Models, Morals, and Management in a Trading Room

Most investment banks, certainly the larger ones, have functions outside of investment banking itself, among them trading, securities research, asset management, and wealth management.  Each subgroup has its own structure, culture, and rules by which it interacts with the other parts of the organization.

This posting looks at a trading operation, by way of Daniel Beunza’s book, Taking the Floor.  Like Karen Ho’s analysis of the norms of corporate finance and M&A within investment banks (which was the topic of the last posting), Beunza’s evaluation developed over many years; the reader experiences his discoveries and changing conclusions as each layer of the onion is peeled away.

Trading is now substantially different than it was when Beunza was first exposed to the business in 1998.  It is much more automated (although that varies by asset class and security type), and — because of regulatory changes following the financial crisis — investment banks don’t dominate institutional trading flows to the extent that they once did.  Those changes are part of the story.

“New people, new practices, and new tools” altered social relations and communications within firms, and with clients and counterparties.  Types of trades that had worked in the past no longer did, while other opportunities opened up because of the evolution of derivatives and multi-asset strategies.  Deregulation and technological improvements fostered outsized risks before the crisis, then the Volcker Rule changed the game again after it.

“Models, Morals, and Management in a Wall Street Trading Room” is an apt subtitle for the book.  Those three factors are explored in depth.

A remarkable gap

Beunza was intrigued by what he saw as “a remarkable gap in the academic understanding of finance” regarding “the managerial and organizational aspect of Wall Street.”  He observed that his fellow academics fell into one of two camps:  “orthodox economists, who studied capital markets from the standpoint of rational choice” and “behavioral economists, who explored the ways in which decision-making biases impacted financial markets.”  Missing was the social aspect of markets, within and between the organizations that are the major actors within the ecosystem.

The first part of Beunza’s work involved interviewing traders and observing their work.  He longed for “the habituation and familiarity that arises from closer involvement,” so Bob (the head of the trading operation through whom he had arranged the interviews) gave him a pass, desk, computer, etc. for several months.  In subsequent years, Beunza would revisit the firm, which he called “International Securities” to hide its identity, and continue to interview the people involved, even after they had moved on.

Bob

Bob is the main protagonist in the book.  He was in many ways an anomaly, “a curious dude” whose approach to running a trading room differed from others on the Street.  Agreeing to have an academic embed within his staff was one example of Bob’s willingness to stand apart.

Beunza realized that the trading room at International Securities “was not representative of the average investment bank on Wall Street, but illustrative of what a possible solution to the challenges that plagued the financial industry might be.”  Bob sought ideas from outside the industry rather than just replicating what others were doing, and rethought established ways of structuring a trading room and managing traders.

At first, Beunza thought that Bob’s ideas gained traction through his moral authority as a role model.  Later on, Beunza learned that prior to the time of his research, Bob was more forceful in creating a number of rules that would he thought would lead to the culture that he sought.  By the time of Beunza’s period of involvement those rules were well entrenched, so he hadn’t realized the management decisions that led to the environment that he witnessed.  (That’s a good lesson for those trying to evaluate an organization.  The norms in place can be the product of evolution, but often there are direct actions at some point in years past that were instrumental in framing them.)

In many ways, Bob was trying to hold onto the ethos of the Wall Street partnerships that had disappeared in the 1990s.  One of the other interviewees reflected on those structures:  “The partners did two things that people don’t do these days:  they did their own risk analysis, and they criticized each other’s risk positions at the partners’ meetings.”  A former banker in the City of London characterized the impact:

In the old broking firms, career structure was straightforward.  The goal was partnership.  Once this was removed [in the move to a corporate form] status was dethroned and cash became king.

The structure had changed, the culture had changed, and risk positions were increasingly quantified and “managed” via models.

Models

Beunza’s research took place during a period when models (especially Value at Risk, commonly known as VaR) were increasingly used to summarize positions at the trader level and across the entire firm.  The problems with models and the increasing dependence upon them are a major theme of the book.

The “performativity” of models in the financial world make them different than models in the realm of the hard sciences.  Two examples, the portfolio work of Harry Markowitz and the Black-Scholes option pricing formula, were descriptive at first and then something more than that, as their adoption shaped how market participants (and markets) behaved.  The theories behind the models became self-fulfilling:

New quantitative representations had led to new practices and trading strategies.  In turn, these strategies often created a new financial product, and thus an opportunity for yet another representation.

As models become widely adopted, the returns that were available to pioneers in their initial use are “competed away” and new models are built on top of the old ones, “leading to an overlap in financial properties and interdependencies across models,” in what Beunza calls a “performative spiral.”  Those layers of belief in models are rarely challenged once they are entrenched.

But problems lurk.  According to Beunza, Bob was concerned that the use of models “creates an illusory simplification that is attractive but misleading.”  That can lead to “model-based moral disengagement,” where “the self-regulatory function of individuals ceases to apply.”  Beunza walks through how the historical relationships changed within firms and with outside parties once models overcame judgment as the governing factor of behavior across an organization.

In a column in the Journal of Portfolio Management many years ago, Peter Bernstein wrote:

Models are not immutable.  Indeed, the more immutable we believe them to be, the more useless they are likely to become.

Risk management

The risk management department of a firm is culturally different and usually separate from trading, with little political power relative to those who are viewed as being on the front lines making money.  One interviewee remarked that the function “should really be called risk measurement,” since it “was not effective in instilling restraint.”  Bob said:

One guy gets the rewards and the other gets the responsibility.  One guy is the hero, the other guy is the scold, right?  How the hell can that work?

Over time, VaR became the measure of risk that was the essence of communication between traders and risk analysts and firm management.  What was meant to be a management tool turned into a management substitute.  It allowed for “control at a distance,” so that a firm could:

grow and diversify into multiple markets and asset classes without appearing to lose its ability to quantify and aggregate the various risks it entered into.

A single metric was used to define risk, even though it did so in a narrow way that overlooked the widespread adoption of the model across the industry — and its shortcomings.  The tool that was supposed to manage risk completely missed the true risks that built up in individual firms and across the industry during the years leading up to the financial crisis.

Everything is seating charts

Over the years, Bloomberg columnist Matt Levine has titled a number of items “Everything is seating charts,” because issues of status and interaction in an organization are driven by who sits where.

When he came to International Securities, Bob created a trading room structure unlike others on the Street, and periodically he would shake up the layout of the different specialty desks in the trading room if he thought things were stale or that market relationships were evolving in ways that required new combinations of people.  For example, Bob began to see three properties of securities — fundamental, quantitative, and volatility — as driving strategies in disparate directions, and he thought that should feed into the organizational design.

Trading rooms are complex social entities, where visual cues and background noise provide clues, and proximity is a critical factor in whether and how people work together.  Without attempts at integration, traders tended to remain in their own silos.  According to Bob, at most firms, if you ventured into another area:

There were these cold looks.  Somebody would ask, “What do you want?” in a defensive tone.  People do not like you to watch them trade.

Those tendencies lead to a lack of information sharing, which Bob wanted to avoid.  So he organized the traders “to encourage collaboration and reduce status differences,” drawing from network theory to arrive at the configuration of the room.

Managing traders

A trading room is a community.  Bob described how he saw himself within it:

My role is as a cooling rod.  I walk the floor.  I talk to people about non-substantial issues.  I try to find out who is stressed.

But he needed to overrule traders’ decisions and force them to liquidate losing positions, a delicate balancing act that “created a complex relationship” with them.  He was also mindful that a trader’s intuition might be hindered by a forced analysis, that the initial implementation of a good idea “could be hampered by managerial supervision.”  Good managers need to read the room and protect their people from undue interference — but they also need to objectively judge their work and act accordingly.

Most traders are happy being traders, so they are not angling to move out of the trading room to another role.  That lack of interest in hierarchical advancement feeds into their focus on maximizing income, and that can be a source of much friction.  At other firms, traders often “experienced their outsized bonus as insufficient and unfair,” so Bob used a simple arithmetic approach for calculation, avoiding subjective issues and not cutting special deals with those who thought they deserved them.

Examples of trades and their effect on traders are included in the book, among them some merger arbitrage situations.  One trader offered this memorable comparison:  “The best predictor of your skill at merger arbitrage is your potential as a taxi dispatcher — the skill to do lots of things in parallel.

In general, complex trades are sought after, because that’s where bigger returns can be found.  But the theoretical limits to arbitrage become very real when you have a trade on that doesn’t move in the way that you think it should.

Periods of opportunity appear and disappear, so traders need to have the ability to take advantage of the openings that exist while restraining themselves when the odds are poor.  The standard models may not provide that warning, which is where the morals and management come in.

Universal concerns

Many of the topics addressed in the book apply beyond the confines of a trading floor:

~ While formal “speed bumps” can be used within an organization (or by regulators), morals are more effective as a means of social control.  Norms are powerful.

~ Bob:  “Money is not a good driver of cooperation,” especially when people are getting paid massive bonuses for their bottom-line contributions.  (This is an important issue across organizations — with beliefs on the topic that differ significantly based upon the type of entity and its culture.)

~ Beunza wrote of “the reactive and social nature of the trading room:  people resisted being acted upon, whether it was being exposed to the screams of others, seen by others to make a flawed argument, or being told to whom they should talk.”

~ The range of investor types and their strategies, resources, and concerns is staggering.  An investment bank sees flows from investors for a variety of reasons; understanding the motivations of the different players in the ecosystem is crucial to getting a sense of what is driving changes in the market.

