There can’t be many hedge fund managers who’d want me on their Christmas card list. I’ve said far too much about that ignoble profession to be on friendly terms with any of them. I can though see myself sitting down to a good old chinwag with Andrew Feinberg.
Mr Feinberg has just written the most honest — and extraordinarily insightful — article about investing and the investing industry that I have read in a long time.
In short, he’s leaving the hedge fund industry for the simple reason that constantly trying (and latterly failing) to beat the market was making him miserable.
For me there are six key take-aways for investors from what he has to say:
“I apologise to readers who have shared the pain of some of my recent picks.”
Take-away 1: Stock picks are everywhere. Gurus are only too happy to give them, and the media to publish or broadcast them. It doesn’t mean they’re worth acting on. Indeed the track record of media tipsters is pretty dismal. Always ask yourself, does he or she really know something that millions of other market participants don’t?
“I never came close to engaging in insider trading. But I understood how some money managers could be tempted to cheat knowing that nothing less than hitting a home run would help salvage the year.”
Take-away 2: If your fund manager has inside information, that is useful — or at least it would be if it were legal. Anyone caught acting on it risks a long prison sentence. The admission that many money managers are tempted shows just how desperate they have become.
“Nothing teaches you what a dread disease short-termism can be quite like getting to the 20th of a particular month and feeling that you need to make something special happen in your portfolio in the next 10 days.”
Take-away 3: All the evidence shows that short-term speculation is not a good idea. The professionals know that better than anyone, and yet they still they engage in it. Indeed, as Mr Feinberg concedes, they have no choice. To keep attracting and retaining assets, they have to keep on taking regular gambles, and that is not in your best interests.
“What did I learn from my plight? First, that I took a big risk when I created a portfolio that was wildly different from Standard & Poor’s 500-stock index.”
Take-away 4: The only way an active manager can outperform is by moving away from the market consensus. Securities are priced the way they are because, millions of times every second, buyers and sellers agree that those prices are fair. The more you diverge from the index — in other words, the greater your active share — the greater the risk you take.
“Now I plan to invest a chunk of the family portfolio in index funds.”
Take-away 5: Some of the most famous active managers are also the staunchest advocates of indexing — Lynch, Swensen and Schwab to name but three. By entrusting his own family to index funds, Mr Feinberg is following the example of the Sage of Omaha himself. Think about that. If even Warren Buffett won’t trust active managers with his money, why should you with yours?
“My wife is elated that I’m quitting, which should clue you in to the impact she thought lagging the market was having on my life.”
Take-away 6: Yes, money managers are hugely well remunerated, but studies have shown that many are racked with insecurity. Beating the market at all, let alone consistently, is very hard indeed, especially when the costs of active management are factored in. Mrs Feinberg won’t be the last fund manager’s spouse to be glad to get her husband back.
Happy retirement, Mr Feinberg, and I mean it sincerely. Thank you for being honest. Honest with your clients, your readers and ultimately yourself. If only more of your fellow money managers would do the same.
The full article is in the November edition of Kiplinger magazine. You can read it here: