Frederik Gieschen hosted a presentation by hedge fund manager Alix Pasquet.
The presentation is titled:
Learning for Analysts and Future Portfolio Managers (YouTube)
- Frederik’s notes (neckar.substack)
- Presentation slides (download)
This presentation is overflowing with ideas and insights. I took notes. They are not intended to be comprehensive, but rather a filter of what stood out to me. If the topics sound interesting definitely check out the video yourself, there’s a lot of detail I’m leaving out.
Alix mentions that the presentation was inspired by Bill Gurley’s talk:
Runnin’ Down a Dream: How to Succeed and Thrive in a Career You Love (YouTube)
Overview
About Alix
- Runs a “behavioral hedge fund” Prime Macaya that seeks to exploit uneconomic group behavior
- Alix came from the game world specifically poker and backgammon
Key Takeaways From The Presentation
The presentation was focused on learning in the context of rising from an analyst to portfolio manager. Many of the lessons felt more universal which is what interested me.
- In the investment business, we are paid to learn
- Learning is behavioral change. If your behavior hasn’t changed you haven’t learned.
- Jim O’Shaughnessy quote emphasizes application: “Don’t look for the meaning, look for the uses”
- Create the conditions to learn as opposed to relying on willpower.
- There’s an emphasis on community for feedback, collaboration, filtering, and as a forcing function (ie instead of practicing public-speaking alone, join Toastmasters. I found this resonant because being forced to play guitar on stage or gives your practice more intent)
Structure of the Presentation
The first hour is focused on:
- Problems in learning
- Mindsets required for learning
The second hour focuses on:
- Conditions, procedures and actions steps.
These include specific discussions about:- being a good mentee
- personal knowledge management
- the idea of a personal lab where you can practice your learning
- support structures
- the role of physical exercise
- inspectional reading
- studying frauds and deception to “know your enemy”
- exploiting group behavior
What Caught My Eye
Ideas That Resonated
- Alix believes “learning is a team sport” which echoes my belief that “trading is a team sport”
- Problems as well as smart people and goals are useful filters for narrowing what to learn
- The investing job needs to be about more than the money because you will compete with passionate, competitive people determined to learn and get better.
“Many that have brain power should literally be doctors and nuclear physicists but they’re out there chasing stocks. I love what I do but I have no notion that I’m helping out the world here. We’re having fun with what we do and hopefully, we’ll make some money. One day we can help the world but this is not a business where you’re adding value to the world and if you have the intelligence and you don’t love this business go do something else.” - Overfitting lessons
“Analysts don’t understand that they need to tailor their style structure processes and resources according to their own personalities and temperament. They try to replicate what others have done not realizing that these people have totally different personalities and have gone through totally different environments.
No lesson is better than the wrong lesson. The key suggestion I would make is to involve others. Get feedback from others that will keep you intellectually honest because in the hedge fund business we have a tendency of doing this thing called “revisionist history” which frankly exists to protect our confidence but sadly it doesn’t improve our investment performance.”
Me: Unwarranted confidence from “resulting” undermines one of the most key inputs to sound betting — calibration. Consider the Paul Slovic horse handicappers study that found the accuracy of handicapperss’ predictions did not improve from the original 5 variables they desired as they were given more variables. Their confidence went up although their accuracy did not! The handicappers with only 5 variables were well-calibrated. They were close to 2x better than chance at predicting the winner (20% vs 10%) and they estimated their confidence as such. When they were given more variables their accuracy remained 20% but confidence grew to 30%! -
Investing feedback is long and deceptive unlike games
- “Futsal principle”
“Futsal is soccer at the fraction of the size of a football team pitch. The number of players is smaller. You would think that it increases the number of strategic interactions by double but actually, it increases the number of interactions by eight to sometimes 16 times. And what that does is you’re learning at a very, very fast clip.
