One of the benefits of being in the DC area is that there are a lot of other people in the DC area too. I have a friend that works at a hedge fund, just met a guy that works as a lobbyist broker, and had some interesting interactions with a few Ivy League business school PhDs. As much as I criticize DC for the traffic and crime, these kinds of opportunities don’t exist back home. It’s been great for learning a lot more about how the world works. People come to DC for a number of reasons, but many times it does come back to some kind of policy related things, and with financial reform going on my kind of people are here all the time.
As a part of this central of power benefit, I recently had the opportunity to meet with some mutual fund professionals. This included mutual fund managers and analysts. There’s no value in saying why I was there or why they were there, but instead what I learned about the industry specifically.
Their Research Is Better Than Yours: The old saying is you can’t beat the market, partially because the people in the market do this full time. These people travel all over the country. They meet with executives, suppliers of companies, and other analysts. The specialized analysts are just as capable of being financial officers at the companies they cover as the people in place. Aside from simply guessing what a company should do, they’re actually in a position to tell the company what they should do; many times serving kid kind of like consultants. These analysts’ livelihoods depend on these companies too, and they want them to succeed.
Emotion Is Everything: One thing personal finance and investing books preach extensively is the removal of emotion from investing. If you get attached to investment, you’re more likely to make bad decisions regarding that investment. But it is in fact this emotion that drives some mutual fund managers. To them, emotion is everything. If you aren’t emotionally connected to an investment, how can you really believe in it? Now the idea behind this philosophy more applies the actively managed mutual funds, than index funds. But it was shocking to learn there was so much emotion behind some mutual fund managers.
They Get It Wrong: Sometimes they make investments that don’t work out. But they proudly talk about them as if they were profitable investments. That’s because they always learn something from it.
Experience Is Key: Dave Ramsey is to debt what Bobby Boucher’s momma is to “the foosball”. It’s the devil. Ramsey and I differ on many personal finance issues, but I can agree with him about experience. If I recall correctly, he only invests in mutual funds where the fund and its manager(s) have been around for a while. The experience gained from being in this industry is invaluable. It doesn’t always lead to the highest returns every year, but the people who do this day in an day out for 20 years know something about what’s going on.
Perhaps the biggest takeaway of all though, is really no big surprise. It’s to keep you money in index funds. Unless you can meet the manager of the fund themselves. This is next to impossible unless you’re looking at making a huge investment and can get the manager’s attention that way. Fund managers are as different as a West Coast rapper and an Ivy League history major. Their intelligence is different too. When you buy a mutual fund, you’re really buying that manager. Make sure you know something about the company too. Do they promote from within or just hire last year’s hotshot from another company? The people I met have been with their respective companies for longer than I’ve been alive in some cases. They know their business and their funds. I’d feel confident investing with them, but of course only after I verified their track record through an independent party like Morningstar.
The manager isn’t everything, but without it the fund is nothing. And just to make sure we aren’t confusing anything here, I’m talking about actively managed funds and as of right now I still intend to stay in index funds.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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