Santangel's Review


Introducing a New Series: The Art of Rhetoric in Manager Selection

Broadly speaking, we who evaluate money managers for a living break down the process into two components: the quantitative and the qualitative. The quantitative component is the numbers: performance record, volatility, performance vs. benchmarks, etc., as well as the analysis required to determine how those numbers were achieved. Simple enough (which is not to say easy), and very important.

But many will tell you that the qualitative component of manager selection is even more important than the quantitative. It’s harder to define exactly what “qualitative” means, but it comes down to evaluating the manager as a person. The best way to evaluate a person is to watch his behavior over a long period of time, as that’s the hardest thing to fake.* But too often in manager selection, you don’t have that luxury: the manager is too young, or too private and low-key to have left many behavioral footprints that you can track, or, like most of us, has never done anything obviously bad or obviously good: no bank robberies, but no medals of honor either.

What does that leave you with if you want to evaluate a manager as a person? For the most part, it leaves you with the manager’s communications to you, everything from marketing brochures to investor letters to stock write-ups on message boards to meetings in person. Absent the preliminary small talk and pleasantries that most human beings engage in naturally (or unnaturally if you’re me) before getting down to business, most of this communication is persuasive in intent. Implicitly or explicitly, the manager is trying to bring you around to a certain point of view: why a particular stock is undervalued, why value investing works, why you should invest in my fund, etc.

It is through his persuasive communication that most of a manager’s character reveals itself.

What are you trying to evaluate when a manager communicates with you? You want to know if he’s ethical, of course, and if he’s passionate about what he does. But for the most part, you want to know if he’s smart. Smartness can be divided into two components. The first is: Does he know a lot? Facts, data, statistics — does he have the knowledge necessary to make correct decisions? This is relatively easy to spot. If you find yourself in a meeting with a guy and saying to yourself “I didn’t know that … I didn’t know that … I didn’t know that …,” then odds are good that your manager knows a lot. When people say “He’s really smart, he always wins at Trivial Pursuit,” it’s this kind of smartness they’re talking about.

The second kind of smartness, a little harder to spot, is this: Does he think well? Does he reason properly?

What does it mean to reason properly? How can you evaluate how well someone thinks? Most manager selectors already evaluate how well a manager thinks, they just do it subconsciously by intuition, taking a “I know it when I see it” attitude. Have you ever talked with someone who didn’t tell you anything you didn’t already know, but who nevertheless left the impression of intelligence and wisdom? That’s your intuition telling you that the person thinks well.

This intuition can be taken from the subconscious to the conscious mind, and that’s what this series will be all about. What precisely does it mean to think well, and how can you evaluate a money manager’s ability to think? We’ll call the series the Art of Rhetoric, after a book by Aristotle of the same name. We hope to show that, far from being a useless pastime for geeks to entertain themselves with — the adult equivalent of Dungeons and Dragons — the careful study of the art of rhetoric is an essential tool in the manager selector’s toolkit, and one that can make the difference between finding a good manager and a great one.

So stay tuned.


* Watching someone’s behavior over time is not the same thing as looking at his pedigree. As we have discussed elsewhere on this blog, pedigree is a poor predictor of future performance. Many people with perfect pedigrees don’t succeed as independent money managers, while many people with no pedigrees at all do very well. In any event, most people who get to be hedge fund managers have good enough pedigrees, so it’s not much of a differentiator by the time they get to you. “Not really necessary, and not at all sufficient” is the best we can say about pedigree.