~ No matter what kind of entity you seek to create — asset manager, advisory firm, etc. — you will mostly imitate what others have done before you, for better or worse, unless you purposely set out to build something that addresses the weaknesses of the standard approach.

~ Invariably, the best performers in a cycle are the ones who get destroyed when circumstances change in a meaningful way.

~ After a time trying to study International Securities, Beunza realized that his approach had been limited, because he was only dealing with traders and their managers.  That is similar to a key failing of many due diligence analyses, namely, a constriction of inputs.  Those deemed to be most important get too much attention when a representative sampling of people from throughout the environment under study will provide a more complete picture.

~ Bob:  “Communication is the central driver to adding value in business.”

Understanding an organization

As with the other sources in this series, Taking the Floor gives a detailed and valuable look at the workings of one part of the ecosystem.  An anthropological view can offer deep insight into why an organization does what it does, providing perspectives that can be missed by others.

Published: May 17, 2023

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AI Über Alles, Gaping Holes, and Searching for the Right Valuations

If you’re not currently a paid subscriber, it’s time to take advantage of a two-month free trial to get access to all of the content from The Investment Ecosystem, which includes everything in the archives.

AI über alles

The introduction of ChatGPT set off a fervor regarding artificial intelligence that seems to be expanding exponentially.  We’ve seen many shooting stars before — remember the metaverse? — but AI has been researched and talked about for decades.  Now it seems that long-held hopes and fears are close to reality.

As ever, the investment industry is in chase mode, looking to own the picks-and-shovels providers and the firms that can disrupt an industry using AI, while remaking its own processes to capture that elusive alpha.

The CFA Institute Research Foundation has issued a handbook on AI and big data applications in investments.  The introduction lists a wide range of people who should read it, from “C-suite executives and board members” to those leading projects to investment professionals, regulators, and students.  A foreword that precedes it illustrates one challenge, in that it assumes a higher level of knowledge than most readers will have.  As with many other investment topics, finding the communication sweet spot regarding AI concepts will be difficult except within narrowly-drawn groups.  Important topics are covered within the handbook, but which of them connect with you will depend on where you are starting from.

Elsewhere, there are all sorts of angles to pursue; a smattering of examples:  How does ChatGPT work?  Which businesses will be disrupted?  Can ChatGPT get to the essence of sentiment by summarizing the bloated disclosures in filings?  How long before we see revolutionary changes in applications (and elevated risks) because of AI?  Can I use it to beat the market?

One place to start is with a series of questions that will get you thinking about some of the quandaries you will face in the future.

Gaping holes

David Larcker and Brian Tayan released a paper in the Stanford Closer Look Series, “Seven Gaping Holes in our Knowledge of Corporate Governance.”  The authors write, “The formulation of best practices (or should we say “better practices”) would improve greatly from careful research into these topics.”

In brief, the seven topics are:  what attributes make a board effective; how to assess the true independence of directors; how to deal with the inefficient market for CEOs; how much value creation should be attributed to CEOs; how to align pay and performance; whether having “quality shareholders” makes a meaningful difference (if you can identify them); and what role other stakeholders should play in governance.

Searching for the right valuations

A white paper from Deloitte is titled “Now that the dust has settled,” although it’s not clear what that means.  The piece is aimed at mutual fund board directors, to help them in their oversight of valuation practices, especially regarding alternative investments, but the ideas put forth apply to other kinds of entities and governing bodies.

For a given private investment, the valuations used by owners can vary widely, causing confusion and poor decision making — and setting funds up for legal claims regarding excessive fees for assets under management if the assets are overvalued.  But there is no easy answer:

Valuations that are “conservative” may reduce the risk that a fund incurs excessive fees.  However, for open-end funds, it can still lead to an incorrect NAV on each and every day that the NAV is calculated, disadvantaging certain fund investors.

University initiatives

Adjacent items on the “Frontlines” page of a recent issue of Pensions & Investments highlighted new investment-related initiatives at high-profile universities.  Ashby Monk will be leading the Institutional Investors and Sustainable Capitalism Seminar at Stanford; he seeks to “get a generation of Stanford grads to want to work for pension funds.”  Yale created the Swensen Asset Management Institute, according to its website, to “further the study and practice of asset management by supporting research, convening thought leaders, and funding scholarships.”

Other reads

“Regulatory arbitrage,” Matt Levine, Bloomberg.  (Second section of the column.)

The lesson that I learned from my career as a derivatives structurer is that much of finance is about this sort of regulatory arbitrage.  Economic life is socially constructed, society has rules, and you can make use of the rules to make money.

“Inside Wells Fargo’s ‘chaotic’ journey to transform its services for the ultrarich,” Hayley Cuccinello and Reed Alexander, Insider.  Should advisory firms segment their advisory services for different levels of wealth?  How?

“Apple is a Chinese company,” Jay Newman, Financial Times.

In the race against time, Apple’s scramble to reduce dependence on China won’t beat the CCP’s power to erase most of its value with the stroke of a pen.  Investors, take note.

“On the Road to Failure,” Slidebook.  Slide decks created by some notable frauds and failures of the past and present.

“Investors With Radically Different ESG Views Got in a Room Together. Here’s What Happened Next.” Alicia McElhaney, Institutional Investor.  Giuseppe Bivona:

My biggest concern is that we have five constituencies.  Two leading proxy advisors and three dominant asset managers.  They effectively control the outcome of any annual general meeting.

“It’s a Case of ‘BuyIRR Beware’ for Private Equity Investors as Headwinds Compress Multiples,” Jeffrey Diehl, Adams Street.  On the need for “rigorous IRR diligence” in a changed environment.

“Spitzer’s research settlement at 20,” Craig Coben, Financial Times.

Nuclear plant safety inspector Homer Jay Simpson once described alcohol as “the cause of, and solution to, all of life’s problems.”  The same could be said about Spitzer’s reforms and the problems with equity research.

“Who Goes Into Finance, and Who Stays?” Byrne Hobart, Capital Gains.  “The baseline skill in finance isn’t cleverness, but conscientiousness.”

“Vicious Traps,” Morgan Housel, Collaborative Fund.

Take patience and confidence.  They both sound great.  But mixed together they often form stubbornness, which is a disaster.

“The Direct Indexing Landscape,” Jason Kephart, et. al, Morningstar.  Following the flurry of acquisitions in the “arms race” among asset managers to get on board the direct indexing trend, providers are struggling to differentiate themselves.  (Note that Morningstar offers its own direct indexing service in addition to commenting on those of others.)

Evergreen quote

“Diligence is the mother of good luck.” — Benjamin Franklin.

Shadow banks

This chart accompanied a Greg Ip article, “Banking Problems May Be Tip of Debt Iceberg,” from the Wall Street Journal.  Strong growth in assets is not a predictor of problems, but it does bear watching when the environment changes, which we’ve seen in spades.  The focus has been on banks to date; will it shift to “shadow banks”?

They don’t face a run-on-the-bank risk of depositors fleeing, although a series of tweets by Kieran Goodwin argues that something similar is possible, ending with this:  “Forced selling into a market with zero liquidity would have wide ranging ramifications.”

As you would expect, the view from the managers of private credit assets is more sanguine.  See, for example, “The Opportunity of a Lifetime?” from Benefit Street Partners, which acknowledges some near-term challenges but draws a very positive picture overall, and an article in Institutional Investor.

Postings

“Airbrushed Appearances and Underlying Realities” was a Sampler posting, brought out from behind the paywall for all to read.  Its last paragraph:

A conventional due diligence process allows asset managers to deliver their intended message as they would like.  Discovery involves getting past that.

Paid subscribers also received the first two postings in a series on the cultures at different kinds of investment organizations:

“The Anthropologists and the Pension Funds.”

“Wall Street Culture and the Shareholder Value Mantra.”

All of the content published by The Investment Ecosystem is available in the archives.

Thanks for reading.  Many happy total returns.

Published: May 8, 2023

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Wall Street Culture and the Shareholder Value Mantra

How have the mores and operating models of investment banks shaped the markets of today?

A deeply-researched book by Karen Ho, Liquidated: An Ethnography of Wall Street, provides the source material for this posting (the first of two about investment banks), continuing a series of anthropological evaluations of industry organizations (which began with a look at pension funds).

Ho’s first exposure to Wall Street culture came when she worked for Bankers Trust in the 1990s, during a go-go period for corporate activity.  The book was published in 2009, just after the financial crisis — during which many investment banks would have perished if not for extraordinary intervention by governments and central banks.

An ethnography is a descriptive study of a culture.  Ho’s work is based not just upon her own experience, but on the development of the industry, studies by others, and, most importantly, extensive interviews with employees from a variety of firms.  Evaluating “the culture of power rather than the culture of the powerless,” as one anthropologist put it, often requires a different approach than embedding in a tribe, since access to key people is more challenging in that situation.

Painting a picture of a culture involves understanding its historical underpinnings, noticing the details that define how it works, and recognizing the themes and beliefs that tie it all together.

Ho could pinpoint the day in 1995 when she became interested in studying Street culture.  AT&T announced a massive restructuring, causing a strong rally in its stock.  By then, that sort of reaction had become the norm, with investors cheering every downsizing or dismantling that hit the newswires.  For Ho:

What was so arresting about Wall Street’s approach to corporate downsizing was its celebratory tone, its rejoicing in the very fact of corporate restructuring.

Ho could have studied the phenomenon from a variety of angles.  For example, why did sell-side analysts (the most influential of which work within investment banks) raise their earnings and ratings on the companies that restructured?  Why did asset managers buy the stocks in response?  How did asset owners respond to the change in market behavior, given that they have longer time horizons and broader concerns?

