Thread by @BrianFeroldi

10 Reasons Why You Have An Edge Over Professional Money Managers

1⃣High fees:

Management fees act as a drag on returns

👇👇👇

2⃣Incentives:

Money managers are paid to acquire assets, not outperform (usually)

A $1 billion AUM fund makes 100x more $10 million AUM fund

So, managers spend most of their time...acquiring assets

Outperforming helps to acquire asset, but doesn't make them more directly

3⃣Size:

Get too big and you move the market when you buy/sell

This eventually limits your investable universe

4⃣Shortened time horizon:

If your investors are focused on next week, month, or quarter...so are you

Lots of clients demand short-term performance

Short-term underperformance = withdraw assets = less money for you

Managers can't think/act for the long-term

5⃣Window Dressing:

Some fund managers buy recent winners right before the quarter ends

Makes them look good to their clients, even if they didn’t benefit at all from the recent appreciation

6⃣ Closet Indexing:

Some fund managers closely match the holdings of index funds to minimize alpha in both directions

It lowers the risk of underperforming

It also kills the ability to outperform

7⃣Taxes:

Who pays them? Investors! Not the fund managers

There is no incentive to optimize for taxes

Would you buy/sell differently if there were no tax consequences?

8⃣Career risk:

If you lose money on $AAPL, investors are understanding

If you lose money on a small company no one has ever heard of its much harder to explain yourself

Makes it hard to invest in small, little-known companies

9⃣ Forced selling:

Clients pull their money after big market declines, forcing managers to sell great stocks at the worst possible time

Some keep cash on the side to help buffer this, which drags down returns

🔟 Forced buying:

New money flows in after rallies, forcing buying of appreciated stocks

If you love a stock at $50, it doesn't mean you love that same stock 3 months later at $100!

All of these factors combine to make it incredibly challenging for money managers to outperform

I KNOW that I couldn't outperform by managing other people's money

I would act differently since I would constantly have to explain myself to others

Even with these factors, some fund managers STILL outperform, which is incredible

The greats you know:

@WarrenBuffett
Pat Dorsey
Terry Smith - @FundsmithLLP
Cathie Wood - @CathieDWood
Bill Miller - @B3_MillerValue
Polen Capital
Chuck Akre

A few others great follows from Twitterverse:

@GreenhavenRoad
@ritholtz
@BarrySchwartzBW
@UpslopeCapital
@IntrinsicInv
@GerberKawasaki
@HaydenCapital
@altcap
@AltaFoxCapital

Non-Twitter:

Michael Shearn
1MainCapital
Connor Haley
Frank Sands
Mark Dow
Joel Tillinghast
Henry Ellenbogen
John Huber
Scott Miller
Steven S Wymer
David R. Giroux
Will Danoff
Kathy Xu

"If professional money managers can't beat the market, what chance do I have?"

You have
1⃣Permanent capital
2⃣No career risk
3⃣Aligned incentives
4⃣Ability to think/act in the long-term

These are MASSIVE advantages

Don't waste them by trading!