Financial world roulette

I explained, that it is not worth playing negative expectation game on roulette example. But we have also seen there is high probability to win small amount of money even in that negative expectation game.

Risk isn't worth it. But there exist money managers which do so on regular basis.

Imagine you are money manager for small money market mutual fund. You are fighting with your peers for customers in fearful competition. You have 1 000 000 $ in your fund and you earn 3% income on your investments after 364 days. At 31st of December you see that you are in the middle of the crowd.

So you will take 100 000$ from you fund and will go to some kind of financial casino. You will do one simple bet which have 90% chance for success and will pay you 10 000$ and 10% chance for failure - in which case you will lose 100 000$.

You will win with big probability and finish year with 4% performance which place you among top money managers for that year. People are happy, more of them will come to your fund and you see your assets under management increase to 10 000 000$. So you will do same trick next year and you are again star. Press calls you next Soros. Money are flowing and you are getting rich from management fees.

Do you see how investment stars are born? And how they often end?  Do you see similarity to business world and company management?

As Warren Buffet once said - "You never know who is swimming naked until the tide goes out."

So we want to invest in mutual fund. Or hedge fund. Or some company via its stocks. What could we do if we do not want to invest with such money managers?

Know them! Know their characters, know their strategies, know how they invest. Look on their fingers and ask questions. Learn stuff they do and do our own risk due diligence.

Trust is something they must deserve.