Ho chose to analyze the major investment banks, specifically the functional areas of corporate finance and M&A, “because they directly demonstrate the interconnections between financial and productive markets, between financial and corporate institutions.”

In her book, she captured the investment banking culture — and connected it to the predominant investment narrative of our era.

A culture of smartness

Above all, the top investment banks try to foster — and market to their clients — a culture of smartness.  To bring that narrative to life, over the last four decades the firms have built an elaborate feeder system that concentrates its efforts on attracting talent from a small number of top schools.  (Ho’s time at Stanford and Princeton made her part of this “elite kinship,” which led to her Bankers Trust job and enabled her to have the credentials and contacts to tap a network of interviewees during her field work.)

The “hunting season” for that talent is well documented in the book — emails, ads, events, swag, and wining and dining (which was referenced in an earlier piece on reciprocity).  A Goldman Sachs recruitment schedule for Harvard provides a sample of the progression of meetings and interviews that go along with its marketing efforts.  Candidates are sourced primarily based upon their apparent smartness, not on their finance ability; they hear over and over that they deserve to move from elite universities to elite (and very high-paying) jobs.  Each firm tries to pitch itself as the best of the best to buttress that message.

White-collar sweatshops

Orientation for those who are selected starts with a financial training course and some basics about the firm that hired them.  Soon enough they learn that “Wall Street emphasizes short-term, competitive individualism, not teamwork or the cultivation of long-standing mentorship or collegiality.”  And that the work itself can be brutal, despite the “mundane, but seductive perks” of expensed food and free rides home:

On Wall Street, overwork is a normative practice.  One is not initiated into the investment banking life until one has experienced its rigorous hours.

After being chased and pampered during the courting stage, the promised glamour of investment banking is at first out of reach, further up the ladder.  The early years in the “white-collar sweatshop” primarily involve doing grunt work — models and endlessly-revised slide decks — for the pitches the new hires hope to make themselves someday.

In 2021 the financial press was full of stories about junior bankers at a number of firms rebelling against this long-established culture — and being awarded bigger salaries and less onerous working hours by the investment banks.  That was a time of hot and heavy dealmaking.  The cycle turned the next year; the stories disappeared (and some of the junior bankers probably have too).

Doing deals

Momentum drives the investment banking business.  The appetite for mergers and acquisitions fluctuates in response to the economic environment and the popularity of those activities at any point in time.  And while some corporate finance tactics have been on the table forever, there are always trendy new strategies to market.  Whatever the situation, investment bankers have something to sell — and for the most part they sell what’s hot.

The firms in which they work do the same thing.  Take SPACs as a recent example.  Out of the blue, that market backwater became the topic of headlines and several new SPACs were announced every day.  Big investment banks scaled up in an area they had ceded to bit players in the past.  Now the business has withered.  That’s one small example; a much more dramatic one in size and economic effects was the subprime mortgage mess.

Scale up, scale down is the name of the game.  Push something as hard and far as you can until it doesn’t work any more, and don’t worry about the consequences, because:

It is important to remember that investment bankers always received high compensation for the deal no matter the result.

The bankers and their firms go where the money is flowing.  That leads to cycles of booms and retrenchments (and occasional busts or government interventions) at the firms and within individual units and specialties.  That fact defines the culture of the organizations and the experiences of the people who work there.

Liquid lives

Befitting and reinforcing the culture, investment banking compensation practices are marked by high pay and a lack of job security to “engender a relentless deal-making frenzy with no future orientation.”  As one of Ho’s interviewees said:

You need to be thinking I’m going to get as much as I can today because you don’t know what is going to happen tomorrow.

That employment volatility includes another wrinkle:  It is common for layoffs to occur before bonus season so that the pool of money that is available will go to those who remain at the firm.

Given the upsizing and downsizing, firms often aggressively buy talent at the peak of trends.  Therefore the success of your career is sometimes determined not by the quality of your work but by whether you arrived near the crest of a wave, only to be washed away before you had a chance to show your meddle.

For many, all of this is made acceptable by the levels of compensation that are available.  Some think they’ll make their pot of money and get out, but, as an interviewee said, it doesn’t always work that way:

They just can’t make that leap.  I’d say maybe half the people like [the investment banking life] and half the people don’t.  The half that don’t are sort of caught anyway.  They have built up a lifestyle around the compensation, and they are unwilling to give up the lifestyle or they can’t stomach the idea of making less.

Shareholder value

Ho’s analysis of the culture of investment banks is as industry regulars would have anticipated.  More surprising is how she connects it to the proliferation of the shareholder value mantra that has driven market and corporate behavior over the last four-plus decades.

The “two dominant visions of capitalism (one understanding the corporation as social entity, the other viewing the corporation as financial property)” have been in a tug of war, with the latter view winning out in the marketplace.

Ho points out that much of the story about shareholder value is muddled:

One of the most egregious mistakes in neoclassical narratives of corporate history is their refusal to understand the history of stocks, shareholders, and the stock market as a phenomenon different from (though related to) the history of corporations, and thus constructed on a diverging set of values and historical trajectories.

Those who advocate for the preeminence of the shareholder value philosophy claim that it is a return to the historical norm.  But Ho challenges that notion in detail, examining the tenets of Adam Smith’s philosophy and the history of corporations to conclude that the belief that the stock price as the sole measure of success does not rest firmly on those building blocks, but rather is a creation of the 1980s.

That decade was marked by the emergence of leveraged buyouts and the high yield bond market (as well as mortgage-back securities and new kinds of derivatives).  Wall Street was pivotal in the development of each and in the propagation of the shareholder value philosophy, which resulted in dramatic changes to the institutional investment landscape.

Time horizons collapsed, and “value” went from something to be delivered over time by means of the corporation (a purposely illiquid form) to “making a lot of money today” for shareholders.

When she was at Bankers Trust, Ho was told that “the mission (of all of Wall Street and all corporations) is always to create shareholder value.”  But the record of the philosophy in practice is spotty at best and often disastrous.  If you define value as what can be realized today, you don’t spend any time looking at how things worked out over time; it’s on to the next deal without regard to the ultimate consequences of the transactions that came before.

Despite the Street’s own striking failures, it has managed to lead the cheering section for shareholder value.  The M&A and corporate finance areas urge companies to do boost their stock prices in whatever way they can.  Corporate managers learn to cater to the stock research analysts at the banks and to manage to near-term numbers rather than looking further out.  Another author, Richard Sennett, wrote of the pressure that is “put on companies to look beautiful in the eyes of the passing voyeur.”  That’s hardly a prescription for true value creation.

Utterly predictable

At the end of the book, Ho quotes Fortune editor-at-large Shawn Tully, who wrote in November 2007, almost a year in advance of the dramatic collapse of Lehman Brothers and the rescue of many other firms:

Two things stand out about the credit crisis cascading through Wall Street:  It is both totally shocking and utterly predictable.  Shocking, because a pack of the highest-paid executives on the planet, lauded as the best minds in business and backed by cadres of math whizzes and computer geeks, managed to lose tens of billions of dollars on exotic instruments built on the shaky foundation of subprime mortgages.  Predictable because whether it’s junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes.  As the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times.

The get-what-you-can-today ethos, built into Street institutions and part and parcel of the shareholder value movement, is still the defining feature of today’s capital markets, despite the cataclysm of the financial crisis.

The challenge

In a 2010 review of Liquidated in the Financial Analysts Journal, Janet Mangano and William Hayes wrote that the book “asks many questions that those who work in the investment field should ask themselves,” about how investment banks are run, the role that they play in the larger ecosystem, and the shareholder value mantra that they have promoted:

Although many in the financial industry will not agree with Ho’s hypotheses and conclusions, they will be challenged by the questions she raises and enthralled by the body of fieldwork she presents.

The shareholder value revolution has rippled through the investment world, with the ethos of investment banking culture permeating the practices of entities far and wide.

Cultures are built up slowly over time, often developing in ways that weren’t intended or foreseen.   Fourteen years after its publication, the questions prompted by Karen Ho’s book should be debated at investment organizations.  Foremost among them:  Whose game are we playing?

Published: May 7, 2023

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The Anthropologists and the Pension Funds

Culture is much cited in the investment world but little analyzed.

The sociologist Pierre Bourdieu said, “Every established order tends to make its own entirely arbitrary system seem entirely natural.”  Norms become entrenched and are defended by those involved, even if they haven’t been reexamined in a long time.  In every part of the investment ecosystem there are prevailing practices — allocation frameworks, fee structures, roles, processes, theories, mantras, etc. — that are rooted in history, lore, and long-forgotten imperatives.

We think of anthropologists as studying tribes of one sort or another.  Can the techniques that they use provide a useful way to analyze investment tribes?  If culture is important, shouldn’t we learn how to evaluate it as best we can?

This posting (the first in a series) covers an evaluation of pension funds by John Conley and William O’Barr.  The quotations throughout are drawn from these sources, all written by them:

Fortune and Folly: The Wealth and Power of Institutional Investing (book).

“Managing Relationships: The Culture of Institutional Investing” (Financial Analysts Journal).

“The Culture of Capital: An Anthropological Investigation of Institutional Investment” (North Carolina Law Review).

“Pension Fund Management: An Anthropological Perspective” (conference presentation, no link available).

Other than the book, the law review article is the most thorough.  The conference presentation is also very good, although it is unavailable now (because CFA Institute thoughtlessly removed the transcript from its archive, along with many other valuable materials it has produced).

