Posts filed under “Philosophy”
Well, that was a busy week, wasn’t it?
The non-Taper, the Lehman anniversary, oh, and our little launch has kept your humble author rather busy. Since its Friday, the day I like to get all philosophical on y’all, let’s reflect on a simple issue: What is more important to investors, their process or their results?
Given the amount of emphasis The Street puts on results, it is no surprise that Outcome dominates.
“The reason investors and the investment industry rely on performance is because it’s simple, objective and easy to measure. But more importantly, performance goals, performance reviews and performance measurement are so common in business, in sports, in education, in investing—almost everywhere—that not using them feels uncomfortable.”
-Marshall Jaffe, Think Advisor
In broad strokes, what Jaffe is suggesting is dead on. However, I suspect there are more nuanced wrinkles involved.
Wall Street appears to be selling outcome, but thats illusory. What they are really selling is potential results. They are luring investors in by selling the possibility of out-performance, and not the actual out-performance itself. After all, how many managers receive the wildly misnamed “incentive fees” even when they under-perform? The incentive, to be blunt, is to bill 2&20 on as many assets as possible. This is not the sort of fee outcome most investors really thought they were signing up for.
Then there is meta-performance — why do you imagine you have the skills to pick the managers who will out-perform? Experience teaches us that most don’t; those fund of fees that charge an additional fee on top of fees not only can’t pick managers that consistently out-perform, their additional fees make the task nearly impossible.
When you consider the alternative — evaluating process — most investors (including many pros) simply lack the skill set to proceed. It has a degree of subjectivity; it relies on statistical analysis that is often counter-intuitive. And perhaps most difficult of all, it requires the abdication of traditional investing myths. To quote Jaffe, “Process is a much better predictive tool in the search for future success—and the most successful people in their fields focus on it and only it.”
Process focused investors shift the usual thought process. They create a different perspective from the usual analytical framework. I have yet to see anyone make good investment decisions based on evaluating queries Sharpe ratios and biggest draw downs, but that has not stopped a cottage industry of consultants from relying heavily on those and related mostly useless questions.
Its not just that “Past performance is no guarantee of future results.” Its that it is an actively misleading goal, a dangle of which you have precisely zero ability to evaluate.
Hence, the best practice for both individual and institutional investors is to focus on the investment process, and not the outcome.
This was awesome: Dear Barton: You have a man in your employ that I have thought for a long time should be fired. I refer to Sherwood Anderson. He is a fellow of a good deal of ability, but for a long time I have been convinced that his heart is not in his work….Read More
I am going to skip the my usual Friday Philosophy as this week has been enormously insane for me, out late for work every night, with lots of meetings every day (and tonight is another holiday). But I do have a few things I want to discuss/tease/show you: • There are still a few tickets left…Read More
I am thrilled to tell you about the 5th Annual Big Picture Conference coming up on October 8th in New York City. We are extremely excited about the speakers, topics, even the venue itself. And, we are expecting our largest audience yet. I wanted to personally invite you as a reader of the Big Picture to what we…Read More
Lately, the day job has been inspiring many of our Philosophy Phriday posts. (This coming Sunday’s WaPo column was also inspired by what we see int he office). Today’s post is another such example. Perhaps its because we run a somewhat different business model than is typical in the finance industry in the US. Our…Read More
“Knowing yourself is the beginning of all wisdom.” -Aristotle Over the past few weeks, I have been waxing eloquent on the subject of self-awareness, knowledge, and recognizing one’s own lackings thereto. Last week, we discussed the Value of Not Knowing; that followed the prior week’s discussion of why I don’t bother guessing a…Read More
In 2011, I posed the question “Is McKinsey & Co. the Root of All Evil ?” This was not a tongue-in-cheek query, but rather, a look at how so many recent disasters traced their origins back to McKinsey & Co. Which brings us to the latest issue negatively affecting the United States, skyrocketing CEO pay…Read More
Its Philosophy Phriday, and as such, I want to discuss my ignorance. Or rather, my justifiable pride in my willingness to say “I don’t know.” I use this phrase frequently, for there are a wealth of subjects I know very, very little about. Sometimes I am asked things I could not possibly know, particularly about…Read More