John Simpson speaks at First Rate annual conference

This week, my friend and colleague, John D. Simpson, CIPM spoke at First Rate's annual user conference.

As I understand it, this event had a record attendance. And while I'd like to think that it's because John was there, I know there was much more to it (for instance, Steve Campisi, CFA spoke, too!). John's topic was "Trends in Performance Measurement."

We were pleased to have had the opportunity to once again participate in this program. We congratulate our friends at First Rate, and thank them for allowing us to join in.

John and I have spoken at numerous vendor events. Anyone wishing for John, Jed Schneider, CIPM,  FRM or me to speak, should contact Jaime Puerschner at 732-873-5700.

Code of Conduct for GIPS Service Providers

At the recent GIPS(R) (Global Investment Performance Standards) Executive Committee meeting in Brussels, Belgium, the EC discussed the possibility of creating a "Code of Conduct" for GIPS service providers. I think this is an excellent idea, though at this point have zero knowledge of what is actually being considered.

In Tuesday's post, I mentioned how The Spaulding Group will not take on a verification client who we believe has come by their historical performance records through some improper means, and recommended that other verifiers adopt this policy, too. I would think that this is an example of the code of conduct one would expect from service providers.

When the Performance Measurement Forum set off to develop a certification program for performance measurement professionals several years ago (which contributed to the creation of the CIPM program), ethics wasn't a section we considered. The CIPM program wisely has included it, and more and more we can see how ethics is an important topic for our industry. It seems that almost daily we learn of infractions. Granted, the political world may be outpacing our industry in this regard, but it seems as if some would like to overtake them.

Performance measurement professionals can serve as a key gatekeeper to the delivery of fraudulent information. And while we haven't yet heard of any PMPs who have allowed the presentation of information they knew was wrong, these individuals can still find themselves being pressured to do something they know would be wrong.

Verifiers can serve as yet another group to try to halt the spread of fictitious information, by holding firm when we learn of something unethical and to simply refuse to be a part of it. My feeling is that if a firm is willing to act improperly to obtain historical records, won't they do the same when it comes to other situations that arise? It's better to avoid even going down the path with someone who may not behave as we think they should.

Turning lemons into lemonade

We just discovered that we had a printing error with the second edition of my Handbook of Investment Performance: we left off part of the bibliography.

Now, you might think this isn't a big deal, but for a firm that prides itself on the highest quality in all we do, we are quite upset, disappointed, and embarrassed. And so, if you purchased a copy, even though you may not have noticed the error yourself, just send us a note and we'll send you a corrected one (yes, we've undergone the expense of another printing to correct the mistake). You can keep the copy you have; we'll send you a replacement. All you need to do is ask for it.

As you might imagine, we're now stuck with a lot of books with this mistake. And so, we offer you this opportunity: you can get a copy of the version with the missing bibliography pages for a ridiculously low $20 (plus the cost of shipping), or you can purchase the now corrected and complete edition for $75. Note that the version with the missing pages is complete, except for the bibliography pages, which we'll include separately, so you'll still know what these items are. And so, our mistake can be an opportunity for you to obtain a copy of my book at a HUGE discount. Just let us know if you'd like a copy (or more; perhaps you'll want to get copies for your entire team at this price), and we'll send it (them) out!

Select the one you want by clicking the appropriate link below:

Corrected Version ($75)

$20 Version

Learning from USMA

I served in the U.S. Army (Field Artillery branch) for nearly five years, and spent 39 months with the 25th Infantry Division in Hawaii (tough duty, but someone had to do it). During that time I worked with several West Point graduates (I obtained my commission through ROTC), and recall learning the "cadet honor code":

A cadet will not lie, cheat, steal,

or tolerate those who do

There's a great lesson here, is there not, and a great example for us all to follow?

An article in yesterday's WSJ ("Weitz Firm Got Rival's Database, Suit Says," by Dionne Dearcey) spoke of a lawsuit filed by a former employer for Weitz & Luxemberg, Joseph C. Maher, who claimed Weitz had "a cache of files from a competitor [Waters & Kraus] that allegedly could be used to earn millions of dollars." These records were supposedly brought to the firm by a former W&L employee of the competitor, who had joined Weitz. We have no way to know at this time where the truth lies, but if Maher's allegations are found to be true, why would a law firm hire someone who stole records from their prior firm? (Please, no lawyer jokes)

We had a conversation recently with someone about the GIPS® (Global Investment Performance Standards) portability rules, which require:

1. Substantially all of the investment decision makers to be employed by the new or acquiring firm (e.g., research department staff, portfolio managers, and other relevant staff);
2. The decision-making process to remain substantially intact and independent within the new or acquiring firm; and
3. The new or acquiring firm to have records that document and support the past performance.

 (See ¶ I.5.A.8, Global Investment Performance Standards. 2010)

In most cases, managing to meet the first two requirements is a lot easier than meeting the third. And so, what is a person to do to get the records, especially if they are leaving in less than an ideal way?

Well, if they are a CFA charterholder, stealing the records would be considered an ethics violation; but what if they aren't a charterholder, can they steal them? Of course they can; who's to stop them (unless they get caught or sued, of course)? But would that not still constitute an ethics problem?

Last year The Spaulding Group adopted a Standards of Practice, based on the CFA Institutes's, and appointed both a Chief Ethics Officer (John Simpson, CIPM) and Assistant (Jed Schneider, CIPM, FRM). And we made the decision that we will not accept a verification client if we suspect they obtained their historical records through some improper means. Yes, it is tempting to copy records in order to achieve compliance; but such action says something about the character of the individual(s), and we would prefer not to include them among our clients. We encourage all GIPS verifiers to adopt a similar rule. As USMA (United States Military Academy) proclaims, "...or tolerate those who do." And we won't.

