It’s the process, stupid!
I’ve said it before and I will continue to say it: if you don’t understand how a portfolio manager is making money, turn your back and run.
A corollary of this is: if the description of the way the portfolio manager is making money sounds too complicated or if you fail to grasp the principal elements of the investment process, turn your back and run.
A lot of running, I know, so wear your favorite sneakers when you visit a manager. But that’s what you need to do if you care about what will happen to your money. In fact, you shouldn’t even look at any figures relating to performance before you have gone through the exercise of understanding where they came from – and how repeatable they are. Yet, as you already guessed, the opposite is the norm: bad figures mean automatically no audience for the hapless manager, so no one talks about a potential pool of true talent. People are just too lazy or occupied elsewhere (or – you guessed it – stupid) to think rationally about this matter. And just as in the gold digging times in the Far West prospectors resorted to any means (real or surreal) to find the metal, today hope springs eternal that the next bright mind in the investment field is just around the corner waiting for nothing better than an audience with you. Get real, please.
Why “the next bright mind”? Is that qualification even relevant? While pondering investment processes and selecting an investment manager do you think it makes a difference if he/she
- is a top graduate from a top school oozing intelligence with every syllable and exuding confidence (dare I say arrogance?) out of every pore, or
- is clueless?
Many years ago, a very smart person made me smile with her take on the question. She was my boss and the head of proprietary trading at a major banking institution. During a brief break, she stood among a few senior colleagues debating which were the best pedigrees for successful traders. One said “need best school background”, another “need strong achievement record”, another “need brain” (to this day I still can’t imagine what he meant by that). Yet another suggested “his mother’s cooking skills are the key.” All this time my boss looked casually at her nails. When prompted, she snapped “I don’t really know; just give me the ten lucky idiots.”
I agree, with an important caveat. The word “lucky” is a problem: luck is not replicable because it’s random. But here’s the real catch about processes in the investment world: an idiot is worth as much as genius so long as their processes are defined and replicable. All you must remember to do is follow the genius and do the opposite of the idiot, and you’re set.
No need for IQ in investing.