One of my favourite films is The Shawshank Redemption, based on a short story by Stephen King. It stars Tim Robbins and Morgan Freeman, and the whole thing takes place inside a prison. There is a scene where Freeman’s inmate character is talking to another inmate about a guy named Brooks who has been locked up for 40 or 50 years and has basically lived his whole life in prison. Brooks is now an old man and up for parole, and he is terrified of getting out because he does not remember how to live in the real world. My favourite line is in this scene, when Freeman says: “These prison walls are funny. First you hate ’em, then you get used to ’em. Enough time passes, you get so you depend on ‘em. That’s institutionalised.”

This notion applies to many areas of life. It is easy to resign yourself to a bad situation and accept your lot in life. After a while you do not know how to live any other way. You make up all sorts of reasons to justify why it is alright to remain in a bad situation. This can be true of jobs and relationships and other things. Like the money management business.

I think a lot of money managers are like Brooks. They have become institutionalised.

The average actively managed mutual fund in the US holds about 100 stocks. This means the managers can’t possibly be doing in-depth research on each company they hold. So how is the average fund managed, if not by researching each stock in the portfolio?

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