Who are you competing with?

If you’re a professional in asset management, you’re competing against the market in general and your peers in the asset management business specifically. In some cases, it’s a monthly competition or quarterly or annual – but you’re always being measured and measuring yourself.


Well, it’s your job. Also, it’s the only way you can make more money. Asset flows always, always, always follow performance. A great fund going through a period of underperformance doesn’t bring in new money. A mediocre fund going through a period of outperformance brings in a lot.

Individual investors are lucky. They don’t need to engage in the type of short-termist behavior that monthly and quarterly performance measurement engenders. There’s no institutional imperative to be be seen as having been in the winning group for any particular period. There’s nothing wrong with average, if average is good enough to grow a portfolio toward the goals the investors have set for themselves. And there’s certainly no reason to look at a portfolio that averaged 8% over a few years and be upset that it could’ve yielded 9 or 10% had you just done X,Y and Z.

The most damaging mental state to get into is to compare the returns of your own portfolio to those of the guy or gal down the street. It’s not a measuring stick for who is smarter or happier. David Letterman gave a bizarre interview to New York Magazine and in one section he talks about the “Late Night Wars” that consumed him for the majority of his professional life.

Going back to the late-night wars — doesn’t the fact that you and so many viewers cared so much about who was winning late night seem a little crazy? Why did it matter who was No. 1? Both shows were being seen by millions of people.
I cared. Jay cared. I can remember being on Johnny Carson’s show toward the end of his run, and during the commercial break I said, “Honestly, what’s the deal here?” Because he seemed like he was still the Johnny that we all loved. And he said, “I want to go out on top.” So he cared. When I began, if you didn’t have a 30 share, get in your car and go home. For a time, I looked at the ratings every single morning. If our number was bigger than The Tonight Show’s number, I would feel good. If it was not as big, I would feel bad. That was every day. Now I don’t know if anybody cares. I keep saying to people, “Where are the late-night wars?” “Oh, the U.N. came in and Ban Ki-moon put a stop to it.”

Now, Letterman’s job and the job of his show’s producers was to pull in big ratings. Did they have to be bigger than Leno’s at any given time? Probably not. But there’s an argument to be made that chasing Jay is what drove Dave to be great. Okay, that’s probably true to some extent.

But in investing, it doesn’t work that way. More resources, more time spent, more effort, etc to do not necessarily lead to better outcomes. We get proof of that every year, as the wealthiest, smartest, most well-connected investors in the business go through booms, busts, stumbles and disastrous bets turning their funds upside down.

As a wealth management firm, we get reports internally about how we’re doing against other wealth management firms around the country. Our software providers and custodians are always conducting “benchmarking studies” of the RIA shops they support, ranking them on things like average account performance, assets raised, etc. We’re always hoping to be high second-quartile or low first-quartile in these metrics. By remaining there, that’s how you win long-term and wind up at the top – through attrition of the icarus characters you come across along the way.

The firms ranked number one in average account performance – especially in a bull market – are probably taking risks for their clients that we would never take, solely to win some non-existent bake-off in the sky. To be at the top at all times, you have to be willing to risk being at the bottom – and statistically it is probable that you eventually will end up at the bottom if you keep it up.

I know it seems fundamentally unAmerican and unfair to make this point – that working harder doesn’t produce a physics-like reaction in the end results you’re trying to generate, but it’s a fact. If anything, trying harder can result in over-trading or more concentrated bets or many other behaviors that have the net effect of eating into potential returns. If it were simply a case of effort, then the people who trade all day, every day, and never turn off the screens would be the wealthiest. I’ve found that, in the real world, it works in the opposite way.

If you’re not a professional investor, don’t waste time and energy comparing yourself to the pros or to any other benchmark that is irrelevant to your future spending needs. At best, it will make you anxious and envious during the inevitable periods in which you’ll find yourself behind. At worst it will cause you to do things that are unnecessary and dangerous.

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