Jump to content

Why smart Investment Manager analysts best picks could not beat market?


LongHaul
 Share

Recommended Posts

The answer, I believe, turns on three issues:

 

  • everyone is not Buffett or Munger, so diversification will get you average returns.
  • The deeper issue is that asking an analyst for his or her best idea is a forcing function on something that should not be forced, your need to wait for an outstanding idea to surface.  Buffett's best idea at the top of the market ('68) was to get out of the market!
  • in all probability, the investment firm graded the trade on a yearly basis and ideas often take more than a year to work out

Link to comment
Share on other sites

Munger Mentioned at the DJCO meeting that the best picks of a local Investment Manager could not beat the market. 

It happened 3x apparently. 

 

Any thoughts on why this failed?

 

a) most people are bad analysts

b) the quality of local managers in Omaha, I'm guessing, is awful

c) Buffett/Munger know a & b are true and don't want people to lose money so they always recommend not investing yourself and go into index funds and they say look even these smart people can't do it

Link to comment
Share on other sites

The answer, I believe, turns on three issues:

 

  • everyone is not Buffett or Munger, so diversification will get you average returns.
  • The deeper issue is that asking an analyst for his or her best idea is a forcing function on something that should not be forced, your need to wait for an outstanding idea to surface.  Buffett's best idea at the top of the market ('68) was to get out of the market!
  • in all probability, the investment firm graded the trade on a yearly basis and ideas often take more than a year to work out

 

I am guessing you nailed it netnet.  Great analysis.  Unless something was missed but I can't think of anything else right now.

Link to comment
Share on other sites

I think this article might explain part of it.

 

 

From: http://pembridgecap.com/?m=201706

 

"The Best Idea Fund

 

Charlie Munger coined a problem at his dinner party: Capital Group (large LA based fund manager) created The Best Ideas fund. This fund would collect one favorite stock per analyst in the fund. Munger mentioned that this fund underperformed the market significantly and asked guests as to why this might be.

 

The answer was

 

consistency bias: the idea that managers had spent the most research time on was typically their “best idea”. Human beings tend to selectively filter new information that confirms the first thing they belief to be true based on something they read or listened to.

 

the specialist problem: specialist analysts get biased toward their sector benchmarks. They do not select the best stock, but the best stock in the sector.

TC Comment: this compounds the insider view bias that Kahneman discovered. Man is naturally taking too much of an insider view already in general, and not enough benchmarking ideas to the outsider view, or base rates."

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...