Friday, October 14, 2011

The Most Important Characteristic

I recently saw a research piece from Wolfe Trahan where the well-known and highly respected analyst, Francois Trahan, referenced the book, Good to Great, in discussing the “best” portfolio strategies. It got me thinking about Pinnacle’s investment methodology and how we continually attempt to improve how we do what we do. I’m not sure how anyone in the investment business characterizes themselves as “great,” since active money managers know that the market makes a mockery of us on a routine basis. However, I was thinking about our investment team, and specifically our investment analysts, and wondering what characteristic is most needed to be great. They certainly need to be intelligent, persistent, tireless, and able to fit complicated ideas into a simple narrative.

But I think far and away the most important characteristic for an investment analyst -- at least here at Pinnacle -- is courage. Perhaps not physical courage (although there have been times when shoes were thrown in my direction during investment team meetings), but having the courage of your convictions. In the real world of working on an investment team, there are many team dynamics that come into play that can sway the decision-making ability of the group. For example, there is first and foremost a natural desire to conform to the same opinions as the rest of the group. It is a very uncomfortable feeling to sit in a meeting with your peers where they all say black and you say white. Yet the analyst who makes an impassioned case for “white” often adds the most value to the conversation, if for no other reason than it makes the rest of the team reconsider “black” as the best answer. The willingness to resist compromise, especially on a team where everyone actually likes and respects each other, takes courage. It is terribly human to want to fit in and behavioral finance tells us that herd behavior is one of the heuristics that lead investors to poor investment decisions. It takes courage to exhibit what society considers 'bad manners.'

Along the same lines, it takes courage to oppose the opinion of the Chief Investment Officer, and the opinion of the Chief Investment Strategist. It ain’t easy to go toe-to-toe with the boss, especially when you will be sitting at the table with him discussing next year’s compensation at the end of the year. Yet it turns out that informed, considered, and well-articulated dissent is a requirement for investment analysts who want to succeed in a career at Pinnacle. As one of the architects of our investment process, perhaps the thing I am most proud of is the group of analysts on our investment team. Our investment process depends on the conviction of the team in our forecast, which is forged in serious debate about the market evidence. For our analysts, that's just another day at the office -- and that takes guts.