Essentially 100% of our investable liquid net worth is managed under the same strategy we invest our clients in.  We believe our approach is rare among investment managers. When thinking about the world outside of investments, nobody really wants to eat in a restaurant where the owners aren’t willing to eat their own cooking. Yet, customers and their investment managers are often being served from very different menus.

The typical investment manager is earning an override on other people’s money and never really participates in the losses or the tax consequences of frequent trading. We think there can be occasions when our mindset and our own direct investment makes a world of difference in how we think about risks and rewards.

 On the one hand, many mutual fund managers focus on the question: ‘What mistake would it take to get me fired?’ The answer usually centers on underperforming an unmanaged index by a certain amount, so they try to minimize the probability of that outcome through over diversification. The investors upside will be limited because the manager is focused on career risk instead of the actual risk of a permanent loss of capital.

Alternatively, a manager who’s incentive compensation is based largely on a performance allocation when things go well, with little downside when they don’t perform, probably has a skewed view of risk. To use a baseball analogy, assume an investment manager has swung at a risky pitch and ended up hitting a home run. Chances are he/she has been rewarded handsomely with significant immediate compensation and more assets to manage in the future. Did they ever personally face actual monetary losses other than the career risk associated with making a bad decision?

 In this scenario, it’s really just human nature for the manager to create a ‘monetary memory’ for what has worked out for him/her personally in the past . . . regardless of the level of risk associated with the investment. Their investors will bear the losses if the next pitch that gets swung on should have been let to pass.

We believe that when your own life savings are on the line you are more likely to adopt Mr. Buffett’s attitude of ignoring career related performance pressure and having the fortitude to wait for the “fat pitch”. As he likes to say: “One thing that makes investing such a great game is that you can never be called out on strikes”.

The final distinction between Brotchie Capital and other managers may be that as much as we are committed to investing for life, we won’t violate our principles to succeed in the money management industry. Many money managers get into trouble by engaging in crowd-pleasing behavior because they want to attract big money to their firm. You only have to look as far as the “.com” bubble or to the housing/ mortgage catastrophe that caused the recent financial crisis to recognize that crowd -pleasing behavior is dangerous to an investor’s financial health.

It’s been that way throughout history. Even someone as brilliant as Sir Isaac Newton lost his fortune in the South Sea bubble of 1720. Charlie Munger likes to say that part of the reason he and Warren Buffett did so well at Berkshire is that they didn’t have any clients who could fire them for NOT investing in these kinds of mania’s or “story stocks”.  (A “story stock” is the one that everyone is talking about at the dinner party but is often significantly over valued and very often eventually crashes and burns.)

Another great investor we admire is Seth Klarman of Boston’s own Baupost Group. We have heard Klarman say in an interview that he does not want to know how his institutional investors are benchmarking him because he doesn’t want to be thinking about keeping up with the benchmark.

Commendably, Klarman is interested in making the correct judgments irrespective of how his investors will be judging him. Very few professional investors can take that kind of stand and survive.

The pressure to keep up with the investment flavor of the month leads many mangers to make mistakes and we’re determined to avoid that kind of behavior. The fact that so many managers have to engage in actions driven by short term performance concerns, over diversification and other crowd-pleasing behavior actually helps to create the bargains we hunt for.

It would be more important to us to go back to simply managing our own capital in a way where we believe that we’re behaving rationally as investors rather than  join the crowd in the hunt for large sums to manage.