Reposting: Talent in the Investment World

Sampler postings republish essays previously available only to paid subscribers.
This is compilation of four postings from July, lightly edited to
eliminate context that served to connect the separate pieces.

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Posting one:  “Finding the Right Talent”

A long series of postings will unfold intermittently on this site over the next several months, focusing on what the world of work might look like in the investment industry going forward.  That’s an impossibly broad topic — with no discernable endpoint — so the goal is to explore the ideas in ways that help investment professionals and organizations consider the possibilities and weigh their options.

Where to start?  The list of potential subjects is broad and deep.  Certainly there are a couple of major forces to address.   The increased automation of tasks is likely to alter traditional industry roles — and the popularity of remote and hybrid work arrangements will challenge the norms of structuring organizations, with implications for culture, investment process, and a host of other concerns.

Talent

The first few postings in the series will focus on people, specifically on the goal of finding the right people to bring into an organization, using an excellent book — Talent, written by Tyler Cowen and Daniel Gross — as thematic glue.

One of the principles of this site is that good ideas from other disciplines should be examined, debated, and (if appropriate) applied within investment organizations.  That seems obvious, but such exploration is relatively rare; energy gets devoted to the “investment” part of the description, not the “organization” part.

Therefore, on any topic, the standard questions are:  Is there something about investment organizations in general that makes them different than other entities, so that a specific idea wouldn’t apply?  Why?  How can the idea be adapted to fit the circumstances in a given situation in order to further investment and organizational goals?

The authors of Talent encourage that kind of approach:

Always ask:  In which areas might this work?  Might this not work?  When does this work or not work?

Along that line, it’s worth noting that the book focuses on finding “talent with a creative spark.”  How that is interpreted — or whether it is truly valued — varies by organization.  But the concepts put forth are broadly applicable even if they aren’t directly aimed at investment organizations.

This posting will provide an overview of sorts, while subsequent ones will deal with narrower topics like the challenges and opportunities of “otherness,” the differences between virtual and in-person communication, and how the tactical aspects of interviewing highlighted by the authors apply to the craft of due diligence.

Identification and valuation

Some themes of the book:

~ The search for talent is both art and science.

~ The proper valuation of talent is critical to success.

~ Talent might be undervalued or overvalued by the market, perhaps in systematic ways.

~ Identifying and valuing talent in a changing environment requires ongoing improvements in process.

If you substitute “investments” for “talent” in each of those statements, you’ll see that the philosophy of the authors fits with the investment mindset.  Their goal is “to revise the bureaucratic approach to talent search,” in order to provide “a personal or organizational edge” in identifying and valuing talent.

There are valuable insights sprinkled throughout the book.  Early on, a group dinner discussion is described this way:  “Events like this, in which ideas are shotgunned out at a rapid pace, often provide a quick window into whether a person’s true interests lie in status or in ideas.”  Such an important distinction.

One factor that comes into play (not just at dinners but in other situations as well):

Most of us have a bias toward well-spoken and articulate storytellers.  But make sure you keep an awareness of this at the front of your mind, for it can cause you to hire glib but unsubstantial people and overlook rare creative talent.  Do not overestimate the importance of a person’s articulateness.

Being mindful of your biases is important; “don’t leap too quickly to conclusions about [a] person being ‘a weirdo’ . . . ‘weirdos’ may end up as some of your best performers.”  You want to be able to objectively judge people across various dimensions, and to recognize their abilities even when they are overlooked (and therefore misvalued) by others.

Intelligence

Invariably, if you ask someone about working in the investment world, they’ll talk about how smart everyone is.  Therefore, a chapter with the title “What is Intelligence Good For?” seems made to order.  The authors state their conclusion up front, that “intelligence is usually overrated, most of all by people who are smart.”

They cite Marc Andreessen, who agrees with that assessment and “argues that, all other factors equal, the more important qualities in a hire are drive, self-motivation, curiosity, and ethics.”  If intelligence is overrated, it’s also then overvalued.  Now add in some of that articulateness and you can see how the valuation of an individual can really get out of whack.

