Scene from an Italian Restaurant
#leaders #coaching
The details of the conversation may vary, but as leaders, it’s key to be ready to guide mentees long after they’ve flown the nest. All you need is “a bottle of whites, a bottle of red,” and the right questions to ask.
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In the coming weeks, we’ll talk about investing from three angles – for rising talent, investor and leaders. Today’s note is for the leader in you. As always, feedback welcome. And if you have not had a chance to do our first snap survey, here's a link (should take no more than 3 minutes):
And now back to Billy Joel…
A bottle of whites, a bottle of red
The sommelier poured. It was a nice bottle. We had a prime table in the back. He got there first, sheepishly asked if red was ok when I arrived. I walked around the table and gave him a big hug and little peck on the cheek, then teased him about being so damn handsome I couldn’t help it.
Things are okay with me these days, Got a good job, I got a good office
Bread and olive oil on the table. It was only 2-years since we worked together, but seeing him confidently driving though a “big-boy” dinner at a nice place in midtown was a proud moment. He told me about his family, his plans to move to a new home. He told me that things were going well at work. As a mentor, I’d given him some periodic advice on various things relating to career advancement – how to weigh pros and cons for new opportunities, philosophies on compensation, managing relationships with both your boss and your juniors. These meetings were an absolute pleasure for me. He’s one of my favorites. He is a talented investor, and when he’s on his game, an elite one. He's also a dog; won’t be out-worked or out-hustled. Keeps a nice big block on his shoulder – still scarred from the guy three bosses ago treating him like he didn’t have the game or the stomach to make it.
In our old familiar place, You and I, face to face
We ordered a pasta course. Always polite, he asked about my family, my gig. It was easy banter. We got caught up on people, on work, on family. We both knew we would always root for each other even though we also knew that in our business, this was not usually anything close to a certainty. In our world, the stakes are high and that impacts behaviors, sometimes poorly. Anyway, the food was great.
Do you remember those days hanging out
For the main, I ordered the fish. Something told me to go easy, better to focus. He seemed to have something a little deeper he wanted to discuss. It began with, “Yeah, it’s all good and I’m sure process is fine, but I have been on a pretty shitty run with stock-picking lately.” I knew why I was there and getting some pricey free grub! Even the best of them needs a little coaching and sometimes, a course correction. He was not getting the inputs he needed from inside the firm, despite considerable resources.
They started to fight when the money got tight
Pours another glass of wine. “I’ve been getting completely bogged down with set-up,” he said. He was spending more time talking to other investors to try to get a sense of where people were positioned. It threw off the rest of his game, he noted. I reminded myself that this guy was a precision instrument who managed his time carefully from his morning workout to bed time. To be flexible to different possible outcomes and open analytically, he needed to allocate time to consider things, but now there was real pressure, money was on the line, and he was down some PNL, “and I don’t think my boss is so happy with me right now”. On this last point, it was difficult to know whether he was feeling it because of some actual conflict, (I had doubts – his numbers had been too good for any reasonable boss to fret) or because he was feeling pressed. It did not matter in this case. He needed to walk though some ideas to be sure he wasn’t losing it.
My friend Larry is a great investor, runs his own firm and has enjoyed enviable career success for decades. He sums up this feeling best, “I love my job. I hate my job.” We just needed to get back to basics. We talked ideas for rest of the night. One question at time:
1. “Why were you short in the first place?”
I asked. It was a med-tech name, one of the cardio companies. They started building the position after he had done quite a bit of research on opportunities in one of their core patient populations from a competitor. This happens all the time in that space. The risk that another device or procedure becomes standard of care will change the growth trajectory, and the valuation was not discounting this in either the short-term or the long-term.
2. “Has anything happened in the market (company reports) to refute your thesis, or any data/news (healthcare claims, key opinion leader discussions, regulatory approvals, insurance company comments or even potential formulary changes) to give you pause?
“No, the opposite in fact.”, he said with a face that exclaimed ‘these guys just don’t fucking get it’. “There’s more reason to be short now, but the bulls in the name have not moved numbers, and the big longs seem to be really dug in, and it’s in the damn ARK index.” He was again anchoring to set-up. He paid lip service to his own compelling story for his short, bashing everyone else for missing it.
