PMs - what differentiates the great from mediocre? Investment process discussion:

What do you believe sets apart the best performing analysts and PMs from the rest of the pack? I saw a comment on another thread about Fundamental Edge's training saying it was just fine/ pretty rudimentary, and it made me start to wonder about this topic, especially as I have limited insight. 

More recently (from my limited and naive vantage point) it has been feeling like a lot of the basic steps to the investment processes are quite similar for the majority of L/S funds - understand the business intimately, you build your model, identify the key drivers of the stock, understand the embedded expectations, identify catalysts, etc. You find the best leading indicators for your business that you can, source differentiated views (not for the sake of it but objectively), and ideally you discover attractive risk/rewards. I am not underplaying the difficulty of doing this process efficiently and consistently, and the nature of the markets to operate in the gray space of uncertainties and beat you anyways, but I feel like Brett covers these basic steps quite well. So two part question:

1) What do you believe sets apart the best performing analysts and PMs from the rest of the pack? Is it time efficiency and the clairvoyance to nail down what matters? Wisdom in decision making and weighing tough calls? Consistency?  

2) What other aspects of this job / the investment process are not often covered that needs to be highlighted? What topics should be covered that could make that training even more effective. I get that you may need to be somewhat familiar with Brett's course to make this call, and this is not to opine on the quality of his course, but for my own improvement, I want to understand with better nuance what processes and tools I may be missing when it comes to the basic investment process steps. 


Being in the right place (right firm, right group, right pod) at the right time (market upcycle for your sector, capital inflows).

Macro traders/analysts were geniuses last year, but they were viewed as "idiots" in the past decade as oil/gas slumped

Tech/TMT guys were idiots last year, but they were "geniuses" in 2020 getting high on zero interest rates

China guys were "geniuses" in 2019-2020 on easy money and flow to emerging markets, but now no matter how deep their fundamentals the stocks in China just keep going down. 

Japanese guys were viewed as "idiots" for many years, but this year everything they do makes money because money is flowing to Japan. 

You get the point. 

I get your "luck" thing.

However, it's an actual talent to put yourself in a position in which you can be lucky. 

You're completely wrong. You can't control when you are going to be lucky, that's luck by definition. If you could predict which industries would be good you still might not get the network or connections to switch over to that field right when it becomes hot. There's so many uncontrollable factors that have to all go well for you to get the right opportunities, at the right time. If you don't understand this then you don't have enough real world experience. Life will teach you. You control nothing. If you actually controlled your life so would everyone else, and we would all be billionaires easily. 

I agree with both you and our homie holdencrystal. There's always a middle ground - and it's called the surface area of luck. Yes, you can't control things. Yes, it's hard to put yourself in a position to be lucky. What gives?

Surface area of luck - try out as many chances as you can, maximizing your chances to be lucky. Don't just sit at home hoping for smtg to happen cuz luck doesn't knock on the front door. And keep grinding, no matter how unlucky you may feel, no matter how many times life gives you the middle finger, because luck is when opportunity meets preparation. Stay hungry, stay foolish

Nobody sits at home waiting for luck to strike them. We all work our asses off, but you still need luck to be a billionaire. You don't work your ass off to billionaire status alone without some magnificent blessing of luck that you didn't rightfully work for, but which just happened to favour you. Show me any titan of the finance world and I will show you a list of very lucky factors that happened to work for them that they are not giving credit for. 

The beauty of Warren Buffett is he actually admits this. While other billionaires who are far more arrogant and have big egos can't seem to admit.…

Luck is more than 50% factor in this industry. There is also hard work and intelligence, but in business you don't need >130 IQ. It's simple math and common sense. But you need the right connections at the right time to show up for you to place you to be able to take advantage of right trends which may only last a few years. I'm sure there are other more capable investors than Todd and Ted (those two are still very good) at Berkshire but they had to get extraordinarily lucky to have had the resources to meet Buffett to get hired. All those baller PMs at Tiger Cubs, etc.... for each one that made it there are about 10-20 similar IQ, similar EQ people who didn't get picked by the hiring committee due to reasons other than their competence and drive. You control very little in your career and life. If you think you control everything you haven't lived long enough.

If I understand your question correctly, I don't think there is much of a difference in terms of the research process (I do think that larger funds have better informational advantages, though, such as access to the Street, third party research, or alt data sources that smaller funds can't afford). I think the biggest differentiators that separate good vs. great, which I don't think are process related, are 1) identifying opportunities; and then 2) implementation. How is it that someone else can look at a name and see a great money-making opportunity but, if I were to look at the same name unprompted, I see nothing? How is that two people can look at the same information / data on a name but come to two different conclusions? How is it that some people wind up buying at the top or selling at the bottom even though we know especially as professionals to do the exact opposite?  