Analogies to the valuation of companies are appropriate.  There are “no extra gains to be had from investing by running after positive qualities but neglecting price.”  You are much better off discovering “hidden virtues.”  And should you be bidding against others, you may end up experiencing the “winner’s curse” of finding out you paid too much in your rush to capture that talent.

That is especially true when notions of intelligence are intertwined with observations of an investment track record (which is an inherently noisy measure of quality).  Intelligence is context dependent and so is performance.  If you hire someone into a new organizational environment, they may struggle to understand how to succeed within it.  Or they may encounter a much different market regime to navigate than they had before and find it difficult to adapt.  Faced with tougher circumstances, their results may suffer, and perceptions of their intelligence may decline along with them.

Personality

Also context dependent:  personality, even though most tests of it pronounce someone to be of a certain type.  While “often those claims are correct to some degree,” they miss the variability in the measured characteristics across different situations.

The authors use the common Five Factor model for illustration, and write that

if you’ve never heard of it or worked with it, it can teach you something, but at the same time, most of the practitioners who use it or cite it tend to significantly overrate its effectiveness and overlook its limitations.

It’s “marginally useful” to use that model, but you “should not obsess over” it.  Some investment firms swear by personality tests and others think they are garbage, but

there is another use of personality psychology:  namely, as a way of developing a common language so that you and your team can discuss and evaluate claims about personality.

The personalities of individuals matter in an organization.  The authors’ recommendation provides a sensible middle ground on which issues can be examined thoughtfully and with more depth than would result from a slavish adoption of a methodology or the rejection of all possible benefits of one.

In addition to the standard five factors (scales of neuroticism, extraversion, openness to experience, agreeableness, and conscientiousness), Cowen and Gross mention that “a tradition factor” comes into play in certain cultures, especially in Asia.  They also discuss other qualities, including stamina, self-improvement, dynamism, maturity, ambition, sturdiness, generativeness, and several more.

Another indicator is important for the investment realm — the number of conceptual frameworks that someone can reference and apply.  If they have a single model to which they always return, they are likely good at one kind of thing, limiting the roles that they will fit into and the environments in which they can excel.

Also:

When it comes to hiring, most of all you need a good match, not some supposed vision of candidate perfection.  So skill in spotting flaws in other people can lead to very positive matching outcomes, and that is another reason the dialectical perspective of seeing both the good and bad sides of talent is highly useful.

Your talent strategy

The book also gets into different ways of searching for talent, some of which are better suited to the world of entrepreneurs than the process that plays out for investment professionals, which is driven by biography and track record more than innovative ideas.

Nonetheless, every organization demonstrates a pattern of hiring over time, perhaps by design but maybe by happenstance.  Ideally, “your set of filters should be part of an integrated strategy”:

Whom are your filters bringing through the door?  And which strengths and drawbacks are those individuals likely to have?  Your talent search and interviewing techniques never start from a totally blank slate; they should start from an understanding of where your institution stands in the broader scheme of things, and what are the main problems you face when trying to attract talent.

