Investors: The one thing separating excellent from competent
If you’re hard-working, intelligent and good at exams you can become a fund manager. But that won’t make you a great fund manager. That takes something else. What?
See the guy in this fantastic Norman Thelwell cartoon? How does he make you feel?
I ask because, like Brexit, Prince Harry, or pineapple on pizza, he really divides opinion: Some people see a man who’s got life worked out, others see an arrogant, lazy rule-breaker.
We’ll get into what I think of him in a moment. First, this picture is useful in understanding what separates great fund managers from average ones.
This matters to me — and my investors — because finding great fund managers is my thing: It’s why, when it comes to interviewing, assessing and hiring fund managers, I’m long past the 10,000-hour mark. If I get it right, I make my investors more than they’d get from a low-cost market tracker, if I don’t, I’m a waste of money.
And if I was selecting from the men in this cartoon* I’d be drawn first to Deck-Chair Dude: My instinct tells me he’s the most likely to have what it takes to be a great fund manager.
To be considerably better than everyone else (i.e. the market — which you need to be to cover your fees and still leave something for your fund’s holders), you can’t simply do the same thing as everyone else. This is just maths.
Knowing this maths, you’d assume all fund managers must act very differently from their market, right?
Nope; they don’t. Quite the opposite.
The market exerts an enormous gravitational pull. Because managers are constantly being compared to it. This is great when they’re beating it, but horrible when they’re not: It creates a toxic mix of peer pressure and personal financial risk (chiefly getting sacked). The pressure to ‘copy’ the market is huge, so most end up mimicking it to one degree or another.
And that’s how life appears on this cartoon’s allotment (aka a community garden in the US). Its occupants are doing the obvious and expected thing; growing veg. But not, it appears, because they feel a calling to do so (they’d be smiling otherwise, or at least not scowling).
But one is different. And the crowd are making their feelings about him clear. They would, I surmise, be happier if he was doing what they’re doing (or, perhaps, if they were doing what he’s doing).
Humans naturally fear an outsider, and acting differently marks you out as a threat (even if the thing you’re doing is perfectly harmless). We instinctively know this and feel the pressure to conform for safety’s sake. And you can see this allotment’s peer pressure a mile off, which is why, despite not appearing happy to, most are doing the same as everyone else.
And this is why I’m drawn to Deck-Chair Dude. He seems to know what he wants, and how to achieve it. Even if he’s at odds with everyone else.
All great investors, past and present, are specialists, not generalists. They’re laser focused on doing one thing, and doing that one thing really well.
Warren Buffett, for example, finds great companies and holds them while they do great stuff. He knows what he wants (to make lots of money) and how to achieve it (hold great companies). So he ignores what everyone else is doing, and focuses on that.
The rub is that, no matter what your one thing is, it won’t work each and every year. This means there will be years when everyone else — the market — looks better than you (even Buffett — he’s had plenty of years like that).
Take 2020; the pandemic year. If your one thing was finding small turnaround stories (another perfectly good way of making lots of money), then 2020 was a nightmare: The share prices of big, obvious companies like Google, Amazon and Facebook, rocketed, while your carefully-selected recovery stocks cratered.
So, doing your one thing in 2020 made you look like a moron. I mean, wasn’t it obvious? It’s Amazon! We’re all locked in our homes! Amazon does home delivery, dummy!
“But buying a huge, widely-analysed company like Amazon isn’t what I do! It’s not my one thing!” You’d plead. And, with tears in your eyes, you’d go on; “I don’t care what happens over 365 days, my one thing can take five years to work!”
“Whatever, dummkopf.” will come the universe’s response. And now you, and your ego, have been numerically proven by everyone you’ve ever known to be an idiot. Worse, your clients will give you the same thunderous looks as Deck-Chair Dude’s neighbours — a sure sign they’re about to pull their money out.
At such a time, the temptation to end the pain of disdain is huge: Maybe you’ll give in and buy the big, obvious companies, or maybe you’ll quit your job (if you haven’t already been sacked). Either would bring sweet relief from being reminded, every single day, that the world thinks you’re a clown.
However, Sod’s Law rules: Inevitably, the moment you give up on your one thing, is the moment it dramatically rebounds. While the thing you’ve just capitulated into crashes (big, obvious companies had a nightmare last year).
