Author: Jeremy Zhou
Covestor model: Biotech and Medtech
2011 was a difficult year for investing – especially so for small cap biotech investing. But hardship should breed adaptation, learning and survival, all of which are key to progress.
Below I list the top ten lessons I learned from managing money in 2011. They are not necessarily new to me, but I need to relearn them with the hope of internalizing them in my process by this time next year.
1. There is no investment methodology or signal that will always work. This is due to competition, behavioral shortcomings and evolving market dynamics.
2. When fear overwhelms greed, throw all valuation metrics into trash – they mean nothing.
3. Managing money is a lot more than just delivering performance. How you got to the performance matters more than anything else, unless you have truly long-term oriented clients and you are a truly long term manager. In a world where short-term performance is often scrutinized on a monthly and quarterly basis, leading to immediate fund outflow, managers must focus to reduce portfolio volatility and tracking error, even if it means lowering the long term rate of compounded returns. To prevent shortsighted investors from pulling their money, it’s imperative for such managers to limit volatility at the expense of maximizing alpha – because few have the patience and temperament to wait for the eventual positive outcome.
4. The biggest difference between Warren Buffett and all other money managers in the world is that Buffett has permanent capital. In his case, how he got to his performance matters a lot less than the eventual performance.
5. Humility trumps intelligence, diligence and ambition – humintelligence, humdiligence and humambition are the three most important traits to the making of a great investor.
6. Money doesn’t have any attitude, ego and self interest – it is far easier to manage money than human beings. One of the primary reasons for this is scalability. A money manager can manage and allocate hundreds of millions of dollars, and some can even get into the billions. This is why Warren Buffett can single-handedly manage billions in business profits and insurance floats and leave the personnel management to his business managers. He even stated numerous times that he’d only acquire businesses with readily available managers, because he can neither provide them management or perform on their behalf.
7. Investing is not a zero sum game, because every market participant has a unique
risk tolerance, return expectation, time horizon, and most important, sense of fulfillment .
8. Analyzing the past helps to predict the future, but predicting the future requires a lot more than analyzing the past – it requires imagination.
9. Mediocre managers lose money when they make mistakes; good managers break even
when they make mistakes; great managers make money when they make mistakes; legendary managers make a great deal of money by leveraging their mistakes. How?
Making mistakes is unavoidable in the business of money management, even for best of breed managers. The great managers can still manage to make a profit even when they made mistakes because they recognize their fallibility fast and reverse trades quickly. The legendary managers go even further by not only reversing their trades quickly, but also developing investment theses and frameworks that scale insights originated from their initial mistakes.
10. Luck has everything to do with the making of great money managers; those who recognize this will most likely extend their success, and those who don’t will cease to be great.
Each lesson probably requires a few more paragraphs of elaboration to do them justice, but we’ll save that for next time.
In 2012, I expect to see most if not all of the above lessons to emerge and recur, only this time I will be more prepared and wiser.
