The investment industry poses an interesting conundrum. Active public stock investment managers meticulously scrutinize each investment’s growth potential, revenue predictability, margin potential, competitive positioning, full risk set, and more. Yet, if we consider these managers as individual businesses, they would probably fail to pass their own scrutiny.
To clarify, investment managers evaluate a company’s revenue potential and certainty over the next three to five years. They assess the likelihood of delivering value to customers within a reasonable timeframe and compare the company’s unique positioning and products to others in the industry. They also consider whether the industry is saturated with similar businesses.
An alternative way to examine the situation is through the lens of private asset fund fee structures. A public stock manager would likely generate negligible fee revenue from their portfolio companies (dividends) and rely heavily on performance revenue, which can be highly volatile and unpredictable. If an alternatives manager had a similar revenue profile, they would receive a poor public valuation due to the uncertainty and instability of earnings.
Ironically, public stock managers often criticize financial advisors, not realizing that their core value proposition includes planning, education, optimization, and financial therapy. Real estate investors also face condescension from public stock managers, although real estate investments typically generate tax-efficient returns from income or fees rather than revaluation of the asset.
When I tell people I solely manage our own savings, many have asked why I do not take on third-party money. At first, I lacked a satisfactory answer, but now it is clearer to me that forming a business based solely on gain-on-sale profits is not a business model I could look someone in the eye and feel confident of a positive future outcome.