In WFC’s last blog post recapping my January 30 presentation with CFA Society Chicago about how to write better investor letters, I mentioned that, at a high level, there are three critical components to making your letters more effective:
- Tell a compelling story
- Make it easy to consume visually
- Streamline your process
Here, I’ll write more in depth about why that first point–using your letters to tell a compelling story–is so important, and how you can use storytelling techniques to make your commentary more engaging for clients.
The Power of Stories
The point of most quarterly investor letters is to inform clients about a fund’s progress in the most recent quarter and to provide an outlook for the next several quarters. But to do this in a way that showcases your expertise and builds confidence among your investors, you need to tell a compelling story about the forces that drove performance over the last three months as well as the factors that will determine performance in the months to come.
Why is it so important to tell a story, instead of just laying out plainly a fund’s performance statistics over a given quarter?
Put simply: Stories make your ideas more tangible and easier to understand. Yes, on the surface, most of your clients could probably make sense of a fund’s performance if you just provided them with a staid list of metrics from the quarter. But approaching your letters this way would be overlooking a prime opportunity.
The purpose of quarterly letters isn’t just to inform your clients of a fund’s performance; these letters are an opportunity to engage clients and showcase your expertise. These are elements that have the potential to further solidify your relationship with your investors and, potentially, help your firm attract new investors over time.
Still, becoming an expert storyteller isn’t easy to do. Despite the fact that so much of the content you likely consume on a daily and weekly basis–news and magazine articles, movies, television shows, books, etc.–is rooted in classic storytelling formats, it can be difficult to translate these techniques to a task that doesn’t appear to fit a traditional storytelling mold, such as writing quarterly investor letters.
I’ve written and edited many quarterly letters for clients over the years. Through that work, I’ve been able to identify a set of five rules that make the act of storytelling easier for investment professionals looking to incorporate storytelling into their own letter writing. They are:
- Don’t bury the lead
- Use transition sentences
- Overcome the “curse of knowledge”
- Provide context for numbers
- Embrace uncertainty
Don’t Bury the Lead
In a world where our audience is constantly being bombarded with information, we don’t have much time to capture readers’ attention. That is why it’s so important to put the most important takeaway from your writing at the very beginning of your letter. Don’t make the reader search for the main point or conclusion. Instead, use the headline, subheads, and first paragraph in your letter to articulate your main message.
Consider an example showing the difference between how a lawyer might write a legal brief and how a journalist might write a newspaper article.
A legal brief is typically written: fact, fact, fact, conclusion. A newspaper article: conclusion, fact, fact, fact.
Given readers’ short attention spans, you should emulate a journalist in your letter writing. Start with the main idea that you want readers to grasp about the fund’s performance that quarter, and then use the rest of the letter to justify your argument.
Use Transition Sentences
During in-person conversations, people can change the inflection of their voice or use other non-verbal cues to indicate when they are shifting topics. This is harder to do in written communications.
When an investor letter suddenly jumps from one topic to the next, the writer risks confusing the reader. Worse, the reader may not understand how one point or topic relates to the next one.
Make it easy for the reader to follow along by using transition sentences or phrases that highlight this relationship.
Common transition words/phrases include:
- But
- However
- In spite of
- As a result of
- Thus
- In addition to
- In light of
- Nevertheless
Overcome the “Curse of Knowledge”
Good writing requires identifying what your audience doesn’t know. Remember that you’re the expert, so, by definition, the readers aren’t as knowledgeable as you. This is especially true when your audience is individual investors and their financial advisors. But even if your audience is made up of mostly institutional investors, these investment professionals have their attention spread across many different asset classes, so they likely don’t know all of the nuances of your fund’s asset class. As a result, you should err on the side of writing below your audience’s level of knowledge rather than above it.
If you write “over the reader’s head,” it won’t make you look smart; it will make you look out of touch. As Albert Einstein said, “If you can’t explain it simply, you don’t understand it well enough.” Warren Buffett is famous for his ability to take complex ideas and distill them down to their essence in a straightforward way.
Some tips to keep in mind:
- Avoid jargon and describe concepts using plain, simple language
- Show each step of your line of reasoning; don’t assume your audience knows how you got from Point A to Point B
- Think about what questions you commonly get from clients and other members of your target audience on a topic
Provide Context for Numbers
Writing about data and statistics is one of the most common ways that the “curse of knowledge” manifests itself in investor letters. Often, the writer will include valuation information, economic data, market performance data, and other statistics without providing any explanation about why those numbers are meaningful.
For instance, a portfolio management team spends all day thinking about valuations, so when they write that PE ratios in a certain industry have increased to 27x, they assume that readers will know that this means stocks are getting expensive. But most readers don’t spend all day thinking about valuations, and they don’t know where 27x stacks up historically.
Like with the “curse of knowledge,” be clear when writing about the context behind each number or statistic you present in a quarterly letter to your investors.
Embrace Uncertainty
Many portfolio managers make the mistake of thinking that they can only write about topics for which they have an ironclad conclusion. For example, during brainstorming sessions for investor letters, someone from the portfolio management team will bring up an interesting dynamic that could play a major role in shaping market performance over the next several quarters. But the team will decide to exclude it from the letter because there is a high degree of uncertainty about how that dynamic will play out.
Rather than avoiding the topic, letter writers should embrace this uncertainty. Doing so gives you a chance to display your expertise by showing that you know which leading indicators to pay attention to and what forces might tip the outcome one direction or the other.
Adding Storytelling to Your Investor Letters
Follow these principles, and you’ll be well on your way to writing more compelling investor letters for your clients.
In my next blog post, I’ll write about why, in addition to telling a compelling story with your words, you need to go the extra mile in making your letter appealing visually for the reader and easy to digest.
In the meantime, by clicking here, you can get our free e-book on how investment professionals can improve their quarterly letters.
About the Author
Scott Wentworth is the founder and head financial writer at Wentworth Financial Communications. Scott and the team of writers and editors at WFC help professionals across the financial services industry build their brands by creating investment-grade white papers, bylined articles, newsletters, blogs, social media posts, and other forms of content marketing.