We believe that superior investment managers exhibit most of the following characteristics:
- A well-defined process that is executed with discipline. There are many intelligent people in the investment business, but based on our many years of researching stock pickers we believe that great stock pickers have a process that is usually explicitly outlined and faithfully followed rather than intuitive. This helps to reduce decision errors that result from mental shortcuts born from overconfidence or sloppy work.
- The passion for stock picking that results in the drive to work harder and more creatively in order to gain an edge. The investment business is intellectually stimulating but hugely demanding. Successful investors usually have a love for the business that allows them to make lifestyle sacrifices as they pursue their overriding passion for stock picking.
- The confidence and ability to think and act independently. Great stock pickers tend not to be influenced by consensus views. Hand in hand with thinking independently is a long time horizon and a high degree of patience. (They are willing to be wrong at least temporarily.)
- Intellectual honesty. Great stock pickers are honest about their circle of competence and are aware of their biases so that they can be objective in their analysis. While confident, they are also able to recognize and admit mistakes and learn from them so they can go on to fight another day.
- Experience and an above-average long-term performance relative to an appropriate benchmark index and peer group. Litman Gregory measures investment manager performance against performance composites made up of other stock pickers using a similar stock-picking style and market capitalization. Litman Gregory maintains its own database and has developed proprietary software to measure and analyze performance over various periods.
- A focus on the job of stock-picking and portfolio management. Litman Gregory seeks investment managers who have attempted to mitigate non-investment distractions by delegating most business management and marketing duties.
- An investment process that lends itself to concentrated investing. Though we don‘t require that a stock picker have experience in running concentrated portfolios, they must have a process that lends itself to concentrated investing to be considered for a Litman Gregory Masters Funds sub-advisory position.
- A high level of enthusiasm for being part of Litman Gregory Masters Funds. We require that any Litman Gregory Masters Funds sub-advisor be enthusiastic about the opportunity.
We have extensive experience evaluating investment advisory firms using the above criteria, and we believe that each of the investment managers selected to participate in the funds exhibits most of these qualities.