The best part of our business is that we are paid to work with some of the smartest people in the world. Our job is to elicit from fascinating discussions with investment professionals who invest literally billions of dollars what is distinctive about their investment approaches. What is the hardest part of our business? We work with geniuses. Geniuses who are sometimes arrogant.
How Do We Distinguish Genius?
Someone recently asked us how we classify investment professionals. A discussion ensued about introverts versus extroverts, and investors who think that they are perfect and why doesn’t the rest of the world recognize that. Reflecting later on that discussion, those attributes are not how we think about investment talent. My business partner and I have met with literally hundreds and hundreds of investment managers and analysts over our careers. When we walk out of an initial meeting with an investor or analyst, we sometimes glance at one another, and then mouth one word, “Genius.” I can recall vividly the first time it happened. In Philadelphia in 1983, we had just completed an interview of a young research analyst at his first job at a bank. Christine and I glanced at one another, and nodded, “Genius.” That young analyst went on to become the head of global equities at William Blair.
It is true that most investment professionals are introverts, but not all. Nearly all are notably smart, but not all have the genius factor. Most are skeptics, and many are creative, independent thinkers. Most tell us that their processes, teams and/or philosophies are unique. Sometimes they are, often they are not. But successful active investment managers do think differently than the rest of the world. Their innately high IQ’s, their original analyses and creative conclusions are generally the truest and most persistent sources of alpha (or added value). These investors are disciplined, and strong in their convictions regardless of market environments, volatility or even periods of significant underperformance. They are courageous. They are generally successful. As a result, they may sometimes come across as arrogant.
We do not perceive arrogance as a bad quality. We expect good investment professionals to be both smart and confident. Genius and arrogance are just degrees of smart and confident. Arrogance, in fact, may be as necessary to successful investment as intelligence. The opposite of arrogance is modesty, humility, politeness, shyness, meekness, diffidence. Those qualities seldom translate into high-conviction stock recommendations or high-conviction portfolio construction. While there is a negative connotation to arrogance, the pride and imperiousness associated with arrogance can also translate to “courage of convictions.” Arrogance breeds the courage an investment professional needs to make decisions that may be out of step with the rest of the world, but are true to the investment professional’s convictions.
In fact, when we work with a successful active asset management firm, there generally is someone – who – on the television show, Scandal, would be called the gladiator – protects both the investment culture that supports independent thinking, and the investment professionals’ time and personas. While the role is essential, the titles vary. The person can be CEO, president, CIO, COO, Director of Research, Director of Portfolio Management, the Lead Portfolio Manager or Gladiator.
How Do You Work with Geniuses?
When you work with geniuses, you better be prepared. You read everything you can get your hands on pertinent to that individual’s beliefs in advance. For nearly every investment principle, there is an investor who believes the polar opposite. Our job is to uncover each individual’s deepest convictions about how she or he invests, and help to articulate those beliefs for current and future clients. You read about the competition. You know the asset flows in or out of their strategies. You review their portfolios. You know their performance. You know their professional credentials.
You use their time wisely. Some questions are pertinent to all investment approaches. What are your sources of alpha? Why will they be persistent? What is your investment philosophy? Tell us about your research. The deeper you dive into an investor’s beliefs and processes, the more that relevance of certain questions will vary. You ask questions that are relevant to their processes. Why is it important to screen a universe of stocks before you research? Why is it critical that you have an unconstrained universe? Why do you use no screens? Why are macro-economic secular trends important? Why is the economy unimportant to your stock selection? Why is gold at bargain base prices, and what will change that? How long can the current rally persist? Why are zero interest rates giving Japan the chance it needs to regain its footing? Why are zero interest rates killing the economy as we know it? Why are you buying Apple? Why are you selling Apple? When is a company’s valuation just cheap? When is it attractive? What will make an industry’s growth sustainable? How many jobs will 3D printing destroy? Why is the market so irrational? Why is the market so efficient?
Can Arrogance Be a Bad Thing?
As John Wooden coached his players, “You can’t let praise or criticism get to you. It’s a weakness to get caught up in either one.” He’s right. Arrogance can be like nuclear energy. While arrogance can be positive, it can also create a hot mess faster than Kanye West at a music awards ceremony. There are investment professionals who believe that rallying markets inflating their portfolios’ returns are a direct
result of their “genius.” They perceive themselves as capable of anything – SuperPortfolioManager! Emboldened by their successes as long investors, they decide they can easily short stocks. Attracted by lucrative hedge fund 2% and 20% fees, they launch a hedge fund! Shorting, however, requires a special kind of investor, a different investment time horizon, a distinct personality. We have seen more than one firm launch an alternative strategy, only to have it blow up in the first 18 months.
How Can You Tell The Difference Between Good and Bad Arrogance?
We have a simple question we use to test an investor’s AQ (Arrogance Quotient). It’s a simple question, but it surfaces a lot about a personality. If you could improve one thing about your process or team, what would it be? “Nothing. If there was anything to improve, I would have done it.” That’s high AQ.
If you could improve one thing about your process or team, what would it be? “Expand idea generation and accelerate valuation analysis.” “Eliminate analysts falling in love with their stocks.” “More astute sell decisions.” “Better protection in down markets.” “Higher participation in rising markets, less in declining markets.” “Communications.” “Let me think about that.” Those are all smart IQ, low AQ.
We appreciate the challenge for consultants and clients attracted by strong performance forced to distinguish whether arrogance reflects brilliance and conviction that will make a performance record repeatable, or whether it is arrogance poised for disaster. But just remember, arrogance can be a good thing.
Charnley & Røstvold, Inc., a preeminent marketing consulting firm to asset management firms ranging in size from start-up firms to some of the world’s largest investment firms with over $1 trillion under management. Charnley & Røstvold helps clients with competitive positioning, marketing strategies, key messages, presentation refinements, communications and sales training, consultant relations and client service programs.
Jackie Charnley, co-founder of Charnley & Røstvold, Inc., is a popular industry speaker and author. Jackie serves on the ICMA-RC Board, a not-for-profit company serving the financial needs of over one million public employees. She was also a founding board member of PAICR (Professional Association for Investment Communications Resources).