How does LT investing work?
Hello all,
I have been interested in a career in AM/HF for some time but wondered how more traditional, value-oriented funds make money. From reading investment books and learning finance I have come to a conclusion that long term investing is the best. But how does this work at a fund, where short-term investments are necessary as there are internal and external pressures to make money? How do you build rapport, when you recommend an investment that will have a 3+ years of holding period or if your investment is still not sold when you leave the fund? Maybe I have the wrong understanding about all this, but if someone could elaborate that'd be great. Thank you.
A group with a long-term focus should understand that an investment thesis is dynamic and can change over time, especially if the idea comes with a longer-term time horizon. The key for the analyst is to strike a balance between discipline and commitment to a thesis, and being able to recognize when the thesis has changed materially to the point where positioning needs to be adjusted or re-evaluated. It is inevitable that you will get trades wrong, what is important is how you react and what you learn from them. Specifically to your question, your level of comfort with volatility will be a function of how thorough your research was/is. If you've fully vetted an idea, you will be able to decipher whether or not volatility represents risk or opportunity. You should know all sides of the trade: what is the bull case/base case/bear case, what is the upside/downside, what are some signs that a certain scenario is playing out, what are the catalysts that could cause one or the other to play out, and what do you think is the most likely of these potential outcomes? This process of looking at all angles, even if you develop a clear preference for a certain angle early on, will help guide you through volatility and reduce your risk of acting emotionally to price. Lastly, at a truly long-term oriented fund, there will generally be less emotional response to price volatility and a greater focus on fundamental developments. You may have to try and explain volatility to the team, but you likely will not be forced out of a position if the fundamental setup remains intact.
On performance, the team will likely put more weight on the quality and thoroughness of your research rather than short-term results. In a committee-type environment, once you have pitched your idea the group will try and poke holes in it and this is where it will be clear whether you really looked at it from all angles. There's nothing worse than getting a question that you have no answer to in the meeting (and my PM is a master at this, mostly because he will ask things that have no real relevance to the value of the asset, but that's another story), and you can mitigate this by trying to address all possible sides in your initial pitch.