Choosing and investment manager is in many ways even more difficult than choosing stocks. We meet with them and open ourselves up to a new set of biases. Successful fund raisers are more qualified in psychology than in economics. Just like your “trusted” “sweet-talking” jeweller is more qualified in etiquette and mannerisms than actual gemology, some investment managers too know the art of selling better than the art of making money.
I came across an interesting chapter in the book “Simple but Not Easy” about choosing the right managers. Here are a few take away points to consider while choosing someone for PMS.
- Counter Presentational Principle
- The best guy to do the job need not be the one with the best presentation.
- Don’t get too impressed by smooth-talking, head bobbing, smart dressing bankers. A simple test is to tell a rotten joke and see if he laughs, if he does, theres a clue to his character.
- Don’t be put off by people simply because they are absent minded. Some of the best genius’s are.
- “My job is to find the loot, My presentation style is cute, I tell them i have nothing to fear, and when they signed the cheque, i disappear”.
- Get their personal numbers ! Home line too.
- Characteristics to look for
- Convictions – a good manager need not have knowledge, opinions or convictions about every damn thing happening in the world. People who appear unsure of a lot of things and sure about the things they are sure about, are way more trustworthy that people who seem to know everything about everything.
- Commonsense – Common sense really matters more than brilliance. Funnily practical people tend to use probabilities way more than brilliant people. Check if your manager happens to like poker or bridge.
- Diversification vs Diworsification – If one really wants to diversify, you can do it owning as few as 15 stocks, though a portfolio with less than 25 is regarded as concentrated. Once the number of stocks goes up, it really becomes much easier to tolerate duds. Just compare how well children are taken care of when they are single kids vs families with more than 5 kids.
- Impact – When every buy or sell decision has a significant impact, managers ought to be super careful.
- Goals – Simple goals, in sentences that we use in daily talk. Not some idiotic, sophisticated, twisted language that people use while writing up “career objectives” in resume’s. Portfolio’s should stand for something ! Managers should also have a fair idea of what they are generally good at.
- Transaction Records – The HIV test !
- Nothing can be hidden by transaction records – excessive churning, loss of conviction when markets are shaky, buying/selling when everyone else is.
- On average the busiest managers perform less well than the least busy.
- Doing nothing, is often a mug wiser policy than doing an uninformed, conviction less something.
- Think busy, act idle.
- Very few people can successfully mimic super investors, despite what Mohish Pabrai keeps talking about.
- Don’t give money to a “Phattu”. Failure of nerve cannot be tolerated.
- Bernstein Paradox – when the price of an asset falls, its expected return rises.
- Incentive and Interest – Do your fund managers invest a large proportion of their own assets in the funds that they manage ? They should be prepared to take their own medicine.
- The workplace –
- A great manager can simply be ruined by being in the wrong place. Rather than have them come to your office, go to theirs !
- The lonelier the investment manager, the more likely can he resist the siren song of the consensus.
- Very many great investors, do most of their research at home.
- No of portfolios – Small is beautiful, pooled is the best. If the manager has hundreds of PMS accounts to handle, even executing his decision is like a full-on strategy. Pooled funds therefore are way easier to execute that large number of private accounts.
- Reporting – “Pass ya Fail ?”
- Look at a standard report and see if you can understand what has happened with your money. Frankly there are only 3 things that could have happened, either you made some, lost some or were just where your started.
- If there is too much mumbo jumbo, ask for a report that you can understand, if they still refuse, you know what to do 🙂
- Good reports
- talk about geographical, sectoral and currency exposure.
- bring out the performance is really easy to understand tables and graphs.
- compare themselves to benchmarks.
- clearly state, the HITS and MISSES.
It takes a lot of time and energy to make money, be careful about who you trust. Take time to decide.Remember how much time you took in deciding “which car to buy”. That was an expense, your asset ought to be looked into more carefully.
Happy Compounding !