that extreme adjectives
are used to describe the Immortal One, such as phenomenal,
spectacular, incredible, once-in-a-lifetime, and so forth. But
adjectives are to be handed out like war medals only after
an investment has earned your respect after much thorough
analysis.
The Immortal One is potentially dangerous for investors
because the company that “never fails to deliver” eventually
does just that. Because of the unexpected nature of the failure,
it usually leads to huge declines in the company’s stock.
The Immortal One is also dangerous because most investors
secretly harbor desires of finding the next Immortal One
before anyone else. That “find” is the investor’s ticket to
fame and fortune. I myself have fallen prey to this sort of
thinking in my career several times, including my thinking
about International Rectifier.
It is possible that the company in question truly is ex-
traordinary, so you must be careful to avoid dismissing every
company just because it neatly fits the archetype of the Im-
mortal One.
OLD IRONSIDES
Occupying the space directly opposite the Rocket Ship is
Old Ironsides. This is the boring old battleship company that
refuses to die, yet steadily and reliably executes its missions
despite competition and disdain from most investors. These
businesses are those founded several generations ago and
have names that are known by multiple generations of folks
who either use or know about their products. Old Ironsides
companies cannot move very fast, are not sexy, and the per-
ception is that they are to be retired soon along with the other
relics of a bygone era. The share prices of these companies
are typically more stable and often they pay (gasp!) a div-
idend. That is how unsexy they are—they actually provide
their investors with a cash return.
The danger is that investors might never see the vast po-
tential for return that Old Ironsides can provide because their
eyes are firmly fixed on the sky looking for Rocket Ships.
Often the real opportunity of Old Ironsides takes the form
of its dividends or the financial assets of the company (i.e.,
stock) being purchased inexpensively so that capital gains
are a real possibility. The other danger for investors is trust-
ing Old Ironsides’ archetypal story to such a degree that they
miss that Old Ironsides is, in fact, rusty and about to capsize
under its own behemoth weight. Again, you must evaluate
and evaluate more, and never rely upon an archetype to do
your thinking for you.
THE PLAGUE COMPANY
Just as the Rocket Ship has its extreme version, as the Immor-
tal One, there is also an extreme case for Old Ironsides, as the
Plague Company. This company is diseased and about to die.
Investors avert their eyes from the Plague Company because
it is painful to look at and they do not want to “get any of it
on ‘em” lest their investment portfolios implode. The Plague

Company can do no right and is the butt of investors’ jokes
and the target of ridicule from most of the investment com-
munity, including professional investors, investment news
providers, and academics. The academics might talk of us-
ing the Plague Company as a case study for business school
students of how not to run a business.
The danger is the Plague Company may not be terminally
ill but rather just going through a period of severe illness.
There are whole and famous investment careers founded on
the identification and pursuit of Plague Companies. You can
bet that if the news about a company includes a discussion of
“emergency financing,” a “white knight,” or the firm being
on its “last legs,” it must be a Plague Company. Like the Im-
mortal Ones, you are careful with the Plague Company. This
is because price declines can be sharp, sudden, and frequent
until the Plague Company stabilizes its health. Scrutinize,
and do not stereotype.
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A STRANGER COMES TO TOWN
A Stranger-Comes-to-Town company is one whose manage-
ment fails to satisfy either their customers or their capital
owners, so they get on horses and leave town in a real big
hurry. Then a stranger comes to town and saves the company
from the evils that hound it. New management is of course
the Stranger. Frequently they are heroes from a similar
company, heroes from another and sexier industry, or heroes
from another business era. The Strangers are brought in to
resuscitate the business and to save the day. The thinking
usually goes something like, “Well Bobby saved the XYZ
Company and that was a tougher situation than this one;
therefore, Company ABC is going to be turned around and
be just as successful.” The investment battlefield is littered
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INVESTMENT ARCHETYPES 81
with the corpses of Strangers who have taken the job of
sheriff in the new town and that are killed by the same
circumstances as the old sheriff. Again, the Stranger might
be what the company needs to right itself, but then again,
archetypes are no substitute for analysis.
THE BOY GENIUS
The Boy Genius is the human equivalent of the Immortal One.
This is the portfolio manager, investment adviser, business
news pundit, or investment newsletter writer who walks on
water. The story begins when the boy genius was a young man
and he worked very hard selling lemonade or newspapers.
He then parlayed this quaint occupation into his first virginal
investment, which of course made him an instant millionaire.
Now when the Boy Genius is not living the life of luxury he
pontificates about currencies or commodities or stocks that
are just as sexy as his lifestyle is sexy. The story of the
Boy Genius only includes the misfortunes of his mother and
father’s economic means, but never the misfortunes of his
investment choices. A skewing toward perfection in the story
of an investor is a sure sign of the Boy Genius archetype
attempting to work you over.
Your familiarity with these archetypes allows you to see
through the obscuring smoke of news around most busi-
nesses. This is because most investment news is of the same
character, retelling the same old investment myths involving
the same old investment archetypes. Always remember that
every investment situation is unique and requires real analy-
sis to be understood well. Once you start paying attention to
archetypes you will likely be amazed at just how pervasive
they are and just how strongly they affect the perception of a
business. Beware and be aware. Take no shortcuts!