Anatomy of a Panvestor – Part 1
Outside of film making, arts, sports and singing, rarely is one’s personality allowed to impact their professional work, especially in life impacting jobs such as piloting, surgery, fire-fighting, etc. Why then is there such a thing as behavioral finance? How would you feel if your pilot was a specialist in behavioral piloting? That is why investors and money managers claim that what they do is as much an art as it is a science. We cannot but help that our personal traits (flaws and all) come into play as we execute the science many call investing, which I call panvesting (evolution of investing). In this month’s Arcus, I share with you a few of the personal lenses through which the anatomy of an investor(s) is viewed by some of the smartest selectors of investors.
I recently returned from a 22 day, 17 city, 32 meetings roadshow in the US, where much was shared about our panvesting philosophy and even more learnt. The 32+ hours of questioning from some of the most well-versed and experienced dissectors of fund managers, gave me an opportunity to review myself and my 25 years’ experience. The following questions were the most consistent lenses used to assess my team and I.
Who… are you when making decisions?
What.... are you trying to achieve?
How… do you intend to do that?
Why… do you think you are right?
Today I will only cover the who and what, leaving the how and why for another Arcus. Who are you when making decisions? These selectors of investors know that while behavioral finance is taught in most finance degrees so as to help investors manage their personal biases, we cannot change who we are for our profession. Who we are, as individuals, will and does impact our decision-making. Personal traits, amongst other things, impact one’s analytical skills, risk aversion, time horizon and most of all confidence or arrogance. An individual’s and team’s personality, culture, mission, motivation and values can be as much an asset as a liability.
“The investor’s chief problem – and even his worst enemy – is likely to be himself.” Benjamin Graham Within investing, the science part has become even more scientific especially with data, analytics and quantitative tools, but the arts part has not changed. Behavioral finance research continues to show the pros and cons of human decision making in investing and especially wealth creation. Many financial firms deploy psych tests on their graduate intakes before allocating them full time positions, if at all. 25 years ago, I myself was unceremoniously shown the door by a well-known Australian financial giant when I questioned their use of a psych test to put this (me) round peg in a square hole. Many many years later, I have come to realize that as instructive as that psych test may have been for my potential employer it was static and stale from the minute I finished the test. There are certain personal traits that stay with you for life and others evolve with life. For me, the desire to learn, need to prove myself (courtesy of the failed psych test) and never taking things for granted are almost genetically ingrained as a first-generation economic migrant. On the other hand, patience and long-term focus became personal traits when I started running marathons in my 30s, while disciplined preparation and measured risk taking were reaffirmed with successful summiting of Mt Aspiring and Mt Cook. So, Who am I when making panvesting decisions?
A 47-year-old student of life who will not give up learning nor is scared of proving myself; who knows the first 25 years of investing was on the job training and prep work for the next 25 years; who appreciates the concept of patience and pacing for the long run. All these elements no doubt creep into my panvesting philosophy, process and execution. What are you trying to achieve? Returns… on invested capital greater than WACC …is what I was trained to find. Returns… better than peers and the market is what I was paid to find. Returns… compensating for risk is what I could not properly define or find. Resilient Returns and Progress… on all forms of capital is what I aim to find.
“The older I get, the more I see a straight path where I want to go. If you're going to hunt elephants, don't get off the trail for a rabbit." T. BOONE PICKENS Many senior investors of my vintage started their careers in the days when Gordon Gekko’s “Greed is Good” defined investors motivation and “Chainsaw Al (Dunlap)” defined companies to invest in. Over the years, institutional investors have had to also adapt to increased relative risk and return targets when making their investments. As most investors get older, job security and complacency kicks in, with yet again index and benchmarks becoming the life rafts to cling on to, if not guide one’s decision-making. For many of my peers, stock picking rather than picking good companies became their What and yours truly also dabbled in that game for a while. Becoming a great Stock Picker is for many still What they want to achieve in investing. Stock picking now versus what it was 25 years ago has changed. In the 1990s stock picking and picking good companies was the same, but now it is NOT. Stock picking now (for many) is all about whether the stock will do better than the benchmark for the next 12-18 months, at best. Stock picking now is driven by FOMO (fear of missing out) - if I don’t own this company will it go up and thus affect my returns relative to some benchmark. Stock picking now is about how will this stock impact my portfolio risk profile to show activeness. Stock picking now is mostly about anticipating where one’s benchmark will go and then picking stocks that may do better. I stopped stock picking when I realized that it has us implicitly assume that we know what the true value of a stock is, that the market is inefficient and thus we have an opportunity in the short run. Instead, I take the view that the market efficiency will show through in the medium to long term and therefore it is better that I focus on finding resilient companies that treat all forms of capital as assets, seeking return and progress on them through cycles. Picking resilient companies rather than stocks has been the hallmark of wealth creation even before the time of institutional investors. As a panvestor, What I want to achieve, is resilient returns and progress on all forms of capital. Many children dream of becoming a pilot. I never had those dreams. I’m fortunate that my path led me to funds management where my personality and experience can come together as an asset. I can’t imagine taxing an A380 Airbus onto a runway with headwinds and asking the control tower for a longer runway. In coming months, we hope to share more on our engagement with our portfolio companies, our interns contribution to the Panarchy collective brain and Part II of the Anatomy of an Panvestor. Happy Panvesting, Munib Madni Founding Panvestor