Article by Alex Gavrish, Etalon Investment Research; author of “Story Investing”
Alex Gavrish explains how storytelling skills can improve your chances of landing a job offer from a hedge fund and advance your career as an analyst
Some time ago I came across an article on the internet that summarized a talk by Mark Sellers, a hedge fund manager, gave at one of the universities. In the article, he asked what gives investors a competitive advantage. To start, Mark showed that it is not education and not even experience. It is a very insightful article and I highly recommend you to look it up on the internet.
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To make a long story short, the argument was that competitive advantage lies in entirely different aspects. It lies in psychology and the way you think, in the ability to withstand market pressures and stick to your investment philosophy, strategy and rules.
One of the most intriguing ideas of his speech was that to be an extremely successful investor you need to be a good writer. As a proof, just look at all of successful investors. Most of them are good writers. Warren Buffet annual letter to shareholders are eagerly awaited and read by thousands of investors, both professionals and amateurs. Howard Marks, founder of Oaktree Capital Management also writes regular memos to his clients. His memos were transformed into a book he authored The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor, which is considered bestseller in the investment management field. Peter Cundill, the famous Canadian value investor, kept a writing journal during his entire investment management career – both for personal as well as professional notes. Daniel Loeb and other activist investors often write letters to companies’ management and boards that accompany their investment. These letters are not only a way to communicate and outline the investment thesis and raise shareholdersâ€™ concerns – they also became a real “weapons of mass destruction”, in a positive meaning of course and possess a great power.
Obviously good writing and communication skills are important in analysts’ work. The person who writes clearly usually thinks clearly. But is it all? I think that writing skills are important, but there is much more to it.
I think that great investment managers are also good storytellers. Many investors believe that making good investments requires excellent skills in the analysis of financial accounting statements, building complex and detailed valuation models, forecasting future profitability of companies and otherwise analyzing numbers “to death”.
But according to one of the best investment managers of the 20th century, Peter Lynch of Fidelity Investment’s Magellan Fund – which achieved a 29% annual return over thirteen years period between 1977 and 1990, good investing is about something else:
“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage”
For example, strictly analytical approach to investment management does not provide us tools for dealing with uncertainty. The closed and fixed form of analytics leaves no place for imagination. And without imagination, we are just not capable of fathoming uncertainty, fathoming the future.
Isaac Bashevis Singer, Nobel Prize laureate in literature said: “A story to me means a plot where there is some surprise. Because that is how life is – full of surprises”. The same holds true for investing, because companies, markets and economy by their very nature are social processes. And when there are humans involved, there will always be surprises.
In investing, you cannot escape them. They will arise either because your decision was made with incomplete information or just because that is how life and business are. Best financial minds put a lot of effort into solving this problem through strictly quantitative or analytical ways. Whole investment philosophies were developed as an outcome of addressing the problems posed by uncertainty and risk.
Many successful investors enjoy the success because they were able to develop a methodology and otherwise deal with uncertainty. Howard Marks’ and Seth Klarmans’ books are bestsellers, among other reasons, because they describe solutions to problems of risk and uncertainty.
Peter Lynch is not the only one who expressed the idea that investing is more art than science. What is this art then? What is meant by art in investing? It is possible to learn it? Can it be pursued by everyone or will always remain the privilege of a select few, like painting or music? After all, there is only one Claude Monet. Only one Vincent Van Gogh. Only one Pablo Picasso.
So far, similar dynamics could be noticed in investing. There is only one Warren Buffett. Only one George Soros. Only one Peter Lynch. Can famous investors’ skills be replicated or will this art of excellent investing forever remain a mystery?
In my book Story Investing I argue that best investments are just like good stories or movies: with three part structure, important turning points, intrigue, drama, and surprises. One of the highlights of the approach is the proposal to develop both a historical perspective as well as future narrative for the company and its share price. It is not only a question of providing verbal and common sense explanations of the numbers.
When activist investors communicate their investment thesis to general public, they often tell a story: about a struggling business, a corrupt CEO or management team, a restructuring process that failed or is not reflected in the share price yet, a strategy for improving business and a myriad other types of stories. Activists tell these stories with an intrigue, with drama, with conflict, with struggle, with emotions.
Jerome Bruner, a famous cognitive psychologist, explains that narrative mode of thinking leads to conclusions not about certain absolute truths, but about varying perspectives that can be constructed to make experience comprehensible. By telling stories, we formulate these different perspectives.
If you want to get a job at a hedge fund or advance your career as an analyst, you need not only to analyze companies well and develop a sound investment thesis. You need to tell a story. It can be to a potential employer at a hedge fund who is portfolio manager or when you present your idea to potential investors or when you present and pitch your idea to a team at your firm.
Pablo Picasso said that "Art is a lie that makes us realize truth". Of course, one should not be carried away into total fantasy with this storytelling: the story should be combined with analytical thinking and should be supported by fundamental valuation. But it is the art of narrative thinking and story composition that will ultimately make a difference.