You know that past returns are not indicators of future performance, right? You've read that on a billion mutual prospectuses. Nonetheless people tend to use their past returns as their primary motivation for selecting new ventures and speculations.
This is probably a combination of everyday human nature, the historical charts and graphs they feed us, and the shortcomings of available information for retail investors, like you and me. You see, mutual funds give very little information for people to evaluate them by, so we take what we can get and we roll with it. This is far from the ideal investment strategy.
Past returns are insufficient primarily because they only paint a very small picture of the overall investment management picture. Past returns are incapable of telling you how those specific returns were made, whether or not they were consistent with the strategy of the investment manager, or even why the investment manager decided to choose the assets that he or she chose.
Given the option to choose, would you choose an investor who made 10% by following his own preferences and investment strategy, or an investor who made 12% but did so without following any clear preference or strategy? The correct answer is to choose the first investor, who followed a strategy. The first investor in the example set out to achieve returns by following a clear path, where the second investor did not. If the second investor made a 12% return, it was purely by luck.
So how do the pros in investing choose their investors?
The best way to answer this question is to turn to the managers of premier endowment funds at prestigious universities such as Stanford, Harvard and University of Pennsylvania. Between them, these prestigious managers oversee more than hundreds of billions of dollars in funds, meaning that they have an obligation to make the right choices.
When choosing stock investment managers, these premier endowments are looking for three specific things:
- Excellent risk-adjusted returns.
- Compelling rationale for investing.
- Adherence to a stated style and preference for investing.
While no one can be completely immune from loses, investment managers that score high on all three of these dimensions are skilled rather than lucky, and therefore are much more likely to exhibit returns that are consistent.
Why should you be settling for less?
kaChing is releasing a brand new proprietary metric that is inspired by premier endowments and that they believe to be a better solution to evaluating rock star investors. They call it the Investing IQ.
There are 3 components making up the Investing IQ:
- Risk adjusted returns based on the information ratio.
- Quality of rationale for your positions.
- Sticking to strategies.
They then combine your individual score for each of these components, assigning a score out of 100, where higher is better just like with school grades. Is it going to the change the face of investing?
Photo Credits: vramak
Related Posts -
Review: The Motley Fool’s You Have More Than You Think By David and Tom Gardener For many people, the ability to invest is a pie in the sky dream that will never be achieved, due to the fact that they may not believe they have “enough” money to invest. This book promises to allay those fears and help readers get a better view on personal...... -
Investing Safely You want for your money to work for you and to grow, right? But taking risks makes you feel uneasy? So is there a way for you to invest more safely? Of course there is! There is a rule that is associated with investing that is ancient, and yet remains...... -
Mutual Funds Introduction It is really not much of an exaggeration for you to say that mutual funds are one of the best things that the middle class can take advantage of financially since the invention of sliced bread. What mutual funds do, is they allow for investors that have small amounts of...... -
Geezeo Review A number of financial planning and "get out of debt" websites have been springing up over the past year or so, because consumers are showing that they are looking for more online web applications and other tools for managing their finances. What makes Geezeo even more exciting in terms of...... -
How to Keep Your Money Safe As some of the biggest and most respected banks in the world look as though they may be crumbling, consumers are wondering in greater numbers just how safe their finances are. In times of economic uncertainty, there are no real guarantees, but there are a few things that you can......
Related Websites - New Book By Monish Pabrai Monish Pabrai is being called the 'young Warrent Buffett'. He's been returning 30% annual returns for his investors, similar to what Warren Buffett had been returning in the initial stages of his career. He's come out with a new book: The Dhandho Investor: The Low - Risk Value Method to......
- Best Investment for 2009: Use your Emergency Fund to pay off your debt Just by writing this title, I already know that people won’t agree with this strategy. How can you tell people to get rid of their emergency fund while we are in one of the most important recessions ever? So please, keep reading until the end of the post, I......
- Investing for the long haul I have said it before that I am not an investment professional and I don't provide specific investment advice. What I do know is that if you have several years until retirement (like I do), this uncertain time in the stock market is nothing that should cause you to abandon......
- Roundup for week of 24 June 2007 Weekend linkification coming up!All Financial Matters discusses whether a share buyback or a dividend is better. whether to spend $30k on a wedding or use most of it to jump-start savings as a newlywed couple. (This can be a tough one to discuss with your fiancee (or fiance)). Blueprint for......
- M is for Money has a Spring Carnival M is for Money posted a very flowery Carnival of Debt Reduction on Monday to celebrate the arrival of the spring equinox. Thanks go out to her for hosting! Two of the submissions made Editor's Pick for this week: Cash Money Life talks about how one can improve their credit......
Categories:
Investing, Money, News, Personal Finance, money management techniques
Tags:
0 comments ↓
There are no comments yet...Kick things off by filling out the form below.
Leave a Comment