Hi Guys,
We’re all constantly scrounging for heuristic rules of thumb that will enlarge our portfolio rates of return What works? A lot does not.
My postulate is that age matters greatly when selecting a mutual fund manager. Not the investor’s age, but the fund manager’s chronological and professional age, and the integrated time he has managed the candidate mutual fund.
As a committed mutual fund/ETF investor, I am in a constant search mode to discover selection criteria that will contribute to Alpha (excess returns) for my portfolio.
I submit that a fund manager’s age profile should be a major factor. I certainly understand that this late recognition is not a stunning finding to many seasoned investors. Many include the age criteria as a normal part of their assessment process; I did also in a somewhat loose manner.
But based on some recent reading, I have added some precision to my generic observation that age matters in some undefined way. I now have specific numbers to crystallize my thoughts on the matter.
As Lord John Maynard Keynes remarked: “The difficulty lies not so much in developing new ideas as in escaping from old ones.” I am particularly guilty of not seeking firmer ground when my current position is eroding. Too often, I stay too long.
Keynes was also correct when he observed “When the facts change, I change my mind. What do you do, sir?” In reality, I’m not truly changing my mind; I’m just being a little more precise in my evaluation of candidate fund management.
I don’t want to valorize Keynes simply because I cited his two quotes. I like some of his work; I dislike other parts of it. To balance the scale, allow me to reference Murray Rothbard’s (an Austrian school economist) judgment on Lord Keynes: “There is one good thing about Marx: he was not a Keynesian.”
I can now put a definite number on the minimum age that I will consider for a mutual fund manager or composite team management. My magic number is 40 years old.
Why that particular number? Why so old? Some geniuses and gurus develop at a much younger age. Wrong. The data does not support that contention. The recent scientific research on this subject does not validate the child prodigy concept.
My awakening came recently when I carefully examined a paper by K. A. Ericsson and coauthors. This team is from Florida State University. I referenced the paper in an earlier posting, but will append it here for completeness:
https://my.psychologytoday.com/files/u81/Ericsson__Roring__and_Nandagopal__2007_.pdfThe bottom-line conclusion that can be extracted from this lengthy review is that the DNA genius gene is a myth. The perceived elitist genius status is more a function of “deliberate practice” (highly focused, carefully directed, and painfully lengthy time commitments) than of innate abilities. Expert performance is an outcome from intensive training.
The so called gifted are created, not born. Practice has the potential (not the certainty) to make perfect. That’s a healthy lesson.
To quote from the Ericsson document: “Our review of evidence favors a gradual development of these abilities (they refer here to the “emergence of high levels of performance”) . Furthermore, while proponents of innate talent may cite upper limits of ability as evidence of genetic predisposition, reviews from the expert performance approach suggests that these upper-limits may not reflect innate limits, as motivated individuals are often able to improve their performance by engaging in deliberate practice.”
In Ericsson’s concluding section, he writes: “We found no rigorous reproducible evidence that innate abilities, excepting height and body size, prevent healthy individuals from attaining expert levels of performance.” This is inspiring news.
Along the way, the referenced paper totally discounts child prodigy claims as being an overstatement of the accomplishments of the cited prodigies. To illustrate, the paper observes that Bobby Fischer did not become a chess grandmaster and world champion until middle age, and Wolfgang Mozart did not compose his finest, most complex pieces until maturity was reached. As youngsters, they showed some keen interest that was later augmented by practice into a world-class wizardry.
The paper argued that superior performance is attained only after 10 years of committed learning, training, and practice, and/or 10,000 hours of “deliberate practice”.
This “deliberate practice” trajectory is the basis for my assessment of mutual fund management requirements. It is identical to the 10,000 rule highlighted in Malcolm Gladwell’s “Outlier”. Gladwell used Ericsson’s work as his primary source when preparing that portion of his book.
Ericsson recognizes the distinction between physically-dominated and mentally-dominated professions when graphing performance accomplishments as a function of age. The mentally demanding disciplines mature at an older age and decay more slowly than athletic professions. This trajectory is mostly controlled by the formal schooling needed to enter the mental intensive professions.
Here is my invented age requirement scenario.