Each of the sources is from the early 1990s.  Despite the passage of time and changes in the environment, the conclusions are instructive.

The methods

The authors wrote that despite “the size and power of pension funds, very little is known about how these organizations actually work.”  So they interviewed people at nine funds (and at some of the asset management firms hired by the funds):

The anthropological method depends primarily on intensive observation and open-ended interviewing.  In crude terms, the anthropologist lives with the natives, learns their language, observes their customs and way of life, and talks with them at length.  The anthropological interview is relatively unstructured, designed more to encourage informants to identify and elaborate on issues that are important to them than to survey their views on issues that are important to the interviewer.

The “naïve perspective” of an interviewer using these methods yields a different kind of understanding than would come from a typical analysis of an organization by an investment professional.  Both points of view are important, but one is almost nonexistent in practice while the other is omnipresent.  That is a problem:

Business and finance are human enterprises, and human beings always behave in cultural ways.  Anyone who aspires to a real understanding of these enterprises must therefore come to terms with the culture of capital.

Major conclusions

The authors found that when interviewees were asked why they did what they did in their roles, they invariably focused “in the first instance on cultural rather than on economic or financial grounds.”  They talked about “cultural, historical, and personal factors” that framed their decision making.

Non-economic forces are powerful in all kinds of organizations, so it should be no surprise that that is the case with investment entities.  But that reality stands in contrast to the perception of the industry held by those outside of it, who expect decisions about investments to be driven by economic considerations.

One prominent finding came out in a variety of ways, referenced here following a section about indexing:

These comments about indexing suggest a preoccupation with responsibility or, more accurately, with displacing responsibility.  Comments about assuming, assigning, or avoiding responsibility were prominent in every interview we conducted.  Moreover, it appeared to us as naïve outsiders that decision making procedures in many funds had been designed almost with questions of responsibility in mind.

Two other observations:

A critical element in these accounts is that individuals’ perspectives on institutional structures and strategies are constrained by the time horizons of their own careers.

In our study of the nine funds, we were repeatedly struck by the lack of interest in questioning or analyzing the structures and strategies that had evolved.

The cultural and philosophical underpinnings for decision making were not regularly or intensively examined.  Changes occurred in response to significant external events or internal problems.

Public versus private

Of the nine funds, three were large public funds and the rest were for corporate plans.  In retrospect, the work by the authors took place at the time of a shift in the relative market influence of those two types of entities.

Many public funds have grown dramatically over the ensuing three decades.  Corporate plans are less prominent than they were, since company managements tired of the accounting rules that caused pension results and projections to affect the bottom line.  They embraced defined contribution plans to shift the long-term benefit burden to employees, and employed strategies to de-risk or jettison the responsibilities of legacy defined benefit plans.

Cultural differences between the public and corporate investment functions were identified by Conley and O’Barr.  Public funds were tied to the civil-service culture, so people were paid less.  Their decisions were also subject to public scrutiny from the media and pressure from political leaders.  Most working in the corporate pension world were transferred from other areas within the firm, sometimes taking them off the fast track of advancement.  The cultures within which they worked varied quite a bit:

Most private pension funds adopt the cultures of their sponsoring corporations.  To know the culture of the sponsoring corporation is to understand what makes the fund’s decision making tick.

In one sense, public and private investment staffers had the same jobs, but their environments were not alike.  That led to differences in the use of indexing versus active strategies, internal versus external management, diversification philosophies, organizational structures, oversight committees, and the willingness to engage with owned companies and the hot-button issues of the day.  Plus:

Most public funds are governed ultimately by diffuse, non-expert bodies.  Such bodies probably are “worked” more easily (to use our informant’s apt term) than are corporate executives and committees of corporate boards.

Private fund executives feel that they are bound by a version of the Golden Rule:  Do unto other corporations as you would want their pension funds to do unto yours.

Relationships

Relationships influence decision making.  Internally, connections (or frictions) among co-workers or with members of governing committees, etc. can sway opinions and actions.

And then there are the relationships with external asset managers, which can have the same kinds of effects.  Those relationships matter a great deal or asset management firms wouldn’t devote the sizable resources to them that they do.  Selection, evaluation, and retention aren’t just by the numbers.

Pension officials and asset managers need each other, but the authors gave a blunt assessment of the relationships based on their interviews:

Superficially, the relationship between pension funds and outside managers could be characterized as one of mutual contempt.  Rarely have two groups of people said such consistently terrible things about each other.  Within the pension funds, we heard that outside managers are not demonstrably effective and that they charge much too much for services.

The critical evaluation criterion in looking at outside managers was whether they were doing what they said they would do.  Did they implement the style the fund hired them to implement?  A “change in stripes” was the thing most feared.  As long as the stripes remained vertical or horizontal, as the case may be, firing was rare.

From the managers’ perspective, we heard how ignorant the people in pension funds are, how sophisticated presentations had to be condensed into a single page.  One manager referred to it as the Sesame Street version of the presentation.

And:

The dominant feature of the relationship between fund and manager is the illusion of control each has.  Fund executives would have you believe they control the quality of their managers’ work through a rigorous program of selection and evaluation.  At the same time, managers talk of how they control the selection process by pandering to the ignorance and insecurities of these same executives.

In fact, each group seems to be doing a successful job of patronizing the other, to their mutual benefit.  The managers’ performance typically hovers near the mean, so the fund executives are rarely embarrassed, while the managers are gainfully and profitably employed.  Whether all this attention to relationships promotes the interests of the pension beneficiaries, the sponsoring corporations, or the American economy is another question, and one for which no one we interviewed had a very good answer.

Lingering issues

Several of the ideas and issues that came to the attention of the authors are still with us.

Social investing.  For the most part, executives at several funds said that both ERISA and the prudent person standard “absolutely rule out so-called social investing.”  However, “some public fund officers take just the opposite view.”  The seeds of today’s ESG debate were germinating at the time.

Short-termism.  In the early nineties, the changes in corporate and investment behavior were such that there were concerns that short-term thinking was becoming destructive.  Some excerpts:

Although fund executives may speak of the hereafter in responding to charges of short-term myopia, the everyday discourse of the investment world focuses on the short term.

The advent of the computer has brought about daily scrutiny of performance.

We found a remarkable contrast between the way people are required to think for reporting purposes and the rhetoric of the long term.

The procedures for accounting to beneficiaries, corporate boards, and public trustees — just like corporate accounting procedures — are not based on the long term.

Professional rhetoric so constrains the investment world that a serious commitment to the long term is an act of intellectual originality as well as a burdensome undertaking.

The interviewees would often speak of the general problem while protesting, “Not us!”  The authors wrote about the notion of a “composite villain” — each fund was putting five or ten percent into strategies (like leveraged buyouts, the flavor of the day), which seemed small on their own but in the aggregate represented a substantial change in investor behavior.  Therefore, “It may be that pension funds contribute to short-term pressures in a subtle, cumulative way that is all but imperceptible to pension fund managers themselves.”

Gender.  Back then,

The world we saw was predominantly, but not exclusively, a male world.  We made a special point to talk to the women who were involved in pension fund management.  The small sample of women we had the opportunity to interview had a very different way of talking about the world.  As a matter of fact, many of them commented on the baseball metaphor [commonly used by men at the time], its inappropriateness, and its triviality.  Women enjoined us to think about investment, not in terms of sports, but in terms of duty and relationships.

The “market cycle.”  This vague but still widely-referenced notion for evaluating performance was put into perspective:

The market cycle seemed the most flexible of terms.  It was a way of arguing things in a highly abstract, but not very specific and certainly not statistical, manner.  A market cycle seemed to be an after-the-fact, post hoc rationalization of the way things went.

Official and unofficial versions

For naïve observers, Conley and O’Barr got to the essence of these organizations and as a result received a fair bit of attention from the industry for a short time.

The authors expressed hope that the unique structures of other institutions like banks and mutual funds would be studied in the future — and that the influential role that consultants played between asset owners and asset managers would be examined.  In subsequent postings, we will look at some other studies of industry players, but as the authors could have predicted, anthropological examinations are easily dismissed by the keepers of investment culture, so there hasn’t been a great deal of that kind of work.

It is easy to point to the limited number of organizations that were analyzed or the methods used (even though the same critique can be made of much investment analysis), but the conclusions were sound and captured the nature of the entities — and, for the most part, still do today.

To be fair, all of this is not unique to investment cultures.  At the end of the Q&A session following their conference presentation, the authors were asked how other industries would look.  Conley responded:

I think the structure of the findings would be the same.  Every field of endeavor has an official version — what anthropologists call the “normative version” — which is retailed to an audience, and the back-room version, which is the unofficial or “pragmatic” version of how things work.  The specifics would be different, but in any field, the official version and the pragmatic version of what is going on differ widely.

Getting past those narratives should be at the core of the evaluations of our counterparties.  Anthropologists can show us the way.

Published: April 27, 2023

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EPS Maximizers, Investment Beliefs, and Knowing Everything

If you’ve been reading The Investment Ecosystem for a while, you know that one of our specialties is due diligence.  Here’s a one-pager that shows the consulting, training, and content resources that are available.

EPS maximization

“Modeling Managers As EPS Maximizers,” by Itzhak Ben-David and Alexander Chinco (via NBER), opens with this:

Textbook corporate-finance theory assumes that firm managers maximize the net present value of future cash flows.  If a policy increases this net present value (NPV), they do it.  If it does not, they do not.

