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Answer extracted from the How I Invest with David Weisburd podcast — listen to the full episode below.

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How can LPs tell the difference between bad luck and bad judgment in underperforming funds?

2026-09-08 How I Invest with David Weisburd · John Austin

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Deep knowledge of a fund manager's process and the sector environment allows LPs to separate environmental headwinds from actual poor decision-making. This distinction matters because it enables limited partners to remain invested through temporary downturns rather than panic-selling based purely on results—a critical ability for long-term wealth creation.

Why results alone can mislead investors

A fund's underperformance in any given year tells an incomplete story. Market cycles, sector rotations, and macro conditions shift constantly, but the quality of a manager's underlying decisions remains separate from the outcome those decisions generate in a specific moment. An excellent decision made in a poor environment can still produce disappointing returns, just as a mediocre decision might benefit from favorable tailwinds.

As John Austin explains in the episode, the real test is understanding whether a manager's process was sound—whether they invested in things they genuinely understood and made choices aligned with their stated thesis. If that process was rigorous and the decision-making was disciplined, a temporary drawdown may reflect nothing more than bad timing or sector headwinds.

The real work: understanding the manager's conviction framework

LPs that invest the time to understand how a manager thinks and what drives their investment decisions gain an enormous advantage when volatility arrives. This means going beyond track record—asking about the manager's process, their investment criteria, and the specific context in which past returns were earned.

A manager who lost money during a specific downturn but did so for reasons that made sense at the time—given sector fundamentals and the information available—is fundamentally different from a manager who made bets they did not fully understand or took risks misaligned with their mandate. The first manager may deserve another chance; the second is a legitimate reason to exit.

This point is explored in depth in this podcast episode, where Austin stresses that understanding the manager's sector expertise and decision-making environment is what separates smart patience from denial.

"The really truly unforgivable sin is doing things you don't understand. You can't do things you don't understand as a CIO."

This philosophy—that conviction and understanding must precede capital deployment—applies equally to LPs evaluating their managers. An LP who has done the work to understand a manager's process can confidently distinguish between a bad year and a bad investor. An LP who has not done that work has no basis for holding through difficulty and often sells at exactly the wrong time.

For more on how to structure this evaluation from the ground up, Austin's full discussion on identifying managers worth backing provides a comprehensive framework.

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