Money Managers

The nature of the Portfolio Manager - Analyst relationship

OPM 6 min read

I wrote this essay on the true nature of the analyst’s role when they work for a portfolio manager. This piece originates from a discussion I was having with an analyst who felt confused about his role. It might also help cure some delusions many portfolio managers have, but that might be too optimistic. I hope the essay is better than the title.

The best way to think about investments is to be in a room with no one else around and to just sit there and read and then think about what you read. If you think that's not going to work, then I think nothing else is going to work.

- Warren Buffett

The ostensible reason why a portfolio manager hires an investment analyst is to help the investment decisionmaking workflow. Run investment screens. Generate ideas. Perform basic primary research. Model financials. Take meetings with management. But, as usual, the truth of things is far different. And the essential is invisible to the eye - except for me, of course. Here are the subconscious reasons that could just as well explain why your PM hired you as an analyst: Being a portfolio manager triggers a lot of anxieties. A PM is bombarded with stimuli like market events, price fluctuations, news, phone calls from stupid institutional equity salespeople, demands from know-it-all clients. Now, consider the way many people deal with anxieties. You have an essay due on Monday. You sit at your desk on Sunday afternoon and instead of working on the essay, you work on clearing your email inbox or cleaning your desk. This sort of busywork is a subconscious tactic to forestall the real hard work of writing an essay - which produces anxiety, fear of failure, etc.

Hiring an analyst is often a way for a PM to deal with the anxiety of his job. It appears to be a logical, sensible thing. Everyone does it. A PM working with one, two or several analysts is the standard model of how the buyside works. And so, like you procrastinating by clearing your inbox, hiring an analyst is something your PM can easily do. It's something he can control in a job in which he or she doesn't have much control. It's the easy thing to do and often, the wrong thing to do.

The truth is, the way to deal with the anxiety is to have a highly refined investment thought process. To have absolute clarity of thought about your focus, strategy, universe, circle of competence, etc. But achieving such clarity of thought requires doing the hardest thing in the world: to just sit there and think. And knowing yourself. It is said that most men would rather die than think. So you can imagine that between doing the hard work of thinking and hiring an analyst, it's a no-brainer.

So the analyst is often just a crutch for the necessary work of thinking clearly. I can easily prove to you that an investor with true clarity of thought and purpose doesn't need an analyst. Warren Buffett manages more than a half-trillion of assets across public and private equities and fixed income. How many analysts does he have? The entire HQ staff of his conglomerate is about 25 people. There has been reporting on this and as best as I can tell, there is no one you would meaningfully call an investment analyst working for him. Over the years, there have been some junior people assisting him on investments. The latest was Tracy Britt Cool, but after a stint as a financial assistant, she was rapidly promoted to executive and governance roles. And she has now left. So it would be accurate to say that Warren Buffett has little use for investment analysts, with occasional exceptions over the years. Now compare that with the situation that prevails at many small asset management / sausage-making operations you and I know. I have known many funds with circa $100m AUM that employ two analysts. Something is amiss here: name another industry where the productivity ratio could be as disparate. It would be like one automaker producing 10k cars with a thousand people and another producing the same volume with three employees.

Here are some other subconscious reasons you were hired as an analyst. Loneliness. Writing, managing a portfolio, these are lonely jobs. Status. People are always asking you questions in order to not-so-subtly ascertain your status. Only I have the forthrightness to ask people: "What did you report as your taxable income last year?" as an icebreaker. Many people resort to more devious questions like "What floor do you live on" or "How many employees do you have". And so your PM would rather answer that he has two analysts working for him. Because of the stigma against one-man bands. Having more bodies working for you also helps in projecting wherewithal with potential clients.

Many clients only casually acquainted with the game (like pension funds) might be fooled into thinking that an operation with more analysts (or more flatscreen monitors) denotes a more sophisticated operation. Of course, as I have written, it might just as well be a symptom of a lack of process refinement. Understanding that you, as an analyst, are - quite likely - a crutch is key. For the first few months, you will be like a shiny new toy for your PM. But in time, you will be just like all the other toys - like Bloomberg terminals, institutional equity salespeople and research reports. None of which Buffett uses, by the way. Sometimes you will be right and sometimes you will be wrong, just like every other tool. And so given that you are not clairvoyant, you will be just more noise in the cacophonous chaos that is a lot of investment management. None of this makes being an analyst - even for a bad PM - a bad situation. Not at all. In fact, a few months into my former job as an analyst, it occurred to me that being an analyst is the best job possible. Everyone I met had to answer to someone. My boss had annoying clients who would come and go. He would have administrative and compliance duties. CEOs I met had a board to answer to. In fact, the mere fact that they would come to meet a junior analyst was a pretty good indication that their role isn't as glamorous as people think it is. The people on the sell-side had terrible jobs, I saw firsthand that some of their bosses were mean. In contrast, a buyside analyst is sort of like library work. In school, I had written a lot of reports (on elephants, Planet Mars and the like) and this was just a continuation of that. It was a flip of the coin if I was right or wrong and no one could say for months or years. And so keep some perspective and think of the positives of the job!

While I was an analyst, I occasionally chatted with noted Bay St. independent equity analyst and socialite Kona Shio. Kona told me he read a book by Robert Rubin (former Treasury Secretary and Goldman alum, excuse the redundancy). In the book, Bob Rubin said that a job should be viewed as a platform. A platform to travel, to meet people, to build a personal brand, to learn. As back then I was very pure and innocent, I was not familiar with such Machiavellian, strategic, second-degree, Illuminati-style thinking. But Bob Rubin is absolutely right. Think of the access you get. One junior analyst at a relatively undistinguished firm told me he gets to speak with bank CEOs. When I was on the buyside, it was the only time women would call to invite me for lunch (ie institutional equity saleswomen). And if only I had been better at keeping in touch with Kona Shio, I would probably get occasional invites to trunk shows at Holt Renfrew.

The main downside of the job is that it's boring. That's why it's called a job. In my expert opinion, there are probably less than 10 PMs in Canada worthy of even some emulation, so chances are you don't work for one of them. But many PMs are secretly insecure about their skill - so provide them the validation they crave. Make them feel as though they are investment gods and that you are privileged to work for them. Ask them questions to make them feel important. Then in the evening, go home and wipe your brain clean of all the garbage they told you. I believe studying Buffett and experimenting on your own provides the complete foundation necessary to be a good investor.

If you don't have a job as an analyst, the classic way to get one is to ask. Buffett worked for Benjamin Graham by pestering him for several months and sending him ideas. In my case, I just cold emailed my eventual boss. And as recently as this last year, I heard the story of analyst Fui Gbedemah who got a job as an analyst at Barrage Capital by attending their AGMs, sending them ideas, etc. Managing money is like being a standup comic. There are no barriers to entry. The barriers to success, on the other hand, that's a whole other story.

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