How do you decide if someone managing your investments has done a good job, or is likely to do a good job?

I’ve got a feeling that we might actually be more sophisticated comparing Uber drivers than the people managing our money! 

When we travel from one place to another, let’s say by taxi, we usually assess the success of the journey on several measures:

• Speed: how long did the journey take (in absolute terms and also relative to some prior expectation)?

• Cost: what were you charged and was it in line with what you expected?

• Safety: did the driver run red lights or risk distraction by talking on the phone?

• Comfort: was the ride smooth or a rollercoaster?

• Legality: did the driver have an appropriate licence and was the vehicle fit and proper to transport you?

On the odd occasion we might only care about one of these (say, speed, when late for an appointment), but even then, there’s always an extent to which the other measures count for something. You’ll take being late rather than driving on pavements, GTA-style. 

Yet investing is also a journey: one through time instead of through space – in other words, from one point in time to a future point. For some reason, however, when assessing investing journeys, we have a tendency to assess is based on a single measure: the return.

We tend to do this especially when comparing one investment manager with another. Here’s a real example: a family office placed identical sums of money with five different managers and told them that it would check in “to see how they are doing” in 12 months, meaning, in this case, comparing the returns generated over that period.

This would be very much like judging taxi drivers purely on speed and ignoring cost, safety, comfort and legality, and deciding that the one with the shortest journey time was the best. Even if the car smells of smoke and the driver runs red lights to do it.

There’s a reason this happens. We focus on the thing that’s easiest to measure – the thing that can be expressed in a simple number.

The other measures for assessing your investment manager are almost always subjective (even if, in the case of investing, some firms have tried to come up with statistical proxies for the equivalent of safety or comfort).

For taxi rides, we’d almost never look at speed alone. For investing, too often it seems to be ok to look at returns alone. That’s bad news for everyone: getting your advisor to fixate on short-term returns is probably the one thing you *don’t* want them to be doing, especially if they are tempted to take unwarranted risks to get there.