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I'm firmly in the camp of index fund investing over picking individual stocks or money managers. Statistics will tell you that you're far better off just picki

I'm firmly in the camp of index fund investing over picking individual stocks or money managers. Statistics will tell you that you're far better off just picking an index fund. But that doesn't make money management an invalid field or a pseudoscience. It just means that it's hard to differentiate between those with true skill and those who just got lucky. It seems like the same can be said for venture investing. How do you know which entrepreneurs will be successful? You don't, so you go off of their past performance, the market environment, the strength of their idea and their team, etc, etc. But you also go one step further and try to spread the risk across a portfolio of investments. Perhaps you should do the same with money managers? Pick the 10-20 at the top of the field and let them all manage a piece of your portfolio? Obvious problems here as well. On a related note, does this mean that venture funding is fundamentally flawed? That venture funds would be better off just putting their money in index funds? I have a hard time seeing that.

mattmaroon 18y ago
It's not hard to differentiate between those who have true skill and those who got lucky, it's impossible. The variance is just too high. Hard implies that if you worked at it enough, you could somehow do it. You can't. And yes, venture funding is fundamentally flawed and the average VC firm underperforms the market. LPs as a whole would be better off with index funds. However, unlike with equities, you can get an edge in VC investing because results tend to perpetuate themselves. Remember, equities of non-public companies aren't priced by the market, so they aren't as efficient, and it's the efficiency of the market that makes beating it untenable. Also there's a tremendous deal of collusion in private equity that doesn't exist in public due to regulation. It's actually a mystery to me how they get away with much of what they do. The two types of investing aren't really comparable due to that. You could simply invest every year in the top few VC firms from the previous year and outperform the market for a long time that way. You cannot do this with hedge funds or mutual funds, or if you could, you and I would both not support the notion of just sticking it in ETFs.

mattmaroon 18y ago

It's not hard to differentiate between those who have true skill and those who got lucky, it's impossible. The variance is just too high. Hard implies that if you worked at it enough, you could somehow do it. You can't. And yes, venture funding is fundamentally flawed and the average VC firm underperforms the market. LPs as a whole would be better off with index funds. However, unlike with equities, you can get an edge in VC investing because results tend to perpetuate themselves. Remember, equities of non-public companies aren't priced by the market, so they aren't as efficient, and it's the efficiency of the market that makes beating it untenable. Also there's a tremendous deal of collusion in private equity that doesn't exist in public due to regulation. It's actually a mystery to me how they get away with much of what they do. The two types of investing aren't really comparable due to that. You could simply invest every year in the top few VC firms from the previous year and outperform the market for a long time that way. You cannot do this with hedge funds or mutual funds, or if you could, you and I would both not support the notion of just sticking it in ETFs.