The Secret Sauce of the Investment Business

Forbes has an excellent profile out on DoubleLine’s Jeffrey Gundlach. The entire piece is worth a read since Gundlach is not only one of the most respected investors out there today but he’s also very outspoken and entertaining.

There was one part of the interview that I thought was interesting as it relates to the finance industry. Gundlach was describing Jeffrey Sherman, his 37 year-old protégé at DoubleLine:

“Sherman is extremely analytic, which I am always attracted to,” says Gundlach. “But he also understands psychology. There are a lot of people who are quants, and they think you can explain the world with an econometric model. You just get the coefficients right and you can explain everything about the future. Sherman understands all of the coefficients and can derive all the equations just like I used to do, but he understands that it won’t predict where the market is going to be in a month. He is also good at explaining, which, of course, is the secret sauce of this business.”

Gundlach lays out what I think are the three most important skills for anyone working in the investment business:

1. They have to be analytical.
2. They absolutely must have an understanding of human psychology.
3. And they have to be able to communicate and explain their views so everyone else — clients and colleagues — understands what it is they’re trying to get across.

Wall Street is full of analytical worker bees. There will never be a shortage of intelligent finance people that are able to analyze the markets. Behavioral finance is definitely becoming more mainstream, but there are far fewer people in finance that understand psychology than can analyze financial statements. Most people in finance still think they can outsmart you instead of beating you with their emotional intelligence (a huge mistake).

There have always been those with good communication skills in the investment industry, but the majority of them work in the sales and marketing departments. They’re only concerned with the psychology of getting you to buy something, not the process of reducing behavioral biases. There’s a huge difference between having the ability to sell a client a product and explaining to a client an investment process or idea.

I’ve seen extremely intelligent portfolio managers lose multi-million dollar mandates because they didn’t have the ability to relay their message correctly to their clients. The thing I’m most often impressed with when it comes to the all-time great investors – guys like Buffett, Marks, Dalio, Klarman, Munger and even Gundlach – is their ability to translate their ideas into simple terminology. Not only are these guys brilliant, but they all simplify their message when explaining their process instead talking over your head or trying to make things more complicated than they need to be.

It’s rare to find an investor that has the ability to combine all three of these skills. The first two are important for anyone investing their money in the markets. The last one, as Gundlach says, is definitely the secret sauce for anyone trying to make it in the investment business.

Source:
Glory to the New Bond King (Forbes)

Further Reading:
Unfortunate Realities of the Investment Business