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10 Reasons Why You Have An Edge Over Professional Money Managers
High fees:
Management fees act as a drag on returns
High fees: Management fees act as a drag on returns
Incentives: Money managers are paid to acquire assets, not outperform (usually)
A $1 billion AUM fund makes 100x more $10 million AUM fund
So, managers spend most of their time...acquiring assets
Outperforming helps to acquire asset, but doesn't make them more directly
Size:Get too big and you move the market when you buy/sell
This eventually limits your investable universe
Shortened time horizon:If your investors are focused on next week, month, or quarter...so are you
Lots of clients demand short-term performance
Short-term underperformance = withdraw assets = less money for you
Managers can't think/act for the long-term
Window Dressing:Some fund managers buy recent winners right before the quarter ends
Makes them look good to their clients, even if they didn’t benefit at all from the recent appreciation
Closet Indexing:Some fund managers closely match the holdings of index funds to minimize alpha in both directions
It lowers the risk of underperforming
It also kills the ability to outperform
Taxes:Who pays them? Investors! Not the fund managers
There is no incentive to optimize for taxes
Would you buy/sell differently if there were no tax consequences?
Career risk:If you lose money on $AAPL, investors are understanding
If you lose money on a small company no one has ever heard of its much harder to explain yourself
Makes it hard to invest in small, little-known companies
Forced selling:Clients pull their money after big market declines, forcing managers to sell great stocks at the worst possible time
Some keep cash on the side to help buffer this, which drags down returns
Forced buying:New money flows in after rallies, forcing buying of appreciated stocks
If you love a stock at $50, it doesn't mean you love that same stock 3 months later at $100!
All of these factors combine to make it incredibly challenging for money managers to outperform
I KNOW that I couldn't outperform by managing other people's money
I would act differently since I would constantly have to explain myself to others
I KNOW that I couldn't outperform by managing other people's money
I would act differently since I would constantly have to explain myself to others
Even with these factors, some fund managers STILL outperform, which is incredible
The greats you know:
@WarrenBuffett
Pat Dorsey
Terry Smith - @FundsmithLLP
Cathie Wood - @CathieDWood
Bill Miller - @B3_MillerValue
Polen Capital
Chuck Akre
The greats you know:
@WarrenBuffett
Pat Dorsey
Terry Smith - @FundsmithLLP
Cathie Wood - @CathieDWood
Bill Miller - @B3_MillerValue
Polen Capital
Chuck Akre
A few others great follows from Twitterverse:
@GreenhavenRoad
@ritholtz
@BarrySchwartzBW
@UpslopeCapital
@IntrinsicInv
@GerberKawasaki
@HaydenCapital
@altcap
@AltaFoxCapital
@GreenhavenRoad
@ritholtz
@BarrySchwartzBW
@UpslopeCapital
@IntrinsicInv
@GerberKawasaki
@HaydenCapital
@altcap
@AltaFoxCapital
Non-Twitter:
Michael Shearn
1MainCapital
Connor Haley
Frank Sands
Mark Dow
Joel Tillinghast
Henry Ellenbogen
John Huber
Scott Miller
Steven S Wymer
David R. Giroux
Will Danoff
Kathy Xu
Michael Shearn
1MainCapital
Connor Haley
Frank Sands
Mark Dow
Joel Tillinghast
Henry Ellenbogen
John Huber
Scott Miller
Steven S Wymer
David R. Giroux
Will Danoff
Kathy Xu
"If professional money managers can't beat the market, what chance do I have?"
You have
Permanent capital
No career risk
Aligned incentives
Ability to think/act in the long-term
These are MASSIVE advantages
Don't waste them by trading!
You have
Permanent capitalNo career riskAligned incentivesAbility to think/act in the long-termThese are MASSIVE advantages
Don't waste them by trading!
