Double Standards & Great Expectations

You need preparation and mental fortitude to benefit from a great track record, it’s never a straight line upwards. Don’t be blinded by smoke and mirrors, focus on the essence.

Everyone wants an amazing track record. But the problem with great track records is that people know they are great only after they have happened. It’s not as easy to recognise them while they are still happening.

We look at 30 or 50 year track records and stand in awe of the amazing, flawless and easy ride that someone enriched himself on. Fund managers want to achieve them and investors want to be invested with the managers that achieve them.

We believe that there must be some secret or recipe, some timeless and universally valid laws that enabled this investor to muster up such a “magical” track record.

We start searching and asking, “What did Buffet do? What were his secrets? How about George Soros?” Maybe it was Wells Fargo and Coca Cola that gave Buffet this amazing performance – I should buy some of that. Maybe it was just buying good companies after a big sell-off and holding. Can I get that track record too if I invest with a promising fund manager that does the same things like Buffet or Soros?

Looking at just one number – the annualised investment performance of a whole career – doesn’t show you the amount of work, patience, persistence, sweat and sacrifice that was put in by the steward of that career. 

It doesn’t show you the mistakes, failures and ups and downs that the investor had not only to endure, but also recover from. Note here that these enviable investors come back better after big mistakes and underperformance. They go back to the drawing board, figure out what’s wrong and work until they become better. Therefore, mistakes are the rule and not the exception when looking back at the career of a successful investor.

My point is that shopping for investment returns is not like shopping for shoes, what you see is not what you get. If at the end of a career, a fund manager retires with a performance of 20% over 30 years – you better believe you are not going to get that 20% return year in year out. These are the great expectations that I am referring to. Track records are like stocks, they never go up in a straight line. If you think your stock will go up in a straight line – you won’t go far. 

To benefit from a great track record, you have to stay invested during the ups and downs. You have to have conviction in the manager of that strategy and believe in him enough to stay invested with him during his most difficult moments. Only then do you stand a chance of riding a 30-year investing career that could multiply your initial capital by 1,000 or 2,000 times. (Note: 30% for 30 years results in a 2,620X)

There is a double standard with track records and investment performance. Investor demands and expectations are much greater for a certain type of fund manager, and much more forgiving for others. 

You see, when you run a small investment fund, you are not allowed to make mistakes. You are not allowed to lose money. Prospective investors ask for your track record and expect to see a steady 45 degree line going up with no drops whatsoever. 

“We can’t invest with you unless you have a 5-year track record and manage more than $100 million.” They proudly say. Maybe they should ask themselves what the Credit Suisse track record is looking like as of late. They don’t have a problem working with them, on no matter what Credit Suisse decides to sell them. “We like your work but we don’t believe your portfolio companies are as undervalued as you say. Wall Streets analysts have much lower price targets on them than you.” they respond.

Why are big funds and private banks so perfect? Do investment bank research analysts really know the future? Or are they just offering their best guess like the rest of us? Sure, Credit Suisse and J.P. Morgan are more reputable than a garage band hedge fund or a small investment firm, but that is not the whole story.

Look at the recent Credit Suisse debacle with Greensill Capital and the Archegos blowup which resulted in billions in losses for almost every big bank out there. Did Credit Suisse shut its doors after that? Did Credit Suisse salesmen start being asked, “Do you have a track record?”, after that?

If a smaller firm went through these scandals, they would already not be in existence. Their clients and stakeholders would give up on them, they would even give up on themselves.

Why should it be different for bigger institutions? Especially when they blow up repeatedly. Don’t they have more resources at their disposal to invest in making less mistakes than a smaller firm? Aren’t they bigger and better? Shouldn’t they have known better?

No they shouldn’t, because the main difference between small and big firms is not their size, but their dynamics. 

You see, big firms rarely use the army of staff and analysts that they have to make sure their clients benefit, they use the army to make sure they benefit. 

Bulge bracket banks have thousands of employees, offices everywhere, and a very strong brand that commands respect all around the world. Of course investors want to keep their money with this kind of institution. They feel safer and sleep better at night.

The thing is, the main objective of big banks is to earn fees. Whether that is for or against the interests of the clients. They will sell them whatever is in fashion, regardless how risky or uninvestable it is. 

On the other hand, a smaller firm does not have hundreds of investment products to offer their clients. It needs to build a solid client base and reputation with its first fund, if the first fund fails they can’t wipe the slate clean and move to the next one. In most cases, all the money of the founder/portfolio manager is invested in his fund – he is “all in”.

It is widely known that Jamie Dimon, the CEO of J.P. Morgan has been very vocal against Bitcoin and crypto in general (and that is his right). In late April of 2021 news came out that J.P. Morgan is preparing an actively managed Bitcoin fund to be offered only to the bank’s private wealth clients. At the time, Bitcoin had benefited from a rally of 10X since one year ago.

Two months later and Bitcoin is down ~30% relative to that day. My point is that it will be very hard for big funds and banks to offer you market-beating trades and investments because they are the market.

It’s another great expectation that the goal of market-tracking, passive index funds is to make you money – while their goal is simply to replicate an index and offer in product form what you want, regardless of whether it is a good investment or not. If the underlying assets in the funds do well, you will too. If they don’t, you won’t. 

Read more about Active vs Passive investment strategies.

Now let’s talk a little about more racking up great track records. Successful investing is not about having graduated from Harvard Business School. It’s not about having worked at a bulge bracket investment bank or being invited to speak live on Bloomberg.

It’s about an endless pursuit of practicing intelligent risk/reward, like trying to solve an ever evolving puzzle. It’s about developing the proper strategy, method and mindset to extract that reward when it appears. 

If you are looking to compound your capital over the long-term by investing in funds – make sure you focus on substance before selecting rather than superficiality and marketing, and be prepared to stick with your choices through the hard times.

“Six thousand years of recorded history reads like this: opportunity mixed with difficulty. It isn’t going to change. ‘So,’ you ask, ‘how will my life change?’ When you change!”

Jim Rohn