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John Engle
John Engle
Articles (406) 

4 Lessons From a Master Market Operator

Paul Singer has made a name in merger arbitrage, but his advice is often universal

May 29, 2019

Paul Singer (Trades, Portfolio) has gained a fearsome reputation as a master of mergers and acquisitions, but he is no dour warrior. Indeed, he has made it clear time and again that he loves the investing game, especially the cut-and-thrust of merger arbitrage:

“There’s no way anyone could get bored with this business.”

True students of value investing can certainly appreciate this sentiment. As with so many of the most exciting niches of the market, however, Singer operates in a space fraught with peril. Thankfully, the guru has shared some excellent advice for other investors curious about his particular battlefields of choice, advice anyone serious about investing should take to heart.

First, avoid losses

Singer echoes many of history’s investing greats when he talks about investment priorities. This is especially true with regard to the first duty of investment managers, which is to not lose money:

“I don’t want to lose money, ever, with no excuses. My goal with investors is a combination of underpromising and overdelivering whenever I can. And I try not to be benchmarked. We just try to make moderate returns - as high as possible - given that our goal is not to lose money.”

That may sound obvious, or even trite, on first reading. Of course, investors should prioritize not losing, as that is a prerequisite to winning. Yet, amazingly, investors frequently fail to act on what ought to be obvious logic.

The pursuit of excess returns often results in market participants taking on excess risks. That strategy can work for a while, especially in bull markets with long periods of low volatility, but eventually the music has to stop. Like doctors who take the Hippocratic Oath to “first, do no harm,” so, too, must investors adopt the principle of avoiding harm to their portfolios first and foremost.

Never stop asking and adapting

One of Singer’s most critical lessons applies to investors in every asset class. Specifically, he admonishes investors to never stop asking questions and filling in blanks in their theses:

“There’s a set of mind that is an absolute requirement. If you’re not a person whose starting point is ‘What am I missing?’ rather than ‘How frickin’ great am I?’ you are missing something essential to survival. ‘What am I missing?’ is like oxygen. If you’re asking, ‘How great am I?’ you’re the Night of the Living Dead.”

This is not an investment trick or strategy per se. Rather, it is a frame of mind that Singer rightly calls on all serious investors to adopt. It is easy to fall into the trap of accepting a thesis and refusing to change it, even as more information emerges and the story changes.

Markets are dynamic systems and investing is a dynamic game. Mental and psychological adaptiveness and inquisitiveness are absolutely essential for long-term success.

Creativity and intelligence trump technical proficiency

For someone who has made a fortune on the numbers-heavy world of mergers and risk arbitrage, Singer is remarkably muted when it comes to the importance of technical proficiency to investing success:

“I actually think the technical skills are secondary. The important stuff is creativity and a little intelligence.”

This is a very interesting perspective to take. In merger arbitrage, where the slightest misstep can wreck a deal (and where one bad deal can wreck a long track record), one would think technical skills would rate extremely highly. Yet, it is actually quite understandable why Singer takes this view.

Everyone can learn the basics of financial modeling. It is not terribly difficult to learn even the more esoteric tricks of modeling and financial engineering employed by Singer and his ilk. What is more valuable is an individual’s ability to “see the full picture” of the market, and of particular deals.

Develop psychological grit to survive hard calls

No ball player bats a thousand, and neither does any investor - even Singer. And that is all right, provided one is able to learn from failure and improve their technique:

“As an investor, you need tenacity, resilience. Everybody makes mistakes - sometimes big - and you have to have resilience to come back, survive, make decisions amid ambiguity.”

Markets are rapidly evolving environments with an ever-changing cast of characters and participants. Adapting to that change is a fundamental requirement of investment survival. But one of the hardest changes to adapt to is the one that sets you back financially. Many investors who make a bad call lose confidence in their processes and in their ability to make intelligent decisions. They end up second-guessing themselves, which can result in missing opportunities and exacerbated losses.

Investors must learn to take their licks and get back up. Every failure is a learning experience. Developing personal grit will allow you to take failures and adapt them to future success.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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