Choosing an Investment Manager: Beyond Warren and Charlie

I love answering questions from readers, because it allows me to sit down in front of a blinking cursor, think, and construct a complete answer. In the process, hopefully, both you and I can learn something. If you want me to answer your questions, please reply to this email. I’ll do my best to answer them in future essays.

Today, we’re tackling an intriguing question:

If you were obliged to invest all your investable assets with one person and you couldn’t choose Warren or Charlie, whom would you pick? (I received this question before Charlie Munger passed away).

This question opens up an interesting discussion about what really matters when choosing someone to manage your money. You’ll hear why philosophical alignment might be more important than raw performance numbers, and how our approach to selecting clients at IMA reflects these principles.

This is a question I will have to answer as a politician, by addressing the question I’d like to answer, not the one that was asked. I have many investment friends, and I don’t want to offend most of them by choosing just one.

But, if I had to choose one of them to manage my money, their philosophical approach to investing would have to match mine. Mine as a client, that is. If there was someone who had better results than others, but I couldn’t relate to their investment philosophy or approach, I wouldn’t invest with them.

Philosophical match is incredibly important for the client-money manager relationship. The best performing fund of the decade ending in 2009 was the CGM Focus Fund, which gained 18% annually. That’s a truly remarkable result.

What is stunning is that the average investor in that fund lost 11% per year. Yes, lost 11%! The fund was very volatile, with investors attracted to the latest results buying it when it was high and then, disappointed with the next downward trend, selling it. They bought high and sold low. Their greed bought the fund, while their fear sold it.

Returns achieved by the fund or money manager are important, but what is as important are returns realized (captured) by the investors in the fund. This is why philosophical fit is so important; it allows you to ride through ups and downs while keeping the volatility of your blood pressure low.

Let me explain this through the lens of how we select clients at IMA. I think there are broader lessons here.

When someone knocks on our (proverbial) door asking to become a client, we want to make sure we are a good fit for each other. We provide a lot of information about what we do and how we do it to prospects.

I was analyzing Match.com, a company that owns a lot of dating apps. I learned that it takes less than two minutes to set up a profile on Tinder – a casual hook-up app. It takes more than 20 minutes to set up a profile on Hinge – an app people use when they are looking for a life partner. 

I don’t want to take this analogy too far, but different relationships require different levels of commitment. Selecting a money manager is a decision that will impact your financial well-being for the rest of your life, and it should not be taken lightly.

Our reading materials will probably demand a few hours of a prospect’s time. As they should; but after reading them the person will know almost everything they need to know about our investment philosophy and process.

But we are also evaluating each prospective client as well. We want to make sure they are a good fit for IMA. Thus, we screen them for the following criteria:

1. Do they buy into our philosophy? Again, this is why reading our materials is so important.
2. Do they have a long-term horizon? We cannot help those who don’t have at least a 7- to 10-year investment horizon. People should not be investing in stocks if they don’t have long-term horizons.
3. Are they willing to do the homework? On day one, we take the client’s cash and convert it (a good chunk, not all of it) into our portfolio of stocks. At the end of day one, the client receives a PDF with our analysis of each company we bought for them. But reading doesn’t stop there. A few times a year, clients receive a letter from me explaining our buy and sell decisions and updating analysis on some existing positions. Our ultimate goal is for the portfolio to stop being “IMA’s portfolio” and become their portfolio.
4. Are they kind and respectful? We screen out unkind, rude people. We rarely run into them, but we have declined advances from people who were rude to IMA folks. Life is too short.

If I were looking to hire a money manager, I would want them to have both skin and soul in the game.

Key takeaways

• When choosing an investment manager, philosophical alignment is crucial – perhaps even more important than raw performance numbers. You need to relate to their investment philosophy to stick with them through market ups and downs.
• The best-performing fund doesn’t always translate to the best investor returns. Case in point: CGM Focus Fund’s impressive 18% annual gain, while its average investor lost 11% annually due to poor timing decisions.
• Selecting an investment manager should be a thorough process, akin to finding a life partner rather than a casual hookup. It demands time, careful consideration, and mutual evaluation.
• At IMA, we screen potential clients for philosophical alignment, long-term perspective, willingness to do homework, and personal qualities like kindness and respect. This ensures a good fit between manager and client.
• As a client, you should look for an investment manager who has both skin and soul in the game – someone who’s not just financially invested, but also philosophically and emotionally committed to your shared approach.