Contents
Prologue
Acknowledgments
Introduction
Part I: What the Best Negotiators Do Chapter 1: What Is a Good Outcome? Identify Truly Good Outcomes and Don’t Get Distracted
What Makes for a Good Outcome?
Chapter Summary
Notes
Chapter 2: Interests, Options, and Goals What Do You Really, Really Want?
Shared Interests
Dig Deep to Explore Underlying Interests
Don’t Settle for Win-Win
Options
Structure the Deal to Meet Their Needs, Too
Work with Them to Create More Value
Chapter Summary
Notes
Chapter 3: Fairness What Is “Fair”?
Move beyond Market Value to Measure Fairness
Chapter Summary
Notes
Chapter 4: Communication to Build the Kind of Relationship You Want Set Relationship Goals
Choose Communication Tools Carefully
Work to Create the Atmosphere You Want
Focus on What You Want to Tell Them—and How
Use Active Listening Techniques
Good Negotiating Process
Be Aware of the Power Dynamics—and Consider Changing Them
Plan a Process That Will Lead to Good Outcomes
Chapter Summary
Notes
Chapter 5: Thinking about Commitments How Tight Are the Bindings?
When Should We Be Bound?
Degrees of Commitment
Commitment Is Not Just about the Ending—Consider It throughout the Process
Many Little Agreement Steps
Chapter Summary
Note
Chapter 6: Best Alternative: Where Your Power Comes From Step 1—An Inventory of Your Possible Alternatives
Step 2—Identify Your BATNA
Step 3—Strengthen Your BATNA
Step 4—Estimate What the Other Side’s BATNA Might Be
Step 5—Consider Whether You Can Weaken the Other Side’s BATNA
Work to Shape Their Perceptions
Be Careful Not to Rely Too Much on BATNA, Especially Where Relationships Are Important
Chapter Summary
Notes
Chapter 7: The Preparation Phase Where Do We Hope to End Up?
Consider the Substantive Issues
Then Consider the Relationship Issues
You Want Good Substance and Good Relationships—But Don’t Trade One for the Other
Set High, Achievable Goals
Who Are These People Who Will Soon Be Sitting Across from Us?
Chapter Summary
Notes
Chapter 8: The Exchanging Information Phase Ask Lots of Questions
Strengthen Your Bonds with the Other Parties
Gather Up All the Facts That They Are Willing to Share
Managing the Danger That They May Lie to Us
Chapter Summary
Note
Chapter 9: The Bargaining Phase Work to Increase the Pie—and to Claim a Fair Slice
Use Conditional Language to Explore Trades That May Create Value
Propose Terms Favorable to You—But Defensible as Fair
Make Small Concessions Slowly and Deliberately—and Insist on Fairness
Be Resolute about Claiming Your Fair Share
Chapter Summary
Notes
Chapter 10: The Closing and Commitment Phase You Want Promises They Are Sure to Keep
Create Scarcity to Enhance Their Enthusiasm for the Deal
Prepare to Be Patient
Chapter Summary
Notes
Chapter 11: The Problem with Agents Sometimes Employing an Agent Is Wise
Often Employing an Agent Is Foolish
Are the Agent’s Interests the Same as Yours?
Chapter Summary
Note
Part II: Applying Negotiating Principles to Investing Chapter 12: Why Is Investing Really Just Another Type of Negotiation? Investing Is Similar to Other Big-Ticket Negotiations
Do Not Be Fooled into Thinking It Is Something Other Than a Negotiation
Different Types of Investing Negotiations
Chapter Summary
Chapter 13: What Is a Good Outcome Regarding Your Investments? The One Investment Goal That Almost Everyone Shares
Your Investment Good Outcome Is Uniquely Your Own
Should You Narrow Your Investment Goals?