Which brings us to issues to be unfurled, including what kinds of jobs are to be filled — and what kinds of people will be needed to fill them — in the decades to come.  The challenge for those leading investment organizations is to create a “hive mind” (and desirable hive behaviors) that fosters an ability to compete at a high level, over time, in a complex adaptive system.  There are many pieces of the puzzle to be uncovered and put together.

~~~

Posting two:  “Valuing Otherness in Investment Organizations”

A key theme in Talent, by Tyler Cowen and Daniel Gross, is that talent is often improperly valued, providing opportunities for those who can get past structural barriers and behavioral biases to see the possibilities.

Human differences

A short opening section of one chapter uses Greta Thunberg as an example to

reveal important lessons about how people with “disabilities” can be startlingly effective not because they “overcame” their disability but because of it.

Thunberg describes herself as having Asperger’s syndrome, which she has in common with some notable investors.  Michael Burry, one of the key figures in The Big Short, said, “Only someone who has Asperger’s would read a subprime-mortgage-bond prospectus.”  Then there are the two most famous fixed income portfolio managers.  Jeffrey Gundlach claimed to be “obsessively regimented in my analysis, borderline autistic,” and Bill Gross believes his Asperger’s diagnosis “helps explain not only why he was such a successful investor for so long but also why he could, by his own admission, rub people the wrong way.”

That dichotomy is what gives people pause and what leads to those misvaluations.  Yet:

To the extent that autistic and Asperger’s individuals remain outside of the usual loops of social pressure and mimetic desire, they may retain strong capacities for original, non-conformist thought.

The authors provide context for the use of the word “disability,” including a “possible” definition:  “human differences in range and/or abilities, which are currently judged to impair essential aspects of functioning, regardless of actual outcomes or achievements.”

What is often missed:

Many individuals respond to that initial deficiency by investing more in acquiring other, different skills.  Disability is thus a potential marker for skill specialization, and skill specialization can be a very potent advantage, most of all in a world that is rapidly becoming more complex.

Common misconceptions about different conditions abound, so education is the first step in preparation for interviewing people who are (or are perceived to be) out of the norm — and for creating a work environment where they can thrive.  The book uses those on the autism spectrum to examine the competitive advantages (even “superpowers”) that they can bring to an organization, as well as the potential challenges.  With that kind of balanced understanding, you can evaluate a range of possibilities, including the use of remote work options that might better fit the needs of an employee.

The authors’ bottom line on this topic also sets up the ones to come:

At the very least, please consider and internalize the general lesson that you should not let stereotypes dominate your thinking.

Gender

As other professions have become more balanced between men and women over the last few decades, decision making roles in the investment world have remained dominated by men.  That’s true even though the evidence from study after study is that women in general produce better risk-adjusted returns.

The italics above were used because while there are differences across genders in various attributes, the authors stress that looking past those to the qualities of specific individuals is key, since there are situations where “the returns on talent spotting are going to be high, because other people are too attached to their statistical discrimination.”

If you look at the scores for the Five Factor personality model, there are different ranges by gender — from their scores, “whether a person is male or female can be forecast with about 85 percent accuracy.”  And the evidence shows that personality traits matter more in the evaluation of women than men.  That leads the authors to conclude that “the talent search for women is more difficult or requires a subtler set of skills,” so that “you can take advantage of other people’s prescriptive stereotypes.”

Among the tendencies to be aware of:  people have a harder time being criticized by a woman; female voices more often cause negative reactions; and women are “asked to walk an almost impossible middle line in the workplace,” where they “are supposed to be tough but not too tough, firm but not obnoxious, like men but not too much like men.”

In general, women have different communication styles and lower self-confidence than men.  “Yet labor markets often reward confidence, sometimes even excess confidence.”  (That’s something rather noticeable among investment folks, and the authors cite “evidence from economics . . . that the gender confidence gap comes mainly from male economists making proclamations about areas they don’t know much about.”)

Notably, men aren’t very good at reading and understanding different personality styles — or judging the intelligence of women — and “many talent-spotting mechanisms are more geared toward males, [so] it is easier for super-talented women to go unselected.”

It is, at this late date, still easy to find investment firms at which women appear only at the margins (just as was the situation seven years ago when this essay was written); whatever the reason for the narrow pool of talent, it is likely to hurt those organizations over time.  Cowen and Gross:

It is better for everyone — yourself included — if you side with an emancipatory perspective that improvement is possible and you can be an agent of change.  This holds even if you harbor very strong conservative views about the intrinsic differences between the sexes.

Race

Misperceptions and poor valuations come into play regarding differences in race too, which can be even trickier:

Our first piece of advice — and we mean this for individuals of all races — is not to pretend that you understand race as an issue very well.  Don’t approach the problem, and the issue of bias, with some pet theory about how the world works with respect to race, because the diversity of racial issues, problems, and biases likely will defeat your schema.  Mostly, as an outsider, you want to shed many of your preconceptions, whether explicit or implicit ones, and open yourself up to the talent possibilities in minority communities, particularly communities you may have no connection to personally.

Again, the authors recommend learning above all else, putting yourself in new environments and exposing yourself to content that is foreign to you.  There are knowledge gaps to be closed (or at least narrowed) before you can begin to value the talent available with an objective perspective.

Consider how the lack of familiarity can play out in the search process:

To the extent there is a cultural gap between whites and blacks (or other groups) in an interview setting, it is a common strategic response — on both sides — to take fewer chances.  To be less natural.  To tell fewer jokes.  To reveal less about one’s personal life.  And so on.  It is thus harder to move into the highly productive conversational mode [discussed earlier in the book].  The end result is that you — even if you have no prejudices in the narrow sense of the term — are less likely to see the true talent strengths of the people you are talking to.

Similar dynamics might affect another talent-selection endeavor.  Many minority-owned investment firms and funds have trouble raising assets, even when their results are good (and even though some consultants and asset owners have programs designed to foster them).

Otherness

No doubt there are additional dimensions of otherness that could fit into this paradigm.  Early in the book, the authors reflect on the past fifty years:

Prejudices were — and still are — distorting many of our talent allocation decisions.

We struggle to value otherness, in the hiring process and in the operation of our organizations.  As with the investment process, identifying talent and properly valuing it necessarily depends on the ability to get past traditional methods and deep-seated biases.

