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Thursday, January 24, 2013

I don't think I Have Read an Article I Agree With More than This One....

From the FT...always a far more useful read than the NYT or WSJ

Here summarizing an academic paper by Paul Wooley and Dmitri Vayanos of London School of Economics

I respect FT policy and just provide the takeaway from the article entitled

Tackling the two-headed monster of efficient markets theory and the principal-agent problem

  • Traditional investors are destined to be frustrated they give money to a money manager that fails to outperform the relevant inded. "Being a traditional investor sucks, doesn’t it?"

  • Being a traditional manager "sucks too". Investors expect alpha but dont want a policy that differs "too much from the benchmark indices"
What should investors do:

  • Focus on Long Term Results
  • Limit turnover in the portfolo
  • Invest for the long term focus on the long term not short term price movements
  • Dont benchmark to cap weighted indices which have higher weightings to assets that are highly valued and subject to poor long term results
  • Avoid or limit performance based conpensation or tied them only to long term performance
  • Avoid "sophistate "new" strategies and "alternative investments" even if they may offer some advantages those are likely to be offset by high fees and lack of liquidity
  • Insist on transparency of the portfolios
sounds good to me...and it's what I do with my clients...and hope my clients will do for me.

Unfortunately for me this is hard to do for investors...which means I either suffer "career risk" with clients withdrawing assets based on short term performance.

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