No investor desires underperformance. Not the managers delivering it and not the investors receiving it.

You can’t get away from it. You can’t solve it. You can’t eliminate it. It’s not a flaw in the system. It is the system.

In 2019, Warren Buffett underperformed the S&P 500 by 20.5%! In 2020, he followed that with a 16.0% underperformance. Despite his tremendous track record, Buffett still underperforms at times.

So if Buffett hasn’t figured out how to eliminate underperformance, what in the hell makes you think your manager can?

I hear this every time I’m at a conference: allocators demand that an underperforming manager “fix” their underperformance.

“What are you doing to address the underperformance,” they proclaim to the manager. As if the manager just needs to find the one bad formula in excel that’s screwing everything up. As if the manager just needs to resolve to work harder by putting in 16-hour days instead of 14-hour days. As if the manager just needs to find a new formula or crystal ball that will magically crank out winning stocks.  

It doesn’t work like that.  

Underperformance isn’t like, let’s say, a broken car. When your car breaks down, a mechanic diagnoses the issue and replaces the bad part. It’s the advantage of working with linear, physical systems. It’s easy to know what’s broken because there’s a simple, obvious explanation.

Not in investing. There is no one solution. It’s a complex system with multiple inputs and an unknown and infinite number of combinations. There’s no “fix.”

Most calls for fixing underperformance are just calls to chase performance. Allocators demand managers chase what’s hot to “catch up.” That’s not fixing the problem. That’s creating another problem worse than the underperformance itself. You’re trying to solve a problem that can’t be solved with a “solution” that’s actually another problem.  

The best managers won’t change a damn thing. They’ll stick to their process, fully understanding any given year may go against them.  

There are, of course, many managers that don’t have the requisite investment skill. They will underperform over the long term. Eventually, performance reveals the true skill level.

In the short run, stop focusing on performance and figure out if something permanent has changed with your manager:

• Are people leaving?

• Are positions deviating from the stated strategy?

• Is there any evidence of malfeasance or dishonesty?

• Is the manager investing in industries in which they have no experience?

• Is the manager violating position or industry limits?

These are legitimate concerns and must be addressed. But notice how underperformance isn’t one of them. If you can’t identify something tangible that has changed compared to your initial due diligence, then you don’t have a problem.

The hard part is the waiting. The patience. Underperformance is an irreducible part of investing. Trying to fix it only makes it worse.