How to Make Manager Research Decisions

How you ask a question matters. It determines the tools you use to answer the question and what a useful answer looks like. Investment professionals tend to ask questions about manager selection as though they were trying to prove that the manager they were researching was going to add value. This makes reaching a meaningful answer almost impossible for a host of practical and theoretical reasons. Once we recognize that manager research can never be about proof, but is in fact an exercise of making calculated balance-of-probability assessments with limited information, and then updating those assessments as new information comes in, we can think more clearly. This recognition helps us in a number of ways. It clarifies how we should do research and how we should make manager hiring decisions. Most important, this change can help us improve our decision making: the grand tradition of investors buying too late and selling too late is based at least in part in the feeling that we need to “prove” the skill (or lack thereof) of a manager, and of course by the time the investor feels that “proof” has been achieved the story has moved on, and the “proof” is either no longer true, or is too late to implement. Changing our mindset can help us move more swiftly when there is meaningful new information while stopping us from getting distracted by information that seems important but which has little real value.