Sniff Out Imitators: Identifying Imitators in Investment Management
In the world of investment management, distinguishing between genuine experts and mere imitators is crucial for protecting your investor portfolio from the significant risk of loss. In the webinar hosted by the IRA Club, Chris Carsley, our Chief Investment Officer at Kirkland Capital Group provided important insights into recognizing imitators, applying investment due diligence, and strategies that help investors ensure their portfolios are safeguarded against potential pitfalls.
Understanding the Role of Imitators in Investment Management
The investment management sector has many imitators who copy successful strategies without comprehending the fundamental principles behind them. Although not all imitators are fraudulent, their shallow understanding can present considerable risks to investors.
“Although not all imitators are fraudulent, their shallow understanding can present considerable risks to investors. ”
Key Aspects of Identifying Imitators
1. Investment Due Diligence: Beyond the Numbers
Conducting a thorough investment due diligence process is vital. Chris underscores that performance numbers should prompt questions rather than provide conclusive answers. Scrutinizing custom benchmarks and footnotes thoroughly is essential. For example, Chris cites an investment fund that compared its performance to the S&P 500 when it had no correlation to equities. Understanding the attribution of returns and digging deeper into backtested results is also crucial.
“Performance numbers should prompt questions rather than provide conclusive answers.”
2. Deciphering Marketing Claims
Marketing decks are crafted to highlight key points, yet decisions should not be made solely on them. Chris shares an anecdote about a "Private Income Fund," which investors mistakenly believed was a private debt fund. A thorough review revealed that a majority of assets in the fund were equity stakes, posing an equity-level risk rather than the debt-level security investors sought.
“Marketing decks are crafted to highlight key points, yet decisions should not be made solely on them”
3. Evaluating Process and Procedure
Misrepresentation and investment fraud prevention is an ever-growing concern, especially with technological advancements. Robust processes and procedures must be in place to dissect marketing decks meticulously and validate claims made by investment managers.
“Validate claims made by investment managers.”
Applying First Principles in Finance
Applying first principles, a concept attributed to Aristotle, involves deconstructing issues into elemental parts and reassembling them with a new understanding. Chris advocates using this method to enhance financial risk management and due diligence processes, so that you, as an investor, comprehend the life cycle of a trade from inception to exit. By challenging assumptions and embracing Socratic questioning, investors can clarify thinking and unravel inherent biases.
“Deconstruct issues into elemental parts and reassemble them to get deeper understanding.”
The Chef vs. Cook Analogy
To elucidate the difference between experts and imitators, Chris shares the chef versus cook analogy. A chef, akin to an investment expert, innovates and adapts to varying environments and ingredients. In contrast, a cook merely follows recipes and struggles creating something from scratch especially when the context changes. This analogy highlights the importance of selecting investment managers who can navigate shifts in the financial landscape with expertise and has experience across different market cycles.
“Select investment managers who can navigate shifts in the financial landscape with expertise and has experience across different market cycles.”
Recognizing Red Flags: Behaviors of Imitators
Chris detailed certain behaviors that imitators might display, which could assist investors in recognizing them.
Inability to Adapt Vocabulary: Imitators may use complex terminology to project an image of expertise. However, their inability to simplify concepts and explain them in layman's terms can be a key red flag.
Reluctance to Discuss Failures: A reluctance to share past failures is a significant indicator of insecurity or lack of genuine experience. Experts typically do not hesitate to discuss their failures as they understand that doing so will not diminish their reputation.
Overconfidence and Lack of Limits: Experts recognize their knowledge and limitations, whereas imitators may attempt to mask their shortcomings with fabricated answers.
Name Dropping: Building credibility through associations rather than substantive experience is a common tactic among imitators.
By applying rigorous investment due diligence techniques and understanding the distinctions between imitators and experts, investors can significantly enhance financial risk management and investment success. Recognizing the behaviors indicative of imitators and applying first principles in finance can drastically reduce exposure to unnecessary risks.
To dive deeper into these strategies, we invite you to watch the full video and download the presentation used in this webinar or schedule a call with Chris to discuss this topic further.
You can also download our free guide on “How To Perform Due Diligence” to get you started.