In Manager Selection, Conventional Rules of Thumb are Dumb

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MIT’s Alchemist sculpture ponders a gorgeous (pre-pandemic) early fall day on campus

MITIMCo (the group that manages MIT’s endowment) will soon be launching a new webpage for emerging managers. It will describe our approach to partnering with emerging managers, including why we do not ask for GP economics when we anchor emerging managers, and why we commit capital to emerging managers for ten years. Subscribe to this medium page and/or follow me on twitter @joelmcohen to see it when it goes live!

Conventional rules of thumb typically conflict with thoughtful investing. A classic example is the price to earnings ratio. P/E is a very imperfect proxy for discount to intrinsic value, yet investors tend to equate the two. In the recent past, there was a huge opportunity to invest in companies with astronomical headline P/E ratios due to earnings being depressed by heavy investments through the P&L in growth and upgrades to the customer experience. The high P/E ratios scared many investors off, yet these are some of the companies that created the most business value over the past ten years. (It is interesting to note, though not directly relevant here, that P/E was a good proxy for intrinsic value for a very long time, but this has become less and less the case over time. The very fact that it worked so well for so long is largely the reason it continues to be overused today)

It is less often remarked upon, but investing with investment managers is much the same. Below are some of the many silly rules of thumb we see used to the detriment of thoughtful manager selection. We have worked hard to train ourselves to be “organizationally allergic” to these and anything that resembles them.

Simply put, in investing we find that most of the best opportunities are found in places where conventional rules of thumb fail.

For us, investing is as simple as looking for exceptional people doing something unconventional that we can understand and that seems likely to generate excellent risk-adjusted returns. If that is a one-person shop with $5 million of AUM, no track record, and no other institutions — but an exceptionally thoughtful approach to investing — great! In fact, that is frequently where we find the most exciting opportunities.

Know of any exceptional investors we should meet who fall victim to typical institutional rules of thumb? We are always looking to get to know unconventional firms who can produce exceptional results in the coming decades.

I can be reached at

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10+ years on the Global Investment Staff at MITIMCo, helping invest MIT’s endowment in exceptional investment firms around the world.

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