“The Money Game” is an all-time classic of investment literature. Its author, George Goodman (writing as Adam Smith), offered an insider’s view of Wall Street and the game of professional investment in the 1960s and 1970s. While some of his observations may now be a bit dated, much of it is as valuable today as it was 40 years ago.
We have already drawn on Goodman’s wisdom in a couple research notes published here. We have discussed some of his most cogent general market insights, as well as danger signs to watch out for in the market.
In today’s research note, we continue our discussion of Goodman’s thinking by addressing the topic of investment managers. Goodman covers the topic in part via a reported conversation with "Mister Johnson," a top investment manager at Fidelity (and probably referring to Edward Johnson, the firm’s founder). Johnson is clearly not your average investment manager:
“What hooks me about Mister Johnson is that he does not talk about the stock market in terms of GNP and tax cuts and automobile production. He talks about whether reality and time are coexistent at the moment, and whether there is anything in Alan Watts’ 'The Wisdom of Insecurity' that is relevant, whether the hemlines of women’s skirts really mean anything, and he is deadly serious; he had his analysts check out whether hemlines were a true indicator.”
Let’s see if we can shed some light on the subject of good portfolio management.
Improve or perish
According to Goodman, the mark of a great portfolio manager is the ability to adapt and improve over time:
“If you are a player in the Game, or are thinking of becoming one, there is one irony of which you should be aware. The object of the game is to make money, hopefully a lot of it. All the players in the Game are getting rapidly more professional; the amount of sheer information poured out on what is going on has become almost too much to absorb. The true professionals in the Game – the professional portfolio managers – grow more skilled all the time. They are human and they make mistakes, but if you have your money managed by a truly alert mutual fund or even by one of the better banks, you will have a better job done for you than probably at any time in the past.”
We have spilled plenty of digital ink in research notes published here on GuruFocus about the problems with professional money managers. Goodman, however, is not wrong about the continuously improving state of the industry. His observations about increasing professionalism and rigor, made in the 60s and 70s, continue to hold water as investment managers continue to get access to better data and tools. That said, even the best institutional money managers are susceptible to the inefficiencies and issues we have discussed in the past.
Individuals over committees
Investment advisors and managers come in all shapes and sizes. But the overarching size may not be a particularly useful guide. More important is the manner in which investment decision-making is structured. Johnson’s take on the subject is worth a read:
“So I let the managers develop and handle their own funds. Each one had his own responsibilities. He could walk down the hall for a chat if he wanted to consult, but the show was his own. Positive decisions have to be made by an individual; groups can’t do it. And I think a lot of the investment business was committee-oriented.”
While an investment firm or large fund may require more than one decision-maker on a macro level, individual portfolio managers are crucial in the chain of command – and their importance only grows the more assets there are under management. Think of it like an army: Analysts are the foot soldiers while the CEO, chief investment officers and principals are the high command. In a small formation that is all that is necessary, but a firm or fund with considerable assets under management needs people who can act as decision-makers on the ground. Thus, in a well-organized firm, portfolio managers serve as the leaders in the field, empowered to make tactical (and even strategic) decisions on their own initiative. While some may fail to live up to their promise, the only way to develop is through individual responsibility.
More art than science
While much has changed since Johnson's day, his view of investing as an art still resonates:
“I have been absorbed and immersed since 1924 and I know this is no science. It is an art. Now we have computers and all sorts of statistics, but the market is still the same and understanding the market is still no easier. It is personal intuition, sensing patterns of behavior. There is always something unknown, undiscerned.”
Data are radically more plentiful and precise, and the tools for analyzing them both more sophisticated and refined than in Johnson’s day. Yet, his conclusion cannot be overlooked even in our computer-driven age. While the rigor of valuation models is far greater and the data available to inform them more accurate, the market is still driven day to day by the same human animals that have always participated in it.
Accepting there is a subtlety beyond analytics alone is crucial for long-term success as an investment manager. In these heady times where true value plays appear few and far between, it is especially important to recognize the mass psychology underpinning market behavior and to be positioned to weather storms and exploit opportunities when they arise.
Investors, whether simply running their own books or managing other people’s money, should heed the advice of Goodman and Johnson.
Disclosure: I/We own no stocks discussed in this article.
