The Wall Street Journal had a fascinating article over the weekend on a training simulation for pension plan trustees. Teams compete with one another, with advice and guidance from employees of Brandes Investment Partner, the developers of the simulation. What participants should focus on—and what they do focus on—are often two different things.
What the participants should focus on, [Brandes research analyst Nick Magnuson] says, are the results over longer periods and the information they have about the people, philosophy and processes at the 13 hypothetical money-management firms. In most cases, long-term performance is “a byproduct” of those aspects, Mr. Magnuson explains, while short-term results can be “noisy” rather than predictive.
Yet, the trustees playing the simulation often find that it’s hard to resist a manager on a hot streak—and it’s tempting to dump a long-term winner in a slump. Typically, when Brandes conducts what it calls its Manager Challenge, at least one-third of the teams pick managers based on three-year records, says Barry Gillman, a consultant to Brandes who previously was head of the firm’s portfolio strategies group. “The ingrained patterns are too hard to break,” he says.
The key to success, as it is so often, is being thoughtful about your decisions and then sticking with them.
Participants in these investing simulations, as in the real world, tend to trade too much, the Brandes officials say. Last month, some teams made 10 trades a round. By contrast, the winning team made a total of just five trades after picking its initial portfolio—the fewest in the game.
Sometimes even less trading has paid off. At a few contests in the past, the Brandes folks saw teams select their initial portfolios, slip out of the room to spend their time elsewhere, and come back to find themselves the winners. “We don’t really want people to figure that out” and miss out on the full experience, Mr. Gillman says. “But the reality is many of them would really be better off doing that.”
Winning by doing nothing should be a big lesson to all investors. Select your managers carefully based on people, philosophy, and process (we happen to like relative strength)—and then leave it alone. Assuming the people haven’t turned over and the philosophy and process are unchanged, that should be simple to do. All too often, however, it is not done.
Look at it this way: financial markets are going to bounce up and down no matter what managers you select. Sometimes markets will be smooth for extended periods; at other times they will be frustrating and turbulent. Again, this will occur regardless of the managers you select. You cannot let your confidence in the process be derailed by the inevitable bumps in the market.
There is a fine art to doing nothing. Resisting the urge to tinker once your due diligence is complete actually requires a conscious decision not to intervene at each temptation. It’s harder than it looks—and that’s often the difference between winning and losing.