10 Attributes Of Great Investors

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Picking an active manager to invest with is difficult because it’s tough to determine which manager’s investing process is sustainable. If you are a small investor, you won’t get to meet with the manager. You don’t have much of a basis to make up your mind. Many people who aren’t in the investing field think if a manager outperforms for 10 years, that’s good enough. However, cyclical swings mean it isn’t good enough.

The best managers in the past 5-10 years have taken the most risk on growth stocks, but that might be wrong in the next decade. Managers get to pocket the fees along the way, so if they lose money and underperform in the future, it affects them less than it does you. Some even believe they are brilliant just because of the cycle. Beware of thinking you are extremely smart just because of performance. It can change in a heartbeat.

The other aspects of funds that make them tough to invest in is that when these hot funds get a massive influx of capital it’s tougher to execute the same winning strategies. Furthermore, people copy their process, so their alpha is whittled away. It takes a lot of mental flexibility to be a great manager over decades. You don’t know if a manger has what it takes to change when the cycle changes which is why it’s probably better to go with an index fund if you don’t want to manage your own money.

As you can see from the chart above, in the 1970s, 1980s, and 1990s, the funds that outperformed in the current decade didn’t outperform in the following one. It’s tough to maintain great performance. Obviously, it’s not the end of the world to moderately underperform after years of big wins. The problem is when the cycle ends, these mangers underperform in down markets. The bigger winners become the biggest losers. Years of opportunity cost is incurred by big losses. That’s why it’s so important to avoid losing money.

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