Have you hugged your PM today?
Morningstar's John Rekenthaler
writes an article expressing agreement with Nassim Taleb
, author of "The Black Swan," in that people in positions of power can't be held accountable for their failures unless they have "skin in the game." That includes PMs.
PMs receive large bonuses if they succeed and small bonuses if they fail but never lose money if they fail, Rekenthaler
Though portfolio managers could "eat their own cooking" in order to align their interests with shareholders, this doesn't really work, Rekenthaler
writes. If the fund gains 10 percent when the index is up 20 percent, the PMs would have failed even if they still made money. Moreover, if they lose 10 percent when the index is down 20, they still did well by investors despite losing money.
While gains or losses in the fund don't always match gains or losses for the PM, they still feel shame in failing investors, keeping them in check, Rekenthaler
writes that the comparison with the index lays bare a PMs' faults for everyone to see, and can leave their "psyches battered."
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