Mod Note: Each day we'll be posting the top WSO forum posts of 2014. This one was originally posted on 5/28/14 and ranks #24 for the year by total silver banana count. You can see all our top ranked content here.
My background is posted in my Q&A ("Q&A: Credit Analyst at +$5B Distressed Shop") - just wanted to pass along a few thoughts as I think about my own career.
1. You are never the smartest guy in the room.
Conviction is one of the most important things you can have in investing, but it's alter-ego, arrogance, can devastate your career. Knowing from day one that you will never understand, say, the gold mining business better than someone who has been in the business for twenty years is a strong competitive advantage. That's why I think industry conferences are so underrated. You spend a few days drinking and socializing with some of the smartest executives in their industries, robbing them blind and looting that invaluable source of knowledge. This information arbitrage isn't just about industry knowledge - I know that I will never understand CDS as well as the BlueMountains or Sabas of the world. When I invest, I stick to my strengths (problem solving, pattern recognition, and financial analysis) and supplement that with the knowledge I've gleaned from others - that's how conviction is built.
2. You have to enjoy the day-to-day.
I like to tell people that my job is like military intelligence: you're briefed on a situation (sourcing), you do all the required reconnaissance work (financial modeling and channel checks), you travel and liase with local contacts (on-the-ground due diligence), you draft a plan or strategy (risk management and how to technically execute the trade), and then you pull the trigger (deploy capital). But it's all bullshit. The reality is decidedly less sexy: I spend all of my day thinking about how companies generate cash, why the market is under or overvaluing the health of those cash flows, and finally identifying an event that will bridge the valuation gap. This means I have to read a lot: Ks/Qs, transcripts, research reports, technical industry reports, local newspapers, and govt white papers. I also spend a lot of my time going through financial statements, understanding changes in accounting methods and gauging the health of the company. Good times and bad times never last - you can be up 20% one year and down 20% the next - so the guys who have longevity in this business are the ones who take pride in the day-to-day work.
3. Don't ever get married to your trades.
There's no such thing as a "bad" or a "good" company, so getting married to a long or short is a bad idea. Investing is more or less about taking a view on the intrinsic value of a business relative to its current market price. I've met so many analysts who label a company as "bad" and will always be short the stock or bonds, even if the trade has gone significantly against them. One of the most painful lessons I've learned is how to cut my losses when there is a change to the thesis. The best analysts can U-turn and understand at what price it makes sense to go long (after making money on a short) and vice versa.
4. Know the price of loyalty and ambition.
I know plenty of guys who are great analysts and who have been devoutly loyal to their funds, but that loyalty oftentimes comes at the price of slower career growth. When you think about your own career, you have to have a goal of where you want to be in the next 3 to 5 years, and you'll have to make realistic decisions about whether or not you can accomplish these goals at your current fund. Oftentimes, the best way to get a better seat is to to leave for another fund, which is why turnover in the industry is so high. If you had the option to stay at your current $10B fund or take an offer from a growing $3B fund with a pay increase and a brand spanking new "Sector Head" title, many would opt to take the new role. The number of strong buy side analysts looking to make the transition to PM will almost always exceed the number of PM opportunities available. That's why the most attractive upside is when you start your own fund. However, doing so is incredibly difficult. LPs want to see a minimum of a 3 year track record before you can start growing assets in a meaningful way.
In short, I wouldn't change who you are at heart, but you should be a realist about the dynamics of the labor market.