1/7 Thread: Cascading myopia in the investing business
One of my favorite professors once asked in class: "What do you think about the time horizon of Sovereign Wealth Funds?"
The answer seemed pretty obvious. SWFs, of course, have a very long term horizon.
One of my favorite professors once asked in class: "What do you think about the time horizon of Sovereign Wealth Funds?"
The answer seemed pretty obvious. SWFs, of course, have a very long term horizon.
2/7 Our Professor explained the answer is far from obvious to him.
A SWF, as an institution, may have a very long-term mandate. But what happens when managers working for the fund underperform their benchmark? How long before they get fired for underperforming the benchmark?
A SWF, as an institution, may have a very long-term mandate. But what happens when managers working for the fund underperform their benchmark? How long before they get fired for underperforming the benchmark?
3/7 Is the tolerance for underperformance significantly higher compared to other institutions?
The answer is perhaps no.
While SWFs have a very long term horizon, their managers are likely to experience the similar performance pressure the rest of institutional managers do.
The answer is perhaps no.
While SWFs have a very long term horizon, their managers are likely to experience the similar performance pressure the rest of institutional managers do.
4/7 It is the tolerance of underperformance that can dictate your managers' time horizon.
Lack of tolerance for underperformance can lead to what the Professor called "cascading myopia", in which everyone is just focused on saving their jobs.
Lack of tolerance for underperformance can lead to what the Professor called "cascading myopia", in which everyone is just focused on saving their jobs.
5/7 Your investor base can be an important source of alpha.
You can call it "Client alpha", as explained by Arlington Value's Allan Mecham.
You can call it "Client alpha", as explained by Arlington Value's Allan Mecham.
6/7 Individual investors, the ones who know what they're doing, are the most well-positioned investors to beat the market by avoiding this cascading myopia.
Then again, what is YOUR tolerance level for your own underperformance? How long before you give up and start indexing?
Then again, what is YOUR tolerance level for your own underperformance? How long before you give up and start indexing?
7/7 If your tolerance level is not different from the institutions suffering from cascading myopia, you waste that advantage.
If we are honest with ourselves, very few of us have greater tolerance, and therefore, it's always going to be a tiny minority that beats the market!
If we are honest with ourselves, very few of us have greater tolerance, and therefore, it's always going to be a tiny minority that beats the market!
