The truth about fund managers: it's not about beating the benchmark
If I was to give you a stock tip, what would you do? I'll tell you. You'd do what you always do - whatever that is.
Everybody has their process for assessing what stock to buy and when - a habit if you like - and it is the integrity of this very individual process that makes the difference between a successful investor and a bunny.
The top fund managers and investors are not lucky; they have not been blessed with a genetic ability to predict future share prices.
Their success comes from the development and refinement of a process for picking stocks. This requires hard work, losses, experience and an investment of time.
The alternative is to adopt a process on the instruction of another, and the tantalising prospect of buying a shortcut has spawned a cohort of products sold by heroes and charlatans whose primary purpose is not to endow you with investment knowledge but to cash in on your laziness.
One of the first such processes was described in Benjamin Graham's book The Intelligent Investor, endorsed by Warren Buffett and marketed ever since by a legion of Buffett-quoting product sellers more interested in your credit card number than the efficacy of their offering.
For instance, you might have also heard of W.D. Gann, whose technical indicators are on every commercial piece of charting software and whose theories still occupy a chapter in every course on technical analysis. Gann's son, John Gann, was a stockbroker in New York.
Alexander Elder, in his book Trading for a Living, said: "Various opportunists sell Gann courses and Gann software. They claim that Gann was one of the best traders who ever lived, that he left a $50 million estate, and so on. I interviewed W.D. Gann's son, an analyst for a Boston bank.
He told me that his famous father could not support his family by trading but earned his living by writing and selling instructional courses.
When W.D. Gann died in the 1950s, his estate, including his house, was valued at slightly over $100,000. The "legend" of W.D. Gann, the giant of trading, is perpetuated by those who sell courses and other paraphernalia to gullible customers."
There are two types of people who offer an investment process: those who sell it and those who do it.
Fund managers do it (some of them, anyway) because these days many of the very large funds are run by people whose job is not to outperform but to replicate a benchmark.
When you run billions of dollars, if you want to keep your job you don't have to be a top-quartile performer; you just have to make sure you are not a bottom-quartile performer. You have no choice when you are a large industry or super fund with thousands of members and many billions of dollars.
The transition is forced upon you: from a fund manager trying to outperform to a "fund administrator" offering little more than access to the average return less fees.
On the flip side are fund managers whose businesses live and die on their performance, fund managers who develop sophisticated processes that work, fund managers who go to tremendous lengths to find some insight, some edge, that an average, time-poor, under-resourced or lazy investor won't find, fund managers who mix other people's money with their own and charge themselves with the responsibility to not only make money for themselves and their customers but to preserve their lifeblood, the assets under management, in times of trouble.
To mention these fund managers in the same sentence as a fund manager whose job it is to replicate the benchmark while hosting yet another branded event for 500 people in the botanical gardens at the expense of their faceless investors, with not a care in the world about fund performance, is an insult.
So if you want to "shortcut" yourself to a successful investment process, keep your credit card in your pocket.
What you need to do is identify the successful and invested fund managers, go to their websites and read about how they do it.
Most fund managers publish their investment philosophy, methodology, process or similar as a marketing ploy. Net result: there are a host of investment processes available on their websites, most often on the "About us" link.
Which fund managers are invested?
Go onto the internet and look up the best performers in the past year. Or check the listed investment companies on the ASX (visit the ASX website) and look at the share price performance over one, three and five years. The cream will float to the surface.
Or, of course, you could ask me how I do it. My $31 million fund was up 22.34% last financial year. I am one of those who lives and breathes and dies by their stock-picking performance.