Despite good resolutions, I haven’t written something for quite some time.1Slightly more than 3 months, to be precise. Time flies by… The reasons were the same as ever: my primary job (I startet a new position on July 1) and two other projects that took longer than expected (see Investing Resources and Research Papers). Anyway. After switching jobs, I wrote down a few learnings and observations from my first position in the investment industry. I startet as a Junior Portfolio Manager on November 1, 2020, so today marks my fourth year of full-time working. There is hardly a better occasion to break the period of inactivity than that.
If you (understandably) don’t care about my background, feel free to go directly to the 10 Learnings, Observations, and Opinions.
- Market Efficiency
- Investment Industry
- Generalist vs. Specialist
- Good Things are Rare
- “Professional” Investors
- Details vs. Big Picture
- Facts vs. Opinions
- Discipline and Structure
- Purpose and Society
- The Best is Yet to Come
Four years of experience is obviously not super-long, but it is something. So let me give you a few disclaimers before we start. I may question common practices of our industry and use somewhat provoking language at some points. But I obviously do have respect for people with more experience and accomplishments than I have. So this post ist not “I worked 4 years and know how the industry works”, but rather “I create something to look back 4 years from now and cringe how stupid I was back then”.
Background
Before diving into the details, let me provide some background on what I actually did. I started my career on November 1, 2020 as Portfolio Manager Equities at a medium-sized life insurance company. The focus of that role was portfolio construction and manager selection, but we also managed a single-stock portfolio. I left the insurance company on June 30, 2024 and now work as Investment Analyst Public Markets for a single family office. The role is on the one hand broader as it goes beyond equities, but on the other hand also narrower as I currently only focus on portfolio construction and manager selection.
Both of my jobs are what some people call allocator or asset-owner positions, meaning that I work(ed) for an institution and invested on its behalf. As I learned over time, this is quite different from a position at a bank or an asset manager. There are many aspects of this, but a deeper comparison goes beyond this post and is worth a piece for itself.2Maybe, at some point, on this website…
As an allocator, at least how I understand and practice it, the job is to search the best-possible investments for your institution. This has the nice side effect that many people in the industry like to talk to you because you are a potential client. Without ever having worked at a fund or an asset manager, I imagine that this is somewhat different there.
After recognizing this advantage a few months into the job, I shamelessly exploited it and was very fortunate that my employer allowed me to do this. Many great experiences would certainly have not been possible without the status as institutional investor. For example, I had the chance to attend two in-person meetings with AQR founder Cliff Asness, travelled to the Berkshire Hathaway shareholder meeting in Omaha twice, and met various fund managers in their offices. Fully admitting my nerdiness, some of those things are dreams coming true and I am very thankful for that.
A few comments before you get too excited about the allocator role. Yes, it is fun to travel to conferences and events when you are passionate about investing. But the ultimate goal, at least in my view, must always be the value-add for your employer and its investments. Fun and work occasionally comes together, but not always.3You clearly see the intention of this paragraph, right? I neither want employers to believe that I have too much fun at work, nor do I want the asset managers to stop inviting me to interesting events… Having said that, institutional investors obviously have access to many resources that others don’t have and capitalizing that advantage is part of the job. By and large, I believe you can use the role as allocator to see a lot of the industry in relatively short time and I may have used this status somewhat more than others.
10 Learnings, Observations, and Opinions
The following learnings, observations, and opinions came more or less randomly to my mind when I reflected on the time in my first job. They are subjective, not necessarily backed by evidence, and I reserve the right to change my mind about them at any time in the future.
Market Efficiency. Even though Fama’s paper (URL) is now more than 54 years old, a surprisingly large number of people in the industry still deny the evidence on market efficiency.4My personal favorite so far is the statement of an active German fund manager that “passive ETFs are silly money”. Interestingly, some of this guy’s active funds decently underperformed the silly passive benchmark over the last years… I am not a passive investor myself and I also do not believe in perfect efficiency. But I do believe that markets are way more efficient than most people acknowledge and that you have to work really hard to outperform. Against this background, it really amazes me how intellectually dishonest some people approach their profession. I also know people who consistently lost money on their active investments for years and still do not adjust their behavior. Assuming we all share the goal of rather having more money than less, that is even more astonishing to me…
Investment Industry. The investment industry is much larger and broader than I imagined when I came out of university. Back in 2020, I was quite narrowly interested in equity strategies and my goal was to join a quantitative asset manager.5As you can see, I wasn’t particularly successful in this respect. I am still primarily interested in equities, but working at two different institutional investors showed me that there is much more. Even within a single asset class like equities, there are so many different players and the room for specialization seems endless. I still discover new types of strategies and asset managers almost every month and I don’t believe this will stop anytime soon.
Generalist vs. Specialist. The previous point naturally touches the question about Generalists vs. Specialists. It obviously depends a lot on the person and goals, but my current view with respect to the investment industry is the following. Asset managers who want to address institutional clients should probably specialize quite radically. In contrast, allocators have it somewhat easier to survive as generalists, although there is also plenty of room for specialization. In the end, like in any profession, you must find a niche where you can add value. Even the most sophisticated hedge fund is usually just a small position in a large institutional portfolio. The specialized hedge fund manager is valuable, but the allocator who constructs a portfolio of such hedge funds together with other asset classes is valuable too.
