131 - How to choose an Investment Manager?

Mental Models discussed in this podcast: Opportunity Cost Alpha Superpower of Incentives Competitive Advantages Process vs Results Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Show Outline Key Concepts for selecting a Portfolio Manager Choosing an investment manager is a lot like choosing a stock Don't invest in anything you don't understand - this includes managers What is their process? How do they earn alpha? Do you need alpha? What are your financial needs? Wealth preservation? Wealth Growth? Do you need alpha? Not every manager can provide alpha.  Not every manager seeks alpha Not every investors NEEDS alpha Value Cost - How are they paid? What is the expense structure? How does it compare to alternatives? Management Fees  Performance Fees  Next podcast will be a whole podcast on fee structure, so I'll limit my discussion on it here. Growth Investment managers inherently benefit from growing AUM. This is unavoidable. Regardless of pay structure. However, you want to understand what drives them. Is investing a passion or a money seeking endeavor? Are they trying to grow AUM? Do they plan to shut down growth at some point? Quality Competitive advantages? How are they different from other investors? Communication? How do they communicate with clients?  Do you understand their process? Are you comfortable with them? Style Size of stocks Liquidity Value vs Growth vs Quality?  Overlooked companies? Index hugging? Concentration vs Diversification   Custom Portfolios vs Investment Fund  Some managers will setup a customized portfolio just for you Or do you simply want to own a portion of a mutual fund or hedge fund. Past Performance - Luck vs Skill It is difficult to analyze a portfolio manager based on past performance Instead, focus on their process.  If you understand their process you can potentially understand the odds of future outperformance (if you even need outperformance) Summary: Choosing an external investment manager for your wealth is a difficult decision. In this episode, I outline the key concepts you should consider when evaluating someone to be your personal portfolio manager.