“Are You Brilliant, or Lucky?”

The subject of the WSJ article “Are You Brilliant, or Lucky?“, Michael Mauboussin discusses mutual funds, but the concept is applicable to financial advisors.  This is more flavor on the post “Is Your Manager Skillful…or Just Lucky?” from November 2, 2012.

Excerpts (emphases added):

Start by studying a fund’s process, which has three components: analysis, or how the manager assembles the portfolio; behavior, or how the manager responds to the emotional extremes in the market; and organization, or how the business is structured to ensure that investors’ interests come first.

You can size up a manager’s analytical process by seeing how the portfolio differs from average. If the names and size of the top holdings are essentially indistinguishable from those of an index fund in the same market, you aren’t looking at a future superstar.

A manager with a good behavioral process makes decisions based on policies and procedures, not intuitions—and doesn’t credit good returns to his own brilliance while blaming bad results on irrational markets, financial crises or bad weather. The manager’s letters to investors will give you an intuitive—but imprecise—feel for this.

Finally, is the firm owned by a giant conglomerate that cares only about maximizing its own profits? Did the fund launch when its investments were so popular they were overpriced? Has the manager closed funds to new investors when too much money came in to manage prudently?

Only after a fund or other investment strategy passes these tests should you look at its performance.

Investing is all about PROCESS, not portfolio and not performance.  The purpose of investing is all about MEETING GOALS, not about beating a benchmark.

Source:  Are You Brilliant, or Lucky?

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