Yh I agree. People’s brains are just wired differently. Can improve pattern recognition and intuition by getting more reps but at the end of the day I think it might come down to this.

I do not think OP is talking about the lucky one-off years to begin with. I agree with the other poster it is all implementation and that is where luck sort of comes in as well. 
Implementation could be understanding when the opportunity arises, could be considering if your career is a 10 year marathon, could be the people you hire, could be the firm you choose and risk profile. So yah its a widee range of things it can mean.

If you have most of that in place than once in a while “light bulb goes on” and the greats know to size it up super fast. End of the day, if your thesis is sound, your strategy works all you need is liquidity to size up. 

Beyond that, there is the odd characteristics see all the time. Photographic memories, people who have business acumen and possibly been around it their whole life. But that is not everyone. 

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Not a PM but IMO the biggest differentiator is having emotional discipline and the ability to form a view independently. Having interacted with many different professional investors in my career at this point, and having studied those with longevity, this is really much rarer than you may think (and helps explain the dismal aggregate track record of the industry). Everyone in this game has high intellectual horsepower, that’s table stakes to even make it to some of these funds, but having high IQ and having high EQ are two totally different things. Smart people get emotional too, and often it is worse because they can be more subject to hubris. We all have biases, but true self-awareness of them is very difficult to develop.

Two quotes that I like on this topic that I think about often. The first is attributed to Buffet (though may be misattributed): “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” The other is from Peter Theil: “The most contrarian thing of all is not to oppose the crowd but to think for yourself.”

That’s part A, and it relates to part B, which is having an investment philosophy, that is repeatable, and where you can identify why the inefficiency persists and articulate how you are manufacturing alpha. This requires self-reflection and honesty with yourself. You have to believe in what you are doing and why it works and stick with it when it goes through periods of underperformance. You also need to be able to acknowledge when an outcome is simply attributable to luck in order to learn from it and adjust. Being right for the wrong reasons can be destructive to investment discipline and some never grow out of it.

On process, I don’t really believe that there is material differentiation outside of the above more qualitative inputs to the process and access to pay-for resources as others have mentioned (a function of scale). No one is going to out-DCF their competition to top decile returns or 10-K your way to a great track record. Now, that said, you can do these things poorly and screw up your returns, but doing them well isn’t a differentiator. Last quote from me but I think it summarizes my thoughts on process. This one is from Mike Mauboussin on the cost of capital but it applies to what I just wrote: “A thoughtful estimation of the cost of capital is a little like hygiene: There’s not much upside in getting it right, but there is a lot of downside in getting it wrong.”

With all that said, luck does play a part to other posters’ points. It is inevitable that we will go through periods of good and bad luck over a long enough career arc. Winning big and losing small is part of that luck optimizing equation, which stems from the more psychological skillset I outlined IMO.

Luck is a pretty crude way to put it. What you are alluding to, I'd frame in a different way. There are many people who have the skills, intelligence, and ability to succeed, but do not for reasons outside of their control. There are always stochastic market events that one, outside of being clairvoyant, cannot predict. There are people, through fortunate circumstances, have survived, and equally capable individuals, through unfortunate circumstances, haven't.

But talking about this isn't a productive discussion. There's a always a fair number of people who do not succeed and are squarely at fault. The best you can do is to avoid being part of that group. That is, don't make avoidable mistakes. And that's the type of discussion that would be productive here. If you do all that and you still fail, well, that's just how life is.

As a quant, I think it's important to test your ideas and hypotheses as best you can. If you're making a decision based on some research/analysis, how profitable would that thought process have been historically? What's the variance of your expected return from this decision, i.e. have you identified your risks in the investment and can you quantify them? You can quantify your "luck" to an extent and optimize for it. If it isn't working, then something must be wrong between how you quantified your expected perfeomance and reality, you should now iterate and rectify that.

I understand fundamental analysis may rely on methods and information that aren't ripe for larger scale data analysis, but I also think there's plenty of room to integrate the two. Give yourseld the best statistical odds of winning, because everything else is just noise/luck.

On your last point, it feels to me that many HFs have tried creating the "Quantamental" analyst who in theory is adept in marrying fundamental analysis with data-driven analysis and from what I have heard, many of those analysts haven't been successful. Know a couple people myself who were quantamental at shops like P72 and Citadel and weren't able to generate the alpha they needed to succeed meaningfully. Interestingly they decided to pursue pure quant roles for their next steps in lieu of fundamentals. One had an equity research background and the other was a finance / compsci double major who went straight into a quant role and then pivoted into quantamental analysis. Makes me wonder if it is simply too much for most people to handle, being exceptional in doing both simultaneously.. and if they aren't able to properly meld together how each type of analysis supplements eachother in their search for alpha. Curious to hear your thoughts

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