Earlier this year Michael Santoli asked a number of bloggers what we ‘know’ about investing but can’t prove with stats. This was one of my responses:
Supremely intelligent investors are well suited to run a fund but not an entire portfolio. I’d rather have an Ivy Leaguer run a hedge fund for me than a portfolio. Portfolio management is more about common sense than intelligence.
My comment was obviously an over-generalization, but I think there is an element of truth to the theory that it becomes very easy to overthink the job of capital allocator. As Buffett once said, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.” I’ve witnessed plenty of intelligent people overcomplicate the portfolio management process by trying to get too clever with their overall strategy.
I was reminded of this recently as I was reading the classic book from pseudonymous author Adam Smith called The Money Game:
There is a personality difference between the people who are good at finding stocks and the people who call the shots on the timing and manage the whole portfolio. Security analysts dog down information and come up with an idea about what should be bought or sold, but they do not necessarily make good conductors for the whole orchestra. If they are woodwind players to start, they tend to hear the whole orchestra as woodwinds, and it takes another type to keep the woodwinds and brasses and strings in a line.
There is a huge difference between a fund manager (the security analyst in Smith’s example), who comes up with individual investment ideas for a specific strategy and the conductor, who puts together the individual asset classes and strategies into a coherent portfolio strategy. It’s the difference between a portfolio manager and portfolio management.
Fund managers and security analysts tend to stick to their knitting and invest in a specific strategy. They’re typically specialists in a certain style of investing or even a sector of the market. Portfolio management involves coming up with an overarching investment plan by utilizing many different strategies and asset classes. This position requires a generalist who understands a wide variety of investing styles.
Security analysts focus on the micro aspects of the investment process, while conductors focus on the macro aspects. Both end up playing an important role in shaping how the overall portfolio performs, but they require very different skill sets to succeed.
When I first started out in this business I always assumed one day I would end up working in a role as a research analyst and eventually become a fund manager for a specific strategy. I read all of the Buffett and Peter Lynch I could get my hands on. But it didn’t take long for me to figure out picking stocks wasn’t the right career path for me. Some people aren’t suited for this type of role. I just didn’t have the right background or mental make-up to narrow my focus on specific companies or a single strategy. I also learned that picking the best stocks doesn’t matter much if you don’t get the allocation to stocks right in the first place.
I found I was much more suited to positions that were involved with managing an entire portfolio (or portfolios) and creating big picture investment plans. It’s not that one position is better or worse than the other — this just happens to be what interested me.
(As a side note — one of the best pieces of career advice I ever received was don’t try to follow your passion; let your passion find you. That’s basically how things worked out for me.)
But working in the conductor role over the years means that I’ve had the chance to interact and work with a number of people and organizations who do focus their time on security analysis. Here’s a list of traits that I feel, based on my experience, are important for each of these respective positions:
- The ability to process investment ideas from a number of different sources.
- Attention to detail.
- Knowing when to admit that you’re wrong and made a mistake.
- Being flexible in your views on the markets.
- Understanding where your competitive advantage lies.
- Having a quick filter for poor ideas.
- Being passionate about the markets.
- Conviction in your best ideas.
- Knowing how to manage risk (position sizing, trading strategies, when to buy/sell, etc.).
- The ability to sell and explain your process to others.
- The correct temperament.
- Intellectual honesty.
- The ability to understand a number of different investment philosophies.
- The capacity to work with many different personalities and, more importantly, judge a person’s character.
- A broad understanding of how the different asset classes and strategies generally work and interact with one another.
- A thirst for knowledge (there’s a lot of reading involved).
- The ability to effectively communicate and define your overarching philosophy and strategy.
- An understanding of the difference between being stubborn and following a disciplined investment process.
- Knowing when to make portfolio changes and when to do nothing.
- The ability to manage risk.
- Control over your emotions.
The Money Game