There’s only one problem with the theory.  That’s not the way of the world.  If you ask corporate managers or observe their actions, you know that EPS (earnings per share) considerations predominate.  So:

We take firm managers at their word and show that EPS maximization provides a single unified explanation for a wide range of corporate policies such as leverage, share repurchases, M&A payment method, cash accumulation, and capital budgeting.

That sets up a conundrum for investors, as to how to judge what companies do as opposed to what we think they should do.  By and large, the industry has chosen EPS as the yardstick for analysis, although those with longer time horizons usually favor other measures.  Clarity about what matters and why — and the implications of ignoring the opposite point of view — is essential.

Marks on SVB

The latest memo from Howard Marks starts with a good synopsis of the fall of Silicon Valley Bank, followed by elements it shared with other banks:  asset/liability mismatches (despite liquidity being a “transient quality”), high leverage, and a reliance on trust.  A combustible mixture, making banks “essentially, highly levered fixed income investors.”

He writes of the differences from the financial crisis, when everyone “ignored the possibility that excessive faith in mortgages — and the resultant lowering of lending standards — could precipitate massive numbers of mortgage defaults.”  (See the flashback item below.)

Also, “financial regulation is highly cyclical,” reactive and focused on the latest problems.  And diligence standards are too:

I once wrote of Bernie Madoff that you can say you did thorough due diligence or you can say he passed the test, but you can’t say you did thorough due diligence and he passed the test.  Likewise, in the case of Credit Suisse’s AT1, you can say you read and understood the prospectus, or you can say you thought they were like ordinary debt securities, but you can’t say both.

As for ripple effects from the bank troubles, Marks expects a tightening of credit standards but not widespread contagion.  Commercial real estate is his area of greatest concern.

Flashback

Speaking truth to power — and to the “collective wisdom” of the day when it needs to hear some corrective wisdom — is never easy and often career threatening.  Such a moment came in 2005 when Raghuram Rajan warned the assembled experts at the Fed’s annual symposium in Jackson Hole about the house of mortgage and derivative cards that would collapse a few years later.  They didn’t listen.  Frank Martin put it all in proper perspective in an August 2022 piece.  As a NYT article said, Rajan “nailed it.”

Other reads

“Stock-Based Compensation,” Michael Mauboussin and Dan Callahan, Morgan Stanley.  This survey lives up to the billing of its subtitle, “Unpacking the issues.”

“Why Do Investors Fire Their Financial Advisor?” Danielle Labotka and Samantha Lamas, Morningstar.  Three main reasons:

1) insufficient focus on the person side of personal finance; 2) advisors’ inability to communicate their value; and 3) a mismatch of expectations early in the relationship.

“Investment Beliefs,” Bob Seawright, The Better Letter.  A mix of analytical and behavioral underpinnings for investment success.

“Battle Scars,” Ian Cassel, MicroCapClub.  Speaking of analysis and behavior, Cassel provides some good have-you-ever situations to ponder.

“ChatGPT in Knowledge Management,” Wouter Klijn, Investment Innovation Institute.

“We should not trust it yet. It is a little bit dangerous because it is so elegant and confident.  The lies it is telling you feel believable,” [Ashby Monk] says.

“Solicited Career Advice,” Phil Bak, BakStack.  Seven rules for career success, beyond “do what I did.”

“Inside the 5-hour psychological interview that can make or break your career at Citadel, Blackstone, and other finance titans,” Emmalyse Brownstein and Alex Morrell, Insider.

The interviewer will ask these 5 questions about every job you’ve had:

What were you hired to do?

What did you accomplish?

What were your low points and/or mistakes?

Who did you work with?  What would each say were your biggest strengths back then and your biggest areas for improvement?

Why did you leave?

“Picking a Stock for the Year 2048,” Jason Zweig, Wall Street Journal.  “Meet the stock pickers who pick stocks once and then stop — for a quarter of a century.”

“Timing the Factor Zoo,” Andreas Neuhierl, et. al, SSRN.

In this paper we conduct a comprehensive analysis of factor timing, simultaneously considering a large set of risk factors and of prediction variables.

Our evidence reveals that factor timing is greatly beneficial to investors relative to passive “harvesting” of risk premia.

“Are Private Equity Valuations Too High?” StepStone.  The private markets firm offers a dissenting view from current concerns:  “We think valuations are probably about right.”

“Private Equity Secondary Funds,” Kunal Shah, iCapital.  An overview of secondaries; where will the average pricing of them bottom out this cycle?

“When You Should Know Everything,” Tim Hanson, Permanent Equity.

See, when you’re in charge of upside, you need to focus on what matters.  But if you’re accountable for the downside, you need to know everything.

“A beginner’s guide to accounting fraud (and how to get away with it),” Leo Perry, Financial Times.  Some tales from Perry’s time as a hedge fund manager.

Always there

“Performance comes, performance goes.  Fees never falter.” — Warren Buffett.

A triumvirate of challenges

In “A Painful Epiphany,” a report from AllianceBernstein, investors face “a new investment regime with a triumvirate of challenges:  lower returns, higher inflation and less diversification.”  At more than two hundred pages, the report is full of ideas and charts.  A summary gives a shorter sense of each of the three parts — the environment, allocation issues, and the investment industry.

The graphic above is the the first of 188.  That’s fitting given how it maps the changes in risk and return that the firm expects — and it also sets up the dissonant discussion of private equity that unfolds.

That PE appears as a low-volatility asset class in the anchor image is a disservice to asset owners, furthering a narrative that serves providers and enables poor decision making.  Later the report puts forth “a broad case for increasing allocations to private assets” while noting “a growing tension” regarding liquidity needs — and also predicting returns that won’t live up to expectations.  The mixture is confusing.

A “black book” of this heft includes a lot of ideas worth considering and debating.  Among them:  that the evolution of 60/40 from “an investment heuristic” to “a default allocation” is a result of “a fallacious view” dependent on an abnormal last two decades; that “the active investing industry will soon be synonymous with ESG investing” (on the basis of engagement and long-term thinking); and that there should be a rethinking of some key benchmarks.  Namely, at the portfolio level, “more investors identifying inflation as the true benchmark, not a financial market index.”  With regard to managers, selecting (and rewarding) only on the basis of “idiosyncratic alpha” (after beta and factor exposures) rather than excess return.

Postings

A new series of postings about investment culture will kick off this week.

If you missed it, “The Banality of Investment Process” uses the Beatles documentary Get Back to explore the “aimlessness and alchemy” that can be involved.

All of the content published by The Investment Ecosystem is available in the archives.

Thanks for reading.  Many happy total returns.

Published: April 24, 2023

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The Banality of Investment Process

Released in 2021, the Beatles documentary Get Back offered a captivating inside look at the creative process of the legendary group.  The director of the three-part film, Peter Jackson, used restored footage of sessions that took place more than half a century ago to capture the dynamics involved when the four lads from Liverpool came together to make new music.  Only a handful of years after the height of Beatlemania, the sessions showed a changed group little more than a year away from breaking up.

This posting about investment process borrows part of the title from an excellent essay about the documentary, “The Banality of Genius,” by Ian Leslie.

There are significant differences between the day-to-day gatherings of an investment team trying to outperform the market and a musical group hoping to capture the fancy of the listeners of the day (and maybe even stand the test of time).  The latter is seen to be a more creative activity, even though enduring success in each realm requires domain expertise, discipline, and a willingness to stand apart from what others are doing.

Aimlessness and alchemy

The documentary clocks in at around eight hours, but Jackson had more than six times that much raw material from which to choose.  The Beatles had provided unparalleled access to a film crew for a television special documenting the creation of an album.  Instead, some of the footage was used in the film Let it Be, which was released in 1970.

Most of the eight hours is the band working out songs, many of them played over and over and over.  Despite the banality of it all, Leslie wrote, “Somewhere on this seemingly aimless journey, an alchemy takes place.”  The genius is revealed slowly, as we get into their world just a bit:

That so little happens for long stretches makes the viewer pay closer attention to what is happening.  It forces us to become attuned to the microscopic level at which close relationships unfold; to read the densely compressed messages that can be contained in a look, a smile, an offhand comment.

Switching to the investment realm, sometimes those doing due diligence ask to observe a meeting of an investment team, in the hope that a promised alchemy can be observed.  But an hour of watching the interactions of a team doesn’t reveal much, since such encounters are more performance than reality.  The messiness of the process isn’t there — and it is in that messiness that the alchemy often takes place, where the connections, conflicts, confusions, and true underlying culture come to the fore.

Get Back provides all of that regarding the Beatles in a most unusual way, because they let the cameras roll.  Leslie observed that there were two founding principles that the group seemed to live:  “being themselves and staying themselves,” while “always moving on.”  The band’s incredible body of work rested on that combination.

Analogies

The film offers some perspectives regarding investment process:

That banality.  The day-to-day can’t be captured in a diagram in a pitch book or by witnessing a single meeting.  That presents problems for those evaluating asset managers and for the managers themselves, since the real process can’t be explained or understood.

The people.  John, Paul, George, and Ringo were different from each other in temperament and skills.  Each went on to solo success, but together they could really make magic — a lesson for investment teams, which are often made up of people with similar abilities (and shortcomings).

The dynamic duo.  Lennon and McCartney were the alphas that guided the group, but the film shows the relationship during a time of change.  (Leslie:  “John and Paul are talking to each other without talking to each other.”)  Even so, when they were making music, something clicked into place.  Similarly, the shifting dynamics among the members of a firm or a team is one of the hardest things for leaders to manage (and followers to manage/endure), and difficult to assess from the outside.

