This post by Clare Flynn Levy was originally published on CFA Institute's Enterprising Investor.
I received a great piece of advice back in the 1990s when I first started out in London as a young fund manager at a large European asset manager: “Clare, great fund managers are made, not born. Investment decision making is something you will always be able to improve upon, and the day you stop being interested in that improvement is the day you should find another occupation.”
A lot has changed since that day, but that advice has never been more relevant.
Many of today’s managers realize that there’s no longer a competitive advantage to being smarter than everyone else or even having access to better information. All that has been commoditized. What’s left is “behavioral alpha” — the excess returns that can be generated by “knowing thyself” and being more focused on self improvement than the next person.
Today’s most thoughtful investors have a wealth of experience to share with the next generation of fund managers. Each offers a different perspective, but they all share a focus on the importance of learning and reflection.
(The author has listed more suggestions in the original post. We have only taken those which individual investors can apply to their investment plans.)
Ben Wallace, fund manager, Janus Henderson
Bad news is almost never ‘in the price.'
Always be open to hearing views that are the opposite of yours.
Pascal Kummert, portfolio manager and chief investment officer, Calvion Capital Management
Risk management, risk management, risk management. Come up with a well-structured framework that fits your trading style/strategy/psychology. What you lack in experience, make up for with additional structure, process and transparency towards your prospective investors. Show them how you hold yourself accountable to your risk framework.
Document as much as possible of your investment decision making process. This will allow you to make improving tweaks to your process and allow for learning and adaptability to different market regimes.
Gunther Kramert, senior portfolio manager, Union Investment
Be skeptical, be critical, and make up your own mind. As a portfolio manager, a lot of people tell you a lot of things. But they may have motives that are not necessarily to your benefit (even when they seem convincing, or are convinced themselves), and they don’t necessarily know the truth any better than you do.
Do not get overconfident. Stay disciplined and be prepared to reflect on your personal shortcomings and deficiencies. If you’re not prepared to acknowledge these realities, and seek to improve on them, you have a competitive disadvantage.
Jane Coffey, Insight Partner, Essentia Analytics; previously head of equities, Royal London Asset Management
If you want to progress quickly, look for an area in the industry that is relatively new and expanding.
Focus on building your listening skills, and do not be afraid to ask for clarification of things that do not make sense. Being new allows you to ask the “obvious question” that your more experienced colleagues would like to ask but feel they should know by now.
Do not forget that you are making assumptions in all your forecasting. Your model may say the answer is 42 but this is one of many answers that you could have come up with if you made some small changes in your assumptions.
Ian Beattie, co-chief investment officer, NS Partners
Know your own time horizon (and don’t play to someone else’s). Is it two days, two quarters, or two years plus? If you do change it and play outside your norm, you must do so consciously, intentionally. This is a specific version of the advice, ‘Play to your strengths, not other peoples.
Be aware of, and work on, your own mix of humility and arrogance — you need both!
Make a pre-mortem part of your investment process: If the idea you’re proposing were to go wrong — what would be the possible causes?
A.E., portfolio manager, hedge fund
Build a process and stick to it, whatever happens.
Discipline is key: Use stop losses, sizing limits, and other measures to protect you from yourself.
Take the time to do a post mortem, especially on trades that have gone wrong.
Chris White, global head of portfolio construction and risk, Nezu Asia Capital Management
Know your edge. Slice, dice, and analyze with every tool available to you. Aim to do more of the things that add value, and either remove or focus on improving those things that do not. Understand the implicit bets you are taking and be honest about your ability to add insight about them.
Manage the volatility of your edge. It’s no good being long-term right if the losses from short-term volatility prevent you from holding on. Size appropriately, don’t over-trade, and have a plan for the worst case (and stick to it!). Don’t fall in love with your positions.
David Fiszel, founder and CIO, Honeycomb Asset Management
Know your own style. When you play someone else’s game because their returns look better, you will lose copying them.
Tom Martin, Insight Partner, Essentia Analytics
Invest an equal amount in executing and refining your process as much as you do in researching ideas. Be open-minded about your conclusions.
It’s better to be an expert on a few things than it is to know a little about a lot of things.
V.E., portfolio manager, family office
Build a process that leverages your strengths.
Accept that you can’t be good at everything.
Keep refining your process over and over again.
V.E., portfolio manager, family office
Learn to assess yourself dispassionately. The emotional reaction is often to get defensive. In fact, you should be open-minded, as if you are diagnosing problems in a machine. Once you identify the problem’s root causes (not the superficial weakness), create a plan to fix it.
It’s vital to think independently. Most aspiring investment analysts fall into one of two camps: (1) doing exactly what consensus are doing, or (2) doing exactly the opposite of what consensus are doing. The truth is usually somewhere in between. Having a clear process will help you navigate the grey area.
Richard Baskin, Insight Partner, Essentia Analytics; previously director, equity risk management, Point 72 Asset Management
Understand the risk you are taking.
Set risk limits such as size position (max over/under weight) limits and stick with them. Define a limit exception process as well.
Think carefully about your process for controlling losers and preventing big winners from turning into losers. Create a formal, documented mechanism for deciding which losers to cut as well as winners to let run.
Adam Rackley, investment director, Cape Wrath Capital
Keep learning. Make a framework to guide your learning. Read financial history, capital allocation, biographies. Read about industries, corporate strategy, psychology and incentives, great investors, statistics, and investment styles. As well as books, read newspapers and company accounts. Read to understand the world around you but also to understand yourself. Read books about thinking, and make time to write up what you’ve read, and time to think about what you’ve learnt and, above all, make time to apply it. When you read, always think, ‘What’s the application? How will this make me a better investor?'
