We’ve probably all heard the familiar refrain that even if some fund managers do beat the market, it’s impossible to pick the winners in advance. I wrote about this in the bonus material for my series on synthesising the active versus passive debate.
My answer was that the best way to improve your odds of picking a winning fund manager is to flip the manager research question upside down. In other words, look for losing fund managers and boost your odds of success by excluding them from your search. I3 Insights thought that this was an interesting idea that was worth exploring further, so here are a few thoughts on the subject.
I call this method the Via Negativa approach to fund manager selection. You might be wondering what is Via Negativa?
“Via negativa is a Latin phrase used in Christian theology to explain a way of describing God by focusing on what he is not, rather than what he is; understanding Deity’s positive qualities is a task deemed impossible for the finite minds of humans” (just like forecasting the future, which is essentially what you’re trying to do when selecting a fund manager MF).
“Via negativa can also be used to describe a similarly ‘negative’ way of improving one’s life; instead of concentrating on what you do, the focus turns to what you don’t do. This path has two main thrusts: stripping bad habits and situations out of your life, and avoiding bad habits/situations in the first place.”
OK, why should we approach problem solving in such a seemingly backward way? I’ll let Charlie Munger explain: