How to Know an Investment Manager v0
My Candidate for Best Investing Book in 2023
Though certainly a case of recency bias, of the investment and investment adjacent books I read in 2023, I would have David Brooks How to Know a Person at the top of the list, especially for allocators1.
A “best of” quotes this week from the fine folks over at Colossus prompted me to reflect further on this book:
“I learned this from Schwarzman. People don't give money to the investors they think are going to make the most money, they allocate to people they like.”2 Eric Serrano
Being an allocator, I do happen to think this is true, but it also makes me uneasy on multiple fronts.
The obvious one is that of course we prefer to “make the most money” all else equal with our manager decisions (regardless of if we do). I’m going to put that to the side though3, and focus on the latter part of the quote on allocating to people they like.
To “like” something is usually quite subjective and has a large emotional component which can be hard to articulate. Allocators, in general, want to at least attempt to turn this tacit feeling and view into something more tangible that can find its way into a due diligence memo (again, whether they do or not…). This comes with all kinds of pitfalls which include unconscious biases (age, race, etc.), the challenges of quantifying things that may not be amenable to quantification, and liking things that actually don’t matter to investment success4.
I’m even going to push how to deal with those difficulties to the side as well. Instead, I’ll assume one actually has articulated what they like, and why it’s relevant for an investment manager to possess those traits/characteristics.
My question is then:
Do most allocators actually dig into people sufficiently to really know the person(s) they are about to allocate significant capital to, and have convictions that they possess what the allocators “likes”?
I believe the answer to be no.
One of the core units of work in manager due diligence is interviewing. Yet, I don’t think most allocators are trained in this discipline (including this author), and being a conversationalist more generally (a distinction I think worth making), and end up sticking to a rather prescribed script of questions.
Prescribed scripts are unlikely to generate differentiated views though, which strikes me as a prerequisite to investment success. My own evidence is of course limited to my own experience, but in many of my meetings with investment managers they seem ready to either: 1) run through a narrative and pitchbook they’ve practiced endlessly, or 2) answer questions they have gotten ~1000s of times before which have quite canned and immediate responses.
Now, I don’t think there is anything wrong with doing this kind of inquiry initially when getting to know an investment manager (though there is a way to make this more efficient for all), but it should really be the tip of the iceberg.
I think this is where How to Know a Person comes in. The aim of the book is to help the reach learn one foundational skill:
“the ability to see someone else deeply and make them feel seen — to accurately know another person, to let them feel valued, heard and understood.”
If we want to, among other things, invest in people we like, then that means knowing them accurately. David’s book is fantastic in teaching us how to do this.
Instead of doing justice to all the insights that can be used by allocators in this post, I’ll focus on two of his chapters, and hopefully keep writing about interviewing in the future, which will include more from David and others as I learn myself.
Insight #1 - The Interview Isn’t About You
David, rightly starts with what impedes from seeing people, which includes five major pitfalls. I’ll highlight three that really stand out when I think of my own conversations:
Egotism — when allocator’s ask questions they are usually around topics they want to share their opinion on, or those they think reflect well on them (e.g., “how are positioning duration given we appear to be near the end of a hiking cycle, with an inverted curve? This type of environment has generally boded well for a longer position hasn’t it?”). This is a really bad question on multiple levels, but at a high level it presumes this is what the manager thinks is important to their process and current positioning. And yes, I’ve unfortunately asked a question like this.
Anxiety — “Fear is the enemy of communication” . You get too focused on your own mask and performance instead of heeding the advice of the Stoic philospher Epictetus to be content to look foolish and stupid, and not wishing to be thought to know anything. This relates to egoism, and stops one from asking simple yet challenging questions that will at the very least let you see how they think about perennial topics in our industry (e.g. “is tactically managing duration useful to generating returns?”) or get to know them on a personal level (e.g., “if you were as wealthy as Buffett, would you still keep managing money? Why?”).
Essentialism — What David is referring to here is stereotypes. It’s easy when meeting a manager for the first time to pigeonhole them. The materials you’ve reviewed, the role you’re looking for them to play in the portfolio, the other managers you’ve already met makes you come loaded with preconceived notions and expectations for the nature of the conversation. Disavow yourself of this as much as possible and treat them as the unique person they are, with their own approach.
This last point reminded me of Marina Abromavic’s 2010 The Artist is Present performance I first heard about in one Ryan Holiday’s books. This jist of this was that people literally lined up to have her sit across from you and she would just…stare at you. The endurance and commitment she displayed was incredible, but what was stunning to me was how many people cried, or described it as a religious experience when she just really paid attention to them, undistracted. Immersing yourself in the presence of another (like in a manager meeting) and dedicating yourself to really trying to understand them not only is a moral act according to David, but has a nice byproduct that you're likely to understand the person, and what their trying to achieve in ways others haven’t. Isn’t that what the game is about?
Insight #2 - Learn to Have a Conversation the Right Way
I’ve been using the words interview and conversation interchangeably, but I think I’m growing more accustomed to using conversation in referring to the majority of dialogues I want to have as an allocator with investment managers. Interviews set the table for power dynamics, formality, and specific roles. There is certainly a place for this in the long arc of a due diligence process, but I think the simplification and informality that comes with the word conversation leads to better outcomes if it’s emphasized.
Now, we all have conversations, but how should we define it and what is a good conversationalist? A pieced together excerpt from the book captures the core elements:
“A good conversationalist is a master of fostering two-way exchange. A good conversationalist is capable of leading people on a mutual expedition towards understanding…a good conversation is an act of joint exploration…it sparks you to have thoughts you never had before”
Those last two bits are absolute gems. Good conversations need to have a strong element of randomness in them, and both parties need to be comfortable engaging with some degree of vulnerability to show that they actually don’t know something (gasp!) to help them understand something they didn’t prior to the conversation.
Again, this is why I like to emphasize conversation. In an interview with a manager, there is usually a supposition that the manager is supposed to have an answer to any question you’re asking. This is of course, absurd, but it ends up leading to either: 1) speculative, non-informative answers on a topic that doesn’t advance your understanding of anything, 2) substituting the question for an easier (or rehearsed one) instead of the one you’ve asked.
I’ll note it’s hard to rid these discussions of the interview baggage though, especially as more diligence shifts to online. Tactics I’ve started using are: 1) more coffee and beer for meetings (or whatever beverage they prefer), and 2) meetings closer to the end of the week — anything that will remove formality5.
OK. So, we want more conversations that let us engage in “an adaptive process of discovery”6 . Simple, but not easy. David points out that most of us think our conversation skills are like our driving skills — above average! There is room for improvement though, and he provides a nice list of nonobvious ways to become a better conversationalist. Again, I’ll include a few of my favorites:
Be a loud listener — “everyone in conversation is facing an internal conflict between self-expression and self-inhibition. If you listen passively, the other person is likely to become inhibited. Active listening, on the other hand, is an invitation to express”. A quote I stole from somewhere else on the internet and from Kevin Kelly that puts this in an analogous way is “the more you are interested in others the more interesting they’ll find you. To be interesting, be interested.” David is animating this exact point here (and elsewhere) but adds that you should really show it with your body language and tone of voice to get them to lean towards self-expression.
Favour familiarity — David quotes an idea from the social psychology that there is a novelty penalty in conversation. Again, over the length of a diligence, there is a time and place for novelty. But I’m with David that, at least, in early conversation(s) stick close to what they know. The downside of course is not getting insights on the unfamiliar, but I think done well you can glean insights on the familiar which probably hasn’t been picked over that well. How often have you, in the matter of a diligence meeting with somebody new, have really explored their background all the way to childhood? This strikes me as both quite important, easier than other topics, and underutilized — a potent combination!
Make them authors, not witnesses — “good conversationalists ask for stories about specific events or experiences, and then they go even further. They don’t only want to talk about what happened, they want to know how you experienced what happened….Then a good conversationalist will ask how you’re experiencing now what you experienced then…it’s your job to draw out what lessons they learned and how they changed as a result of what happened.” A specific example. Most allocator’s like to run through best and worst investments through time to get a sense of things such as adherence to process, skill vs. luck, and objectivity. But what about the story the manager tells themselves about that event? Do they get meta about that story and worry that mind-sets tend to be quick to form but resistant to change? Are you comfortable enough, and empathic enough to hold them through going into great detail about that period without bringing judgement?…and on and on.
Does this Really Matter?
The counterargument would go along the lines that instead of spending time really getting to know the people, focus on the large organizing principles that are common to due diligence — assessment of the approach and how its implemented, a high-level review of the people, their working history individually and together, the organizational incentives, a deep review of the historical track record and portfolio, the usual operational due diligence smorgasbord, and so on.
I am most certainly for all of these things. There is more to making an investment decision than really knowing some of the key people really well, and I hope to explore these topics in more depth in the future. I would say though that in practice these things are already overweighted in conducting due diligence, versus really getting to know people. Again, if you want differentiated insights, you have to do different things than others. Doesn’t this seem as a means to achieve this, and is also more enjoyable too? Maybe not a free lunch, but perhaps not a bad idea either.
David cites some research from Jerome Bruner on two different thinking modes — paradigmatic (aka analytical) and narrative — that I think form a useful dichotomy to summarize here. Alot of diligence is focused paradigmatically, and this post is one nudge to put additional emphasis on the narrative mode so you can really understand a manager, and why they possess the characteristics you think are important.
I don’t doubt there are upsides to better interviewing techniques for those directly engaging with public companies. There are more challenges to this though (think Reg FD), and not where I’ve spent my time.
I know Eric is much more thoughtful, and actually I believed aligned with what I’ve written.
There is much to be said here. The obvious reasons you’ll hear why this isn’t the case is: 1) principal-agent-agent issues (many plans use a consultant), 2) principal-agent issues that lead to failing conventionally versus succeeding unconventionally (“nobody gets fired for hiring IBM”), 3) decision processes in groups (which also push towards conventionality). In case 2) and 3), one way of looking at this is through the lens of Gerd Gigerenzer recognition heuristic. Many in a group making decisions for institutional investors aren’t themselves mired in the detail, and familiarity rises to become a focal point in the decision.
An underrated Michael Mauboussin paper on this topic is What makes for a useful statistic. While not easy to operationalize with “likes” (i.e., character traits), it at least gets one thinking about how one would go about measuring those things you think matter (you could use OCEAN or a more subjective list like those that are possessed by Super Forecasters). This gets much trickier as most portfolios are run by teams of course. This of course speaks to the challenges of trying to quantify those things that aren’t that amenable to quantification.
I am very open to pushback and suggestions on this point of course. Tactics matter!
Shout out to The Investment Ecosystem