During due diligence, it's crucial to look beyond returns. Top allocators analyze a manager's decision-making process, not just the outcome. They penalize managers who were “right for the wrong reasons” (luck) and give credit to those who were “wrong for the right reasons” (good process, bad luck).

Superior long-term returns come from consistency, not chasing top rankings each year. A pension fund that never ranked above the 27th percentile in any single year ended up in the top 4% overall after 14 years. The key is to avoid big losses and let steady compounding win over time.

Rajiv Jain argues that while investors focus on relative returns in bull markets, long-term survival hinges on absolute performance. As he learned in 2008, outperforming a falling market doesn't pay bills or retain clients. This absolute orientation is crucial for avoiding catastrophic losses.

Instead of designing funds to meet popular demand, DFA focused on leading with research and ideas they believed in. This educational approach attracted high-conviction clients who understood the philosophy, making them more likely to remain invested during periods of underperformance.

Maverick Capital's journey shows even top funds can deviate from their core strategy, in their case by focusing too heavily on near-term valuation metrics. Their recent success is partly attributed to a conscious decision to return to their "first principles approach," demonstrating a critical self-correction mechanism.

During speculative bubbles where a value approach underperforms, client retention hinges on continuous and honest education. Grantham advises laying out the unhyped facts, clearly explaining the firm's market framework, and engaging clients consistently. This process builds trust that outlasts periods of market frenzy and poor relative performance.

Historical analysis of investors like Ben Graham and Charlie Munger reveals a consistent pattern: significant, multi-year periods of lagging the market are not an anomaly but a necessary part of a successful long-term strategy. This reality demands structuring your firm and mindset for inevitable pain.

A manager who experienced a string of subpar years early on, rather than initial success, was forced to build a more battle-tested business. This period of struggle shaped a superior culture and communication strategy that ultimately led to extreme outperformance.

Since 2020, even top-quartile stock pickers have faced extreme drawdowns with concentrated portfolios. A more diversified approach, holding more names than usual (e.g., 50-75 stocks for an institutional manager), has proven superior for mitigating risk and achieving better performance.