A likely mutual fund manager graduates college and completes some advance schooling, perhaps an MBA, at age 25 to 27. He enters the workforce in a financial institution, perhaps a mutual fund, and is assigned duties as an analyst for several years. He does not secure a distinctive track record yet. He is now 30 years old. If he’s lucky he becomes an untested fund manager. According to Ericsson and Gladwell, a fund manager needs at least 10,000 hours of measurable learning performance to challenge and enhance his skill set. He is now 35.
At this juncture, his mutual fund management record may be dismal; he was on an ascending practice curve. If he is talented he has used this opportunity to learn and develop an understanding from that experience; he has been on a “deliberate practice” trajectory. Many fail during this acid test; a few survive and thrive. As investors we can only uncover which is which after yet another 10,000 hour segment of performance observation to firmly establish credentials.
Our candidate mutual fund manager is now about 40 years old.
Therefore, my adjusted minimum manager age for perspective mutual fund portfolio additions in about 40 years old, or at least one fund management team member must have reached that age.
So, that’s my newly minted rule of thumb.
Also, the record for a fund manager during his initial 10,000-hours (like 5 years) should be highly discounted. Even if impressive, it could be an artifact of pure luck. That is the learning, the maturing period. The research suggests that the period following this experience accumulating exposure is more representative of actual skill. It takes time for the really gifted fund managers to exploit their maturing talents and to reveal themselves.
The same logic can be applied when selecting a doctor. Experience is a valuable teacher.
I have not tested my hypothesis since I have not purchased a new fund in over a year. Accidentally, the last fund manager that I hired had 2 decades of on-the-job training. My current portfolio is singularly weighted with highly experienced fund managers. That was by design although I did not evoke my 40-year old age rule because I had not developed that specific criteria during my much earlier portfolio construction years.
My 40-year old fund manager rule is only two days old itself.
The overarching good news from the Ericsson paper is that everyone has the potential to develop into a superior performer. The price is diligent, “deliberate practice”. So, keep on keeping on. Good luck – that always matters.
I encourage and anticipate enjoying your comments. Please contribute.
Best Regards.
Comments
* Assuming the fund manager is male (which most are), Testosterone starts to drop in late 30s-40s. This might be helping more rational decisions instead of instinctive hormone driven rush decisions. That might also explain the success of female managers in managing risk.
* If a person has started to manage a fund in his 30s, it will take 7-10 years for him/her to experience a full business cycle. I believe that experience is very important for successful fund management.
Hi Investor,
You make two keen observations regarding fund manager sex and the business cycle length to better understand fund manager performance. Thanks for your insightful contribution. I completely agree.
Numerous academic studies have concluded that statistically women are better investors than men. They tend to be more conservative in their investment philosophy and more cautious in their decision making. Maybe that can be attributed to their longer life span after retirement and their reduced overconfidence that I suppose is correlated to testosterone levels.
Surely a fund manager benefits from experiencing the uncertainties of a complete business cycle. All fund managers look good when the tide is rising. However, experience is only a great teacher if the student is prepared to learn, adapt, and adopt to changing conditions. Let's hope most of us are in this category.
Once again, thank you for your fine contribution.
Best Wishes.
There's a lot to be said for practice and developed skills. That's where age shines. And this doesn't mean that there aren't lots of really sharp people over the age of 40. But it does suggest that different disciplines benefit from different mixes of genius and craft, and as a career path, one might consider moving toward the craft-oriented ones as one matures. (The fact that one sees so many lawyers working into their 70s or later suggests either greed or a profession where craft is much more important than insight; optimist that I am, I'd like to believe the latter.)
MJG, Surely you don't mean to say any healthy child given the right parenting and education can attain equally "gifted" levels of accomplishment? All my 60+ years of life experience tell me that is not the case. I'll submit that stand-outs in their fields like Einstein, Hawking, Picasso, Bach or Mozart owe at least part of their high achievement to innate inborn traits - not to diminish the important role parents & education play.
As for selecting a fund manager - I suppose age, sex, & other human factors might conceivably affect attitudes or abilities in some manner. However, I believe by far the most important ingredient here is the investment "culture" within the firm through which said investment manager emerges. If invested in T Rowe Price's Capital Appreciation fund, I can be pretty certain of having a highly competent individual at the helm and that he or she will pretty much operate according to the charter they are given. In this case, I won't worry whether it be male or female or whether the person be 35 or 65 years of age. Sure, the company can change (we need to remain vigilant) and they can screw up just like any of us. However, I'll trust them and their processes (over my own abilities to screen a manager) until they provide reason not to. Just my 2 cents.
