I enjoyed this short talk by Yen Liow, the founder of Aravt Global. He shares some thoughts on the career arc of public market investors, including two important transition points: 1) from analyst to money maker and 2) from money maker to portfolio manager. Well worth a watch for people who are interested in or are already pursuing an investment career. I have taken some notes below – these are just for personal reference only, so any mistakes in transcription are my own.

How he became interested in investing: early on in his career (this was prior to business school), he was working as a consultant for Bain. Dell was one of his clients in the late 1990s. He was in Asia helping them build out their China and SEA practices. Dell’s share price went up ~4x over an 18 month period, really lit up his imagination as an investor and business person in terms of how a company could grow so fast and how such a large amount of wealth could be created in such a short span of time. The other side was also important – once Dell came out of the dotcom bubble, the company struggled for a considerable period of time before eventually going private. He wanted to understand how hypergrowth could then transcend into a much more challenged environment. Opened his eyes to business analytics as well as the whole life cycle of businesses from the perspective of an investor.

In his view, there are 4 key “step up” areas in the journey from an analyst to money maker: idea generation, understanding the nuances of risk, having the courage to bet in sufficient size to make real money, and learning how to handle losses. The step up from money maker to portfolio manager is largely around systems level risk management. He won’t focus as much on idea generation as there is plenty of material out there on the topic, but will briefly discuss the other areas. 

Nuances of risk – important to understand the difference between risk and uncertainty. Risk is a function of price, while uncertainty is an inherent part of investing (you are dealing with the future, which is by definition unknowable at the time you place a bet). The two often overlap but they are different concepts. For a better understanding of these concepts, he recommends Mohnish Pabrai’s book “The Dhando Investor.” One of the masters of exploiting this nuance is Richard Branson. 

In terms of handling loss management and understanding risk, another important difference is between marking risk and permanent capital loss. Do you add down, hold through or cut at that moment? Volatility when it hits (“bottom of the Nike swoosh”) is what you train for – in certain situations, you need to differentiate between “is this an opportunity and therefore the moment to be aggressive?” or “is this a moment where the stock will never come back and there is permanent capital loss?” An example of this might be the FDA not approving a drug, this is a negative (binary) outcome, the stock won’t recover from that.

Courage – this is a very important step up between having insights as an analyst and being able to monetize them. You are leaping from the comforts of analysis to the unknowns required to monetize in real size. Markets are efficient most of the time, so you need to bet in significant size on the rare occasions these inefficiencies or opportunities present themselves. You don’t get to play the same game twice – markets are sufficiently efficient that they won’t let you do that easily. There are three people he has learned a lot from in this particular area:

• John Wooden – the importance of process over outcome. If you play your best, you might not win, but you cannot lose. There is something very empowering about giving your all and letting the vicissitudes of fate decide the outcome. If you can play your best repetitively, however, you will eventually either win or at least find your place.
• Bob Rotella – sports psychologist who worked with Tiger Woods. Life is not a game of perfect. There is no such thing as overconfidence; if you are fully prepared, you are ready to meet the moment. Release your soul, trust your preparation and just go for it.
• The Dalai Lama – the concept of courage based on real, not false, confidence – again, about trusting your instincts if you have done the work. 

Handling losses – in general, you learn very little from success, but you learn a tremendous amount from failure. There is a difference between emotional vs. intellectual learning when it comes to mistakes. You need to feel mistakes deeply, but only deep enough that it helps and not hinders your development. The intellectual layer won’t do anything for you, but if the learning is deep enough in terms of the emotional layer, you will learn from mistakes and won’t repeat them. He calls it the Gandalf moment (“you shall not pass”) – that will never happen to me again. Big mistakes will release tremendous power within you to monetize going forward.

He thinks there is often a misconception about pain tolerance, this does not equal will power. Will power exhausts at the worst possible time. All of us have same pain tolerance as Buffett, it just depends on the framing. You need to understand your source of strength. If you understand your why, you will find your how. Thought experiment about running into a burning building – not many people will run in for a few hundred dollars, some might run in for million dollars, but if you have your children in there, most people would run without hesitation into the building. Understand your why. Struggle vs. suffering – the difference is meaning; if there is no meaning, you will suffer and eventually break. He also likes the concept from the Navy Seals about finding your “box”; a place where you can be quiet when under unrelenting attack. Gives you the equanimity to ride the giant waves.

The step up from money maker to portfolio manager is largely around systems level risk management. Two key things: #1 is awareness – are you even aware of the risks you are taking? And are you taking them intentionally? #2 is panic – if you are going to panic, panic very quickly or not at all. Markets are a very expensive place to discover who you are. 

Journeymen in your investing career:

• Fear – the bearer of gifts. If you choose your game wisely, fear is the bearer of gifts. Exceptional businesses rarely go on sale. They only do so when fear turns up to the party. Learn to embrace it.
• Greed/envy – the bearer of danger. Envy is the only one of the seven deadly sins that is all downside. That is true of envy’s role within investing too. Greed and envy are incredibly dangerous for capital preservation.
• Uncertainty – you are dealing with the future, which is unknowable by definition. Need a system to deal with it and then embrace it. If you always need the incremental data point to make a decision, you are in the wrong game.
• Volatility – he would differentiate here between system-level volatility (market wide), which is a natural part of market structure, and idiosyncratic volatility. Game selection is very important – monopolistic vs cyclical volatility. His firm hunts monopolies and oligopolies, where the stocks might be volatile, but the businesses are generally not. Volatility presents more opportunity than risk. Cyclical volatility – if both price and intrinsic volatility are moving around at the same time, it becomes very difficult to assess whether there is an attractive opportunity or not.

Final thoughts: done right, investing is an art that can be refined and improved well into your 60s and 70s. However, a career in professional investing can be like a career in professional sports. There is a danger zone you have to be aware of in your mid to late 30s, even more so in your 40s. Difficult to switch teams. You either have to stick with fund you’re with, become a portfolio manager or be prepared for a career transition. None of these are bad, just be aware of them.