Talent is not a thing; it's a process.
-David Shenk, 2010
On Wednesday, March 31st, Keith interviewed Richard Peterson as a guest host for Bloomberg's taking stock. Peterson, the author of Keith's favorite book on investing - Inside the Investor's Brain - went back and forth with Keith in a rigorous and lively discussion about behavioral finance. In that discussion, Keith explained to Peterson how he likes to work key takeaways from various readings into his own investment process - always open to new information and evolving intellectually.
Such has become the culture here at Hedgeye. A few weeks back (Mar. 10th), my colleague Daryl Jones wrote one of our most popular notes YTD. The note titled, What Are You Reading, highlighted the current favorite book recommendations of various members of the Hedgeye team. In taking that one step further, we've decided to open our library and share with you any new and old required reading with the intent to deliver keen reviews and detailed synopses of the content. We hope you will find these valuable in your quest to evolve your own investment process.
So without further a due, here's our first shot:
In one of the most comprehensive books I've read in my young life, David Shenk's The Genius in All of Us : Why Everything You've Been Told About Genetics, Talent, and IQ Is Wrong completely hammers home the fundamental notion that greatness, superior talent, high achievement, and sheer excellence are not at all the result of natural gifts bestowed upon us by our genetic code. Rather, it is the sum of hard work, perseverance, and a confluence of genetic and environmental interaction - which Shenk aptly titles "GxE" (genes multiplied by environmental factors). Using one of the most voracious research processes I've seen (sorry Keith), he masterfully pores thorough just about all the required reading on the subject in order to dispel the old, tired way of thinking about cognitive, social, and athletic development: "G+E" (genes plus environmental factors). Not only does he accomplish this, he takes it a step further in using more cutting edge research to suggest the best methods for "cultivating greatness" - as he puts it. It is our pleasure to walk you though some of the key takeaways from the book an how you can use them to cultivate greatness within your own investment process.
In the first part of the book titled, "The Myth of Gifts", Shenk explains how groupthink within the scientific community and the media has successfully kept alive the "simpler and more alluring idea of giftedness", one where individual characteristics and achievement levels are more likely the product of genetic inputs, rather than the result of a confluence of factors - many of which we (and our parents) have control over (Shenk 49). In the introduction, Shenk does a great job of using anecdotal evidence about Ted William's masterful skill at baseball to introduce us to one of his main conclusions - "talent is not a thing: it's a process" (Shenk 8). Shenk remarks, "[Ted Williams] sought out the great hitters of the game - Hornsby, Cobb, and others - and grilled them about their techniques" (Shenk 7). In this business, no one is right 100% of the time. Heck, you can make a killing even if you're right less than half of the time. At Hedgeye, we've been right on our trading calls within our virtual portfolio roughly 85% of the time. Rather than rest on our laurels, we're up grinding well before the crack of dawn each day in order to try to capture that remaining 15% - and were not afraid to consult some of the best to do so (see Keith's Feb. 3rd exchange with David Einhorn of Greenlight Capital or any of his recent appearances as host of Bloomberg's Taking Stock).
That brings me to Shenk's next major point: "high… achievers are not necessarily born 'smarter' than others, but [rather they] work harder and develop more self-discipline" (Shenk 42). If you've ready any of our work, by now you're familiar with our love affair with processes over here at Hedgeye Risk Management. Every morning, every member of our team has their feet on the floor, flushing though hordes of macro and industry-specific data to deliver the best research we can possibly put out. My high school offensive line coach used to say, "talent doesn't win when talent doesn't work hard". Shenk goes one step further in suggesting that talent doesn't even become talented without many thousands of hours of deliberate practice. Furthermore, Shenk uses the latest scientific advancements to debunk similar "born with it" myths about Kenyan runners:
"These are not super humans with rare super genes. They are participants in a culture of the extreme, willing to devote more, to ache more, and to risk more in order to do better. Most of us will understandably want nothing to do with that culture..." (Shenk 89)
Our processes don't change day-to-day, no matter how much attention the manic media can sometimes pour into one story (see: iPad). We gather it all the relevant data, analyze it with dozens of years of industry experience, and crank out the content. Then we rinse and repeat. There is no secret Hedgeye sauce. The secret sauce might be that we don't really have a secret sauce. We just grind. Shenk aptly suggests that becoming great "requires enormous, life-altering amounts of time - a daily grinding commitment to become better" (Shenk 55). At Hedgeye, we substitute "become great" for "managing risk and delivering absolute returns for our subscribers".
The second part of Shenk's book walks the reader though a multitude of scientific discoveries and how these findings can be used to form successful ways to "Cultivate Greatness". Shenk flat out says to the reader:
"The only way to [become great] is to go farther, harder, longer than almost everyone else, to push well past the point of login or reason. If it looked easy or even attainable to most, then many more would get there." (Shenk 100)
Plain and simple: there are no shortcuts on the path to remarkable achievement, according to Shenk. Those that are willing to make the long journey must have already developed the understanding that "the big prize is appreciated as a far off goal… not lusted after… [and] small accomplishments along the way provide more than enough satisfaction to continue (Shenk 101). In investing, particularly risk management, the best players are those that relish in the small accomplishments along the way. Too often investors get run over chasing tops, shorting lows, and constantly looking for the next big idea. Unfortunately, the next big idea is the next big idea for a reason. Big, career-making calls are not always around the corner. Most of the time, this job requires that you have to be satisfied with not losing your clients money and capturing the most alpha by strategically managing risk around all of your positions.
As Shenk puts it, "an emphasis on instant gratification makes for bad habits and no effective long-term plan" (113). Ask any baseball player if swinging for the fences is the best approach to driving in runs. Even the littlest of little-leaguers will tell you that "just getting on base" is how teams win ballgames. Moreover, Shenk uses additional scientific justification to suggest that building a winning culture requires that teams "set high expectations, but also show compassion, creativity, and patience" (Shenk 123). Patience, sometimes can sometimes be the most important factor in delivering absolute returns to your clients. Too often investors suffer from duration mismatch because they are too early on their trading calls. As Keith learned form trial in error throughout his years managing hedge funds (and I from him in a few weeks), being early equals being wrong. Furthermore, managing risk requires you know when and at what price to get into each of your positions - no matter how sweet the fundamentals look on the long or short side.
In short (note the irony - sorry for the lengthy note), we hope you'll find this piece as additive to your investment process as it has been and will continue to be for us. Be on the lookout for more notes of this nature, as we are planning to open up to you our process for intellectual fulfillment and investment evolution. As stated before, the best performers in any arena are the ones who willing to adapt and evolve. Scientific study has proven that true for animals, humans, athletes, investors, and everything in between.
As the facts change, so do we. Wash. Rinse. Repeat. That's risk management.