Old Dog, New Tricks

    So, I thought I would write a little bit about how the big money-manager guys play the investment game, at both the more immediate manager level, and the more removed school endowment level.

First, the more immediate manager level.  These are the guys who work for mutual funds or other specific types of money managers.  They operate on one basic principle: knowledge = good investing.  Basically this means a particular mutual fund or other mixed organization of individual stocks has a specific, narrow investment area.  This could be one industry, or country or region, or one category of goods such as commodities or raw materials.  And these professionals know everything about that area.  They have strong contacts with a variety of professionals working at companies in that area.  They know the latest and greatest developments that are coming.  Most especially, they are watching the supply and demand chains for a variety of corporate entities related to their area.  Basically this broad spectrum of knowledge in a narrow part of the investment pie is supposed to help them make intelligent and informed decisions about what companies will do well and should be invested in by the larger portfolio.  Of course this sometimes breaks down – even the best, most informed guesses are not correct.

How this relates to you:  These are the same types of people you will be working with to manage your money, so this does give you a better sense of how they operate and why they can probably do a better job picking stocks than you can.  But how do you really tell the difference between one service provider and another?

On to the next topic: how endowments pick their money managers.  Basically, endowments have begun to follow the philosophy of judging their managers not on returns, which can be misleading, but on something less quantifiable – the way they think.   The idea here is that an intelligent and informed manager will make an advantageous investment decision 8 or 9 times out of 10.  In addition, the same philosophy of knowledge = good investing is used to pick managers.  Opinions are collected from other investment firms, previous co-workers and associates to individuals within the firms, and other investors in the firm.  Most importantly, face-to-face meetings are arranged so specific questions or issues can be addressed, and the general intelligence and knowledge of the group be evaluated.

How this relates to you: Obviously, the majority of the evaluation techniques are not open to the individual.  How then, if past performance is not always a valid indicator, can you choose one specific investment firm over another?   Key principles remain the same.  More knowledge means better investment judgment, and a certain amount can be discovered publicly.  Check out the key individuals in a firm – read articles about them.  There are tons and tons of publications about which industry or area should be invested in – check some of these out, and see how they compare to your own evaluation of current market conditions.  Absorb as much as possible in areas familiar and comfortable for you, and see where ti takes you.  Of course, investing in a range of industries is important, but if you know more about one area, that’s where your particular knowledge is going to give you an edge.  Don’t be afraid to use it by weighting your portfolio in that direction.