Trust Only The Chefs Who Eat Their Own Cooking

Is there anything more off-putting than the sight of a chef, clad in his whites and houndstooth trousers, looking emaciated and sickly thin?  If he’s even an adequate cook or at least a lover of food, should the chef be anything but well-fed?

I would say that investment professionals should be held to a similar standard.  If someone holds themselves out to the public as a brilliant stock picker, a steward of capital, or a talented manager of money and assets, should we not inquire as to how much of their own capital is at risk in the same investments or strategies that they are propounding or endorsing?

Further, should anyone without any scratch in the game ever appear in the media making recommendations to others that they themselves are not following?

Of course, just because someone is in the same boat as you, that doesn’t mean that this boat isn’t going to sink.  Plenty of unsuccessful hedge fund managers have plowed millions of their earnings back into their own vehicles before they ultimately failed.  There are also myriad instances of corporate insiders who have publicly bought their own stock into a selloff.

That being said, we’re not talking about expecting people in the investment world to be right all the time, but accountability for one’s recommendations should begin with some type of alignment of risk.

When sell-side analysts make appearances on television, the network will often flash a disclosure screen indicating whether or not that analyst owns shares personally.  We are meant to be satisfied when the answer is no, he or she does not hold shares in the company they are recommending, because this would remove the potential for conflict of interest.  This is foolish, and I would say the opposite should be the case;  if someone’s own capital is not on the line, yet they want yours to be, what are we not being told?

I understand that the firm the analyst represents often has safeguards and rules prohibiting stock ownership, but again, imagine if this worked in reverse;  what if the analyst or commentator was forced to own shares in companies they endorse?  What percentage of stocks would your average Wall Street research department then be bullish on?  I don’t know empirically what the percentage is currently, but I guarantee it would be significantly lower.

In short, I am more interested to hear the opinions of mutual fund managers or hedge fund managers.  Generally speaking, not only do these managers publicly praise or bury companies, they also have the guts to put their own compensation and reputation on the line based on these opinions.  These are the chefs with the meat on their bones who have eaten their own cooking, for better or worse.