Knowledge must continually be renewed by ceaseless effort.
- Albert Einstein
So-called "Best Practices" are in fact common practices. This isn't just semantics; it's bad practice. Nevin Adams says that "Best practices that are not common practices are merely someone's unpopular opinion." In other words, a true "Best Practice" doesn't stay that way for long because presumably the industry adopts it very quickly so it enters into the mainstream of common practices.
Nevin is correct, but not about the time it takes for investors to recognize a better way - a true Best Practice. Modern Portfolio Theory (MPT) was 30-years-old before it was even discussed. The Black-Scholes Option Pricing Model took decades, largely because no one would publish their groundbreaking paper. Dr. Frank Sortino's leading edge active-passive optimizations have remained a secret for 40 years, although some are doing work in this area. In other words, there are in fact "Best Practices" that have not yet become common practices.
In the meantime, antiquated and inferior approaches are routinely identified as "Best Practices." Without naming names, there is at least one large organization for investment advisors that publishes best practices. These standards recommend the use of peer groups, and go to great extent to elaborate on time periods. You need to look at peer group rankings over various time periods. These standards also recommend an "appropriate benchmark" that could be an off-the-shelf index.
Indexes and peer groups are far from being "Best Practices." In fact they are known to be "Worst Practices" because we know they have failed. I have contributed several articles to Seeking Alpha on this subject, including:
- Rewards for Saving Active Management
- New Definition of Investment Manager Success
- Yin and Yang of Change, about Hedge Fund Evaluation
- New Era for Financial Advisors. Dealing with DOL Fiduciary Rules
- Alpha on Steroids
- Hedge Fund Peer Groups are Hazardous to Your Wealth
- What Investors Really Want from Their Advisors
We can all sit around and tell ourselves how smart we are to use "Best Practices", but we really should continually seek better ways. Please read the Einstein quote that leads off this article.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.