I was on a conference call recently during which the presenter was creating a screen of investment managers as the first part of a selection process.  He said, “And let’s use a maximum tracking error of . . .”  Wait, I thought, let’s stop right there.  Maximum?

In choosing investment managers, many seem to hold dissonant beliefs:  Yes, we want active management, but we don’t want the managers to be too active, lest they stumble.  (Unless, of course, they fit in our “alternatives” bucket.)

If you spend any time in places where financial advisors or plan sponsors gather (online, at a conference, wherever), you know that at a moment’s notice the discussion can devolve into a theological battle about the relative virtues of active versus passive management.  We are going to explore that territory now, so pick sides if you must, although this discussion is about understanding the degree of “activeness” of managers and ... continues

Modest Mussorgsky wrote Pictures at an Exhibition as a tribute; it was structured as a series of piano pieces imagining a stroll though an exhibition of his late friend’s paintings.Never published in Mussorgsky’s lifetime, the composition didn’t hit the charts until it was orchestrated by Maurice Ravel.  Listeners looking for a somewhat edgier treatment can try the Emerson, Lake, and Palmer version. It’s time for us to take a similar journey.

The title of this posting refers, of course, to Warren Buffett.  I have written extensively about investment gurus in previous postings;the research puzzle | Here are some examples for would-be members of a guru’s gang. Buffett is in a class by himself.

In our gallery, we have many pictures of Warren.  Graham and Dodd disciple extraordinaire.  Investor without peer.  Cheapskate, as much as a multibillionaire can be.  Folksy, happy — the word “avuncular” seems to have been made just for him.  ... continues

When I was teaching MBA finance students, I included a class on the sociology of investing.  Seeing it on the syllabus did not cause a stir of excitement throughout the lecture room, since the goals of many there were to a) learn how to find ten-baggers and b) get a job.  Nevertheless, it should be part of “the core” for would-be investors.

An innate sense of where the crowd is going is critical to success, so that’s “the sociology of investing” that gets most of the attention.  Relatively little scrutiny is given to how investment firms work and how investment decisions are made within them.  A great posting yesterday on the blog socializing financesocializing finance | The blog has several authors; this posting was written by Daniel Beunza. speaks to one of the themes I have been preaching for years:  Firms are often structured in ways that make no sense given how markets work.  The posting highlights some nascent efforts to integrate trading ... continues

The dog world was abuzz this week when Sadie the Scottish terrier took top honors at the venerable Westminster Kennel Club Dog Show.OK, I don’t really know what the dogs thought of it, but the dog people were pretty excited. She became the first pooch to win the “triple crown,” after her earlier victories at the National Dog Show and the American Kennel Club Show.

I love dogs as much as the next guy, including the wonderful mix of breeds that we have in our neighborhood.  (They all have one thing in common:  Labradors and rottweilers and terriers have all turned tail and run when they have heard the manic attack cries that Kitty emits if they approach our door.)  Watching the televised coverage of the archetypes of the canine world parade around Madison Square Garden, you get caught up in the emotional aspects of the competition.  Your biases show up in a hurry, from “I want one of those” to “I wouldn’t be caught dead with one of ... continues

Investors are prone to using rules of thumb (high-falutin’ folks now use the term “heuristics”) to help in navigating the markets.  One of the most common looks like this:

Yes, it’s the famous PEG ratio, which is widely given as a reason to embrace or avoid a stock depending on which side of that line its numbers line up on.  Many individual investors cling to it as a guide, and it’s amazing how often professional investors cite this relationship in marketing materials, articles, and television appearances.  Go to Investopedia and one of its featured articles explains why:  “Stock theory suggests that the stock market should assign a PEG ratio of one to every stock.”Investopedia | The title of the piece is “PEG Ratio Nails Down Value Stocks.” Well, no.

The history of this myth is of interest.  When Peter Lynch shepherded Fidelity Magellan to extraordinary gains, he became the first investment star to “go ... continues