And one of the patterns that we’ve seen is great investors often have gone through a futsal period in their careers. So Dan Loeb, for example, in the early 90s, he worked at Jeffries right at the moment when the Resolution Trust Corporation was selling off the problem assets of the savings and loan debacle at discounted prices in a two year period. He saw a deal every few days. And that increased the number of reps that he saw. But also, he had great customers, he had a young David Einhorn and a young David Tepper as customers. And the exposure and the reps were amazing.”
- “Futsal principle”
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Like Alix, I found Mauboussin to be the bridge between trading and investing
Measure what is incorporated in the “outside view” then work backward:-
“PIE”: price implied expectation
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Options implied expectation
- Narrative/sentiment analysis
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- Imitate, Assimilate, Innovate
Mediocre investors and business builders try to innovate first, often fail, and fall back on imitation so they can eat. Originality starts with imitating first.
Me: resonant just based on what I’ve read about writers. We learn to play covers before we create ourselves. -
Importance of Mentors
- “If you’re early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time. It’s not even close. And don’t even think about leaving that mentor until your learning curve peaks. There’s just nothing to me so invaluable in my business, but in many businesses, as great mentors. And a lot of kids are just too short-sighted in terms of going for the short-term money instead of preparing themselves for the longer term.”—Stanley Druckenmiller
Me: reminds me of the greatest advice I received coming out of college: No matter who you work for you will be rich. The question is who do you want to work with? She knew that I knew that I would learn more at Susq and when you are 22 years old that’s what you optimize for. That’s the best way to invest in yourself. That’s when your human capital dwarfs the value of your financial capital. We are all living longer. Even at 30 I’d give the same advice. It’s a long road.
- “If you’re early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time. It’s not even close. And don’t even think about leaving that mentor until your learning curve peaks. There’s just nothing to me so invaluable in my business, but in many businesses, as great mentors. And a lot of kids are just too short-sighted in terms of going for the short-term money instead of preparing themselves for the longer term.”—Stanley Druckenmiller
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Community as leverage
- Community (peers and mentors) can often have access to the context you need for an idea that might otherwise be a dead end
- Ability to crowdsource if you have an audience (usually content is a key to having an audience in the first place so content is also a form of leverage)
- Importance of network diversity. Belong to multiple networks which can be sorted by geography, interests, age etc
Notable Ideas
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“Analysts do not understand that there’s a difference between analytical thinking and portfolio management thinking”
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Bill Miller: “The difference between analytical thinking and pm thinking is you give an analyst a problem and they deconstruct it and figure out what makes a problem tick but you give a problem to a pm and his first question is how do i make money from this?”
Me: portfolio construction and betting literature is required for analysts to be PMs.
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Behavioral bias research is more focused on individuals, but markets are more concerned with group behavior. So there’s a “fallacy of composition. If you take 10 people that are prone to cognitive biases, their group behavior may actually be quite rational.”
Me: a key focus should be on the wisdom and madness of crowds.
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Learning from your own successes but others’ failures
Surgeons learn more from their own successes than from their own failures but they learn more from the failures of others than they do from the successes of others. This was over 6500 procedures. Also my neighbor is a doctor and I spoke to him about this study and he actually made a very important comment that surgeons that had made a fatal mistake over the operating table were more likely to leave surgery because their confidence was shaken whereas a successful surgeon that had seen a surgeon have make a fatal mistake can learn better from that. It’s important to retain this as a mindset of learning from your own successes and the failures of others. Don’t get me wrong you can still learn from the successes of others but temper it. Filter it correctly. You don’t want to overindex to the successes you see in others especially since you don’t have all the context, but it might be easier to learn from somebody else’s mistake. Especially since your own mistakes get you very emotionally involved. -
They study market participants at 4 levels to see if they are “creating opportunities they can exploit”:
- what are their skills?
- psychology?
- positioning?
- institutional quirks?
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Data hierarchy: data —> information —> understanding —wisdom.
- Your goals are a filter for how you travel from data to information.
