Introduction
The
actions of people drive investment results. Numbers are an abstraction of the
various realities that people produce. Quantification is useful in reporting
history, not motivation. As a long-term student of investing and the investment
business, I have seen repeated failures of extrapolating a given set of numbers
that produce very different results. At best past numbers are useful as to what
has happened in the past of repeated results.
Why
Repeated Numbers Won’t be Predictive
People
are not machines. Most of us live, think, and emote in the current time period.
While our memories do produce faulty or incomplete renditions of the past that
we often use as judgments, we don’t always. We don’t follow the old paths, all
the time because of change elements perceived or real.
Change
Agents
I
believe that the presence of change agents occasionally lead to change in
behavior. Some but not all change agents are physical, emotional, political,
and may be a result of new personalities entering the decision process; e.g.,
the titular or actual investment committee. Thus I believe it is useful to apply
more weight to the study of people than numbers. (This is quite an admission
for a green eye-shaded CFA® charter-holder.)
Investment
Personalities
I
suggest that it is worthwhile to practice the art form, not the science, of
people watching with open eyes and empathy. The three useful areas of the study
of investors are:
The
specific investor
The
collection of investors
Speculators
called “the market” and financial intermediaries
Each is
quite different, intermittently changing, making false starts and reversals and
are sometimes unwilling or unable to state clearly their
intentions and motivations. Our good friends the technical market analysts and
other quant type analysts and managers believe that their recorded actions are
sufficient for predictive purposes. They will be right some of the time but
often miss a major change in the mood.
The
Decision-Making Investment Committee
As a
practical matter for some individuals and institutions there is a singular
decider who makes final decisions without benefit of external counsel. In
addition they are legally empowered to make investment decisions, consult with others and/or are heavily
influenced by external sources. Having chaired, sat on, or served various
investment committees, I have learned some investment committees, in truth, make all the decisions. Others are essentially
ratifiers of outsourced chief investment officers (OCIOs) or are driven by the
chair or other dominant personality. What I have experienced even with a number
of people on the formal or informal committee is: change one person, and the
direction of the committee may change. The new person may be the change agent
for a reluctant prior group, a dynamic leader, one with a different set of
investment or management experiences. The informal committee may include a personal
lawyer, tax accountant, neighbor, spouse, significant other or a friend of your
golf buddy.
“Time
to Judgment”
There
are two interrelated statistical periods which could be the current quarter,
year, length of term expected on the committee, lives of beneficiaries or
eternity. (We have suggested that the portfolios be sub-divided in terms of
payment streams into timespan portfolios from short operational needs all the
way out to legacy considerations.)
Measures
of Success
After
the targeted investment period(s) are identified, a key question is what measures of
success to use. The first duty of a fiduciary (and we are all fiduciaries
for ourselves and others) is to deliver returns
sufficient to meet expected spending levels. Thus one of the measures is in
real, after-inflation returns. If the beneficiary is tax paying, the payment to
the beneficiary should be after taxes.
That
is the easy part. Much more difficult are the appropriate measures of
investment success and prudence.
Indices
made up of individual securities were never designed to be prudent portfolios,
but rather a measure of perceived central tendencies. To me these are
inappropriate measures.
Usefulness
of Mutual Fund Performance Databanks
I suggest the comparisons should be with other investors
which are operating under the same constraints as the account.
"People Decide, Numbers Report Investment Success"
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