History.  The Beatles honed their craft by playing in front of audiences in Hamburg and Liverpool for hour after hour, day after day, month after month.  The importance of those formative times was evident from comments in the film and by how spontaneously and easily they could launch into songs from that period out of the blue (many of them written by others).  Whatever a team’s history, it is key to what it is today.

Environment.  The sessions started out in a large movie sound stage that seemed inappropriate for the task at hand, and the band was disconnected, at odds, and unproductive.  Then they moved to a proper studio and everything improved.  The environment in which a team operates matters — it needs to be conducive to the task at hand.  Organizational design should include consideration about what kind of spaces work (and why).

The presence of others.  The Beatles were not alone in either location.  With them were the camera crew, sound engineers, producers, the director of the putative television show, assistants, other visitors, and, always, Yoko Ono.  (Her presence was the topic of much commentary about the original film, which has continued with this one.)  For the most part, the Beatles were able to focus on each other amidst what often was a rather chaotic scene.  An investment team usually doesn’t have to deal with much of that, but it can happen, and over time it becomes evident whom they rely upon among those extras and who mostly gets in the way.

New blood.  Toward the end of the sessions, the keyboardist Billy Preston sat in and the effect was immediate.  Not only did his piano and organ work make many of the songs come alive, but his smile lit up the room and altered the mood.  In no time, Lennon said, “You’re in the group.”  Even a long-successful team can be taken to the next level with the addition of someone with skills or a human quality that have been lacking.  Getting both at once can be transformative.

The missing.  At one point, McCartney indicated that things hadn’t been the same for them since their manager, Brian Epstein, died suddenly two years before at the age of 32.  The absence of those who are no longer part of a group can haunt us in a variety of ways, especially if we have a hard time replacing what they brought to the team.  A departure can mark the beginning of the last chapter, even though it doesn’t appear that way at first.

Good work takes time.  Leslie reported that the Beatles played the song “Get Back” 43 times in one day.  In the film there is take after take of it and many others; the repetition allows you to see the discipline that is required for creativity, as well as how small changes can remake something you’ve been working on forever.  A good lesson in process.

Trust.  Despite things that weren’t as they used to be, the Beatles had each other.  They had lived in a crucible of public attention and made marvelous music.  There was a bond of trust between them that got them past most of the squabbles that they had had over the years — and they knew they made each other better.  Being in the groove together was where they really wanted to be.  That’s a special feeling, whether it is in a studio or a conference room.

The edit matters.  The 1970 film, Let it Be, was depressing, edited in a way that seemed designed to show the impending dissolution of the most iconic music group in history.  There is foreshadowing of that in Get Back, but the overwhelming impression is of the creative process at work, full of flaws and quirks and differences and boredom.  That’s really what human processes are all about if you look closely enough.

Up on the roof

As the allotted time for the project ran out, the planned television special was discarded.  The Beatles eventually decided to record a surprise concert on the roof of their building, several floors up in the heart of London.

It would turn out to be their last live performance.

The band played several of the songs they had been practicing in the studio.  The work showed — and some tunes we have known for fifty years were recorded during that rooftop gig.

It was cold and the conditions weren’t right for greatness, but that’s what the Beatles delivered.  There was a joy in the performance that harkened back to the humble confines of the clubs in Hamburg and Liverpool.  It was all about the music.

When a talented group comes together, there’s nothing quite like it.

Published: April 21, 2023

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Cognitive Diversity, a Whole Bunch of Risks, and a Secret Third Thing

The Investment Ecosystem website now includes information on consulting and training services in addition to the range of content that is available.  In all things, this operation is dedicated to helping professionals and organizations succeed through insights that bolster the continuous improvement process.

BloombergGPT

With the introduction of ChatGPT a few months ago, artificial intelligence has become real in a way that it wasn’t before.  Those with expertise in large language models are being bombarded by investment firms scrambling to get up the learning curve.  People are posting the answers to investment questions asked of ChatGPT on their Twitter and LinkedIn accounts.

Into this scrum comes BloombergGPT.  A paper from the firm introduces its “large language model for finance,” arguing that “the complexity and terminology of the financial domain warrant a domain-specific system.”  It is not a finance-only application and, according to the tests conducted, it does very well on general questions in addition to investment ones.  That said, the machine learning training approach is different “in that it includes a significant amount of curated and prepared data from reliable sources” from inside the investment world.

An interesting example sheds light on the importance of domain focus:  A layoff at a company would be viewed as a negative-sentiment event when based on general information, but could be considered positive by research analysts and result in gains rather than losses in the company’s stock.

The implications of this introduction are vast, supporting the notion that most every investment job will morph over the next decade, as such tools become more and more powerful.  (On one front, hopefully the machines will be more diligent about reading prospectuses than humans have been.)  The competitive environment will change as well; large organizations like Bloomberg with deep pools of data and expertise have a clear advantage now in this territory, and others will have to wrestle with the implications.

Cognitive diversity

A common response from investment organizations when they are asked about diversity is that they most care about cognitive diversity, since that’s what leads to better decisions.  The problem is that only a few seem to be able to back up the belief with examples of what that means — or any real evidence that such diversity actually exists in practice at their organizations.

Neurodiversity was the subject of three articles in a special report from Pensions & Investments.  They cover the business case for bringing neurodivergent individuals on board, who are “often well-suited for the finance industry,” as well as how to create an environment in which they can thrive.  Plus, a number of organizations that are trying to make strides in this area share their experiences.  (However, a number of the related challenges regarding organizational norms, culture, and processes were not explored in depth.)

Additional perspective on the topic comes from Temple Grandin in her book Visual Thinking, which makes a persuasive case for the benefits of integrating different kinds of thinkers to improve decision making.

A whole bunch of risks

Thinking about all of the different investment risks can be daunting for those learning the business, lay members of investment committees, and even professionals.  As the industry has evolved and new instruments and strategies have flourished, there seem to be new risks all the time — or maybe we just become reacquainted with ones we have taken our eyes off of.

Scott Chaput and Timothy Crack have put together a new list, “150 Risks in Finance” (there are actually more than that listed).  The subtitle is “An Alphabetical List of Definitions and Examples, Accompanied by 75 Exercises for University Instructors to Assign to their Students,” but it’s not just for kids.  See how many you can name — or think about which ones have hurt you the most in the past (or surmise which ones are lurking).

Flashback

“The Evolution of an Investor,” by Michael Lewis, was published in 2007.  The article is fascinating in many respects, including its detailing of the sales culture that still pervades parts of the investment business and the rise of passive investing — and the success of quasi-passive DFA.  That firm is the focus of the article.  It straddles passive philosophy and active implementation, resulting in some cognitive dissonance that’s captured by Lewis.  Also of interest is the description of a DFA seminar for advisors, part of its exacting approval process.  According to the investor profiled in the article:  “It was a propaganda session.  It was beyond A.A.  It was Leni Riefenstahl, but the right way.”

Other reads

“How the Biggest Fraud in German History Unravelled,” Ben Taub, New Yorker.  A story as old as the hills in one sense, but full of jaw-dropping details.

Wirecard’s rising stock price was regarded as a sign that the business was dependable, that its critics were clueless or corrupt.

“Mental Liquidity,” Morgan Housel, Collaborative Fund.  “It’s the ability to quickly abandon previous beliefs when the world changes or when you come across new information.”

“The Case for Non-Predictive Decision Making,” Rob Campbell, Mawer.

In our view, market participants systematically underestimate the importance of vulnerabilities while correspondingly overestimating the importance of triggers.

“How should we regulate ESG research?” Craig Coben and Petra Dismorr, Financial Times.  Subtitle:  “Are the firms brokers?  Raters?  Or a secret third thing?”

“Falling Investor Satisfaction Points to a ‘Systemic Problem’ in Wealth Management,” Holly Deaton, RIA Intel.

Advisor satisfaction continues to track overall market performance, and this points to a systemic problem in our industry:  advisor value propositions grounded in investment performance.

“Beware a Culture of Busyness,” Adam Waytz, Harvard Business Review.  “Indeed, much of what managers believe to be institutional knowledge and culture is actually just bad habits.”

“Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms,” Samuel Hartzmark and Kelly Shue, SSRN.

Thus, sustainable investing that directs capital away from brown firms and toward green firms may be counterproductive, in that it makes brown firms more brown without making green firms more green.  We further show that brown firms face very weak incentives to become more green.

“A Short 100-Question Diligence Checklist,” Byrne Hobart, The Diff.  A good starting point for company analysis.

“What’s Troubling Private Equity Executives, According to Their Personal Coaches,” Michael Thrasher, Institutional Investor.

When everything is up and to the right, everyone feels optimistic and gets along. As clouds roll in, these high achievers tighten up and tend to become defensive and argumentative.

“What Can a Book Published in 1912 Teach Us About Investor Psychology?” Joe Wiggins, Behavioural Investment.  One thing it can teach:  Human tendencies are hard to change.

“Personality Differences and Investment Decision-Making,” Zhengyang Jiang, NBER.  What personality factors make a difference in how individuals invest?

“The c factor and group effectiveness,” Mark Rzepczynski, Disciplined Systematic Global Macro Views.

An investment committee can work more effectively if there is more open communication, increased willingness to listen to other opinions, and bringing in more diversity.  Yes, this may sound obvious, yet it is often hard in practice.  Regardless of the investment firm, there will always be group dynamics even if it is in the form of research meetings; consequently, every firm should work on improving group dynamics and intelligence.

