A letter a day!

A letter a day!

Letter#12 Dec’2009

1.The fund management industry is such that it has to constantly say something new to keep the game going: new funds, new products, new investment stories, new “aligned” performance fees, new firms. Each new thing is in turn supported with lots of marketing, perhaps in an attempt to give the new things extra oomph over the, now demoted, old things.

““Specialization” and “diversification” are at the heart of many marketing claims and sound wholesome and prudent enough, a little like motherhood and apple pie. However, such notions, if run to extremes, can be counter- productive. For example, a widely held view in the noughties mortgage market was that the risk of “specialized” lending to the less credit worthy could be removed through “diversification”. It was all sales talk, but it worked, in part, as the salesmen were able to promote their products as “safe” because specialization and diversification were traits so highly prized by the rube investor. False traits, it turned out, as the products were not diversified, and their complexity made them all but un-analyzable.”

2.The locker room culture: It means an attitude whereby the players just have to win, and they are not too much worried about the means. If the investors is prepared to make a meaningful, long-term investment, they have to break out this get rich quick spell of the salesman.

“Our anti-locker room disposition was echoed by the founder of one of Nomad’s investee firms, who, in a private meeting, put it as follows: “if you want to be successful, and we do, then you have to be willing to be misunderstood, and do things that do not seem sensible to most people”. For example, “if you (employees) come into the office in the morning thinking how you are going to beat number one, two or three in the industry” – how many times have we heard companies articulate that view? – “then, our firm is the wrong place for you. We start with the customer and work backwards.”

3.There are broadly 2 ways to behave as an investor:

1)First, buy something cheap in anticipation of a rise in price, sell at a profit, and repeat.

“Almost everybody does this to some extent. And for some fund managers it requires, depending upon the number of shares in a portfolio and the time they are held, perhaps many hundred decisions a year.”

2)To invest is to buy shares in a great business at a reasonable price and let the business grow.

“This appears to require just one decision (to buy the shares) but, in reality, it requires daily decisions not to sell the shares as well! Almost no one does this, in part because it requires patience – and the locker room set does not do patience – but also because inactivity is the enemy of high fees.”