money managers, greedy or cheats

I don't like money managers, and I have made it clear more than once. They are the biggest shitheads for what they do. Consider this: asking for money from other people in the pretext of making them rich, is some kind of a sham. The motive is clearly to make themselves rich. And why would they do it? Perverted incentives, I reckon. This is true with all of them, who managed money for others by taking money from them. It is true with those, who continue to do that, and who intend to do it. I know that is harsh, but, I mean it. Their incentives are so misaligned that investors just do not understand it, or prefer to ignore it. 

Before we dwell into what these idiots engage in, let's find out why individual investors hand their cash to others. Investors are either too busy with their affairs that they don't get time to do it on their own, or they are ignorant about investing in general. That makes it easier for them to just pass it across to the so-called experts to do the job. That is understandable. Yet, there is a better way out for them; and this they do not understand. 

We invest because we want to retain, or rather increase our purchasing power in future. We need to be compensated for inflation. We need to be compensated for facing uncertainties of time. We need enough stash to take care of our future requirements. Among all available opportunities, equities have proven to be best suited to play this game. So we need to invest enough in equities in order to have enough in future. 

Here come money managers: mutual funds, hedge funds, alternative investment funds, and you-name-it funds. You have private portfolio managers. There are those, who manage money for only few groups of people. A number of small-time individual money managers have sprung up calling themselves (value, what else?) investors, who are capable of beating all others. Then there are some combinations of sort. What is common among them is that all of them seek money from others in the pretext of making them rich. Let's collectively call them money managers, although I prefer some other name.

There are two types of money managers: Those who generate excess returns consistently, and those who do not. Excess returns are possible when they beat the market returns over a long period of time. Not many are able to play this game well enough. By virtue of their doing, they are either greedy, or cheats. Yet, both types are frauds. Here's why:

The greedy

Let's take money managers, who are good at the game, and therefore, their operations are able to achieve consistent, superior returns over a long period. Their pitch is the precursor; that they promise to generate higher returns for investors. But if we invert, we get a different motive. These managers want to get rich quickly. These are the greedy breeds. Consider this: If someone is good at investing, the best one could do is to start one's own investment operations, which involves investing own money, and build wealth. Over a period of time, because of the superior investing skills, the investment returns would be superior, and consequently, wealth gets built. Getting rich is not going to be a problem for the person. I know so many of them, who mind their own affairs, and have gotten rich along the way. And I admire them more than others. But, our typical money manager will not do it because of greed. This manager knows that by promising superior returns to investors, there will be two advantages: One, asset management fees, irrespective of returns. Two, performance fees. This manager will get richer faster than he or she would have if other people's money was not sought. So the greed factor makes them tell others that they will make investors rich by earning superior returns; and thus seek money. Well, I give two hoots. 

The cheats

Then there are money managers, who are not capable of achieving consistent, superior returns over a long period. And they are the majority. Their pitch is the same: I will make you rich. However, they don't know how to play the game, and despite that, they get asset management fees, and some (non?) performance fees too. If investors don't call them cheats, what else do they want to name them? Investors should ask these men and women to get the heck out of their life. They are no better than mis-selling salespeople.

The ideal strategy

Now that we have dealt with both the types, what should investors do to stay in the equity game? They have two options:

The first is, if they know the game, like it, and have time to spend on it, they are better off playing the game themselves. Why give your money to others when you can invest yourself? Consistent, superior returns are more of a behavioral thing than of intellectual. Average intelligence, knowledge of accounting, time value of money, and basic statistics are all you need to do well if you have the right behavior.

The second option is for those, who cannot understand investments, or have no time and interest for it. These investors can easily invest their cash on a periodic basis in a diversified index fund. If they carry out such automatic investment operation for a long period of time, they will be assured of market returns, and also will be reasonably rich along the way. I mean rich enough to take care of their future financial requirements. Instead of worrying about purchasing power of money, they can continue to do what they are good at and enjoy life. Index investing will take care of the purchasing power, inflation, time value of money, and so forth.

Cavet emptor
In conclusion, if a money manager uses other people's money to invest, the manager is either greedy, or a cheat. Take your pick.

Also, it is always the caveat emptor that buyers need to be blamed first for choosing to buy without understanding consequences. There is always enough time to build wealth and resources to take care of our needs, but never enough to feed our greed.