Seven Things about Courage that Hedge Fund Investors Need to Know
Above average investment returns require taking above average risks, which, in turn, demands courage. Until last Sunday at 3AM, I thought that courage was a relatively clear concept and that most of us understood what it meant. Since then I’ve thought hard about the issues and I believe now that most of us misunderstand the issues. As an industry, we tend to get, at least, seven things wrong here.
1. Ignore conventional wisdom about courage. Last Sunday at 3AM, I was at a convention and desperate for something, anything, please God, something to read, I picked up a free copy of the Wall Street Journal from the hotel’s front desk and after exhausting the news, began reading Peggy Noonan’s column. This article is about courage, not politics, but in a moment, it will seem like I am attacking Republicans in general. I intend no such thing. Where courage is concerned, the Democrats have their own problems. Mukasey was confirmed by a predominantly Democratic congress, to give one of many, many examples.
The Republicans have made an ideology out of courage and this has infected our culture as a whole and our industry in particular. The purpose of Ms. Noonan’s column is to show that, compared to Margaret Thatcher, Hillary Clinton does not have much of a spine. Based on what I know of Ms. Thatcher and Ms. Clinton, I would have accepted that judgment without any additional evidence. Unfortunately, Ms. Noonan does provide evidence and while it sheds no light on Ms. Clinton or Ms. Thatcher, it sheds light on what some people think constitutes courage these days, and when you do that a lot of small, fast, things slither away, leaving trails of slime and disease behind them.
Ms Noonan writes, “The story as I was told it is that in the early years of her prime ministership, Margaret Thatcher held a meeting with her aides and staff, all of whom were dominated by her, even awed. When it was over she invited her cabinet chiefs to join her at dinner in a nearby restaurant. They went, arrayed themselves around the table, jockeyed for her attention. A young waiter came and asked if they’d like to hear the specials. Mrs. Thatcher said, ‘I will have beef.’
“Yes, said the waiter. ‘And the vegetables?’
“’They will have beef, too.’
“Too good to check, as they say. It is certainly apocryphal, but I don’t want it to be. It captured her singular leadership style, which might be characterized as ‘unafraid.’”
Let me get this straight, humiliating your employees takes courage? It takes more courage to humiliate your employees than it does to torture kittens, I suppose, but not much more. I am no Margaret Thatcher, I have my own fears and dreads, but even I can do better than this. Years ago I was in an investment committee meeting chaired by a man who was good natured, even kindly—most of the time. But the chairman had a nasty streak and, in my opinion, was capable of killing and getting away with it. He was that powerful. In one meeting, he asked one of the accountants to do something that wasn’t unethical, but made no sense. A few weeks later, in one of his infrequent bad moods, he asked the accountant why one of his reports made no sense. The accountant stammered, not knowing what to say. There were a dozen people around the table and none of them said a thing. The chairman started asking the accountant rhetorical questions, telling him how stupid he was. I told the chairman it was his own fault, that he had requested the change and that the accountant was only doing his bidding. The chairman steamed and, to his credit, changed the topic. Later that day, I got the thanks of an accountant who was too low in the food chain to do me any good. I didn’t get a bonus that year, but the chairman didn’t have me killed, either. I guess I broke even. I don’t put that confrontation on my resume, but I’m as proud of it as anything I’ve ever done.
Ms. Noonan’s opinions would not be important if they weren’t so widely shared. That is one of the reasons the Wall Street Journal hired her, of course. Right now, the Republican candidates for President are competing with each other to show just how ‘tough’ they are. Waterboarding is torture? Don’t be silly. Hardly worse than a cold shower, seems to be the Republican Presidential candidate consensus. (John McCain is a partial exception.)
I am conservative enough to believe that consensus opinions must always be taken seriously. In this case, however, the consensus opinion among Republican presidential candidates and, worse, the nation as a whole, if I judge these things correctly, is not just wrong, it is poisonous.
Courage is a simple concept. Courage is doing what you need to do to obtain your goals, despite the short-term pain it causes you. One of my goals is to do what is right, which is why I took the bullet for the accountant.
2. Being courageous doesn’t have to mean being stupid. In one of the Star Wars movies, R2D2 tries to warn Han Solo about something and he replies, “Never tell me the odds.” This makes sense when the only choice is between certain death and almost certain death. In real life, it almost never makes sense. In real life, the most sensible thing to do is to get the facts first and then make the decision. Unfortunately, this kind of behavior is not relegated to the unwashed. To the contrary, the well-scrubbed George Bush seems to glory in the fact that he doesn’t change his opinions, even when the facts have changed. This attitude is nowhere near as common among hedge fund managers and investors as it is among politicians, but I have seen it often enough in our industry among the losers-to-be. If you want to keep your money, you won’t emulate them.
3. It doesn’t matter whose is bigger. I can’t prove it, but I would be surprised if the leading cause of hedge fund failures wasn’t hedge fund managers who need to prove that their penises are larger than everyone else’s. I’m not joking here. I’m a beta male, myself; I’m comfortable working with alpha males. Unfortunately for me, many of the alpha males I have worked with need to demonstrate that they know more than anyone else does, more than I do, certainly. Unfortunately, for alpha males and, apparently, this includes Margaret Thatcher and Peggy Noonan, you can make money or you can dominate others; you can’t always do both. Testosterone can make you brave, but it can’t make you sensible. In our industry, in any industry where managing knowledge and technique is important, you definitely cannot do both.
4. Courage can be learned. I once read a book review about Mohammed Ali that said, if I remember correctly, “Then a wonderful and terrible thing happened, Mohammed Ali learned he could take a punch.” Sometimes, when I’m in a politically dangerous situation I think, “I took the bullet for the accountant and it wasn’t so bad, I can do this.” I’ve had lots of powerful and demanding bosses over the years, but now, I fear no evil.
5. Sometimes, when you face your fears they go away.
6. Sometimes, when you face your fears they don’t go away and that’s OK, too. What matters is not whether you are fearful or not, but whether or not you let your fears stop you. Along these lines, the toughest, most courageous guy on TV, in my opinion, is, by far, Adrian Monk. Monk is afraid of everything, but he never lets his fears keep him from doing what is right.
7. You need to respect your fears. “Adam Smith,” the one-time editor of Institutional Investor magazine, once said, “If you don’t know who you are, this is an expensive place to find out.” This applies to many aspects of trading, but more than anything else, it applies to courage. An investor who pretends to have more courage than he has is setting himself up for failure. For example, if an investor cannot think well during a crisis, and many professional investors cannot, he must draw up rules that will guide him. For example, “Close out the investment when the cumulative losses reach 40%.” Or, “Evaluate the investment once a year on November 1. Otherwise, pay no attention to the investment.”
I am not suggesting that these are optimal rules. I am suggesting that the optimal rule will depend on both the investor and the investment. Similarly, I do not want to suggest that every investment can work for every investor. If an investor cannot control his fears, he needs to know that and act appropriately. Many alternative investments have violent drawdowns. If an investor cannot handle such drawdowns, he needs to play in the shallow end of the pool. He needs to ignore taunts like the one I just threw. Knowing who you are, warts and all, and acting in a way that is appropriate for you, takes real courage.
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