Chapter Summary
Notes
Chapter 14: The Problem of Conflicts of Interest Incentives Matter
Some Conflicts Other Than Money
Chapter Summary
Note
Chapter 15: The Problem of Asymmetric Information They Know Much More Than You Do about the Tricks of the Trade
Knowing More Creates Tremendous Opportunity to Take Advantage of Others
Chapter Summary
Notes
Chapter 16: Whom Can You Trust? And Why? Be Extremely Careful about Whom You Trust—and How Much
You Can Work Well with People without Trusting Them
You Can Trust Those Whose Best Interests Make Them Trustworthy
Chapter Summary
Chapter 17: Professionalism: Who Is a True Professional and Why? The Traditional Professions’ Struggle with Society’s Need for Trustworthy Help
The Traditional Professions Don’t Always Succeed—but They Must Always Try
Reclaiming Professionalism
Chapter Summary
Chapter 18: Use the Power of Your Alternatives Alternatives When Making Direct Investments in Actively Traded Securities
Alternatives When Investing Through Intermediaries
With So Many to Choose from, You Can Demand What You Want with Confidence
Chapter Summary
Notes
Chapter 19: Knowing Your Interests and Theirs Understanding Your Own Interests
Thinking about Their Interests
Interests That Can Lead You Astray
Chapter Summary
Chapter 20: Many Different Possible Options for How to Structure the Deal Trade Their Interests for Yours
Work Together to Create Packages of Interests
Find the Best Investment Deal among Many
A Few Cautions
Chapter Summary
Chapter 21: Insist on Using Objective Standards of Fairness Gather Your Measures of Fairness
Beware of What They Call Fair
Keep Your Eyes on Profitability and Transparency
Demand a Fair Division of All the Value That the Deal Creates
Do the Math on Fees and Costs
Pay Only for Services That Provide You with Value
Chapter Summary
Notes
Chapter 22: Plan the Type and Tone of Communication You Want Communication to Enhance Your Understanding
Communication to Make Things Clear to Them
Create the Tone and Atmosphere You Want
Chapter Summary
Note
Chapter 23: Think about Relationship Goals A Good Working Relationship Need Not Be Personal
Pay Attention to Power Dynamics
Special Concerns about Financial Advisors
Chapter Summary
Notes
Chapter 24: When to Commit—and to What Avoid Getting Locked In
Pay Attention to the “When” of Commitments
Chapter Summary
Chapter 25: The Four Phases of an Investment Negotiation The Preparation Phase of Investing
Gather New Data Continuously
The Exchanging Information Phase of Investing
Plan
to Put Them at Ease
The Bargaining Phase of Investing
Propose Ways for Them to Meet Their Most Important Interests
Let Them Know the Things on Which You Cannot Compromise
Be Aware of Their Salesmanship Skills
The Closing and Commitment Phase of Investing
Build In Your Ability to Check on Them and to Get Out
Get Everything in Writing
Chapter Summary
Notes
Part III: The Economic Truths You Need to Know to Be an Effective Investor-Negotiator Chapter 26: Nobody Can Consistently Beat the Market The Markets Are, for the Most Part, Rational
Don’t Confuse Random Chance with Skill
Stock Research Offers Little Value
Chapter Summary
Notes
Chapter 27: Past Performance Does Not Guarantee Future Results No One Can Predict the Future
Chapter Summary
Chapter 28: The Concept of Present Value What Is Tax Deferral Worth?
Present Value and Life Insurance
Present Value and Money-Back Guarantees
Present Value and Comparing Investments
Chapter Summary
Chapter 29: There Is Really Only One Interest Rate Higher Rates Reflect Higher Levels of Risk
Risky Investments Involve a Danger of Losing Much of Your Principal
Chapter Summary
Chapter 30: There Is No Such Thing as a Free Lunch—Except Diversification Why You Want to Diversify
Chapter Summary
Chapter 31: Diversify Across Every Asset Class Be Honest with Yourself about Your Risk Tolerance
How to Achieve Diversification of an Investment Portfolio
Diversifying Asset Classes beyond Stocks
Use Time to Further Diversify
The Efficient Markets Hypothesis
Some Practical Advice on Choosing Specific Categories of Index Funds
Chapter Summary
Notes
Chapter 32: We Know What Has Happened in the Past The Historical Average Return on Stock Investments Is a Very Good Result
Seeking Higher Than Market Returns Is Called Gambling
Chapter Summary
Notes
Chapter 33: Costs Are Important—They Reduce Your Returns Higher Costs Result in Lower Returns
Many Investments Carry Expenses That Are Just Too High to Be a Good Deal
Figure Out How Much You Are Paying to Those Who Lay Hands on Your Investments
How You Can Minimize Costs
Chapter Summary
Notes
Chapter 34: Investments to Avoid Variable Annuities
Hedge Funds
Derivatives
Callable Bonds
Convertible Securities
High Costs, Complexity, and Creative Geniuses
Chapter Summary
Notes
Chapter 35: How Much Is at Stake? The Impact of the Fees You Pay for Advice
The Need for Action
Chapter Summary
Note
Afterword: What Is a Good Outcome in Your Financial Life?
