Hi Guys,
We’re all constantly scrounging for heuristic rules of thumb that will enlarge our portfolio rates of return What works? A lot does not.
My postulate is that age matters greatly when selecting a mutual fund manager. Not the investor’s age, but the fund manager’s chronological and professional age, and the integrated time he has managed the candidate mutual fund.
As a committed mutual fund/ETF investor, I am in a constant search mode to discover selection criteria that will contribute to Alpha (excess returns) for my portfolio.
I submit that a fund manager’s age profile should be a major factor. I certainly understand that this late recognition is not a stunning finding to many seasoned investors. Many include the age criteria as a normal part of their assessment process; I did also in a somewhat loose manner.
But based on some recent reading, I have added some precision to my generic observation that age matters in some undefined way. I now have specific numbers to crystallize my thoughts on the matter.
As Lord John Maynard Keynes remarked: “The difficulty lies not so much in developing new ideas as in escaping from old ones.” I am particularly guilty of not seeking firmer ground when my current position is eroding. Too often, I stay too long.
Keynes was also correct when he observed “When the facts change, I change my mind. What do you do, sir?” In reality, I’m not truly changing my mind; I’m just being a little more precise in my evaluation of candidate fund management.
I don’t want to valorize Keynes simply because I cited his two quotes. I like some of his work; I dislike other parts of it. To balance the scale, allow me to reference Murray Rothbard’s (an Austrian school economist) judgment on Lord Keynes: “There is one good thing about Marx: he was not a Keynesian.”
I can now put a definite number on the minimum age that I will consider for a mutual fund manager or composite team management. My magic number is 40 years old.
Why that particular number? Why so old? Some geniuses and gurus develop at a much younger age. Wrong. The data does not support that contention. The recent scientific research on this subject does not validate the child prodigy concept.
My awakening came recently when I carefully examined a paper by K. A. Ericsson and coauthors. This team is from Florida State University. I referenced the paper in an earlier posting, but will append it here for completeness:
https://my.psychologytoday.com/files/u81/Ericsson__Roring__and_Nandagopal__2007_.pdfThe bottom-line conclusion that can be extracted from this lengthy review is that the DNA genius gene is a myth. The perceived elitist genius status is more a function of “deliberate practice” (highly focused, carefully directed, and painfully lengthy time commitments) than of innate abilities. Expert performance is an outcome from intensive training.
The so called gifted are created, not born. Practice has the potential (not the certainty) to make perfect. That’s a healthy lesson.
To quote from the Ericsson document: “Our review of evidence favors a gradual development of these abilities (they refer here to the “emergence of high levels of performance”) . Furthermore, while proponents of innate talent may cite upper limits of ability as evidence of genetic predisposition, reviews from the expert performance approach suggests that these upper-limits may not reflect innate limits, as motivated individuals are often able to improve their performance by engaging in deliberate practice.”
In Ericsson’s concluding section, he writes: “We found no rigorous reproducible evidence that innate abilities, excepting height and body size, prevent healthy individuals from attaining expert levels of performance.” This is inspiring news.
Along the way, the referenced paper totally discounts child prodigy claims as being an overstatement of the accomplishments of the cited prodigies. To illustrate, the paper observes that Bobby Fischer did not become a chess grandmaster and world champion until middle age, and Wolfgang Mozart did not compose his finest, most complex pieces until maturity was reached. As youngsters, they showed some keen interest that was later augmented by practice into a world-class wizardry.
The paper argued that superior performance is attained only after 10 years of committed learning, training, and practice, and/or 10,000 hours of “deliberate practice”.
This “deliberate practice” trajectory is the basis for my assessment of mutual fund management requirements. It is identical to the 10,000 rule highlighted in Malcolm Gladwell’s “Outlier”. Gladwell used Ericsson’s work as his primary source when preparing that portion of his book.
Ericsson recognizes the distinction between physically-dominated and mentally-dominated professions when graphing performance accomplishments as a function of age. The mentally demanding disciplines mature at an older age and decay more slowly than athletic professions. This trajectory is mostly controlled by the formal schooling needed to enter the mental intensive professions.
Here is my invented age requirement scenario.
A likely mutual fund manager graduates college and completes some advance schooling, perhaps an MBA, at age 25 to 27. He enters the workforce in a financial institution, perhaps a mutual fund, and is assigned duties as an analyst for several years. He does not secure a distinctive track record yet. He is now 30 years old. If he’s lucky he becomes an untested fund manager. According to Ericsson and Gladwell, a fund manager needs at least 10,000 hours of measurable learning performance to challenge and enhance his skill set. He is now 35.
At this juncture, his mutual fund management record may be dismal; he was on an ascending practice curve. If he is talented he has used this opportunity to learn and develop an understanding from that experience; he has been on a “deliberate practice” trajectory. Many fail during this acid test; a few survive and thrive. As investors we can only uncover which is which after yet another 10,000 hour segment of performance observation to firmly establish credentials.
Our candidate mutual fund manager is now about 40 years old.
Therefore, my adjusted minimum manager age for perspective mutual fund portfolio additions in about 40 years old, or at least one fund management team member must have reached that age.
So, that’s my newly minted rule of thumb.
Also, the record for a fund manager during his initial 10,000-hours (like 5 years) should be highly discounted. Even if impressive, it could be an artifact of pure luck. That is the learning, the maturing period. The research suggests that the period following this experience accumulating exposure is more representative of actual skill. It takes time for the really gifted fund managers to exploit their maturing talents and to reveal themselves.
The same logic can be applied when selecting a doctor. Experience is a valuable teacher.
I have not tested my hypothesis since I have not purchased a new fund in over a year. Accidentally, the last fund manager that I hired had 2 decades of on-the-job training. My current portfolio is singularly weighted with highly experienced fund managers. That was by design although I did not evoke my 40-year old age rule because I had not developed that specific criteria during my much earlier portfolio construction years.
My 40-year old fund manager rule is only two days old itself.
The overarching good news from the Ericsson paper is that everyone has the potential to develop into a superior performer. The price is diligent, “deliberate practice”. So, keep on keeping on. Good luck – that always matters.
I encourage and anticipate enjoying your comments. Please contribute.
Best Regards.