~~~

Posting three:  “Communicating in the Virtual World”

The increased use of remote communications has profound implications for the structure and processes of an investment organization.

Talent, a book by Tyler Cowen and Daniel Gross which has been the subject of previous postings, offers insights into the interpersonal dynamics that are altered by those changes.  They apply equally to interviews as part of a talent search (the authors’ primary topic in this regard) and to other situations.

Different worlds

Cowen and Gross have noticed that people “often make incorrect assessments when real-world conversational models are accidentally applied to online interactions.”  Technology snafus and uncertainty about how things are coming through to others create a different environment from in-person interactions.  You must “be careful not to allow frustration at the medium to seep through to a judgment of the participant.”

Two broad questions offer a platform for you to start to think about the contrasting means of communication — and to engage with others in your organization to help design its standards:

Why are person-to-person interactions often more informative than Zoom calls?

In which ways might a Zoom call be more informative than a person-to-person interaction?

The authors think that “all other things being equal, online trust will be lower” than in-person trust, making “edgy” questions and topics more challenging.  To mitigate that, you need to consciously work to establish greater trust.

Virtual interactions are typified by a loss of context:

To consider the information poverty more generally, when you use distance communications you are missing out on at least three distinct sources of knowledge:  social presence, information richness, and the full synchronicity of back-and-forth.

Re-creating “real life” is not feasible, so you need to “disaggregate and break down the exact problem you are facing” in order to discern what you need to know even though those three elements are lacking.

Status effects

A revealing section of the book considers the impact of virtual communication on “the traditional markers of status.”

In-person meetings often involve a power dynamic; where the most important person sits (and how others array themselves in response) forms a stage — and frames a performance of sorts — that isn’t there online.  Dress, physical presence, and “witty repartee” all diminish in importance.

That changes the dynamics of a meeting and allows for others to have a greater impact:  “Typically the online medium raises the influence and stature of people who can get to the point quickly.”

New behaviors are required:

One of the hardest mental adjustments for people to make is to realize how much their positive affect relies on their in-person projection of high social status. . . . You will do better in the online call if you realize how much your in-person presence relies on a kind of phoniness, and allow your online charisma to be rebuilt on different grounds — those that are easier, more casual, more direct, and just plain charming (but in the modest rather than pushy sense of that word).

Other challenges

We all have to make adjustments.  Consider those used to communicating with audiences at conferences or leading a meeting or a workshop:

When speaking live, experienced lecturers use all kinds of misdirection, including hand motions, body movements, and charisma, to cover up their blemishes, but on Zoom that is much harder to do.