Now, if I (or you) pick managers who say they only do one thing, but stop doing it after a tough year or two, I’m stuffed. It means I’m spending too much time exposed to their one thing when it’s not working, and not enough time when it is.
This is why I’m drawn to Deck-Chair dude. He’s comfortable being different to everyone else. Like Buffett; he knows what he wants, and he knows how to get it. So he’s ignoring everyone else, and their disapproving glares, and focusing on doing his one thing. So, as long as neither of us buckle (and that we’re both good at our respective one things that work over the long term), we’ll do OK.
But there’s more to it than that…
Putting a Name to it
This would have been quicker to write (and read) if there was a word to describe this super-trait.
But there isn’t. Not in English, and not that I know of, anyway (let me know if there is).
There are plenty that come close, but none hit the nail on the head.
‘Disagreeable’ is a word I’ve seen used in this context. And while it’s partly right, it’s also an exclusively negative word that entails being unpleasant or bad-tempered. And that’s not it.
‘Contrarian’ is another often-used term. But this implies someone who always does the opposite to everyone else. Whereas I’m talking about being prepared to do it when necessary, but also being content to run with the crowd when that’s the right thing to do.
To experience the missing word for yourself, try to think of a term that describes this trait in its most heroic form. Like Rosa Parks, for example, when she defied racist rules and social norms to sit in the ‘wrong’ part of the bus.
‘Contrarian’ doesn’t cut it: She wasn’t breaking all laws, just that one. And ‘disagreeable’ in her case is downright offensive.
‘Stubborn’? ‘Dogged’? ‘Pugnacious’? Sure; these are characteristics she displayed, but do they define her? I don’t think so.
Clearly she was ‘brave’, but that’s too broad a term to describe her act of deliberately breaking an unfair law and social order: You can be brave by upholding a good rule as well as breaking a bad one.
On paper ‘Conscientious’ comes close: “Being controlled by one’s inner sense of what is right”, says the dictionary. That works, but recently it’s come to mean someone who’s quietly hard-working — “a conscientious worker” — and that’s well wide of the mark.
So, until I’m told otherwise, I’ve had to create a new word: ‘Bellitious’. A mash-up of ‘belligerent’ and ‘conscientious’, which describes someone who can be belligerent when doing what their conscience tells them to be right.
Back to the Allotment
It was important to isolate and define this trait, because while Deck-Chair Dude may appear the most likely to make a good fund manager, his willingness to act differently is insufficient by itself. In fact, going on this depiction, there’s a serious risk he doesn’t have the “right stuff”, but the wrong stuff that happens to resemble it.
To be clear then; a good manager must be bellitious. They must be willing to be belligerent in resisting obstacles, such as peer pressure, ill-conceived rules or myopic senior management, but only when it pertains to their one thing. Beyond that, they should be as respectful of others’ opinions, expertise and feelings as anyone else.
This is different from being perpetually dogmatic, or contrarian, or disagreeable. Or, in its worst forms, being narcissistic or sociopathic (“one whose behaviour is antisocial, often criminal, and who lacks a sense of moral responsibility or social conscience”). This is more common than it should be in the fund manager world.
Take ex-BlackRock fund manager Jonathan Paul Burrows, who spent five years needlessly dodging rail fares just because he could. Not only did he have to pay it all back — he’s now banned from the industry too.
Karma’s a righteous badass, or that’s what I believe, anyway: If you act malignly, it’ll find a way to punish you (and if you invest with someone who acts malignly, it may well get you too).
On this front, Deck-Chair Dude worries me. I like that he knows what he wants, but couldn’t he find a park? The fact that he can happily drift off amid the glares is concerning too: Resisting peer pressure is one thing, but being that comfortable suggests a lack of empathy or — worse — that he enjoys upsetting his neighbours (I doubt Rosa Parks nodded off when she sat on that bus).
This is why, once I’ve found a manager who’s able to resist peer pressure, I spend even more time ensuring I haven’t backed a sociopath. Or, to put it more simply; I look for courageous fund managers but avoid the arseholes.
And it works like a dream.
*I’d like to tell you fund manager searches are more diverse than this, but sadly most aren’t much better.