Identification

“The world will ask who you are, and if you do not know, the world will tell you.” — Carl Jung.  (Or replace “world” with “markets.”)

Risk-mitigating strategies

Once you get past the full-page disclosure (in bold) that fronts “Risk Mitigating Strategies (RMS) Framework” from Meketa, there are a number of good exhibits regarding RMS.  The first one is shown above.  There have been many like it from others that show a more simple allocation on the left, in order to propose various alternatives to add to diversify the risk.  This image shows that even with several of those alternatives blended in, economic growth predominates.

Therefore, the paper discusses other RMS, using three trios of concepts.  First, sharp drawdowns, extended drawdowns, and bull and flat markets (although one could argue that some “extended drawdowns” referenced weren’t that extended; what would a real longer one bring?).  Then, first responders, second responders, and diversifiers in a portfolio.  Finally, the use and behavior of correlation, structural, and explicit hedges in each environment.

Postings

A December posting for paid subscribers, “Dimensions of Learning for Investment Professionals,” has now been made available to all.  Differentiated ideas from Alix Pasquet about what kinds of training and experience are value added.

“Forbearance (Regarding Performance) is in the Eye of the Beholder,” looks at a recent article in the Financial Analysts Journal regarding how long it takes institutional asset owners to fire asset managers based upon performance.  (Not long enough.)

All of the content published by The Investment Ecosystem is available in the archives.

Thanks for reading.  Many happy total returns.

Published: April 10, 2023

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Forbearance (Regarding Performance) is in the Eye of the Beholder

A new article in the Financial Analyst Journal, “Forbearance in Institutional Investment Management: Evidence from Survey Data,” examines the practices of asset owners when it comes to firing investment managers.  Amit Goyal, Ramon Tol, and Sunil Wahal surveyed more than two hundred institutional investors to come up with their observations.

According to the authors, previous academic work has shown that hiring decisions are primarily a function of performance, personal connections, and the recommendations of consultants, but “we know precious little about the firing process, in part because archival data on terminations are sparse”:

Institutions are disinclined to report terminations lest their shifts affect the transition from legacy to target portfolio or their tactical changes are second-guessed ex post, or because termination may reflect poorly on their initial selection decisions.  Asset managers are similarly disincentivized to report terminations for reputational concerns and for fear of triggering further client withdrawals.

Forbearance

The topic, as reflected in the article’s title, is “forbearance,” so let’s start with that.  The primary definition of the word, as found in the online Merriam-Webster dictionary, is “a refraining from the enforcement of something (such as a debt, right, or obligation) that is due.”  Alternate meanings offered involve “patience” and “leniency.”

Therefore, some sort of standard to be lived up to is implied.  When is something “due,” beyond which point the terms “patience” and “leniency” can be applied?

In this instance, the question involves the investment performance of asset managers who have been hired.  The article introduces some helpful information but gives readers an unfortunate impression.

Expectations

The authors introduce an “obvious question:  How should an institution think about the ‘optimal’ tolerance to underperformance?”  The period of time it takes for statistical significance varies depending on assumptions, but it is well beyond the time horizons applied by the industry, and so such “significance” is almost always ignored by practitioners.  (One calculation cited in the article derived the need for at least sixteen years to determine significance; other assumptions can result in periods much longer than that.)

The question is key, since there are “costs and benefits to asset manager turnover,” with the costs of transitions being “ultimately borne by the claim holders” on the portfolio, while poor performance over time has a negative effect as well.  Overall, the body of evidence shows that frequent changes in managers impede long-term performance, since allocators tend to hire strong performers and fire weak ones not long before their recent fortunes reverse.

From the horse’s mouth

One concern in basing the research on survey data:  “Hearing directly from the horse’s mouth could be problematic because respondents might not do what they say.”  That is an important caveat (which applies generally to surveys), since it is not uncommon for allocators (and consultants) to say a firing is about something other than performance even when the performance is the precipitating factor, since doing so makes them look less like performance chasers.

There is likely less of that tendency in this survey environment than in a situation where the selection process of an allocator or consultant is being evaluated directly.  In any case, the bottom line from the survey is that “underperformance is by far the dominant reason” given for termination.  (The eight options for that question can be found in the survey form.)

The wrong frame

The main problem with the article is evident here:

Respondents report surprisingly long holding periods for their active investment managers.  In public equity and fixed income, over two-thirds of respondents report holding periods of longer than five years.  In contrast, for hedge funds, only 42% of respondents report holding periods of longer than five years.  Regardless of this variation across asset classes, holding periods of this length run counter to the pervasive notion that institutional investors are impatient.

They do?

Another section:

In public equity, almost two-thirds of institutions are willing to tolerate underperformance for three years or longer.  In fixed-income and hedge funds, there is slightly less tolerance, 56% and 50%, respectively.  Notwithstanding these differences across asset classes, this tolerance is strikingly large and goes against the grain of the common narrative that institutions are “trigger-happy.”

And, the article’s conclusion says that “holding periods for the average asset manager are quite long, frequently longer than five years,” and “institutions are surprisingly tolerant of underperformance.”

It is fine that the goal of the research was to describe current practice rather than assert an optimal time horizon after which the concept of forbearance is applied.  But the counterproductive three-to-five year industry time frame which drives the tone of the article is not the standard by which impatience or trigger-happiness or tolerance should be judged.

Those unfortunate characterizations stand in contrast to good advice from the authors about the importance of a “more refined Bayesian approach” that updates “prior beliefs of underperformance based on the arrival of new information about the asset manager,” well beyond the performance numbers coming in.  They favor long-lived, continuous, and multi-faceted assessments — and even mention the importance of tracking fired managers, a praiseworthy practice that a small minority of investors implement.

It is too bad that those good suggestions are buried underneath an unfortunate message — that investors’ time horizons are found to be somewhat longer than a destructive industry “standard.”

Begin with beliefs

As mentioned by the authors, we need more exploration of how and when asset owners terminate managers.  But the most important thing for those doing due diligence and making allocation decisions is to understand their own beliefs about what they should be doing and why.

Start here:

How do you think about signal and noise in investment performance and what kind of significance should you ascribe to performance numbers in your assessment of managers?

What are your expectations about the normal cycles of performance for a given type of manager, including the length of periods of underperformance and their magnitude?

What is your baseline time horizon over which you intend to judge an investment manager?

Without examining these questions — and agreeing on standards that make sense — you are prone to react to interim events in ways that fit the pattern of the industry instead of crafting one of your own that leads to better outcomes.

What is a good baseline horizon?  Start with a decade, even though that also falls short of any statistical proof regarding performance.  That doesn’t mean that you have to be locked in for that time — Bayesian updating based on qualitative factors should play a role in whether you ultimately change your mind — but if you have that as your foundation, both your selection and termination decisions will improve.

These concepts are also addressed in the Advanced Due Diligence and Manager Selection course, other training options, and the consulting work of The Investment Ecosystem.

Published: April 6, 2023

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Anticipating Change (and Calibrating Confidence)

If you’re seeing this content in an email forwarded by a friend or via a link you saw somewhere, please consider joining your co-workers, clients, and competitors who have a subscription to The Investment Ecosystem.

Free access gets you this newsletter full of great reads every two weeks, plus occasional samples of the in-depth essays on critical ideas in the investment world that are posted regularly in the paid tier.

Confidence

A daunting paradox in investment management is that participants want the ideas they hear to be conveyed with conviction, yet overconfidence is at the root of many bad decisions.

A new paper (“Confidence: Methods to Assess Confidence Under Uncertainty”) from Michael Mauboussin and Dan Callahan covers a range of foundational concepts about confidence.  Among them, that we tend to “overweight our experience in a way that distorts our perception.  Thoughtful forecasts are a blend of base rates and the inside view, but we tend to overweight the inside view.”

Also:

Confidence in the reliability of available evidence is a mix of its strength and weight.  Strength reflects the extremeness of outcomes, and weight is the predictive validity based on sample size.

[F]orecasters tend to overemphasize the strength of evidence at the expense of its justified weight.  This leads to a predictable pattern.  Analysts are overconfident when the strength is high and weight is low . . . and underconfident when the strength is low and the weight is high.

That’s something that’s particularly evident in the judgment of performance throughout the ecosystem.

The old economy is changing

The latest analysis from Kai Wu of Sparkline Capital, “Digitizing the Old Economy,” pushes back against the notion that so-called “old economy” companies are in the crosshairs of technological disruption and about to meet their demise.  On the contrary, many are “transforming their work cultures to attract talent,” and are being digitally remade from the inside.

The piece uses categories of firms (innovators, early adopters, early majority, late majority, and laggards) from the theory of technological diffusion to highlight a potential opportunity in the early-majority cohort, noting that:

While innovation is good, investors must also consider the price paid to obtain this innovation.  We only want to invest in companies for which the market is failing to appreciate some aspect of value.

That “early majority” is clearly lumped in with its old-economy brethren when it comes to valuation.

However, if you plot measures of intangible value, those firms look like they belong on the other side of the line.

Activists

“The Evolving Battlefronts of Shareholder Activism,” by Andrew Baker, et. al, looks at changes in the landscape of shareholder activism, and the effect that universal proxies may have on the dynamics of the interactions between companies and activists.

An interesting subtext:  “Despite the extensive research evidence, there is still much we do not know about activism.”  While stocks pop initially, “the long-term impacts are less clear.”  Studies that show long-term benefits from activism are skewed by microcaps; “the total abnormal returns across all activist campaigns are zero.”  And the impact on operating performance is “mixed.”