And, to the topic of blemishes, when you are on “Zoom center stage,” it “can be stressful for you, because everyone can notice all of your imperfections, whether a pimple on your face, your unusual speech patterns, or your head movements.”  And, if you have a window of yourself open on your screen, you may be uncertain “where you should be looking, and so you are torn between looking away in an effort to forget about it and glancing periodically at your own weirdness in order to try to correct it.”

After two-plus years of experience, most of us still aren’t used to the new environment and find it uncomfortable, because

many people thrive on interpreting social signals from body language and broader demeanor, and on mirroring those same signals back — if your interlocutor smiles, you smile too.  The scientific evidence suggests that many of us — perhaps most of us — find it disorienting to be cut off from so many of the usual social signals and forced to focus on only a few markers of the communicative experience.

On the other hand, the lack of the normal cues might result in better decision making.  The extent to which someone’s handshake (remember handshakes?), appearance, how they enter a room, and whether they are good at small talk cause us to misjudge their overall capabilities, stripping away those inputs could be a very good thing.

Organizations need to understand the relative advantages and disadvantages of each mode of communication in order to inform their structuring of jobs and processes — and to provide the tools and training that employees need.

Whether or not that happens, individuals should try to move up the learning curve on their own.  New ways of communicating provide opportunities for those who are willing to actively work to improve their skills at a time when traditional markers of influence hold less sway.

~~~

Posting four:  “The Art of Interviewing”

Those charged with doing due diligence on asset managers (or other investment service providers) can find inspiration in the work of Tyler Cowen and Daniel Gross regarding talent assessment and selection.

Earlier postings in this series have connected their book (Talent) to the investment realm, emphasizing these points, among others:

~ Talent acquisition is not only an investigative process but a valuation exercise.

~ “Otherness” tends to be misvalued.

~ Virtual communications differ from in-person encounters, and participants need to adapt their personal game plans in response.

Each of those has implications for due diligence work, as does the chapter entitled “How to Interview and Ask Questions.”

Question time

The book provides insight for both interviewers and interviewees.  Although this posting will focus on the former, those being interviewed can expect to hear a couple of questions that were recommended by the authors and will be adopted by others.  Here’s one:

What are the open tabs on your browser right now?

The rationale for it:

In essence, you are asking about intellectual habits, curiosity, and what a person does in his or her spare time, all at once.  You are getting past the talk and probing for that person’s demonstrated preferences.

That approach can be adopted in a variety of ways when vetting a portfolio manager, for example.  The spare-time aspect still applies, but, also, which of the many data platforms and tools are in use at the moment and why?  What Bloomberg screens are up?  (While a large share of managers claim not to care much about current prices or technical analysis, a lot of their open windows contain flashing quotes and price charts.)

Here’s a very good question for any market participant:

What is it you do to practice that is analogous to how a pianist practices?

That gets at whether someone has an orientation to self-improvement or whether they are content to tackle an evolving market with the set of skills that they currently have.  Broadly speaking, that kind of practice is rare in investment circles, making the question a surprising and particularly good gateway for discussion.

Before offering more examples, let’s step back and look at the bigger picture.

Interviewing process

While the book addresses job interviews not due diligence ones, in both cases

an interview is fundamentally about how to engage with people, and if you cannot engage with people, you cannot break through the combination of bravado, nerves, and possibly even deceit that people bring to their interviews.  During an interview, you can ask anything (legal) in the known universe and explore any angle you wish.  What a splendid but also baffling position to be in.

There are many choices to make:  Aggressive or ingratiating?  A structured interview or a free-flowing one?  Trying to understand what makes a person tick or asking about investment ideas?

Most due diligence interviews, like most job interviews, proceed in a fairly predictable manner — resulting in equally predictable answers that hew to the narrative of the person being interviewed and those of his or her organization.  According to the authors, “You can do better.”  But that requires rethinking the standard approach, taking risks, and leaving out certain topics that others might view as essential.  Is your goal documentation or discovery?

