Active Management

The last siren call of investment managers is an appeal to your ego.  This is how it goes: 

“Yes, we know most managers fail miserably to outperform the market after they pay themselves hefty fees, but those guys are for the small accounts. You have a million dollars! This will get you access to the next level of managers.  The really good ones.” 

Or: “Oh, of course, accounts below a million dollars are better off investing in asset classes, but you have 5 million dollars! We have proprietary research just for you.  Our investments trounce the market.”

Or: “Well sure, if you only had $5 million it might make sense to keep expenses low. But you have 10 million dollars! You can pay for our quantitative algorithm that picks the best stocks based on how loud Jim Cramer yells the ticker symbol.”

Joking aside.  The trend is clear and you can see the allure.  At every wealth level it seems you have just enough to get you access to the real managers.  So how do you know how much you really need to get the best managers?  Maybe there is a way to find out.  Maybe there is an investor out there so large that they trump every other investor and truly have access to the very best managers.  And maybe this investor makes their returns public so you can see exactly how well their access to the “best” managers turned out for them.

The Princess Bride can teach us a valuable lesson about investing.

I never imagined I would make such a statement until recently when I was pondering the futility of market participants trying to predict the next market downturn or pick the next big stock.  

For me it brings to mind the movie The Princess Bride.  One of my favorite scenes is the Battle of Wits between the characters Wesley and Vizzini.  For anyone who has not seen the movie the Battle of Wits is structured as follows: There are two wine glasses on the table.  One of which has been poisoned by Wesley.  Vizzini does not know which glass has been poisoned and must deduce which glass is deadly. Once Vizzini selects a glass they both must drink their wine and the loser will die. 

By Eric Burkholder

There is a very good article out today on MarketWatch.com.  "You are the best predictor of next bull or bear" The title is misleading but the theme of the article is this:  There is no evidence that any person or any expert has any ability to predict mutual fund returns or forecast the economy.  Actually, an even better summary of the article is in the affirmative: There IS significant evidence that traditional performance metrics cannot reliably predict mutual fund performance and there IS significant evidence that experts do a very poor job of predicting turning points in the economy.  

In the era of perpetual reality TV offerings it is no surprise that Big Foot has finally nabbed his own TV series. And like most outrageous reality TV I caught myself watching for a few minutes.