The introduction to “Barbarians Inside the Gates: Raiders, Activists, and the Risk of Mistargeting,” by Zohar Goshen and Reilly Steel, summarizes an important distinction in the incentives of raiders, who buy whole companies, and activists, who take minority positions.  The thrust of it:

This Article argues that the conventional wisdom — corporate raiders break things and activist hedge funds fix them — is wrong.  Activists are no better than raiders; if anything, they are likely worse.  Because, as we argue, activists have a higher risk of mistargeting — mistakenly shaking things up at firms that only appear to be underperforming — they are much more likely than raiders to destroy value and, ultimately, social wealth.

There is a key difference between the hurdle rates that motivate the two camps into action; “as potential 100% owners of the target’s stock, raiders cannot shift risk onto other parties, further incentivizing them to invest more in information and take only prudent risks.”  Activists can agitate for much smaller (and shorter-lasting) gains and have “an ability to shift some of the cost of mistakes onto other shareholders.”

Other reads

Short-Term Gain, Long-Term Pain, Part 2,” Ted Seides, Capital Allocators.

It’s time to sharpen our pencils on first principles because things are about to get interesting.  Re-underwrite a manager’s competitive advantage in sourcing, due diligence, decision-making, portfolio construction, and risk management.  When a manager finds an opportunity in the mess and calls for the ball, confirm that their first principles resonate with the opportunity set and be ready to pounce.

“The Remaking of Kleiner Perkins,” Mario Gabriele, The Generalist.  A look at a half century of history of the legendary venture capital firm, including its pivot back to relevance.

“Accounting-Fraud Indicator Signals Coming Economic Trouble,” Josh Zumbrun, Wall Street Journal.  Aggregate readings for the M-Score (a measure which indicates the likelihood of earnings manipulation) are at their highest level in over forty years.

“Society’s Technical Debt and Software’s Gutenberg Moment,” Paul Kedrosky and Eric Norlin, Irregular Ideas.

Software production has been too complex and expensive for too long, which has caused us to underproduce software for decades, resulting in immense, society-wide technical debt.

This technical debt is about to contract in a dramatic, economy-wide fashion as the cost and complexity of software production collapses, releasing a wave of innovation.

“Merger Arbitrage,” Nick Sertl, Verdad.  Trends in merger arb, its relationship to other assets, and the return dynamics (“deals with higher spreads generated higher returns, despite the drag caused by higher cancellation rates”).

“CFA Institute Makes ‘Biggest Single Package of Changes’ in Its History,” Alicia McElhaney, Institutional Investor.  How will current members, aspiring professionals, and the industry respond to these modifications?  (CAIA, another credentialing organization, weighed in.)

“4 habits of highly effective CIOs,” Peter Corippo, Russell.  The “best in the business routinely exhibit these four traits.”

“Investment Consultants in Private Equity,” Jose Vicente Martinez and Yiming Qian, SSRN.

The consultant trait that seems to be most associated with asset owner performance is the size of the PE manager list their clients draw from.  Asset owners advised by consultants that rely on a narrow list of PE managers do better than asset owners advised by consultants that work with a larger list of managers.

“Is your PM a psychopath? These are some (possible) red flags,” Tania Mitra, Citywire Pro Buyer.  “Is it because when you take empathy out of the brain, all that’s left is the desire to win?”

“SVB’s challenges will accelerate valuation down rounds, startup mortality, and layoffs,” CB Insights.  “Debt was being used to avoid pressured valuations.”

“On Share Buybacks, Directors Should Stick with Economics, Avoid Politics,” Lawrence Cunningham, Mayer Brown.

In short, as the history and economics of buybacks confirm, they are never always good or always bad.

“Anomalies Wanted: A counterintuitive call to innovate that can set businesses apart, Christensen Institute.  “There is an art and science to searching for anomalies.”

“Steve Leuthold, Influential Fund Manager With a Wild Streak, Dies at 85,” James Hagerty, Wall Street Journal.  Leuthold’s “green book” was one of the most widely-read publications in the investment industry.

What you need

“Rules are great at preventing problems you’ve seen before.  Culture is better at preventing problems you can’t foresee.” — Mark Brooks.

Postings

Two recent postings for paid subscribers:

“Ascendance of the Pod Masters.” Multi-manager, multi-strategy funds are the subject of attention and fascination now.  What are the implications of their success and popularity?

“The Killer App Still Dominates in Middle Age.” Microsoft Excel is everywhere in the investment world.  A reflection on uses, errors, and history, as well as some wizards of columns and rows.

All of the content published by The Investment Ecosystem is available in the archives.

Thanks for reading.  Many happy total returns.

Published: March 27, 2023

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To comment, please send an email to editor@investmentecosystem.com. Comments are for the editor and are not viewable by readers.

The Killer App Still Dominates in Middle Age

One meme captures the importance of Excel:

Even that understates the spreadsheet’s significance, given the myriad ways in which it is used to keep track of things far beyond the financial world.

Pervasive in the industry

Within the investment industry, Excel is ubiquitous.  Anyone with “analyst” in their title has hundreds of spreadsheets of one kind or another — some featuring scores of tabs — and it would be tough to find an investment process that doesn’t rely on Excel at various points along the way.

The same goes for the back office.  Even though operations have gotten more automated over time and crucial systems have been built or bought or leased, there is always a flowering of new Excel documents to fill the gaps that exist or to act as a check on the big system.

Here are the results of a survey of institutional investors by the Milestone Group (a vendor of investment systems), regarding how investment and operational tasks related to asset allocation are accomplished:

Often the creator of a spreadsheet is the only one that really understands how it works and “the organization” may not even know it exists or how it fits.  Some of those Excel files can be quite impressive, but only a small percentage have any reasonable level of documentation — and very few have error-checking built into them.  By and large, spreadsheets aren’t vetted by others, at least until something goes wrong.

Errors

“People tend to forget that even the most elegantly crafted spreadsheet is a house of cards, ready to collapse at the first erroneous assumption,” wrote Steven Levy in 1984, just a handful of years after the introduction of VisiCalc, which started everything.

Over time, there have been plenty of errors big enough to make headlines.  The European Spreadsheet Risks Interest Group (EuSpRIG) has a list of “horror stories,” including ones that came out in the after-bloodbath report on the “London Whale” synthetic credit portfolio managed by the JPMorgan Chief Investment Office.  As recounted in a Financial Times article, bad calculations, erroneous default settings, and misapplied manual cut-and-paste operations in spreadsheets magnified the other human errors.

But that was more than a decade ago.  Surely that wouldn’t happen today, right?  Right?

Joachim Klement reminds us that the mess can sneak up on any of us, that “people who work as research analysts or portfolio managers know that we are mostly sitting in front of computers looking at huge spreadsheets that somebody developed ten years ago and that have since grown ‘organically’ to the point where we have no idea what is going on.”

Klement cites a EuSpRIG estimate that more than ninety percent of spreadsheets contain errors, and he links to a paper from the Institute of Chartered Accountants in England and Wales, “Twenty principles for good spreadsheet practice.”  Consider the first one:  “Determine what role spreadsheets play in your business, and plan your spreadsheet standards and processes accordingly.”  Not only do individuals not want to spend the time on documentation or error-checking routines, but organizations don’t even want to take that foundational step.

Spreadsheets are pervasive — and their creators are protective of them.  The risks and flubs in them never get addressed.

History

Often called “the first killer app,” the electronic spreadsheet was created by Dan Bricklin in 1979.  He told the story of VisiCalc in a TED talk.  It was soon be supplanted by Lotus 1-2-3, which was then overtaken by Microsoft’s Excel.  Packy McCormick provided a good history lesson about all of that in his posting, “Excel Never Dies.”

[In a 2008 essay on the research puzzle, your editor wrote about being a very early Lotus 1-2-3 user — and his encounter with the firm’s founder, Mitch Kapor, at a road show for its IPO.]

In its time, the spreadsheet has revolutionized the investment landscape and (remember that image at the top) in a very real sense has come to carry the financial world on its shoulders.

Wizardry

It’s hard to say where great Excel chops fall on the list of desirable attributes for an investment professional, since it depends on the specific role.  Unfortunately, those that lack the requisite skills might never get to the point where they can demonstrate other capabilities that are arguably more important.

You can head to Twitter to catch banter about Excel prowess among the financial crowd, including claims of being able to do anything worth doing just with keyboard shortcuts, in order to avoid the time-consuming back-and-forth to use a mouse.  Tips, tricks, confessions of bad habits, snark, etc.  The darn thing is woven into our lives and we can’t quit talking about it.

What’s the payoff for that expertise?  You know, in dollars.  No doubt there are wizards that attribute their success in the business to their ability to leverage those columns and rows and tabs to their greatest effect, but is that really it?  And, if they are so good, are they ready to compete for the world championship?

Yes, Excel is riding the esports wave.  While the competitions might not pack arenas like some popular game contests do, they have been covered in The Atlantic and shown on ESPN.  (A fun look at the competitions from some non-Excel gamers trying their hand at the problems involved can be found here.)

But the payoffs don’t measure up to the pay of an investment analyst, so why bother, other than for bragging rights?  Instead, you might as well go for the big money in Excel gurudom.

According to a posting from The Verge, Kat Norton is a full-time influencer who has “over a million followers on TikTok and Instagram, where she goes by the name Miss Excel, and she’s leveraged that into a software training business that is now generating up to six figures of revenue a day.”

Now that’s a killer app.

Published: March 24, 2023

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