Three months ago, Frederik Gieschen of Neckar’s Minds and Markets (NMM) hosted a presentation by Prime Macaya Capital Management’s Alix Pasquet (a link to it was previously included in an edition of the Fortnightly). A subsequent discussion between the two was made available recently.
This posting touches on a number of the topics that were addressed in those two encounters. The first three section headings below reference the parts of Pasquet’s presentation. Most of what is quoted comes from that, but content from the discussion is woven in as well.
If you’d like to take a deeper dive, here is the source material:
“The Learning Mindset for Investors” (NMM); video; slide deck.
“Great Investors Build Networks and Never Stop Learning” (NMM); video.
Pasquet describes Prime Macaya as “a behavioral hedge fund, and what that basically means is we seek to exploit the uneconomic behavior of market participants, specifically group behavior.” That focus comes shining through in his observations about the customs and tendencies of investment professionals and organizations. He says that his goal is show “rookie analysts and future portfolio managers how to use learning to improve their judgment, pattern recognition, and insight generation,” but the ideas apply no matter where someone is on the experience curve.
In fact, while “in the investment business we are paid to learn,” the propensity for learning can fade, a dangerous possibility at any time in a business where change is a given.
Problems
Some of the problems that analysts face:
The feedback loop for learning in investing is long and can be deceptive.
Analysts do not understand that there is a difference between analytical thinking and portfolio management thinking.
Even the best analysts will be wrong 40-45% of the time and many analysts can’t handle the emotions of being wrong in the early years.
Analysts tend to be desk jockeys. They fail to conduct field research. (“A desk is a very dangerous place from which to view the world.” — John le Carré.)
“Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price.” — Michael Mauboussin.
Analysts tend not to understand the game theory, psychological, investment set-up or behavioral side of investing. . . . They underestimate the importance of operational skills, execution, and management.
Analysts don’t understand that they need to tailor their style, structure processes, and resources according to their own personalities and temperament.
Sensitivity to the environment is essential — both that of the market and of the organization (where ownership, legal, team, incentive, and political factors can drive decision making in unexpected ways).
One common failing at investment firms is that team design and development are haphazard or nonexistent. Consequently, according to Pasquet, “individuals in our business don’t understand what it means to be in a team and how one can improve the performance of their teammates through their energy, communication, and actions.”
Mindsets
The presentation’s middle section starts with the statement that “human fallibility and imperfect understanding are features of the human condition.” Or, “Mistakes are what we do.” (Contrast that with the narrative framing of most investment firms; one is realistic and geared for improvement, the other is promotional and defensive about needed change.)
Crucially, “You want to stay within your circle of competence, but you never want to fail to expand it. . . . There needs to be R&D done. You need to learn new tools, new strategies, new people, and new environments.”
Pasquet quotes Wyatt Woodsmall: “Feedback, not Wheaties, is the breakfast of champions.” Self-awareness is critical but elusive; “It’s a competitive advantage to know yourself well, your patterns, your weaknesses, your strengths, how you interact in a team, how you self-sabotage.” We need others to reveal our blind spots.
Action steps
Pasquet offers a host of helpful recommendations about mentors, networks, knowledge management systems, “personal laboratories,” crowdsourcing, communication, personality typing, the importance of physical health, and more.
Like many others, he thinks that learning about the “greats” is important, but his take is more thoughtful than most:
You want to study great investors, CEOs, and leaders, but again, be careful of hero worship. I think we often imagine these individuals that have qualities or abilities that are better than anyone else’s and some do, but mostly they’re schmucks like us. They have the same weaknesses, patterns, they self-sabotage, and don’t think that they play perfectly. Very often, they also may have gotten lucky and have gone through a certain environment. Other times, they have support structures that we don’t see. And you’ve got to remember also that you’re never going to be able to replicate what they’ve done. Mostly because we’re not going to go through the same environment that they went through. Also 5% of what these guys have done has usually given them 95% of the results. So how should you study a hero? You want to study their initial conditions. What was the early context circumstance and environment that shaped them?
He stresses the importance of personal networks (his thoughts complement the recent postings on this site that were focused on internal and external networks from an organizational point of view) and the need for multiple, diverse networks that span ages and geographies.
(Like many in the business, especially at hedge funds, Pasquet uses “guys” instead of a broader term for people, and it seems like all of the investors he cites are, well, guys. Given the male dominance in the industry historically, that may not be surprising, but it is a good reminder that the biggest gap in most networks revolves around gender, despite compelling evidence that adding women leads to better decision making.)
A good network can act as “a moat and it’s also a margin of safety, to use value principles.” It serves as a competitive advantage and a threat warning system, in addition to giving you access to resources and private information. But watch out; working to build a value-adding network means that “you’re much more prone to falling for MNPI, material nonpublic information, so be extremely careful.” (And don’t be shy about going to the compliance experts if you’re not sure about information that you’ve received.)
Pasquet focuses on the importance of building triads, where you match up two people in your network who don’t know each other but could benefit from being introduced. He also emphasizes the need to get past the fear of dealing with people you perceive to be more important than you.
When you do have the opportunity to get in front of someone you’ve been trying to engage with, you want to have done your research on them.
But you also want to focus on a certain type of question. You need to figure out how to get him to speak about his fears and frustrations, the problems he’s trying to solve, and his wants and aspirations. What’s he working on that he’s trying to accomplish three to five years from now? And you keep asking questions across the categories of what he’s trying to accomplish.
As is the case when doing due diligence, questions like those often reveal more than ones about investment specifics. If you can get at their fears and frustrations and wants and aspirations, you’ve reached a higher level of understanding.
Learning
Pasquet recommends an amazing selection of books that span a much broader spectrum of disciplines than what you normally see on investment reading lists. They address many of the holes in training and perspective that inhibit new entrants to the business and bedevil them throughout their careers.
We have the opportunity (and, really, the responsibility) to be “learning machines,” and that means going beyond the boundaries of common investment discourse to apply the best thinking from other domains in ways that can give us advantage in our own realm.
Courtesy of Frederik Gieschen and NMM, Alix Pasquet provides much food for thought — and action.
Published: December 18, 2022
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