Selected Bibliography
About the Author
Index
End User License Agreement
List of Tables
Table 35.1 Percentage of Savings and Resulting Increases in Portfolio Holdings, Starting with $1,000,000
Table 35.2 Percentage of Savings and Resulting Increases in Portfolio Holdings, Starting with $100,000a
Negotiating Your Investments
USE PROVEN NEGOTIATION METHODS TO ENRICH YOUR FINANCIAL LIFE
Steven G. Blum
Cover design: Wiley
Copyright © 2014 by Steven G. Blum. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
ISBN 978-1-118-58307-4 (Hardcover)
ISBN 978-1-118-58316-6 (ePDF)
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For my beloved Adam, Libby, and Suzie.
To honor my parents, Harold Blum and Jean Blum.
And in memory of my grandparents, Adam Spiro, Tonia Spiro, Murray Blum, and Betty Reichler Blum.
Prologue
I have been negotiating all of my life. So have you. Negotiation is what happens when we want something from someone else or they want something from us. Thus, from our earliest moments to our dying day, we are negotiators.
Of course, we may not think of it that way. In my case, I had already become a lawyer and was busy trying to settle cases for my clients before I first had the chance to give much thought to the process. The young lawyer just did what many people do: shouted and threatened and waved his arms. (Of course, many other unskilled negotiators just accede to the other side’s demands, make every effort to avoid the conflict, or just propose to split the difference.) There is a world of difference between being someone who negotiates and being a skilled negotiator.
Several years into my career as a lawyer, I got lucky. My supervising attorney handed me a copy of the book Getting to Yes. I found it amazingly helpful and, even more, deeply satisfying. There really were ways to think about, organize, plan for, and execute negotiations so as to do much better in them. My luck was a lot greater than just the book, though. I had already been admitted to a graduate program at Harvard, and, when I arrived on campus, I headed straight over to the Program on Negotiation at Harvard Law School to find out what other wonderful things they might have to offer me. As it happened, they invited me to take a series of courses culminating in what they called the Specialization in Negotiation and Dispute Resolution. By jumping at this offer, I had the opportunity to study with some of the greatest thinkers and teachers of negotiation in the world.
As I worked my way through classes taught by Roger Fisher, Bill Ury, Bruce Patton, Lawr
ence Susskind, Frank Sander, and David Kuechle, my understanding and skills got palpably better. Almost every teacher there was extraordinary. About one course, though, I cannot help boasting. The instructor in Conflict, Cooperation and Strategy never failed to amaze. His insights were astonishing, and his far-reaching mind took us to places we would never have been and understandings we would never have accomplished. That course was taught by then professor, now Nobel laureate, Thomas Schelling.
As an academic exercise, studying negotiation at Harvard was sublime. I loved the topic and got to think and write about it with some of the greatest teachers at a pinnacle of academic thought.
To my amazement and delight, though, the real-life part of the exercise was also bearing remarkable fruit. I was getting better as a negotiator. A lot better. My entire life started looking up as I built healthier relationships, planned more effective communication, worked to meet my own underlying interests as well as those of the people around me, and began to focus on and strengthen my BATNA. I was also introduced to the question that has come to be something of a guiding light in my life: What is a good outcome? I had become a genuine expert in what the world calls “the Harvard method” of negotiation.
It was a little bit like finding a magic genie in a bottle. “This stuff really works,” I remember telling a friend. I began to have stronger friendships, better alliances, greater satisfactions, and more money. Perhaps of even greater importance, I learned to focus on what I really wanted and on how to guide other people toward providing it to me. Of course, they tended to offer it in exchange for what they really wanted, but I began to see that not as a problem but as a huge new set of opportunities. Everybody wants something, and I can help them get it. In the process, I can get a great deal of what I want. It felt a bit like a new life.
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