The article looks at successful fund managers identified by Fortune magazine in 1989. And with 22 years of real investment performance evaluates the success of the fund managers to find out what made them successful or not.
JJ’s findings are quite surprising, for example, the larger firm becomes the less flexible they are and thus the lower the investment returns. JJ adds that when firms become successful and large, it becomes increasingly difficult for them to focus on the investment returns for their clients.
Even more surprising is the finding that work experience and the longer a manager has been with a fund does not help performance. They found that less experienced managers had better performance.
How can that be you may ask?
JJ quotes research that determined that less experienced managers have stronger incentives and are more willing to take risks, with this often leading to superior performance.
He also makes the point that experience may count against most fund managers saying:
Relying heavily on experience tends to mean looking to the past and considering the probability of future outcomes based on how things played out historically. Exposure, on the other hand, considers the likelihood — and potential risk — of an event that recent history may not reveal.
These two insightful points just scratch the surface of the blog post.
The whole thing is really worth reading.
Here is that link again: The Handicap of Experienced Investors