I wrote this Friday morning and somehow is never published. I don't know what happened but whatever....A discussion broke out in the comments for yesterday's post and I thought some of it would be useful here in case not everyone reads the comments.
The comments were about buy and hold and then drifted into choosing a money manager. The reader asked;
...it is impossible to know what someone's long term performance will be ahead of time.
If investment managers are the "market", how can a manager beat the market ad infinitum? This is a logical contradiction.
My reply;
What is more important to you, beating the market or having enough money when you need (it) and being able to sleep more often than not?
In my answers above I don't think I said competence ties (in with) beating the market.
I would focus on a manager's philosophy, it is either right for you or it isn't, either gives you the sense that they can get you to where you need to be or not. A competent manager will beat the market sometimes, lag it sometimes, have hot streaks along the way and also go cold.
If beating the market is your only criteria you will be disappointed. IMO an investor needs to have enough money when the time comes and need to be able to stomach the ride between here and there.
6 comments:
Roger,
Interesting but LONG article on risk management in the NY times...
http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=1&_r=1&ref=business
The "market" is the aggregate return from all participants. Some exceed the average return, others lag the average return. Half of the participants will fall short, often way short of the market. The point is why not just settle for market returns and not worry whether you will fall short. Managers who make the wrong sector play, or get fooled by moving averages etc. can actually cause someone not to have enough money when they need it.
The question about beating the market arises because that is the only reason someone would choose an active manager. Anybody can easily earn the market's return through index funds without taking on the additional risk of falling short that comes from active management.
I wholly agree with the disappointment comment regarding beating the market. But active management comes with an additional price that virtually assures that over time, an active manager will actually lag the market by a wide margin. That is, even those managers who earn the market's return, their clients will that return, minus all the management fee and unnecessary taxes and consequently fall short.
I hope your client's read this and proceed with their eyes wide open. The evidence is available for all those willing to look.
Anyway, I know this is not the place to come and preach passive investing. I will cease causing commotion. Later.
I think many small investors are passive/active: they see the argument for buy and hold yet still feel that urge to add a bit to the market return. It may be a fool's game, but it does add a little interest to one's investing life to obtain additional returns based upon correct understanding and correct decision-making, however limited the sums involved. If I can be a bit active and "creative" with a portion of my portfolio and obtain an overall return near the market return, I am satisfied with my efforts.
The question about beating the market arises because that is the only reason someone would choose an active manager.
You might want to learn something about the concept of risk adjusted return.
thanks for the NYT link, i'll read it now.
Roger, you are a sports guy, why can selecting money managers be similar to selecting the baseball team you think will win the series. Why can't there be a manager that consistently wins or ranks high, just because of a combination of raw talent, luck, and better resources?
It seems to me, its not that some managers will win and then later lose, it would seem that some managers are really bad, and never win, and that allows some managers to consistently out perform (either in a relative, or hopefully in an absolute sense)
there are some managers that are bad repeatedly and some that are good more often than not but my hunch is that most are middle of the road. but maybe i have that wrong.
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