Writing under the pen name Adam Smith, George Goodman spent decades following the inner workings of Wall Street, ferreting out candid insights about the investing game of the 1960s and 1970s. His magnum opus, “The Money Game,” is filled to the brim with wonderful stories and personalities, as well as profound insights and observations that continue to resonate in the stock market today.
In past research notes, we examined some of Goodman’s market insights. Most recently, we discussed his interactions with Mister Johnson, a top money manager at Fidelity, and their observations on what qualities make a good investment manager.
In this research note, we return once more to Goodman and Johnson, this time to discuss why it is that many securities analysts – even very skillful ones – cannot cut it as fund managers in their own right. We explain their differing qualities, what makes them successful and why only some analysts can (or even want to) make the grade.
A difference of temperament
When comparing analysts and portfolio managers, Goodman focuses on what he considers to be a major divergence of temperament:
“The analyst is building inductively, but the real gunslinger of a portfolio manager can’t stand second thoughts. He bounces with the stimulus, is enthusiastic, almost overresponds. The analyst really wants to be right, his ego needs the pleasure of being right, and he would almost rather be right than make money. The aggressive portfolio manager doesn’t really care about being right on each judgment, as long as he wins when you tot up the score.”
These are obviously the two extreme sides of the analyst-manager dichotomy: a plodding and careful analysis versus a hot-shot bias for action. In truth, an investment manager aiming for long-term success must embrace their inner analyst – and probably have one on staff as well. The important takeaway is not so much that securities analysts and investment managers are incompatible tribes, but rather the decisiveness and confidence essential to successful investment management is not always present even in brilliant analysts.
From analyst to portfolio manager
Strong analytical skills are an essential prerequisite to running money, but they are not sufficient. Johnson has this to say about the necessary qualifications:
“You can’t just graduate an analyst into managing funds. What is the good managers have? It’s a kind of locked-in concentration, an intuition, a feel, nothing that can be schooled. The first thing you have to know is yourself. A man who knows himself and watch his own reactions like an observer.”
An excellent securities analyst may make a poor investment manager if they lack the necessary discipline, concentration, intuition and self-control to make rational decisions informed by imperfect information. That advice sounds a lot like that of hedge fund guru Edgar Wachenheim, whose thoughts we addressed in a recent research note. Crucially, the successful investment manager is able to act in ambiguous and imperfect conditions.
The skills of a dedicated analyst are critical to a managed fund, but those skills do not necessarily qualify the analyst to run money independently. An analytical mind armed with a firm grasp of financial statements and economic data can make a competent analyst of securities. But those skills alone can prove unhelpful if the would-be fund manager cannot govern their own emotions.
Understanding the patterns
Goodman offers this final thought on analysts as money managers:
“The psychological tests can’t really tell you whether you are going to be an ace at making money; they are descriptions of existing groups, some of them followed up with later tests for incumbency (how long in the job), contentment, and success. You may be out of the patterns and still succeed, or the world may change to the point where these are not the successful patterns. But given the world as it is, this is the way the Game goes. Some analysts should not manage their own money, some portfolio managers should be running funds with other characteristics, and some investors should be cutting flowers in their garden and letting smart people run the money.”
In other words, the patterns of economics, finance, etc. can be understood. But they also change. Individuals suited to one iteration may find success difficult when the market shifts and the underlying pattern is transformed. The vicissitudes of circumstance move people into different roles, often suboptimal ones. But the underlying skills needed to succeed rarely change.
We will always need analysts, and there will always be work available in the realm of portfolio management. But recognizing one’s own skills, limitations and advantages is a key step in securing long-term success. That goes for managing one’s own money as well as that of others.
