There is a terrific PDF (warning — its 105 pages) on the Seven Sins of Fund Management. It is a behavioural critique by James Montier, the Global Equity Strategist of Dresdner Kleinwort Wasserstein, and its full of all sorts of smart observations, backed up with data and charts.
I haven’t read prior work of Mr. Montier — but this PDF made me interested in his book, "Behavioural Finance: A User’s Guide."
I may be referencing parts of the PDF in the future, but if you want an overview, here are the 7 Deadly Sins:
Sin 1 Forecasting
The folly of forecasting: Ignore all economists, strategists & analysts
Do analysts understand value: who is the greater fool?Sin 2 The illusion of knowledge
The illusion of knowledge, or is more information better information?Sin 3 Meeting companies
Why waste your time listening to company management?Sin 4 Thinking you can out-smart everyone else
Who’s a pretty boy then? Or beauty contests, rationality and great foolsSin 5 Short time horizons and overtrading
ADHD, time horizons and underperformanceSin 6 Believing everything you read
The story is the thing, or the allure of growth
Scepticism is rare, or, Descartes vs. SpinozaSin 7 Group decisions
Are two heads better than one?>
Seven Sins of Fund Management
James Montier
Dresdner Kleinwort Wasserstein, November 2005
http://www.trendfollowing.com/whitepaper/Seven_Sins_o-DrKW-100436-N.pdf
Thanks for the link Barry. A trend trader? :) I guess we have something else in common other than our first names. I perused the first few pages and it’s so appropriate that in parenthesis the seven deadly sins are associated with each. Leave it to the Pope to accurately describe much of Wall Street. I guess it could also be used to describe the Archdiocese of Boston.
I find that a healthy dose of skepticism for all of life’s activities is one of the best skills one can develop. And it is a skill because you need to develop it. I don’t know how many times I’ve been told something can’t be done only to prove them wrong in spades. Well, not all of the time but many times. I’m from Missouri. I trust no one on Wall Street. I develop my own comfort level over time with those that I know will suit my needs. Then I graciously take from them what will help me.
Recently, one of the world’s largest financial firms, whose name will remain anonymous, told my mother to invest her entire retirement in a “balanced” portfolio which was weighted over 60% stocks and 30% bonds. Neither of which I find tremendously attractive right now. My mom just turned 65 and retired. It is a significant six figure sum and nearly her entire life savings other than her house. Her entire pension plan and 401K was liquidated into cash when she retired. So, at a time when so many dislocations exist and so much of historical precedence says to be careful, they wanted her to do what? If you were 25 and still working, I might be more foregiving. But this is the only livelihood of a retired person.
They don’t need to understand economics, technical analysis, or anything else. But for God’s sake, how can you not understand history and ask someone to invest their entire life savings when a near term market peak is likely developing? Oh, and take 1.5% fee off the top for such a recommendation. I think this foolishness is the same as exhibited by the fund comments by DrKW.
Barry,
I stumbled upon Montier’s behavioral reports about a year ago; they’ve been on my must-read list ever since. If you’ve got a ThompsonOne subscription, they’ve got several years of past reports, most of which weren’t included in the Sins of Fund Management compendium. The older ones are quite interesting to read with the perspective of hindsight.
I’m bothered more by the 1.5% fee than by the 60/30 advice. A random 65-year-old woman has a remaining life expectancy of twenty years, so she should be prepared to make her savings last thirty. Where can you invest that’ll earn a 1.5% alpha?
Not at the company that made the recommendations. You know, since I’ve always managed my own funds and my mom’s investment choices were always limited in her 401K, this was a rather interesting endeavor. Another to remain nameless nationwide investment firm worked up an investment strategy for her. I actually felt it was more thoughtful but they did not disclose a dirty little secret that was hidden in fine print of their mound of paper work. They were immediatly taking 5% of her money as a finder’s fee before investing it in their recommendations and would continue to collect a healthy fee from the funds annually ad infinitum which raised their fees to between 4-6% annually depending on the fund. Huh? Now, I will not be unprofessional with anyone in a business setting so we simply declined their offer. But I had half a mind to give them the other half of my mind. Is this the way this firm does business nationally? Their retail offices are franchised so it is likely a significant source of their income.
Hey, if you can beat the market by 5% regularly and that is after fees, you can charge me 90%. But to deliver sub par performance and collect those fees is almost as bad as Enron. So, my mom says, ” I wonder how many people in town know they are being charged those fees. There are alot of people with their money at XYZ.”. Hmm.. I wonder.
Is this the way this firm does business nationally?
It is the way most of the financial industry operates. You will never earn better money than by learning enough to do it yourself.
I attended a conference where Michael Mauboussin of Legg Mason was a guest speaker — he talked a lot about the 7th sin. How there is a lot of career risk when you are the lone person that is bearish on a company when everybody else is bullish. If you are right, you look like a genious, but if you are wrong, you’re the idiot.
If you join the group, and the company misses their target, then you can say “Gee, 7 out of 8 other people thought the same as me”, but if you are on your own and you are wrong then you have nothing to stand on. You missed what everybody else was saying.
Which brings me to another thought — I don’t follow FirstCall number *too* much, but I always get a laugh when I look at some large cap companies. Take Microsoft for example — there are 33 analysts covering the stock for the upcoming quarter. The high estimate is 35c and low is 32c a share. How can you tell me that 33 individual people are within 3 cents of each other? Seriously. Think about that for a minute. 33 individual people within 3 cents.
Simply. Amazing.
Seven Sins of Fund Management
Barry Ritholtz:There is a terrific PDF (warning — its 105 pages) on the Seven Sins of Fund Management. It is a behavioural critique by James Montier, the Global Equity Strategist of Dresdner Kleinwort Wasserstein, and its full of all sorts…
Seven Sins of Fund Management
Picked up a link from The Big Picture to an interesting paper (warning, .pdf link) critiquing the behavior of fund management.
Paper was written by James Montier at the German investment bank Dresdener Kleinwort Wasserstein. The abstract:
How can behav…
Abhay,
Did you watch the Olympic downhill last night? Notice how close the times were? I am sure it is the same thing with analysts. When you are THAT good, there isn’t a whole lot of variance. Yeah, that’s it.