- Procedures are how you move from information to understanding.
- The meta experience of “testing it again with your network, teaching it to somebody else, and the ability to create things gets you to wisdom”
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Derek Sivers: “The standard pace is for chumps”
There’s no reason why it needs to take 10,000 hours. You can do it in much much less period of time if you can test it and get immediate feedback in a low-cost way than it is to be thinking about it for a long time and cramming your brain with more information.
Tensions
- “Brute intelligence can be a handicap if it leads you to believe you have figured it all out…need to have soft intangibles like integrity, grit, adaptability, flexibility, humility”.
Me: While traders are screened for these intangibles, especially teachability/intellectual humility, another way to think of this is the importance of teams. There is a role for one-dimensional Russian super geniuses in these organizations — well captured by this quote: “The analyst’s job is to be creative everything else I can outsource to India” - “There’s actually no good book on portfolio management which is incredible to me. Not only that, somebody mentioned on a podcast that there’s no analytical team that analyzes what are the best portfolio management techniques”
Me: pod/prop/and some quant shops no? - Alix belief that strong investors should be strong writers and that there’s a connection between these skills.
Me: I don’t think this is true for traders. So then I wonder if Alix is overstating the case (even after allowing for exceptions) OR is trading and investing sufficiently different that my experience is not relevant.
Trading Vs Investing
Notable Book Recs
The entire presentation is actually organized around a reading list by topic so there are so many thoughtful book recs. That alone is worth watching for. The rationale for 2 particular book recs stood out to me:
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The Age of The Unthinkable
- This book “doubled the effectiveness of my judgement” and demonstrates how the world is changing rapidly and the importance of learning.
- He gives the example: “Market structure has changed. Markets are totally different post-2008. The pipes of liquidity have changed. Prior to ‘08 we had market makers, we had prop desks. They were more prevalent. Index funds were smaller, hedge funds were smaller. Now we have no prop desks, quant funds are massive, index funds are massive, hedge funds are massive… As market participants, we’re inclined to study the past, but past markets may not be appropriate to study here because we’ve never seen a bear market with our current market structure.”
- This book “doubled the effectiveness of my judgement” and demonstrates how the world is changing rapidly and the importance of learning.
Me: this is resonant and reminds me of:
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The Path of Least Resistance
- Demonstrates how “structure drives behavior” and the importance of settings and environment.. consider this simple story:
- Take two people. A very intelligent person and a total moron. You drop both in the Russian tundra in the middle of winter. The intelligent person gets a shack that can’t really handle the environment well and doesn’t have that much food. You put the moron in a shack that can handle the environment well and has enough food. Unless the intelligent person goes over there and forcibly takes it from the moron, he’s gonna die.
- It’s about creating structures that you can fall back upon, that make you more resilient [as opposed to] being internally resilient or having inner grit. There are people that we think have this level of motivation level of grit and level of determination that’s incredible, but what we don’t see are the support structures that they’ve created in the background or exploited or frankly they were lucky.
- An example of resilience would be to have ample living costs saved so you can think clearly as you take risk or not upgrading your lifestyle in line with your success so you can continue to take chances. In studying failure, one of the invisible patterns, or as Alix calls it “the silent killer” is investment managers raising their personal overhead:
- It’s a “monkey on their shoulder that they have to view every single thing through and it impacts their judgment and risk-taking ability. We call it the ‘silent killer’ because we’ve seen it kill a bunch of hedge funds but the manager never talks about it as the reason they couldn’t take risks anymore.”
- Take two people. A very intelligent person and a total moron. You drop both in the Russian tundra in the middle of winter. The intelligent person gets a shack that can’t really handle the environment well and doesn’t have that much food. You put the moron in a shack that can handle the environment well and has enough food. Unless the intelligent person goes over there and forcibly takes it from the moron, he’s gonna die.
- Demonstrates how “structure drives behavior” and the importance of settings and environment.. consider this simple story: