A couple of weeks ago, I had the pleasure of hosting my friend Alix Pasquet III for an intimate conversation and Q&A (previous conversations: The Learning Mindset, Great Investors Build Networks). The conversation fit well into the effort of developing a framework for understanding great investors. Alix focused much more on mindset and practices than innate qualities.
Great Analysts are great idea generators. What I think a really good analyst does is he maximizes opportunities, and he's willing, if he doesn't have all the qualities of a great investor, to surround himself with people that have those qualities and is able to still exploit and maximize opportunities.
We talked about his framework of ‘barriers to scale’ in the investment world, the characteristics of opportunities, why Buffett doesn’t short, adopting ideas from military strategy, timing, and how to kill ideas quickly. Alix also shared some books off the beaten path that can not just improve your thinking and judgment but help you See Things Differently.
I’m happy to share the audio, book recommendations, and a transcript with premium subscribers. Enjoy!
A Few Favorite Quotes:
Great analysts are usually and eventually surrounded by other great analysts and portfolio managers. I know extremely wealthy people that don't have the qualities of a great analyst, but they understand that and they compensated for their weaknesses. They know their limitations and compensate for them.
We are not designed to go compete against strong players like Renaissance. We want to compete against weaker players, much better for your self-esteem, much better for your wallet, much better for your investors.
John Griffin has a great saying, he says, ‘the analyst's job is to be creative. The rest I can outsource to India.’
I've seen analysts and fund managers in my career lose all their money; have to seriously downgrade their lifestyles: Move kids out of private schools, sell vacation homes. And guess what, the business is only getting harder. The resources required to do this business by the institutional crowd are very expensive. The majority of analysts will burn out and perhaps 10% will become PM's. That's just the way math works.
The Paradox: How Do You Get Your Own Style?
I like what, I think this was Miles Davis, somebody asked him, how do you play jazz and he says, easily: Imitate, Assimilate, Innovate!
Find the best, imitate them. Assimilate, understand why the imitation is working, and then make it better from there.
By the way, this is also a pattern of companies. So if you look at Apple, Steve Jobs goes to Xerox PARC, copies the interface, and makes it better. He imitates, he assimilates, and he innovates. Bill Gates looks at what Jobs did. He imitates, understands how to make it better and ties it to distribution. He innovates from there, so on and so forth.
So, imitating is the way that you start. The way that mediocre people do it is they try to innovate, they see that it doesn't work. And then they realize that they have to eat. So they imitate.
This is a pattern to teach analysts, especially analysts I want to transition to becoming PMs one day.
Ernie Adams, Bill Belichick's head of intelligence. Ernie was actually a value investor, worked with Paul Isaac before he became head of football research at the Patriots. He says, you're gonna win or lose games at practice. When you prepare. There's no such thing as being a game day player. You see situations come up on the practice field, you've worked on it. You know what it takes when it comes up in the game because you're trained, you're seasoned, you've seen it, you react to make the play.
Barriers to scale:
First barrier, very simple: performance. You have to be able to perform.
Second barrier: In this business, you have to get smart investors that have competing alternatives to want to invest in your fund. We don't only need their money, but we want their intellectual capital as well.
Third barrier: How do you get smart, young, energetic, and resourceful analysts who wanna work for you rather than all the alternatives that are out there?
Fourth barrier: How do you get other analysts and PMs that don't work for you to want to call you, collaborate and share their best ideas with you? The most beautiful thing in our business is the inbound phone call from a smart guy.
Fifth barrier: How do you get access to management teams of your target ideas of suppliers, competitors, and owners?
Sixth barrier: Getting high quality prime brokers, research analysts, and the investment arm dealers to want to reach out and work with you and to be able to afford them.
Seventh barrier: Lowering your cost of capital over time.
Eighth barrier: The ability to constantly find competitive advantages (tools, processes, strategies, and different ponds to fish in) that can help breach these barriers to scale. Competitive advantages are very fleeting in our business. Do you have the ability to find new ones?
Ninth Barrier: The ability to find power curves, tailwinds, trends and conditions that can propel our investment in our firm forward.
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