They can’t do each other’s jobs well.
They can’t show up to each other’s office on Monday morning and pick up where the other one left off.
What if you asked Matisse to paint like Picasso? Of course, as a matter of copying his existing works, it would be possible for him to accomplish. But what about asking Matisse to create Picasso’s next masterpiece? Not very likely. Can Buffett produce Dalio’s next bet?
Each legendary investor has developed a unique investment style full of nuance, creativity, and craft. A fully developed investment style is unique because it is intricately connected to the investor’s way of perceiving the world, their personality, cognitive strengths, beliefs about what is predictable about asset prices and, of course, their experience and training.
Looking at the list of Best Hedge Fund managers of all Time recently updated by Institutional Investor, I can’t help but notice how uniquely different each one of these manager’s investment philosophies are (though wishing for more demographic diversity). Even if these managers fall into the same HFRI category, there are recognizable differences among their styles. For anyone in the investment business, these names instantly trigger fragments of investment frameworks with unique features, big and small. At the risk over over-glorifying these investors, I think this is similar to the way our minds recall the tune of a Beatles song or see the colors of a Renoir painting when we hear the names of these artists. We recognize their style.
In contrast, such style recognition is often not the case in regular investment management jobs. When portfolio managers change firms, they plug right in. The standardized curriculum ensures the transferability of skills: the 5-factor model, the optimizer and the t-statistics for quants; the discounted cash flows, analysts estimates and management phone calls for fundamental stock analysts. Unfortunately, none of these skills typically produce exceptional long-run value for clients; no alpha, no out-performance.
If there was a way to learn investing in a standardized setting, it would be much closer to a technical job than it is to art. In that case, the above list would contain 20 investors with the best technical skills (soon to be replaced by robots) with very similar investment processes and philosophies. The fact that this list is so diverse and that the long-run investment results of each style have been exceptional reflects the similarity between investing and art. A comparable list of the top 20 artists of the last century would feature the leaders and creators of unique artistic styles and schools.
In fact, many hedge funds prefer to hire science and philosophy majors instead of finance majors. They seek individuals who enjoy solving problems that don’t have an answer yet.
Here is an example of D.E. Shaw:
“The cerebral computer scientist would go on to become a pioneer in a revolution in finance that would computerize the industry, turn long-standing practices on their head, and replace a culture of tough-guy traders with brainy eccentrics — not just math and science geeks, but musicians and writers — wearing jeans and T-shirts.” - How a Misfit Group of Computer Geeks and English Majors Transformed Wall Street, New York Magazine
And another one from Renaissance Technologies founder Jim Simons:
“Be guided by beauty, Beauty is an aesthetic. There is beauty in things that work really well — the way a company is run, or the way a theorem comes out” - Quant pioneer James Simons on math, money, and philanthropy, MIT Sloan.
When students ask me which technical skills they should focus on to break into the investing world or which famous investors they should follow, I tell them to examine how their own minds work. I urge them to identify what is special, unique and what clicks. I ask: “if I woke you up in the middle of the night to produce an investment idea, how would you start thinking about it? Or “what questions (other than “what will the return be”) would you ask of the future?”
It’s never too late to shift into this kind of thinking. The goal is not to end up on the above list, but to make progress and generate alpha through evolving as a team. Identifying seeds of style in your own work and in the work of the individuals on your team is a powerful first step. Engaging in research that enables these seeds to grow allows a team-based style to emerge. This requires openness to type 1 risk and meaningful reduction of the type 2 risk - because at worst, the outcome will be average, the starting point, the current status quo.
I have now guided several teams through this process. Before the change, the team was a collection of under-motivated individuals, casually applying their highly technical skills as ‘human calculators’ as one of them once described it. To trigger the change, I first recognized the nuances of individual talents and ways of thinking as the key ingredients upon which successful and differentiated research can be built. I then focused creative innovation on critical questions in areas that the team had the potential to become great at and for which there existed business demand (either from external clients or internal management mandates). This process generated products that solved real problems and added measurable value over time.
Such “team-investment-style” transformation can take place in a matter of months without necessarily the need to hire new people. After seeing it take place many times, I now believe that any team has the potential to develop a unique innovation style.