Good Things are Rare. In my four years of working, I maybe found four to five investments that generated meaningful outperformance and classify in my view as something really good.6You may rightly ask about my output in the remaining time? First of all, one good long-term idea per year is not too bad. I also worked on some non-investing issues and also did things that worked, but not necessarily because of skill. After doing manager selection for quite some time now, I really feel what market efficiency means in practice (see above). The widely researched 80/20 distribution of underperforming active managers and the fact that most portfolios end up close to the index is in my perception pretty real.7Maybe I also just worked on the wrong side of the distribution… The consequence, in my view, is a constant struggle between being open-minded enough to find the few good things and being selective enough to use limited time efficiently.
“Professional” Investors. I need to be careful with that one, so I want to mention explicitly that the following is a general view on the industry, and does not relate specifically to my current or previous employer. From my personal experience and from conversations with friends and contacts, I gained the impression that many professional investors are by no means as sophisticated as I expected them to be.8The alternative, of course, is that my expectations were wrong… This also applies to asset managers, sometimes even to those with apparently prestigious brands. Of course, I do not claim that I am better or more sophisticated. But I would enter the bet that a disciplined portfolio of passive index funds outperforms many comparable institutional portfolios.
Details vs. Big Picture. This one is certainly not unique to the investment industry. Details are important and I generally fight for every minor improvement. However, I recognized at some point that it is equally important to identify the most productive use of your time. I experienced various situations where we spend several days researching some ideas and ultimately invested something like 0.25% of the portfolio. Don’t get me wrong. It is nice to have small ideas with huge potential, but even when the 0.25% position doubles, the impact on the overall portfolio is minor. This gets even worse when you consider the opportunity cost of your time. Suppose that while researching the small position, you ignored that your overall equity exposure is too small to achieve your long-term objectives. Spending your time on that would have had a much larger impact on the end-result. Even though you may have identified a phenomenal stock in the meantime.
Facts vs. Opinions. Beside my jobs and this website, I also spent some of the last four years torturing myself very creatively by going through the CFA designation. Musing about whether the CFA is worth the effort is again a topic for a post itself, but you undeniably learn something. Although I would have never expected it, one of my personal biggest takeaways comes from the Ethics and Professional Standards section. In one of its standards, the CFA Institute requires to clearly “[…] distinguish between fact and opinion […]” (URL). This sounds obvious, but when I applied this distinction to the things I see on a daily basis (news, interviews, …), the results were quite fascinating. Most of the stuff out there are just other peoples’ opinions. There is of course nothing wrong with that, but I think it is important to never treat an opinion like a fact. In addition, I recognized that the fact-vs-opinion distinction is a good indicator whether you are dealing with an (intellectually) honest person.9Small details do really matter here. For example, we had a fund manager who said things like “Company X is going to beat expectations”. Assuming no insider knowledge, this is an opinion stated like fact and a clear red flag for me.
Discipline and Structure. Investing attracts a lot of smart people and a certain level of smartness is certainly required to succeed. However, I observed that disciplined and structured processes tend to be strongly underrated. Monitoring investments on a regular basis, documenting the reasons for investing at the time of the transaction, analyzing both actual and rejected investments, … All of those things are not difficult, but they are time-consuming and tedious. I obviously also don’t enjoy archiving research material and investment memos, but I do like to become better with relatively little effort.10While both are difficult, I do believe it is easier to stick with a routine than to gain additional points of IQ. So I force myself to do those things and I do believe it can be a competitive advantage.
Purpose and Society. Like many people I have talked to over the years, I also had the time when I was searching for the purpose of my work beyond paying the bills. Finance and investing is probably somewhat trickier in this respects because 1) it has a bad reputation, 2) there are enough people who deliver on this reputation, and 3) you typically don’t feel a tangible impact of your work. After thinking way too long about it, I came to the following conclusion. On a higher level, investing means nothing but moving resources through time to pay for something in the future. No matter what you do with the money, I believe that this is a very important and helpful service. So as long as you apply certain standards to yourself, I don’t believe you have to feel bad for working in finance and making money in the markets.
The Best is Yet to Come. It would be strange if had already achieved all my goals after just 4 years and this is definitely not the case.11For example, doing more on this website and more consistent than just every 3 months… It feels like it is only just getting started and the best is (almost certainly) yet to come.
- #5: Working for 4 Years
- #4: Warren Buffett is not an Index Hugger
- How to Use This Site
- #3: Big Data & Machine Learning in Asset Management
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Endnotes
| 1 | Slightly more than 3 months, to be precise. Time flies by… |
|---|---|
| 2 | Maybe, at some point, on this website… |
| 3 | You clearly see the intention of this paragraph, right? I neither want employers to believe that I have too much fun at work, nor do I want the asset managers to stop inviting me to interesting events… |
| 4 | My personal favorite so far is the statement of an active German fund manager that “passive ETFs are silly money”. Interestingly, some of this guy’s active funds decently underperformed the silly passive benchmark over the last years… |
| 5 | As you can see, I wasn’t particularly successful in this respect. |
| 6 | You may rightly ask about my output in the remaining time? First of all, one good long-term idea per year is not too bad. I also worked on some non-investing issues and also did things that worked, but not necessarily because of skill. |
| 7 | Maybe I also just worked on the wrong side of the distribution… |
| 8 | The alternative, of course, is that my expectations were wrong… |
| 9 | Small details do really matter here. For example, we had a fund manager who said things like “Company X is going to beat expectations”. Assuming no insider knowledge, this is an opinion stated like fact and a clear red flag for me. |
| 10 | While both are difficult, I do believe it is easier to stick with a routine than to gain additional points of IQ. |
| 11 | For example, doing more on this website and more consistent than just every 3 months… |