Have you been a victim of "planning fallacy"?

In his recent book, Thinking Fast and Slow, Economic Nobel Laureate Daniel Kahneman speaks of the "planning fallacy," a term he and his former collaborator, Amos Tversky, coined "to describe plans and forecasts that are unrealistically close to best-case scenarios [and] could be improved by consulting the statistics of similar cases." In "forecasting the outcomes of risky projects, executives too easily fall victim to the planning fallacy. In its grip, they make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefits and underestimate costs. They spin scenarios of success while overlooking the potential for mistakes and miscalculations. As a result, they pursue initiatives that are unlikely to come in on budget or on time or to deliver the expected returns—or even to be completed." Sound familiar?

I first encountered this situation roughly 35 years ago, when designing a system for a client. My estimates said it would take two years, but the client said they needed it done in less than one. I said it couldn't be. Shortly thereafter I left [on my own, I might add] before the project commenced, and never learned of its outcome, though I am confident that even two years was an optimistic guess.

A few years back, a client asked us for an estimate to conduct a GIPS(R) (Global Investment Performance Standards) verification for them. We knew the client well, and what their status was vis-a-vis the Standards, and were surprised they were asking for a proposal, given the huge gap they had before they'd be ready to even consider compliance. We lost to a firm that gave them a very low price, and confidence that they'd be ready to be verified in three months. This firm won the assignment partly because of pricing, but perhaps more because of their confidence in getting them into compliance in but a few months time [since that time, bringing the client into compliance and then verifying have been clearly deemed in violation of verifier independence]. Their optimism was impressive, but failed to materialize. Too often scenarios like this play out: the consultant promises to complete a project earlier than is realistic and wins the assignment. This is not to suggest that the competing firm necessarily knows they're providing an unrealistic estimate, but their optimism still results in a win, when their competitor offered a more realistic plan.

I have, on occasion, been a victim of the planning fallacy [who hasn't?]. I estimate what is needed to complete a project, and believe [with confidence] I've done an effective job in identifying risks, only to fail to see the multitude of events that might arise that introduce delays.

More than 40 years ago, Fred Brooks coined the term "mythical man-month" (I guess today, an enlightened and politically correct person would make it "person-month") addressed the false belief that adding resources will speed up a project. The idea of placing nine women on the job of having a baby should result in one in only one month (since it takes one woman nine months to produce one) serves as a good metaphor for the concept.

Projects are routinely missed; deadlines exceeded; costs surpassed. The notion of referring to a "base case" of past performance as a guide is helpful to try to develop more realistic estimates, be they the time to achieve compliance or build a new system. Being at least aware of the "planning fallacy" can be helpful when beginning projects, to try to enhance the estimates and likelihood of success.

Performance examinations: when should you have them done (and when absolutely not)?

By now, if you're a regular (or even infrequent) reader of this blog and/or The Spaulding Group's newsletter, you know of my dislike for GIPS(R) (Global Investment Performance Standards) performance examinations. I have commented at length as to how compliance with the Standards and having annual verifications done are investments, but that in most cases, examinations are an expense or cost that should be avoided. But are there times when they should be done?

Yes, of course!

• If the firm believes they have value! To put it simply, if the firm disagrees with me and feels that this exercise provides them with benefits, then by all means, have them conducted.
• If a prospect virtually mandates that the composite(s) that align with their strategy have them done, and you feel that by having them conducted, you'll stand a better chance of winning the business
• If you find that for your primary composites the market fairly often inquires into whether or not examinations are done.

We've told our verification clients that we'll come in immediately, even over a weekend, if they require an examination to be performed (no one has yet taken us up on this offer). Until that time, most of our clients avoid the expense.

Are there times when they should absolutely NOT be done? Well, one particular case comes to mind:

• For non-marketed composites.

Note that the GIPS standards do not speak of "marketed" and "non-marketed" composites, but the industry surely understands the concept. We see absolutely no need to have examinations performed for non-marketed composites. By sheer virtue of their status, any possible benefits are nonexistent, are they not?

We know that some firms do have them done, but don't understand why. If you do, please let me know the reason(s) why. If you're a verifier and conduct them, chime in, too! And, if you have them done but don't know why, ask your verifier and tell me what they report, as I am curious as to the benefits they provide you for the costs involved. Thanks!

The value of subjective judgment

I must confess that I am enjoying Daniel Kahneman's Thinking Fast and Slow quite a bit; so much so that not only am I listening to it (via my Audible.com account) but am referencing it, too (via my Kindle download!). And so, this affords me the opportunity to capture passages which I find interesting. And here's one example:

“subjective confidence

is a poor index

of the accuracy of a judgment.”

This relates to the idea that we too often think  that  our decisions, based on our expertise, should rule the day, without bothering for any objective analysis. Too often pundits, be they of the performance measurement professional, political, sports, or some other variety, tend to speak as if their opinions, which is all that they really are, are somehow factual. I am no doubt guilty of this myself, thinking that my judgment is sufficient to know what is true and factual. And while I'd like to think that more often than not I am correct, there are also times when I err.

When hearing someone pontificate about a subject it is wise to discern whether or not they are being presented with opinion or fact, derived from objective analysis. This holds true in all walks of life, including performance and risk measurement.