Are fund managers worth their salt?

- N
- nonsense
  
  Contact options for registered users
posted
15 years ago

Thu, Sep 4, 2008 6:02 PM

I notice most fund managers have fancy corporate titles or Ivy league degrees but have very little street smarts business experience. They typically have climbed to the top of the ladder of investment firms or have Phd's, but almost none have any experience with the day to day nitty gritty of actually running a business.

How are these the kind of people to trust with your money on which company is going to do well? Can the complexity of a company be reduced to a fancy spreadsheet calculation? I run my own little business, and even I can not say with any certainty what will happen six months down the road!

So my question is, shouldn't actual business owners be the best people to judge whether a company is good for investment? Why should I pay 1% management fees for people who can not consistently outperform random luck? Should I think about becoming a venture capitalist so I can invest in people I get to know personally?

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

- B
- BreadWithSpam
  
  Contact options for registered users
Vote on answer
posted
15 years ago

Thu, Sep 4, 2008 7:05 PM

People have different skills. Someone who's a great CEO may not be a great financial manager. Chances are that he's got the help of a great CFO. I'd expect there to be more in common between CFOs and investment managers.

Again, you seem to be confusing "running a company" with "managing finances". They are different (if in some places overlapping) skill sets.

Why would they? A guy who owns and runs a car repair shop is probably vastly better at repairing (and knowing what it'll take to repair) cars than he is at computing rates of return and financial feasibility. So he consults with his accountant, his bank, and perhaps his financing partners before he, say, borrows a heap of cash to buy new equipment.

It's his job to convince his partners that he'll use that equipment to profitable purpose and that he'll pay them back. It's their job to decide whether they think he can or not and how much to give him to do so. Different skills.

Seems kind of silly. Why should you?

Of course, if they're doing more than simply failing to outperform - if they're doing things like managing risk, handling volatility, dealing with tax efficiency and such, perhaps you are getting your money's worth. If not, then, again, why should you pay them all that?

Sure. You have a heap of money to invest? Connections?

- D
- dapperdobbs
  
  Contact options for registered users
Vote on answer
posted
15 years ago

Tue, Sep 9, 2008 6:55 AM

The idea behind "Security Analysis" by Graham, Dodd, & Cottle is that analysis of the company's business forms the basis for buying (or not) the stock. This topic has been discussed previously on these boards, with the general consensus (I disagree) : the average investor does not have the time nor intelligence nor resources to analyse companies and construct his own portfolio. Peter Lynch mentioned that with 45 minutes a weekend the average man can manage his own portfolio. Mnay fund managers do not even know what the companies in their portfolios do, since they "invest" on criteria such a "momentum" and "market correlation (how the historic movement of the stock matches historic market movement)".

Also, looking at other companies' operations may lend insight into how to run your own company.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.