Wednesday, August 25, 2010

“It’s More Than Luck”

“I read with interest the decision by Stanley Druckenmiller to close his global macro hedge fund. The guy was good—very good. He quietly went about his business of thinking about how the world works and positioning in front of capital flows—in or out—and got it right most of the time. It is easier said than done and, in his remarks describing why he was ending it, it was clear he spent much time working and not so much playing precisely because this stuff isn’t easy; and to be as good as he was for so many years ... it’s more than luck. It is hard work being open to what the market is really telling us. But a deep understanding of global capital flow from the top down seems the key to his success. We try to mimic that here as it relates to currencies.” – Jack Crooks, Black Swan Capital (

This is the second blog this week that starts with a quote. I thought this quote, from Jack Crooks at Black Swan Capital, a currency newsletter that we subscribe to and highly recommend, was right on the mark. Crooks is giving props to Stanley Druckenmiller, a famous hedge fund manager who is perhaps best know for being a top lieutenant for George Soros for many years, who decided to close his hedge fund and retire last week. I was struck by Crooks’ comments about “doing the work,” which is one of the guiding principles at Pinnacle. When you “do the work,” it’s hard to ascribe success to luck.

It isn’t healthy to spend too much time working and not enough time playing, as apparently Druckenmiller did for much of his career. We all know that balancing family, community, and work, isn’t an easy thing to do. But we also recognize that good value investing implies that you can better understand the valuation of the market…than the market. And as I’ve written before, the preceding statement is dripping in conceit. While experience tells me that we have been able to identify value opportunities for our clients over the past eight years, it also tells me that we should continue to be cautious in our approach to active management, because markets can and do make a mockery of you.

Over the years we have written about how we do it. We insist on diversifying our decision making within our investment team. We “cheat” by employing a variety of methods to identify value, including traditional value, global macro, and studying market psychology. We utilize quantitative methods for evaluating markets, but perhaps our secret sauce is our belief in incorporating wisdom (if we have any to add), common sense, and experience to our investment process. If we have gained wisdom, common sense, and constructive experience over the years it has been through hard work. My objective assessment is that no one here is a genius. We are not “smarter” than our competition (although we still compete on an uneven playing field where many smart investors don’t believe in active management). However, I believe we outwork our competition. Our analysts are immersed in their jobs and passionate about what they do. We try to have “a deep understanding of top down capital flows,” as did Druckenmiller, and as does Crooks. It isn’t the sexiest methodology for outperforming, but I believe it is an important, and underappreciated, part of our process.