Today, I am tackling an interesting question from a reader: Warren Buffett has stated multiple times that if he could manage a very small amount of money today, he would be able to return more than 50% per year to shareholders. If you managed a million dollars of only your own money, would you do it differently?
This question opened up a can of worms. It made me reflect on my early investing mistakes, the evolution of my investment process, and why I manage my own money exactly the same way I manage my clients’ portfolios.
We’ll also explore how portfolio size impacts strategy, the critical importance of a disciplined process, and why passion in investing matters more than you might think.
This question has a couple of questions embedded in it. Let me give you a couple of answers.
First of all, I have always questioned if Buffett could really pull this off. I guess I will never know.
If I only managed a small amount of my own money, would I manage it differently?
Yes, I would, and I’d probably do a worse job of managing it, too. Early in my career (a few decades ago), I managed my personal accounts differently from clients’. I am embarrassed to say this, but I’d hear about an idea from a friend or on CNBC, spend five minutes on it, and buy it. Something nobody should be doing.
Let me contrast that with how our clients’ portfolios are invested. The gravity of what we do, the responsibility, keeps us grounded. We are process driven. Before an idea makes it into our client’s portfolio, we read company filings, listen to earnings calls, and talk to management, competitors, and suppliers. I debate the stock with my analyst friends and get their feedback. We then build a model and try to kill the business by stress testing different assumptions. This process can take dozens (sometimes hundreds) of hours of thorough research. And after all this work, we may decide that we don’t want to own this business; or we may want to own it at a lower price and put it on our watch list.
I did not do any of this when I just invested my own money. My personal results were atrocious, and that is an understatement. I deserved those results – I did not have the time, and I was not process-driven. I was not ever diversified. I was basically gambling with my retirement. Fortunately, I was young and investing a small amount of hard-earned money.
Today, all of my and my family’s wealth is managed by IMA. We are clients of IMA. Our personal portfolios are indistinguishable from those of other IMA clients. I have a rule that I don’t own any stocks that my clients don’t own. If it’s good for IMA clients, it should be good for me. Having skin in the game just seems like the right thing to do.
If we managed only a million dollars, would our portfolio look different?
Today IMA manages just over half a billion dollars. At times, we encounter companies that are not very liquid. We like the business; it is undervalued; but there are so few shares traded, it would take months to accumulate a 3% position. This happens rarely, but it does happen. Would the stock make a large impact on our returns? Hard to say, but probably not. We still have thousands upon thousands of stocks to choose from globally.
Now, let’s say IMA turned into a family office with only one client – the Katsenelson family. Would I manage my money differently?
This question is very important.
One of my favorite characters in the Gershwin Rhapsody in Blue cartoon in Disney’s Fantasia 2000 is the construction worker who is operating a jackhammer while dreaming of being a drummer. He is miserable until he quits construction and follows his passion.
If a portfolio created for a client looked very different from the one a portfolio manager would create if he were unconstrained by the client’s wishes, this manager’s passion for investing would be neutered, and this would eventually show up in the results.
If clients put enough shackles on their manager, they will turn the drummer into a construction worker.
This may sound like a very hypothetical scenario, but I see it all the time, for many reasons: Portfolio managers bend their portfolios to clients’ wishes. They are trying to build the firm and thus trying to appeal to a bigger or different market. Or they try to go after the institutional market. The attraction is great – instead of dealing with hundreds of million-dollar individual accounts, you just need to handle a few three-hundred-million-dollar institutional accounts from foundations or retirement plans.
In this compromise they lose a bit of themselves. They wake up one day and they are operating a jackhammer instead of playing drums – the passion is gone.
I was lucky in that I was able to develop my own strategy inside of IMA. I joined IMA when I was 24 years old, in 1997. Michael Conn, IMA’s founder, was my mentor and taught me his approach. But then, to Michael’s great credit, he allowed me to cultivate my own strategy, which I described in my books Active Value Investing and then The Little Book of Sideways Markets (if you donate money to these charities, we’ll send you signed copies of both books).
Today, the IMA portfolio is run based on our Active Value Investing Strategy. Clients cannot add to it, only subtract. If clients do not wish to own oil, tobacco, or other stocks that fall within their socially responsible universe, we will not buy those stocks for them. (That’s the beauty of individually managed accounts.)
If IMA managed only my family’s money, our portfolio would look identical to how it looks today. I would not change a single thing.
Key takeaways
- If I managed only a small amount of my own money, I’d likely do a worse job than I do for clients. Early in my career, I made this mistake, making hasty decisions based on tips without proper research.
- Our client portfolios at IMA are driven by a rigorous, time-consuming process involving extensive research, modeling, and stress-testing. This level of diligence wasn’t present in my early personal investing attempts.
- Today, all my family’s wealth is managed by IMA, with our portfolios indistinguishable from other clients’. This alignment of interests – having skin in the game – feels right.
- Portfolio size does impact strategy. With a smaller amount like a million dollars, we might consider less liquid stocks that we currently can’t due to our larger assets under management.
- Passion in investing is crucial. If a portfolio manager creates different portfolios for clients versus what they’d do for themselves, it can neuter their passion and ultimately affect results. At IMA, our strategy remains consistent whether managing for clients or just my family.
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