The market can stay irrational longer than the client can stay patient.

The quote above, attributed to Keynes, describes the conflict between investors (principals), and those who manage their money (agents). Jeremy Grantham illustrates the conflict by comparing his sister to the rest of his clients:

I have felt absolutely no career risk. ... In any case, she does not ask nor has she been told about investment changes or short-term performance for several years, and she is, after all, my sister.

For his large institutional clients, who have less patience than his sister, Grantham has to make sure that they earn enough in the short run so that don't change managers. This leads to tradeoffs:

In dealing with clients as opposed to sisters, we ... will leave the portfolio looking at least faintly normal and leave the clients’ pain just tolerable. Too big a safety margin and we are leaving too much money on the table; we are probably protecting our job rather than attempting to maximize our clients’ return.

Too narrow a safety margin and clients may fire us, as some have done in the past. ... It is, of course, a central dilemma of investing.

Grantham has done much better for his sister than he has for his institutional clients because he has the the freedom make big bets and, perhaps more importantly, the freedom to stay out of the market when everyone else is making money.

HT: Merle Hazard