I had an interesting exchange with an Australian reader on the question of why someone rich and thus presumably financially savvy would need to hire a money manager.
I believe John Maynard Keynes, the great economist and a great investor as well, addressed an aspect of this issue in 1937. Investing, he write, is
the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find any one agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am learning from experience, is the right moment for selling it.
Many rich people, especially here in New York City where media, marketing, fashion and entertainment are important industries, made their fortunes from being able to identify and exploit popular taste, what the highest number of people are willing to pay the most money for. Even success in the the hedge fund industry--as opposed to the performance of a given hedge fund--depends in some part on this ability: You can make a lot of money raising capital for a fund in a hot sector or strategy and charging 2 and 20 for it. In fact, you may get richer raising a large fund which goes on to have a mediocre record than by raising a small fund in an unpopular sector that goes on to have a good record.
There is nothing wrong with having this ability, but when you turn this cast of mind to investing it can get you in trouble. Because by definition you can't succeed as an investor without purposely and purposefully being unpopular. An asset won't be a good investment unless it's undervalued when you buy it, and it won't be undervalued unless it's for some reason unloved. This is why people who are personally or professionally concerned with popularity often get into trouble investing over time. I'd give anything to see the personal investment results of the 100 richest people in Hollywood, or the world's top contemporary art collectors, or the heads of the major advertising agencies, during the tech boom and bust.
If you're one of these people, hiring an investment manager is likely a good idea. Take as your model David Geffen, who is both a Hollywood mogul and a top contemporary art collector. He's made more money as an arbiter of popular taste in music and movies than just about anyone, but he was shrewd enough to entrust the management of his capital to hedge fund manager Edward Lampert, who's kind of a hermit and has never been accused of being popular. The result, according to Geffen:
"I've made more money from Eddie than from all the businesses I've created and sold."
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