Post 2300 — On Business Issues

Every 100 posts or so, I take a moment to think about the broader aspects of what I do.  As a blogger, my goal is to educate, and I think I have covered many issues well here.

As an asset manager, my goal is to serve existing clients well.  Most of my assets under management stem from value investing, and 2013 has certainly been good to my clients and me.  2013 has made up for 2011-12, and then some.

What has surprised me is how existing clients have added to their assets with me.  I expected growth to mainly come through new clients, but at present, most is coming from existing clients.

Another thing that surprised me is that a number of my clients said have said something like this to me, “I really appreciate that you don’t press us to give all of our assets to you.  But you help us as if you have all our assets.”

I know that I have to do marketing, but I don’t like it, and so I do as little of it as possible.  Part of it is the unpredictability of investing.  I have a good track record, but does that really mean I will do better than the index in the future?  Markets are fickle, and much more is due to favorable providence than most of us imagine.

All of us say, “Past performance is not indicative of future returns,” but few of us truly act as if we believe it.  How many consultants  will bring forth managers that are underperforming but have good prospects?  Isn’t the proof in the pudding?  Past may not be prologue, but it is incredibly difficult to get in the door with those who advise individual and institutional investors if you don’t have a winning track record.

Why is that?  Secretly, everyone believes that “Past performance IS indicative of future returns.”  Success breeds success, right?  The man with the hot hand will remain hot, no?

Sadly, no.  Though momentum effects sometimes work in the stock market, there is no evidence for manager outperformance persistence, outside of Graham-and-Doddsville.  But you can’t get naive buyers to think otherwise.  Almost all individual and institutional investors choose managers at least partially on past performance.  That’s the sad truth, and all the disclaimers in the world can’t change that.

I am grateful for the trust my readers place in me.  I am grateful for the trust my investors place in me.  And I hope that I never disappoint you badly.