3. “So in your most robust bear scenario, how much do they need to guide lower next year and when do you think the latest the street could possibly reflect that?” I was just trying to steer him back to land. I knew he was focused on some of the wrong things because the trade was taking longer, and he was taking some pain in it. “They need to lower next year by around $1.50 to $8.00 if they lose 20% market share and I think there is a 25% probability they could lose as much as 40%.” Once I got him thinking about math probabilities, the color came back to his face. We then played more ‘fun with math’, “So even if this thing does not de-rate (which it almost certainly would in either scenario)”, I said, “the stock has real downside. At worst it could get cut in half”. He needed to hear it from someone else out loud. It was like therapy. “YES!” He relaxed and had some wine.
4. “Why aren’t you bigger?” We’ve known each other long enough for him to anticipate this one. His demeanor changed. It was less confidence or overconfidence, more the look of a seasoned card player. “I want to be, but I’m getting killed on exposures”. By this he meant style factors. It was a firm that kept its factor exposures very tight using all manner of baskets, hedges, single stocks to limit risk. “Then I think it’s time to talk to your boss about some other portfolio adjustments, pointing out that this could be your best short and it’s a very liquid name”, I said. He had a good relationship to leverage because he had several big winners and was not afraid to short. He nodded. Said something about the last thing his boss wants to hear is that we lost an opportunity because he was worried about portfolio construction. The head was clearing.
5. “What else are you working on?” Investing has always been more like high school than college to me. Instead of intently focusing on one or two big things, stock investing within a sector coverage model is a lot more like 1st period Spanish, 2nd period History, 3rd period PE, 4th period math…For a creative investigator, there is always something to do. I wanted to see where he was headed next period. “Everybody hates these diagnostic/testing companies. No covid, no interest. The thing is, when you do the math, the run-off in revenues is not bad and consensus is too low. Additionally, the other business can grow mid-single digits like they always have so these are high cash flow, high quality, dividend payers”. He wants to be there, wants a better entry point.
6. “How much better do you need?” He felt there was a chance for another 5% down and 18% up. I said that was already an attractive risk/reward at better than 3:1. We kept talking, I nudged a little. Maybe play small, I suggested. It seemed like the stock was no longer falling on bad news. He acknowledged he might be playing a little too cute. Dead bottom buys and peak top sells are more dream than reality. Just make money.
7. What about something further out there? I liked him to stretch his thinking and for most people running a long/short book, this means extending the duration of ideas. In some cases, it means being willing to trade something long before it is recognized, but in many cases, it’s about thinking where the market will be a year or two from now. Most recently, there has been hyper-buzz about GLP-1 drugs and their impact on the entire eco-system. The analogs are smartphones and technology. When you long cast like this, precision is not important, just trying to sort winners and losers. “I think people recognize that if we collectively get a lot less fat people, all the things obesity causes will improve, but some of the things we think are obesity driven may not be, and some of the mental health effects from losing one’s appetite are also not well understood”. Interesting hypothesis. “So how do you identify the conditions?” I asked. “Plenty of research to read from studies of patients treated with these drugs already. And there are countries with much lower rates of obesity that could serve as good analogs for prevalent conditions.” I liked the last one. He was stretching his thinking.
Food arrived. More wine was poured. We talked through the main course and desert. I was glad I ordered fish until I saw his veal shank. He teased me about how any self-respecting Jersey guy could possibly pass on the Osso Bucco. Had me there. It was a lot of fun to run through his ideas, hear his thinking and get him a back on course where he wobbled a bit. We both enjoyed reading the newer market stuff around cognitive biases and the how the brain can operate, like Kahnemans’ “Thinking Fast and Slow”. And Ellenberg’s, “How Not to be Wrong”. We agreed that the best investors naturally embedded a simple form of probabilistic scenario forecasting into their decision-making. It bred a certain emotionlessness that let the math do the work. He was comfortable enough in his own skin to recognize that my real job that night was just to get him back on that road. He never had a problem summoning the intellectual curiosity, just needed some help getting rid of the noise. It was getting late. I thanked him for dinner and told him,” I’ll meet you any time you want in our Italian restaurant.”