Editor's Note: Ever wonder about the inception of Hedgeye? How it all started? Our Founder & CEO Keith McCullough's memoir Diary Of A Hedge Fund Manager written in 2009 chronicles the life and insights McCullough learned on his way "from the top, to the bottom, and back again."
Below is a free excerpt.
Later that July, as I prepped for the daily morning call with the whole firm on the squawk box, during which I knew I’d be asked again about Pacific Sunwear because its June sale numbers were coming out, I saw an item come over the Reuters tape that made my heart jump.
PSUN had missed; June sales had sucked. The stock sold off.
The phone rang. It was Jon Dawson, and he was not happy. Before he hung up on me, I heard him yell to his traders to “sell!”
He was selling at a loss. I felt like an idiot.
PSUN fell about $2.50 that day from the open. We’d been gobbling it up, long, for weeks. Perma-fro had played me. I was a lemming. From that experience I learned a few things:
One, stocks don’t lie. People do.
And two, if you just go along with what everybody else thinks, if you confuse popular consensus for an honest research process, you’re setting yourself up for failure.
I’d been drawn in by the guidance game, by hedge fund group-think syndrome. The whole system had failed me. Yet Herman and Dawson never held the PSUN fiasco over my head, and we moved on; they gave me a chance to take shots and miss.
As my idol Wayne Gretzky once said, “You will miss 100 percent of the shots you don’t take.”
While that holds true, there’s nevertheless a distinct line in the hedge fund business between a few missed shots and outright poor performance. In 2000 and 2001 I’d watched my former Yale hockey teammate Daryl Jones struggle along with Geoff Gross running the Southport Technology Partners fund. I looked at Jones as being twice the analyst I was.
Here was a guy with talent and a tremendous work ethic to go along with it. But the tech fund had been launched at the top of the market, the market cracked, and then they got sucked into a summer of 2000 bounce, doubling down with tech about to come apart completely.
By the end of the summer of 2001, the Nasdaq had melted away. Eventually the Southport tech fund was closed down and Jones left the firm to go to business school. Jones, whether on the ice at Yale or in the office, was one of the hardest workers I'd ever observed. He and Gross had done everything right and they couldn’t make it work. What hope did I have?
That’s when I realized that the hedge fund industry had nothing to do with work ethic or basic principles.
It had everything to do with performance.
Nothing else mattered.