One important strategic decision:  how forceful to be in your questioning.  Some doing due diligence are afraid to burn bridges, because they are worried about future access in cases where they will have ongoing research duties — or about being allowed to invest in situations where a manager is controlling the number and kind of investors who can participate.  Thus, an investment manager being interviewed might hold more cards than a typical job applicant (although the circumstances are akin to those between an in-demand potential hire and a would-be employer).

Do you search for common ground at the start of an interview or ask a specific question?  Either can work, but you are best off when you can move rather quickly “into the mode of inquiry, the mode of curiosity, the mode of conversation, and the mode of learning.”  Getting interviewees to tell stories about themselves and their organizations helps you to understand them, but only if those stories aren’t the well-rehearsed ones that they tell everyone else.  That requires creativity:

The main problem with obvious questions is that they tend to elicit obvious answers.  Try not to ask for stories that are likely to be canned.

If they don’t have to hesitate or ponder in response to your inquiries, you’re not being creative enough.  They should need to pause and think and perhaps fumble a bit.  What matters in the end is whether you can uncover things that others don’t.

You should use silence as a tactic (or a weapon, if you will); “hold the tension as a way of making it clear that you expect an answer, and a direct answer at that.”  And keep the pressure on if they aren’t responsive:

This insistence on an answer is one strategy that makes many interviewers feel uncomfortable or even a little mean.

Nonetheless, your job is to make sure that “every question generates a maximally informative answer.”  That may be hard when a relatively inexperienced manager research analyst is interviewing an investor of some renown, but it’s essential to a good due diligence interview.

As with job interviews, due diligence interactions can be full of clichéd questions.  For the most part they should be avoided, but there are strategies in which they can be used.  By asking them over and over again (in different ways), you will “get the person out of prep sooner or later,” especially if you keep going a level deeper each time around.  (“What is your edge?” definitely fits the definition of a cliché, but it offers an enormous tree of branches to pursue if you ignore the easy summations that you hear and drill down into the nitty gritty, searching for real examples and evidence — and challenging the interviewee as needed when the explanations are empty.)

All along, you should be on the lookout for unusual approaches, ideas, and worldviews; language that is unusual and which might open a door to unique perspectives; and the willingness to talk about challenges and trials in a way that reveals the person behind the mask.

Some examples

There are interview questions sprinkled throughout the book for which there are analogs in the sphere of due diligence, which is, after all, about analyzing and valuing talent.  (After four postings about it, the message should be clear:  Read the book.  It is full of insight into interpersonal dealings that can be applied when analyzing investment organizations.)

Among the questions are some to get interviewees to admit beliefs that they aren’t rational about or may be wrong about.  Or, flipping the script, asking them, “What is one mainstream or consensus view that you whole-heartedly agree with?”  Getting at the underlying beliefs of those you interview (and how they fit into those of their organization) can be fruitful.

Many of the questions offered by the authors are personal in nature, an approach that may fit more obviously in a job interview situation rather than a due diligence visit, but isn’t the purpose the same in each case?  Shouldn’t the “people” paragraphs in a due diligence report actually be about the people?  Biography is not identity, and it’s impossible to get any kind of explanatory depth about people if you don’t engage them in ways that reveal who they are.

One “brutal, meta question”:

How do you think this interview is going?

By using it:

You are in essence asking the candidate how much weakness he or she wishes to disclose.  Should the candidate give an articulate account of her weaknesses so far, thereby impressing you with her insightfulness but also confirming your negative impressions?  Or should the candidate stonewall and instead give an account of everything that has gone well?  If nothing else, you will confront the candidate with a surprise situation and put her in a difficult position, but one that gives her a chance to shine in confronting a challenge.

Another meta question:

What criteria would you use for hiring?

When posing that while conducting due diligence, you are asking a presumed expert to offer a template for analysis.  How thoughtful is she in response?  How open?  Are the recommendations she provides unique and insightful, or are they boilerplate, echoing what everyone always says?  How do she and her organization rate according to the attributes that she has provided?

Such simple questions as those cited by Cowen and Gross can yield multi-layered, revealing answers or mere pablum, providing indications that are of value.  The goal should be to spend a significant percentage of time during an interview in discussions prompted by those kinds of inquiries — and much less on transitory investment chatter.