Library / Outstanding Investors

Date of review: April 2021
Book author: Paul Marshall
Вook published: 2020

10 ½ Lessons from Experience. Perspectives on Fund Management by Paul Marshall (2020)

This is a rare book written by a co-founder of one of the most successful hedge funds of modern times – Marshall Wace.
The book is very concise, easy to read and well structured. The flipside is that it has no secret formula one would expect from a legendary investor. But probably because it simply does not exist.

I liked the lessons emphasising the importance of character, dealing with uncertainty, constant focus on adaption to changes, review of key human biases, inefficiency of market and importance of concentration. Yet, a few lessons are written through the lenses of a trader and an asset manager looking to sell his business services to customers – focusing on volatility, Sharp ratio and other things which do not allow to look at stocks as pieces of businesses.

Marshall makes an important point of rising competitiveness of the investment world which makes harder to generate better results for an individual. The rise of passive investing comes at the expense of weaker active managers leaving only the best managers in the game (like in the super final of a tournament after hundreds of average players have been eliminated).

Key lessons shared by Paul Marshall are as follows:

  1. Markets are inefficient.
  2. Humans are irrational.
  3. Investment skill is measurable and persistent.
  4. In the short term the market is a voting machine, in the long term it is a weighing machine (actually this chapter is not on the importance of long-term investing as one might expect, but rather on importance of psychology. Marshall spends more time discussing Keynes than Graham's thoughts).
  5. Seek change (the chapter talks about change as the main source of returns which is quite useful).
  6. The best portfolio construction combines concentration with diversification (an interesting idea here is that portfolio manager should seek concentration focusing on best 10 ideas, while a client can seek diversification by investing his money in several such concentrated funds).
  7. Shorts are different from longs.
  8. A machine beats a man, but a man plus a machine beats a machine.
  9. Risk management – respect uncertainty.
  10. Size matters.

Key notes:

  • The nature of investing is that to be successful you need to constantly adapt…The nature of investing is that to be successful you need to constantly adapt.

  • Financial theorists build models on the basis that markets are rational and efficient. Many practitioners have been able to build fortunes out of the fact that they are not.

  • Market inefficiencies are visible every day to practitioners. But the anomalies do not automatically close. The challenge is having the conviction and the staying power and the process to exploit them.

  • The most important corrective in equity markets is a properly functioning market for corporate control. Ultimately, if a company becomes too cheap and the value margin becomes too appetising, a corporate buyer will step in to take advantage...

  • Managers and analysts need to specifically seek out contrary opinions and hold up their own theses to scrutiny. They need to know what their own biases are. They need to be challenged from within and without.

  • A truly great manager will have a success ratio of 55 per cent (in other words you can be wrong 45 per cent of the time and still be a truly great manager).

  • There is no particular set of attributes which can guarantee a great fund manager. Of course they have to be very smart, focused and driven…great managers can be optimists, pessimists, mean reverters, growth guys, value guys, short-term traders and long-term holders. Perhaps above all they have to be resilient. Indeed, the main threats to persistent performance are all character related and lie strictly speaking outside the domain of fund management.

  • The greatest opportunities always occur around change. The valuation of a company will not change unless something changes intrinsically about the company (financially, operationally or strategically) or something changes about its economic/financial context (interest rates, growth, volatility, inflation) to create or destroy value.

  • It is a rule applicable to every good fund manager: over time the more concentrated the portfolio, the higher the return.

  • …the slugging ratio is calculated based on the realised gains on winning trades compared to realised losses on losing trades. It is also known as the 'win/loss ratio', and maximising your slugging ratio is a key skill of a successful trader.

  • In the past 50 years there have been six bull markets and six bear markets, if you define a bear market as a 20 per cent drawdown which is not reversed for twelve months. The average bull market has lasted 6.9 years, the average bear market 1.5 years.

  • Five criteria for shorting stocks: Weak or deteriorating growth, Industry structure, Regulatory pressure, Dodgy accounting, Weak and deteriorating balance sheet.

  • Machines typically do not fare well in a crisis. They are not good at responding to a new paradigm until the rules of the new paradigm are plugged into them by a human.

  • The art of risk management is to anticipate or identify emergent risks so you are ahead of the wave before it breaks. The science is to probability-weight those risks and stress-test portfolios in real time so you can anticipate the effect of the wave on your portfolio.

  • It matters enormously how the fund manager reacts to these poor periods. The combination of client pressure and peer pressure can be intense. You need deep reserves of resilience. Confidence in your convictions.

  • Confidence in yourself to come through the valley. A strong character will use the period of underperformance to lay the foundation for the next period of good performance, by re-examining every assumption, every thesis, discarding some and doubling down on others. a weak character will freeze, their decision-making impaired. Or they might take flight, mentally at least, and avoid the difficult thinking.

  • Ultimately, of course, it is all about character. If you do not begin your fund management career with a sense of your fallibility, you are likely to learn it. If you do not learn it, you are likely to fail.

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