Mar 20, 2019
Philipp Kristian Diekhöner is a keynote TEDx speaker, global innovation strategist and author of The Trust Economy, published in English (2017), German (2018) and Simplified Chinese (2019). Philipp has spoken at eminent global organizations such as Facebook, P&G, Microsoft, Turner, Munich Re, Zillow, Globe Telecom, CPA Australia, Germany’s Federal Ministry for Economics and Energy, the Economist Intelligence Unit and many others. He’s written for Forbes, Esquire, e27, Marketing Mag and InVision blog plus several industry publications and featured across Springer Professional, Men’s Folio, Money FM 89.3 and Your Story. Philipp is also a founding partner of DDX, the award-winning German innovation foundry that helps companies innovate the most trusted products and services. In his free time, he’s an avid sailor and yogi.
Trust is key to change and is highly relevant to investing
After spending almost a decade working around the world in the sphere of innovation in numerous disciplines, Philipp makes two important observations: (1) that effecting change is particularly difficult, and that (2) trust is essential whenever we are trying to do something interesting or new. In fact, the world changes when trust patterns shift. This is, he says, why when old technology lingers, it is because it has managed to remain trusted. He added that by the same token, new tech that is actually not very good can still succeed also because we have somehow given it our trust. This change, whether good or bad, is very relevant to investing.
“When it comes to financial markets, our trust in the way the world works determines which things change and which things stay the same.”
– Philipp Kristian Diekhöner
Summary: Technology influence the way we trust businesses
This episode dives deep into a story about the placing (and misplacing) of trust in today’s technology. Our guest Philipp looks back at his investment in a robo-advisor fintech start-up in Singapore. He was attracted to its sophisticated digital interface and trusted them to actively manage his portfolio. At closer inspection, he discovered by himself his investment took a big hit due to a currency correction of which he had not been informed.
Phillip commands a unique perspective on trust, but was led astray based on misplaced trust in the gadgetry and slick delivery of the robo-advisor and its promoters. Despite this disappointment, he nevertheless learned a profound lesson that has paved the way to his development of new methods of research. He warns investors to beware of putting money into a company that provides no absolute “proof points” or evidence to back up their claims. And ultimately, do their own homework on what they place their trust in, an essential point to remember when assessing risk.
“With investments, there is always a difference between trustworthy players and trusted players. Some people just choose to be only trusted but not trustworthy. And at the end of the day, from losing a couple of grand worth of money, I actually realized that I gained a lot of insight
into my topic.”
– Philipp Kristian Diekhöner
Early win with a ‘trustworthy’ robo-advisor lifts that tech’s appeal
Philipp had worked a number of start-ups also in the Singapore fintech space and one was the robo-advisor, smartly. He knew the people well as he had helped them launch in the city state as a pioneer of some of the definitely more interesting fintech products. He also invested with them and earned some rewarding returns, all the while feeling that it was all more hip, modern, and relevant to him than investing in a bank or in the markets: “Because we all know that banks’ incentives are not aligned to yours”. Add to that his inside knowledge of working in finance for years, meaning he knew also what ordinary finance was like behind the scenes.
Flush from modest wins and impressed by the tech, Philipp looked at a new robo-advisor company in Singapore with a sleek interface. He had written a lot about digital interfaces and appreciated that people were increasingly putting a lot of trust in these. As did he, injecting a sizeable chunk of money into it thinking that the robo-advisors presented well and that it appeared they would do a good job, as smartly had done.
Undisclosed currency change exposure stabs in the back
Part of the outfit’s pitch was that the size of clients’ fees is because they were a “full-service” enterprise and would actively manage his portfolio. But when Philipp actually started looking into its investment framework, it turned out to be mostly a work of fiction. While digging even deeper, there was a major currency correction, which of course can have major implications on anyone’s investment. In his case, that meant a loss of around US$7,000), which definitely hurt.
Not-so-active management fails to include vital communication
While the robo-advisor was selling itself as an “actively managed product”, the “managers” neglected to inform customers of the big change in currency values and that they were rebalancing the portfolio in response. Philipp only found out when he realized his investment had slid in a big way. When he challenged management, they just told him to wait. All the promise of an investment that claimed to be sophisticated, tech-driven and active, was in fact, neither fair nor trustworthy.
Insight of excessive trust in digital interfaces was the big return
Despite his considerable losses, Philipp profited in another way – understanding. He realized he had been caught by placing a great deal too much trust digital interfaces, and the people who create and brag about them and their expertise. He admitted also that he invested little time or interest in doing his own research, and that all of this had cost him a lot of money.
2. Do due diligence and exercise caution – And especially avoid doing business with companies that tender fake reviews. After doing the research he admits should have been done prior to investing, Philipp also discovered that the robo-advisor company was asking its employees to post good reviews online. His initial hypothesis for this company was very positive because of prior experience with a similar company, which was a clear case of misplaced trust and a variant of cognitive bias (see Takeaway 1.).
3. Be wary of the dark side of digital interfaces to elicit excessive trust – Technology is actually taking trust away from physical interactions and digitizing it, and this has positive and negative implications.
“Trust is kind of like The Force … if you’re a Star Wars fan), it can be used for good and can it be used for bad.”
– Philipp Kristian Diekhöner
1.Trust is a fundamental part
of motivating change, whether positive or
negative – If
we lose trust in something, that causes a big change
2. Understand what is behind
the presentation – Most companies
have impressive presentations these days,
but investors must make
companies show them the methodology
behind the slick exterior of
an investment program.
3. Demand to know a target company’s risk management plan. – As every company presents well, it is more important to know all the potential risks, how what plans the company has in place to manage them in the future. Investors should not just accept a boilerplate warning. They should ask: “Well what are you going to do about it?”
“Focus not so much on the return, but focus on the risk and what have they done in the past and what would they do if this happened?”
4. Beware of falling for misplaced trust – We are very accepting of all the apps being presented as part of the interface with our personal phones that we misplace trust and think that we can trust what is behind the app.
Actions to avoid making the same mistakes
a. Do your own research – If an investment opportunity seems too good to be true, you are probably right! In a world where everything is served up to us minute to minute, no one like at the minute, nobody seems to want to actually do the research.
b. Ask around – If you ask people who know about investing, you can arrive at a consensus on what an investment target is truly like, whether it is legitimate or not. But you do have to make that effort. You don’t really have to read 15,000 pages of theory.
c. If getting into high-risk investing, start with small batches – The small batch of money might give you a high return, but you might risk losing a large amount. So, put the bulk of your money in conservative and relatively safer investments. That’s a safer method until a company proves itself.
“High risk is not just about a high return, high risk is also about investing in somebody that you don’t know.”
– Philipp Kristian Diekhöner
Philipp’s final words: “I actually love talking about my worst investment because it taught me a lot and I actually feel by having gone through that … (it) really got me thinking in a new form about my own research.”
Andrew’s final words: “I like the idea of what we would call position size, and you build a so-small position into something and this is a risk management tool.”
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