No amount of "creation" will suffice to substitute for the gifted born. Creation is frequently an enhancing factor for those who are born gifted, but you cain't make sumthin' from nuthin'. Add my 73 years to your 60 on that one!
Hi Hank,
We are in total agreement on the two main points you developed in your posting.
I do not expect equal outcomes for all human endeavors. All baseball players can not hit for a 300 batting average and can not pitch a ball in excess of 90 miles per hour, regardless of dedicated practice. But committed practice can and does improve performance for most individuals.
We see this all the time in many skill-centered professions. Anecdotally, an eye surgeon friend reported that his skills and success rates improved remarkably when he volunteered to practice in Latin America for several years and completed an endless stream of needed operations.
Outcomes reflect multiple factors including a large dose of luck. Inherited DNA is only one such factor.
Perhaps I selected the wrong word when I wrote “The so called gifted are created, not born”. The word “created” seems to have ignited (created) a hotspot for a few readers. That was not my goal. I surely did not mean that word in the sense of the Creation/Evolution religious debate. This is certainly the wrong forum for such a controversial and off-topic discussion.
I was merely using the term in the rather innocuous context of “making something”, like an engineer building a bridge. I could have equally written “The so called gifted are made, not born”. My meaning and intent would have been the same. It is amazing how interpretations vary depending upon perspective, viewpoint and agenda.
I think that we agree that parenting, education, and investment management culture are all environmental elements that influence ultimate outcomes. That’s great since we can control these factors to some degree, but can not, at least for now, impact the DNA component.
All you contributors have expanded and enhanced the scope of my original, humble posting that only attempted to say the obvious; that experience matters; that it must be demonstrated over something like a 5 year period after an allowance for a learning cycle; that not everyone equally learns, adopts and adapts; that luck is a residual factor that distorts outcomes.
Thank you once again for taking time to post.
Best wishes.
40 yo demand is quite arbitrary however. While I understand your assumptions, not everyone's career path and experience is identical. Having lived through the latest recession and a huge credit contraction could affect the younger manager's judgment more than the older one's similar length experience in the 90s. Also, some people never learn. John Meriwhether's Long-Term Capital had all the right models and assumptions for the relatively safe arb strategies. He was right in the end, and his trades made money, but AFTER the fund was bailed out as his leveraged positions were considered systemic risk. He then open another fund -- totally identical to LTCM, but 2-3 times leveraged instead of 8-10. He treated his LTCM experience as a 100 year flood and didn't believe in the repeat. And then 2008 happened. So overconfidence is a problem that might not go away with age. Also, as was (or wasn't) mentioned before, luck, investment culture, discipline in taking either gains or losses, corporate set up and support etc. etc.-- contribute to the manager's success. In terms of women being calmer investors, i witnessed a PM so calm that her financial hedge fund rode many of her favorite longs all the way to zero. You could argue that a male PM would have cut his losses at some point or gone short.
An oldie, but goodie..............
The Mutual Fund Chateau
Hi Hank,
Thanks for your quick and meaningful reply. I appreciate it.
I would take issue with the fund manager options A and B that you proposed. They are not all inclusive.
How about other options to more fully fill the options matrix? For example consider these.
Option C: Born gifted (I don’t truly believe this is possible to determine) and hard working, but just appointed to head a mutual fund.
Option D: Same as Option C but add 5 years of average mutual fund results under his belt. This could represent a learning curve.
Option E: Same as Option D plus an additional 5 years of delivering positive Alpha performance against a realistic benchmark.
An endless list of other Options can be defined.
Option E was the scenario that I constructed to reach my 40-year old floor level age for the fund manager that I would choose. Note that 40 years is my minimum age criteria. Since I am talking a more or less statistical average, exceptions surely do exist.
Gifted fund managers are not born since successful fund management is situationally dependent. Managers have demonstrated difficulty to adapt to changing market conditions. Persistence is a constant challenge that defeats many exceptional fund managers; I'm referring now to Bill Miller and his recent fall from grace.
Selecting an untested wiz-kid is gambling.
Thanks again for your effort.
Best Wishes.