Jason Zweig wrote Want to Beat the Stock Market? over three years ago now but many of the ideas contained were resurrected as I listened to Jeremy Giffon on Invest like the Best. Writing about active management, Zweig pointed out that “managers can perform only as well as their worst investors allow them to.”
It’s a simple line, but it explains a lot. A manager can have a sound process. They can be patient, disciplined, right about the market more often than not. None of that matters if their investors panic at the bottom and chase performance at the top. The manager needs cash on hand to meet redemptions, so they are forced to sell when opportunities may be most ripe. Then new money floods in after a hot streak, right when the opportunity has passed or become expensive. The fund’s returns end up shaped as much by investor behavior as by manager skill.
Peter Lynch is one of history’s most famous and successful fund managers. Towards the end of his tenure he explained the constraints on a money manager. A manager’s ability to perform isn’t just a function of skill. It’s shaped by the fund’s stated objective, its name, its category, and its investors’ expectations. A manager who wants to hold 40% cash because they don’t see “attractive opportunities” can’t, not if the fund is marketed as fully invested in stocks. A manager who wants to concentrate in their five best ideas can’t. The Investment Company Act of 1940 has certain diversification requirements. The name of the fund, the category it was assigned, and the benchmark it is measured against become a cage the manager has to perform inside of, whether or not it fits their view or approach.
Don’t get me wrong, the investing public’s ability to measure manager performance and hold managers accountable is a net win. Primarily because there are far fewer managers who actually have skill relative to how many say they do. Yet this creates a dynamic where managers like Thrive Capital, Sixth Street, and a16z have zero interest in creating a publicly available vehicle. They do not want the constraints, so they stay out of the space and leave other, perhaps less-skilled, investors to scoop up the AUM hunting for hot, new ideas.
No large fund complex will advertise or discuss this. Why would they? Fund manager success is, in large part, a marketing exercise. It’s a story, a track record, sometimes a stretch of good luck. Talking publicly about the ways your own mandate ties your hands is basically selling against yourself. Talking about your unique insights, rigorous process, and wonderful track record will always be preferable.
Sure, fund managers have resources that many individual investors do not. AI is making that difference much smaller. When adding in the embedded constraints fund managers face and the adverse effects of investor sentiment, I only see it getting more difficult for active funds and ETFs.
CONSIDER
Junky stocks, defined as companies with lower relative profitability or lower quality, have had a strong start to 2026. Many of the portfolios we design at Root tend to underweight these stocks because they historically have delivered poor returns (especially in the small-cap space).
Yet there can be periods where reality deviates from our expectations. Does that mean something has changed? Does that mean we should abandon ship?
No. In the grand scheme of market returns, one year is far too short a time period to glean anything meaningful. This brings to mind one of Morgan Housel’s best:
“By far the biggest problem for new investors is underestimating how long it takes to put the odds of success in your favor.”
I’m not sure new should be in there. Even seasoned investors often have short attention spans and desire instant gratification.
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Let’s get after it this week!
Brooks
The examples provided are hypothetical and for illustrative purposes only. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The information presented should not be construed as investment advice or a recommendation to buy or sell any security or implement a particular strategy.
Advisory services are offered through Root Financial Partners, LLC, an SEC registered investment adviser.