Brendan Byrnes: Let's talk about how you evaluate fund managers, maybe looking at a mutual fund or another fund. Do past returns have any relevance there at all?

Jack Schwager: Past returns are potentially very, very misleading. As I said before, you have to separate the market effect -- how much of it is the market -- from the manager.

You can look at how a manager does, given what a strategy is. Yes, you look at returns, but you have to be in the context of what the underlying market did, and in the context -- this is very important -- of the amount of risk undertaken to get that return.

This is another mistake I point out: People pay too much attention to return. "Oh, this guy made 40%. He's a great manager." Well, you know what? You take a 20% manager; you know how to turn him into a 40% manager? Just double all his positions.

Anybody can double their returns by taking twice as much risk. If you look only on the return side, you miss a critical element, which is how much risk was taken to get that return. I personally -- and I allocate, because one of the things I do is I'm a portfolio manager for a fund -- and I never look at returns by themselves.

I never look at it. It means nothing. I will only look at return in context of the amount of risk taken.

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