Underrated Skill in Investing
What do you guys think is the most underrated / unappreciated skill in investing? Has this changed over time for you?
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Understanding working capital
Discipline
Having the ability to be pessimistic, especially in our current climate. Mind you, I am not saying be a sceptical bear who believes the markets are rigged or anything like that (not saying they are or aren’t, just saying i’m not commenting on that).
I am more so referring to not getting excited at every investment opportunity that comes your path. You need to be able to be quite critical and break down ideas, especially in an environment where countless companies are littered with buzzwords for the specific purpose of exciting investors. Really sit down and try to break companies apart, and try to look for what might make them a poor investment as opposed to what might make them the next Amazon.
Healthy skepticism will save you a lot of money in the long run, and really help you defend your theses.
The ability to sell. I've said before that you really have two primary responsibilities as an analyst: 1.) Have good ideas; 2.) Convince other people that you have good ideas. You really have to make a concerted effort to understand the personalities around you and adjust your approach based on who you're talking to and what you need from them. Once you learn how to sell ideas, you'll accelerate and be surprised at how much you can accomplish in a short period of time, regardless of your seniority.
The other key skill is the ability to understand the WHAT of what is priced, and WHY something is priced a certain way. This is essentially our entire job but it is an underrated skill because I find other analysts don't weight it enough. You have to know who is on the other side of your trades and why. That is the only way to identify catalysts and generate alpha. As I've developed more, instead of saying "I think this will happen and if it does we will make X", I've turned that into "I think this will happen and here is why this is different than what is priced, and here is how what I think will happen will become priced." It's funny, as I write this I have a specific position in mind that I ran through earnings on last week. I still find it to be quite mispriced with low hurdles for expectations, but I cannot figure out why it is priced the way it is, I can't figure out what others are missing. In the past I might have brought it in anyways, but my new default is that if I cannot figure out why others are wrong, odds become higher that I am the one that is missing something, and I have instead tabled it for a deeper review.
I really like the bottom half of your answer because of the maturity of your thought process.
How do you go about understanding what is priced in? Do you talk to the top holders? What the sell-side is writing about?
Also agree that pitching/selling is a skill that many analysts lack, but I wouldn't call it "underrated", but would characterize as "difficult". I think most people in this business are aware of the importance of selling an idea, but they are not serious about it and do not take the methodical approach that you seem to be taking to be effective in their work environment. There are a lot of smart people that know the ins-and-outs of the companies they cover, but when asked to succinctly make a pitch they end up with brain pukes or come off as emotional.
I would chime in with my 2 cents - the people skills needed to build relationships with management and other stakeholders. I feel that most analysts view this as a paper job and use management meetings as an exercise in pure information extraction and notetaking. It's non-stop, one-way Q&A, often on line items that's really not even appropriate to ask the CEO (e.g. what is your cash taxes?). They don't add value to how management should think about market perception, provide 3rd party input on strategic thinking, and are not interested in who they are as people. I think this is a grave mistake - if you can get the CEO to think of you as a trusted source of capital market advice and a friend, you can learn a ton more about his/her business and industry that will give you an edge over other participants in the market. You also run into a lot more interesting private capital situations this way, being their first call and trusted "partner" even if you may not be the largest holder of their stock/bond etc.
Figuring out what is priced and why is probably one of the most important, yet difficult, parts of the job. It requires both diligence and intuition. I’ll break it into a couple parts:
Written sell side work can be helpful, but they don’t actually commit capital to their ideas, so the sell side consensus may (and often does) differ materially from the priced consensus. That said, sell side consensus expectations are certainly one avenue, and will often provide the best look into not only the WHAT, but also the WHY something may be priced a certain way. A good example from my coverage (Industrials) is that many analysts have defaulted (or had now that Q2 numbers are largely out and many have realized that this isn’t 2008) to comparisons to the GFC in trying to gauge the go-forward for the COVID shutdowns. Naturally, that could result in poor conclusions potentially being priced in if this environment proves to be materially different from the GFC (which in my view, no two recessions or shocks ever provide a clean roadmap for the next one).
The next avenue is speaking to sell side analysts, IR teams, and even sell side sales associates, which can help provide a conduit into buyside expectations and concerns. The question you should always ask in these conversations are what are others worried about the most, and/or what do you think others are missing? I would also ask about call frequency vs prior history (up/down) as well as what kind of shops are calling the most (value/growth) and if what they ask about differs from the other types of shops. Additionally, speaking with a sell side analyst over the phone may leave you with a completely different view regarding their opinion of the company vs their written work. They know mgt teams read their written work and that corporate access is one of their value-adds, so they might be willing to be more candid with their view over the phone. Lastly, if you have meaningful buyside contacts, for sure those would be valuable to have conversations there, but in general, other buyside analysts are less willing to give you the full picture as to their thesis or positioning, at least in my personal experience. Also on the other side of the coin, be warry if someone is really trying to sell you hard on an idea especially if it is a more unique situation.
Lastly, having a robust valuation process allows you to change key variables in order to tease out what is most likely priced. If you have done the work on the name and have a more detailed valuation process than slapping a multiple on EBITDA, you should be able to isolate certain variables where your numbers have a higher probability of being correct, and stress test your valuation on variables that have more uncertainty. This is one of the best ways to feel out what might be priced in my view, and is less subjective than the conversations you may have.
In trying to figure out what is priced, you will never be able to know with absolute certainty, but it is absolutely an imperative endeavor. As I mentioned in my post, if you go through your process and find a company to be mis-valued, if you cannot figure out what is priced or what others are missing, the default assumption should be that your numbers are wrong and that more work is needed.
Everything that people said above is important. But the most important thing IMO is that you need to be at a place you can get a lot of reps. Nobody ever became good at anything without putting in thousands of reps. That's why this job is so difficult. You need to fuck up a lot before you begin to know what you like /don't like, what will work / won't work. The "blink" reaction that your PM has comes from fucking up hundreds of times over the course of his career. That's why I would never advise an analyst to work at a concentrated, low turnover fund. As prestigious as some of these places are, they don't actually provide good training for an analyst. Sure, you spend all of your time learning about a company better than the CEO, but that doesn't teach you how to become a better investor because you the velocity of ideas that you look at and make decisions on is not high enough. Unfortunately there is very little tolerance in our industry for fucking up. So it's a bit of a Catch 22.