The Key to Managing Money, from George Coyle

February 22, 2013 |

Aside from the obvious answer which is to make money, what do dailyspecs think is the key to managing money? Is missing a big up move better/worse than missing a big down move? Meaning, if a long equity focused fund manager was flat in 2008 but underperformed in the recent move is that good or bad? It seems that if you play strong defense you often times don't catch the big moves. Similarly, if you are all offense your drawdowns are far greater. There are, of course, specifics to each style, but I am thinking more generally regardless of method or style.

Ralph Vince writes:

George,

If I may….

"the obvious answer which is to make money"

Is a crazy, amateur answer. Anyone who claims THAT, is here just for entertainment (which does not mean they are playing just nickel dime either, but likely playing TOO heavy).

The number one rules is to answer what you ARE here to do. If you were running the LMNOP corp's pension…how would you define that?

If you were in a trading contest, you would have a different criteria. What would it be?

If you were managing money for granny, wouldn't that be different than a 22 year old kid with a little grubstake's criteria?

How can you have a plan, a map to get somewhere, when you don't know precisely what you are trying to accomplish, where you are trying to go. I know it may sound trivial, but that's step one. Otherwise, you just flounder.

By the way, when people say ".. to make money,: I have found that usually means they need to "make money," to cover their obligations, which is a LOT different than making money to increase their capital (i.e. their obligations are already covered). Those are tow different ballgames, and to me, to have to trade to cover your nut, is not the way to trade. Not for me anyhow, it;s a tough enough game without that on top of it!

A commenter writes:

My first thought, FWIW, is discipline and hard work. It's like much else in life. There are naturals, to be sure, but for the rest of us, in any endeavor in which one seeks success, there's nothing like discipline and hard work.

Timothy Collins writes:

If I HAD to choose, then capital preservation wins out. Fear and greed drive just about everyone, but I've found fear outweighs the greed. There isn't one right answer. It depends, but here is what I can tell you. If you start managing money during a time where we've had sideways action or a very slow climb or even very bullish action, folks are going to want you to outperform. If there hasn't been a recent correction or scare, then greed takes over. If you underperform, they will leave you. You can survive the first major downside move, usually, and keep most of the assets you manage. However, there will be a heighten expectation of communication, hand holding and reassurances that they next drop they won't lose as much, if anything.

If you start managing money during or shortly after a sharp decline, then most of those individuals are probably looking to make a change because they were hurt badly. They will want capital preservation, so underperformance in an up market is somewhat tolerated. Clearly doing 1% when the total market does 15% won't be acceptable, but if you deliver a decent up year during those times (say 6-8%) but avoid losses during 5-10% downswings and greatly minimize during big drops (15%+), they will be very loyal even if you underperform on the upside for several years in a row (3-4 even). People tend to remember and be loyal to protectors.

Just my view of course.

a commenter writes:

This is a superb question and one could fill an entire career answering it. It is the money management equivalent of "Does God Exist?" for a theologian. Belief in one sort of God on one sort of Continent will get you high praise, many parishioners, and a spanking nice Cassock. On another you'd be branded an Infidel and your kippah kicked in the sand. Although the asset management industry has a tendency more towards the Heaven’s Gate end of the spectrum than the Abrahamic.

another commenter writes:

Capital preservation is very similar to when one is playing a strong defensive game and in top shape. Even a player with a weak offense, if he has a strong defense, that and fortitude can grind the opponent down.

Alex Castaldo writes:

The business of money management requires two separate things: first the ability to attract (and retain) Other People's Money (OPM), and second the ability to successfully invest/trade. In my experience it is rare for one person to be good at both, so to have a successful firm you probably need some people who are good at one and some who are good at the other.

Raising money involves marketing skills and also good communication with the clients so you understand what the client wants and so you keep the client informed/reassured about what is going on (even when they should be worried instead!). Basically these are people skills.

For investing/trading on the other hand you need the ability to see things differently from others (so called "variant perception", seeing things that are true but that other people don't see). This skill is partly an intellectual skill and partly guts/courage to do things your own way rather than follow the consensus.

Comments

6 Comments so far

bas agtereek on February 23, 2013 5:36 pm
The key is being realistic.

None of all contributors of this side is in the Forbes500.

Have we all set that goal? not being on that glossy?

The curse of managing money is having toomuch investment/trading ideas,short of plenty money (due to probably more reasons as investing/trading results) not choosing the right one in hindsight. (sure speaking for myself)

lately asked people what they like investing to, APPL or BRKB or A. The answer is both due to valuation (the first) the second is investing in BRKB and going short in WFC. Mr Buffett said he regretted that he did not invest more in WFC, but he did bought back from another investor a couple of billions US Dollars worth of his own stock (which hinted me to a takeover taken place soon) WFC was/is also being up from ‘09 i think its more than 200%. Heavy stock in my opinion with a hangover of 460 million shares being sold in the future probably, lets say no (upside)fuel from this great investor in the short run. The long/short was doing more than 6% in 1 month, not bad. Thanks for reading me.
Fred Tyler on February 23, 2013 6:25 pm
Fed continued liquidity pumping reminds me of a dealer willing to provide drugs to an addicted market. What are the effects of addiction withdrawal and how can the effects of withdrawal be translated to market moves?
Luke on February 25, 2013 3:10 am
“My first thought, FWIW, is discipline and hard work. It’s like much else in life. There are naturals, to be sure, but for the rest of us, in any endeavor in which one seeks success, there’s nothing like discipline and hard work.”

It’s nice to see people keep a sense of humor about these things. And I’m sure for some endeavors the above is true.
Ed on February 25, 2013 1:07 pm
Its about making money. Of course their is a context of specific goals and appropriate risk, but at the end of the day it is money weighted, internal rate of return that matters - The cash you make with cash, the net cash you can pull out.

Time weighted returns and all the benefits of this or that approach are mostly marketing puff.
Ramakrishna Shanker on February 25, 2013 7:27 pm
THE question. In my opinion, the key is to preserve and ideally grow wealth - over a 20-30 year span. Therefore, the current mania for “performance” measuring leaves me thinking :”performance” is for circus animals.
OK- by my definition - you will never be able to identify the successful money manager - only in hindsight. Therefore - everyone has to go it alone - whether or not they like it!
Ramakrishna Shanker on February 25, 2013 7:47 pm
Apologies for a second comment- It therefore follows , in my opinon, that the entire money management industry needs to be abolished. Also all ETFs, mutual funds etcetc. They are all devices to slowly bleed pools of capital - and that is all. The whole industry is at best a waste of human “effort”. problem is the average person would sell his first born to be rid of anxiety about the future - this breeds all manner of con artists. The “money management” industry is simply an example fo this scam. Previous eras had their astrologers, palm readers, priests etc - all highly profitable - since average people will pay large sums to be rid of the awful anxiety of having to deal with the future all on their own.

Recent Posts

List of Authors

Feb

22