Years ago, I was sitting in on a conference call for a mutual fund that had done well for clients but had stumbled recently. The calls offered a chance for advisors to ask questions of management and get more in-depth information about their thoughts and strategy. One advisor in particular was aggressive in his questioning, and the fund manager soon allowed the call to devolve into a back-and-forth with this advisor who had invested a sizable percentage of his clients’ assets in the fund.1

investor

Over the course of the call, it became evident that the fund manager wasn’t willing to admit that he might need to make tweaks to his strategy. He showed no humility, and worse, he equated criticism of his fund with criticism of him personally. Shortly after the call, we liquidated our investments in the fund which continued to underperform for several years until it was ultimately forced to close.

I learned a great lesson about the importance of temperament from that fund manager. A number of good years had given him what ultimately proved to be an unwarranted amount of confidence. When market conditions led his strategy to falter, he lacked the humility to change. I’ll occasionally see the same thing from individual investors who stick with poor investments because they can’t admit they’re wrong, and I regularly read about hedge fund managers doing the same thing. When we’re looking for new funds, lack of humility is among the first qualitative factors that will lead me to reject a fund.

The challenge is that patience is also a key characteristic of a good investment manager. It can take some time for an investment strategy to play out, and good investment managers don’t significantly change a strategy solely because it doesn’t achieve the desired results in the near term. As an investor, the trick is to distinguish between well-grounded confidence and arrogance. We do this by using a series of fund screens, tracking changes to the funds and sitting in on fund calls and reading prospectuses.

It is a good deal of work, and there is a fair amount of subjectivity in the analysis as well. As professionals, we have the time and tools needed to do this, and we think it’s worth the effort if we can achieve returns slightly above benchmark over the long term. This same process may not work for individual investors given the time and tools needed, and if it doesn’t work for you consider going the low-cost index fund route. If, on the other hand, you recognize lack of patience or personalizing losses in the way you approach investments, consider working with an advisor to help you avoid investing mistakes.

1. I can’t recall the exact percentage, but it was far more than we would typically invest in an actively managed fund in a volatile sector.