Peter Kaufman, CEO of Glenair Inc., a company that manufactures connectors used in aerospace and the military, came up with five characteristics that investors should look for when picking out an investment manager.
“He gave [the list] to a picker of professional investors and the picker immediately fired half of his picks. I thought that was such a peculiar outcome,” Charlie Munger, vice chairman of Berkshire Hathaway (BRK-A, BRK-B), said at the Daily Journal’s (DJCO) annual meeting before asking Kaufman to share his list with the audience.
“I came up with this list in giving reference to a very exceptional money manager,” Kaufman explained. “And I not only wanted to give what I thought was a correct reference, I wanted the person I was giving the reference to in turn be able to relate this to the real shot caller so that a compelling narrative would be transferred from me directly to the ultimate shot caller. So, I came up with what I call the five aces, five aces being the highest-hand of cards in a game of wildcard poker.”
Here’s Kaufman’s list verbatim:
Actual deep, deep fluency in whatever you say you are going to do on behalf of the client
A fee structure that’s actually fair in both directions
An uncrowded investment space
A long runway (meaning that the manager is reasonably young in age)
“I further add that if you ever find a money manager who possesses all five of these characteristics, there are two things you should do. One, you should put money with them immediately. And number two, put as much money as you are allowed to put [with them],” Kaufman said.
He noted that the list is not only useful for evaluating where to allocate money, but it’s a great list for money managers to use as part of their own aspiration.
“What characteristics should I seek as a money manager to possess?” Kaufman said. “I should be completely trustworthy, have actual deep fluency in what I claim I’m going to do, adopt a fee structure that’s generally fair in both directions. I should seek an uncrowded space because as we all know in business, ‘where there’s mystery, there’s margin.’ What kind of margin are you going to have in a crowded space? And number five, many of you in here are very fortunate you get to check that box of having a long runway. Some of the best money managers in history only get four out of these five aces because they don’t qualify for number five.”
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.