Summer reflections
Reflecting on an internship I did over the summer.
Hi.
Reading time: About 8 minutes
Over the last three months I interned at an investment fund as a research analyst. It was something which reaffirmed a lot of my beliefs that I had and at the same time it also busted a lot of myths that I used to believe in. I worked with a great team of people and they were kind enough to help me out and teach me and hopefully I could add some sort of value for them at the same time. I found one thing very pleasing which was the fact that the fund did exactly what they preached about. They found high quality companies and stuck with them for the right reasons for the long term.
I have a lot of takeaways from the experience. These are some of the biggest :
The people I worked with were full of energy in what they had to do. They were very excited by any new developments that a business had. Whether it is good or bad. They kept looking for things and information which can possibly serve them value as a differentiated insight or makes them revisit their entire thesis in an investment. In my three months there they did this multiple times where they revisited a lot of the ideas. This leads to one insight which is investing in any business is a never ending journey. You keep getting new information and developments. Of course one more important thing when you have a lot of information is to make sure that you can separate the signal from the noise.
One more thing that I think might be true in this firm was the fact that the team had skin in the game. This made them work smarter and harder. I also think that energy at that level comes out of passion and hunger. These guys had both they loved what they were doing and at the same time they also always wanted to find a new idea which can go straight into the portfolio and help in generating alpha.
I always love to see how a team functions what sort of dynamics are at play because I play a team sport I know how important it is to have a team which trusts and respects each other. It is extraordinary to see how well these guys work together. They have the trust factor and at the same time they have one very important thing, they ask a lot of questions. They are shameless about it. One of the things I think I need to improve the most on is the question asking ability. They of course with all their experience know certain patterns which repeat but it is their hunger to learn and know again which makes it easy for them to ask these questions. I think it is a very important quality to have to ask questions and ask the right ones. It is of great help. In one of my conversations with the fund manager I remember vaguely, he said that if I put two people in front of Rakesh Jhunjhunwala both people would leave the room with a lot of different insights because they would ask different questions and at the same time interpret it differently.
“The important thing is not to stop questioning. Curiosity has its own reason for existence. One cannot help but be in awe when he contemplates the mysteries of eternity, of life, of the marvelous structure of reality. It is enough if one tries merely to comprehend a little of this mystery each day.
~"Old Man's Advice to Youth: 'Never Lose a Holy Curiosity.'" LIFE Magazine (2 May 1955) p. 64”
― Albert Einstein
There is one very important thing known as conviction in investing. Conviction in investing comes from differentiated insights that you have that other people are missing. Conviction is very tricky because while it is very important to have conviction in the business that you own it is equally important to be humble enough to admit that you could be wrong in your differentiated insight. They had a quote in the office which I cannot find right now by Seth Klarman which is articulated much better than what I have written about.
Portfolio management is entirely different and research is entirely different. Both of them are different forms of art. I did not think about portfolio management as something that matters a lot. For me finding ideas was the hard part.I could not be more wrong. Looking at the permutations and combinations that are possible one of the biggest differentiators a fund would have is the weight that they assign their stocks. A lot of people find a lot of good ideas but the way that you size your bets can decide whether you will underperform or outperform the market. Portfolio sizing is again something which is personal, there is no right answer to it. Some people are fine having concentrated bets and some are not willing to take the risk. This is a topic where I feel like there is still a lot of things that I don’t know, so I will have to read a lot more as to how the great investing folk think about this and what they believe to be is the right thing to do.
"There is a personality difference between the people who are good at finding stocks and the people who call the shots on timing and manage the whole portfolio. Security analysts dog down information and come up with an idea about what should be bought or sold, but they do not necessarily make good conductors for the whole orchestra. If they are woodwind players to start, they tend to hear the whole orchestra as woodwinds, and it takes another type to keep the woodwinds and brasses and strings in line." Adam Smith, The Money Game
Biases are fine to have. One interesting thing to know was the fact that they are fine to admit that they have biases and they do not try and escape it, they try and embrace it.
At first, I was a little confused but this aligns with what Paras Chopra says,
I love thinking about thinking. Give me a research paper on rationality, cognitive biases or mental models, and I’ll gobble it up. Given the amount of knowledge I’ve ingested on these topics, I had always assumed that I’m a clear thinker.
Recently, though, it hit me like a lightning strike that this belief is counter-productive. That’s because. After all, if you are convinced that you think clearly by default, why would you put in any extra effort to scrutinize your thought process?
So, ironically, the belief that you’re a clear thinker creates a backdoor for cognitive biases to creep into your thinking because you’re less likely to suspect they might be there in the first place.
Once this realization dawned upon me, I resolved to lower the expectations from my thinking process. Instead of celebrating clever arguments and things making perfect sense, I now see clarity as signs of missing something. The real world is often nuanced and, hence, thinking about it should lead to messy details, not grand one-line aphorisms
Biases are something we cannot escape. On top of this I found out that many times these biases should be pointed out not by yourself but by a third person. You miss a lot of things which others might not. The importance of having a team which has an insight on the things going on in the company also help in them pointing out at times where you might be behaving irrationally.
Before joining the company I had a few preconceived notions on valuations and excel models. I thought excel was a tool which was much too complex and should go in my too complicated bucket of things. I had to make a financial model on Honasa Consumer and Tata Elxsi during my time there and surprisingly I found out how important it is to have a model. The forecasting aspect of the model does not necessarily need to be accurate down to the decimal but you need to be directionally right and you get a lot of knowledge as to what are the possibilities of the company. While making the model you also have to go deep into a few things which are Key performing indicators for the company and they help you get to know what makes the company special and also makes it easier for you to track the company. It is a very rigorous job but I found it to be a very fun job.
Valuations are another topic which is very subjective. There are certain companies which trade at very high multiples and they never tend to fall below certain multiples. Entering into a business at a high multiple seems like the worst thing to do as you have no margin of safety and that is one of the most important things in investing. This was my thought process. But again keeping Munger and Buffett in mind there are certain companies which you should be fine paying up for. And again you need a model to see how much a company needs to grow for how many years to sustain the valuations that they have.
There is no hidden thing to investing. At my time there if I had to describe my day it would mostly be full of reading either annual reports, conference calls, sell side reports or I would be putting in numbers of the companies or learning more about companies by speaking to people. It was very fun to do what I did. The process is something that anyone and everyone can emulate. There is no rocket science.
The three months I spent there ofcourse were filled with a lot of work but it is something I believe to be very important to build my building blocks or foundation which would help me going forward. I learnt a lot of practical things and got to know how alpha is generated and how a great team functions on a day to day basis.
Thank you for reading,
Samvit.