“Opportunity is missed by most people because it is dressed in overalls and looks like work.” (Thomas Edison)
According to the most recent Forbes 400 list, which names the richest people in America, hedge fund manager Ken Griffin is worth $35 billion. That makes him the 22nd richest person in the US.
He is also far from the only hedge fund manager that appears. Forbes names 22 hedge fund managers in the top 400, all with a net worth of at least $2.9 billion.
It is quite incredible to think that 5.5% of this tiny group of the wealthiest Americans are hedge fund managers.
To put that in perspective, every one of these individuals is at least twice as wealthy as Rihanna, who is considered the world’s richest female musician. She can only claim assets worth a measly $1.4bn.
Their wealth also far surpasses that of golf star Tiger Woods, who Forbes estimates is worth $1.1bn.
Being a boring fund manager
It is worth asking why investing other people’s money has become so lucrative. Does it make sense for fund managers to have grown so enormously wealthy, essentially by charging fees on other people’s money?
To put it another way: should fund management really be so sexy?
A local fund manager recently raised exactly this point. By his own admission, his strategy is really rather boring. He wants to invest in good companies that pay consistent dividends, and to hang onto them for the long term.
As far as investment approaches go, this is one of the most tried and tested there is. By reinvesting the dividends he gets from these stocks, he is constantly compounding returns for investors. That means they are earning growth upon growth.
And, as many clichés remind us, compounding is the most powerful force in investing.
The secret to Buffett’s success
However, this kind of investing is not what gets attention. Neither does it make the managers behind it fabulously wealthy.
Rather, it is the sexy, high growth strategies run by the people on the Forbes list that earn those accolades.
But why should this be? After all, success in investing is essentially simple. Warren Buffett (who, unlike the hedge fund managers, invested his own money) became the richest investor in the world through using fundamentally the same long-term strategy as the “boring” fund manager.
What’s even more noteworthy about Buffett, as financial writer Morgan Housel points out, is that 99% of his wealth has been accumulated since his 50th birthday. That’s not because he became a much better investor after he turned 50. It’s because of the power of compounding.
‘Buffett’s secret is that he’s been a good investor for 80 years,’ Housel writes. ‘His secret is time. Most investing secrets are.’
The best thing for investors
Unfortunately, narratives in the investment industry often distract us from this simple fact.
Since the wealthiest fund managers are the hedge fund managers who make it onto the Forbes list, that implies that they must also be the best investors. And that suggests to investors that they should be giving their money to these kinds of stars.
Sadly, however, this narrative just reinforces poor behaviour. It’s the kind of thinking that leads investors to chase performance, or to try to pick the “next big thing”. Short-term gains get prioritised over sustainable long-term growth.
To some extent, the industry encourages this thinking. That’s because if you can make yourself seem sexy to investors, you can attract money.
But this doesn’t really serve investors. As the “boring” fund manager pointed out:
“If compounding is the best thing we can do, and it’s about owning things for a long period of time, and those simple things are what we need to do for investors to help them achieve financial freedom, that’s not a complicated task. It’s just something that requires a bit of discipline, patience, common sense and time. But then we wouldn’t have billionaire hedge fund managers.”
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Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.